The Phantom of the Warehouse: Inventory That Isn't There

Meagan Douglas
Tue, Oct 13, 2015
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Are inaccurate numbers masking inventory shortages?

There's nothing scarier than inventory management systems showing products that don't actually exist. Businesses could make promises to customers that they can't keep or may end up in hot water with government regulators over fraudulent reporting.

To ward off cases of phantom inventory - products displayed on balance sheets that aren't available - companies need warehouse management solutions that bridge the gap between digital and physical procedures.

The Phantom Menace
By building awareness of the problems that phantom inventory could pose, businesses are more likely to prioritize accurate reporting of warehouse levels. Whether a company intentionally or unintentionally misrepresents physical asset holdings, the penalties can be severe.

Some organizations are in league with the phantoms. The Journal of Accountancy said unscrupulous businesses may use phantom inventory to adjust their insurance rates or cover up financial discrepancies. Managers may overvalue their inventory or report inflated numbers of products and fixed assets. These businesses use a variety of tricks to get away with their illegal adjustments, including storing empty boxes, lying about sales and moving products around multiple locations.

Government regulators are wise to the usual tricks and look for signs of phantom warehouse management. When a company attempts to receive financing using inventory or shows a huge increase in stored merchandise, federal auditors check for certain red flags. Has the company reported increased purchases but consistent sales? Has turnover slowed? Do the numbers from sales orders match tax returns?

If government regulators catch companies actively participating in phantom inventory schemes, the consequences could be dire. The business may have to pay numerous fines as well as restitution to the organizations involved in its fraud. Companies that accidently report phantom inventory levels may face the same penalties.

Can't Trust a Phantom
Organizations doing their best to operate honestly and responsibly may still have phantoms in their warehouse. Improper or inefficient data collection procedures can lead to mistakes that will hurt customer satisfaction and overall operations.

Warehouse discrepancies are often caused by a lack of inventory visibility. Many companies are over reliant on their balance sheets and don't create procedures to check records against actually physical inventory levels. A lack of physical counts or disorganized communication between departments could cause phantom inventory to appear when products are lost or stolen, merchandise degrades beyond use, warehouse employees mislabel or misread items or sales aren't reported.

When a business doesn't have the inventory the customer wants, it will lose a sale. Either the consumer is immediately disappointed or incorrect records causes sales teams to process orders warehouses can't fill and the company has to make contact to deliver bad news. Inbound Logistics said another problem with phantom inventory is it creates inaccurate sales projections. If a warehouse balance sheet shows tons of products that aren't there, managers may wrongly assume consumers aren't interested in the merchandise and will halt ordering or production.

To Catch a Phantom
Companies need data collection solutions that offer real-time inventory levels and consistent oversight procedures. Many businesses turn to automated options to streamline communications, speed-up reporting and eliminate mistakes.

Automated data collection solutions avoid the errors associated with constant data re-entry. When companies integrate a centralized system that collects information from sales, warehouse and distribution into an existing infrastructure, they ensure the data works together to create accurate inventory levels. Every user can check the numbers against projections and report discrepancies or any other surprises.

Providing warehouse workers with mobile devices allows them to report inventory movement as soon as it occurs. The RFgen white paper "8 Signs you Need an Automated Data Collection Solution" said mobile devices provide every member of the company with the ability to oversee customer needs and business activities. Constant visibility ensure everything proceeds according to government regulations and business best practices. It is much harder for phantoms to hide from employees armed with mobile data collection devices.

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