CAPTURING PHANTOM DEMAND

For many direct merchants, recording phantom demand can be as elusive as capturing an actual ghost. Advancements in contact center and Website technology have made it somewhat easier to get a handle on this lost demand. But inventory management experts say that far too many multichannel marketers still ignore this mysterious metric.

Phantom demand, sometimes referred to as shadow or lost demand, is generally described as demand that cannot be filled and is not recorded. A cataloger typically captures demand data on the number of customers who actually placed an order for the item but not necessarily the number of shoppers who wanted the item but didn't order it because it was out of stock.

“It is fair to say a true backorder is legitimate demand, especially if it is fulfilled,” says Ken Lane, founder of Litchfield, CT-based direct marketing consultancy Hathaway & Lane Direct. “Backorders that are not filled or items that sell out far before the selling season ends can create phantom demand.”

Say you're an apparel merchant, and you have a purple, cable-knit V-neck sweater that's been a runaway best-seller this fall — maybe because purple was the hot color for the season or perhaps because V-neck tops were all the rage in the fashion magazines. Even if you sell out of the item, customers will continue to call to order it. If a customer is willing to wait for a product that's on backorder, you have a record of the demand. But what about all the customers who call to order the item but don't place orders or cancel their orders once they know it's on backorder? All the units you could have sold if you'd had the merchandise in stock amounts to phantom demand.

Phantom demand is a valuable inventory planning metric, says George Mollo, president of Nanuet, NY-based operations and merchandising consultancy GJM Associates. Because it tells a retailer how much of an item could have been sold if it had been in stock for an entire season, merchants can use that figure to better determine how much of that item they should put in inventory the following season.

In short, this information is critical for improving forecasting accuracy, fill rates, and customer satisfaction, Mollo says. If the amount of lost demand is significant, a company can become perpetually out of stock of highly requested items, as purchases will never be forecasted to true demand — and the company is of course leaving money on the table.

But phantom demand is not only an inventory or operations issue. Tracking all demand can benefit the marketing department as well. For instance, Mollo says, by not capturing information about an order that cannot be filled, some companies may lose potential customer information and thus increase marketing costs by rerenting a name that perhaps they could have added to their file. In addition, actual response rates may be underreported when demand goes uncaptured.

GETTING IT DONE

There are many compelling cases for finding lost demand, But if you're not sure how you should capture and adjust for phantom demand, you're not alone. Most experts are also baffled on the best way to log phantom demand. “I have tried for 26 years to find a good way to identify and adjust for phantom demand, and it's just very difficult,” says Jon Schreibfeder, president of Coppell, TX-based retail consultancy Effective Inventory Management.

Curt Barry, founder/president of Richmond, VA-based consultancy F. Curtis Barry & Co., agrees that capturing phantom demand is one of the toughest challenges for merchandisers and inventory management. But it's worth investing time and money to figure out how to capture phantom demand and how to plan with it. “The point is, only a small percentage of direct retailers actually look to capture phantom demand,” he says. “It's not easy to do, but the benefits are huge.”

“The key to remember is that phantom or lost demand is only a problem if it is not captured,” Mollo says. “Once the systems capture demand and forecasting accuracy improves, the incidence of true lost demand is negligible and controllable.”

To determine if your company is capturing all of its demand, first compare your initial fill rate to your final fill rate. If you have a low initial fill rate — say, 70% or so — but a final fill rate of at least 98%, says Mollo, that's a strong sign that you are failing to capture all of your demand.

Then consider this scenario: “Say a customer places an order for three items; two are on backorder, and the third is in stock,” Mollo says. The customer subsequently decides to cancel the entire order. “Are the demand and the immediate cancellation captured for the item that was in stock? If not, then all demand is not being captured.”

CALLING ON PHONE REPS

Your contact center provides your greatest opportunity for collecting phantom demand. If a customer decides not to place an order for a backordered item and simply hangs up, there is no record that he ever wanted the item. But if you train your contact center agents to document the request or implement software that makes collecting the information easier, you can get a much more accurate picture of actual demand.

Some merchants use a system as elementary as having a contact center agent compile by hand a list of out-of-stock requests that he then gives to the purchasing department. “In a lot of operations we work with, backorder and out-of-stock item requests are pretty much collected and sent to purchasing,” says Kathleen Peterson, founder/chief vision officer of Bedford, NH-based contact center consultancy PowerHouse Consulting. Merchants want that information because it is a revenue opportunity that could be lost. “If five different people call for an out-of-stock beach chair, and the agent just tells the customer they don't have any more and the call ends there, it hurts the data trail because a product query was not entered.”