The term ghost economy is unknown to many retailers. It’s the hidden costs that appear due to inefficiencies that are preventable. They are made up of many components. Instead of focusing on the factors that affect this, we focus on the advertising and marketing of items, making sure that we sell our products.
So…
What is the ghost economy? How does it impact on your business? Are there problem areas you should be aware of?
What Is The Ghost Economy?
The ghost economy is made up of items that are out-of-stock, overstocked, returned, or damaged. They produce considerable hidden costs and opportunities that affect your businesses’ revenue every year.
What Does It Impact?
The ghost economy affects your inventory turnover ratio, increases your carrying and reverse logistics costs, and reduces profits significantly.
Ideally your inventory turnover ratio should be high, meaning that you’re very efficient with your inventory. This ratio measures the amount of your inventory that sells during an amount of time. Your carrying costs should be as low as possible. This is the sum of money that is tied up in inventory, the physical space inventory is taking up, handling inventory, and the cost of deterioration. Reverse logistics is the process of shipping broken or defective items back from customers.
Some of the factors that cause the ghost economy are:
1.Overstocks happen when there is excessive stock that results in loss of revenue or takes up storage. This is due to either the delivery of a supplier or poor ordering and management by a buyer.
2.Stock-outs happen most often in retail situations, where your customers are trying to order a specific item, but are unsuccessful due to it not being in stock. For example, a customer may come into your store and ask for a certain size or colour of an item, but you are sold out. This results in consumers going elsewhere to buy the item.
3.Preventable returns are when your customers return the item they bought due to an error. This is either their fault, or yours, or due to damaged and inconsistent items. This is usually seen with online orders. Customers could’ve received a sweater that they didn’t order, ordered the sweater in the wrong size, or the sweater had a hole in the shoulder. In other instances your customer might have gone home and changed their mind about the sweater they bought, resulting in a return.
With inventory management, these problems are avoidable.
The Problem Areas
These factors that affect the ghost economy come from different problem areas such as business processes, people, or system malfunctions and supplier errors.
Your business might have outgrown the business’ processes that have been in place for years. This leads to issues such as improper training or miscommunication between departments. There are also problems such as employee mistakes or lack of training, which results in inadequate customer service. This makes consumers rethink where they are going to shop next or return items.
The biggest shortfalls are data systems that don’t work correctly or supplier issues. Overstock and out-of-stock items are due to the lack of calculations and lack of communication. Suppliers also increase the problems by delivering at the wrong time or unable to fulfill orders.
In order to stay away from the ghost economy and prevent losses, you need to focus on certain areas to ensure that they are running smoothly across the board.
Although all of these issues add to the financial losses, they only grow and cause even greater effects online.
The Online Problem Areas
Online retail plays an important role in the ghost economy and causes disconnect if there is not a strong inventory management system (IMS) in place. For example, merchandise that is out-of-stock online could be available in a store location. Without a connected channel communicating this to online shoppers, they will likely leaves your site and buy elsewhere.
Furthermore, when shoppers abandon their carts, it results in backordered and out-of-stock items. Without an IMS, you are still marketing these items to your shoppers –another reminder that you don’t have what they’re looking for.
In addition to channel errors, preventable returns skyrocket when customers are ordering online. This happens because of inaccurate sizing or sizing charts, quality of products, or damaged items. These factors online add to the ghost economy by having items take up space in your warehouses and having to be resold.
Is It Just Part Of The Business?
Most of us think that the ghost economy is just a part of the business. That the costs incurred from overstocks, out-of-stocks, and returns just happen and there is nothing that will fix the problem. This is absolutely not the case!
How do you make sure you have these problem areas covered and don’t lose money to the ghost economy?
The Solution
By having a good IMS of course!
With a good IMS and sharing data between all channels, it will reduce and pinpoint areas of overstocked, out-of-stock, and returned items and increase revenue annually.
You throw away money all the time due to the ghost economy, however with the right Inventory Management System (IMS), you will cut down on those losses and even increase your annual revenue.
Summary
The ghost economy happens within every business through overstocks, stock-outs, and returns. There are certain areas, both within your company and online, that needs your attention to ensure that everything is running smoothly. You can prevent these errors by managing correctly, which will save you and your business a lot of money!
