Can anyone plese tell me what exactly is a phantom item or assembly means? 
How does it affect the MRP process? 

A phantom assembly is used when you want to be able to structure a BOM so it is easy to understand, but don't want to create too many production orders. 

Assume an auto Engine. There are hundreds of components. You might structure them as: Engine block and parts, camshaft and parts, and 6 piston assemblies. But you don't want to create 3 production orders, too much hassle. So you want to issue the components for the piston assembly in the same production order as the Engine block. So you create a new material number for the Piston assembly, but you mark it as a phantom assembly. That means that when you create the bom for the Engine assembly, you only have two assemblies, the Engine block and the Camshaft. You add the phantom assembly for the Piston Assembly to the Engine block BOM, saying it requires 8 of the phantom assembly. When the production order is created for the Engine block, the picklist will also include all of the components of the 8 piston assemblies. 

1) When to use, or not use a phantom assembly? 
If you need to do cost accounting on how many hours it takes to assemble a piston assembly, it cannot be a phantom assembly, because as a part of the Engine block assembly, the labor costs are included in the Engine block production order, and therefore in the standard cost. 

2) Can the assembly people pick out the parts for the phantom assembly from the all of the components in the Kit? 
If the guy assembling the Engine Block gets confused because of all of the components for the Piston assemblies are there, then it cannot be a phantom assembly. But if they can seperate them easily, go for it. A printed circuit board assembly should never be a phantom assembly, because all of those little parts for each type of PC board must be kept separate. 

3) Do you usually build 100 piston assemblies, put them into stock, then issue 8 at a time to build an Engine Assembly? 
If so, it is not a phantom assembly. If the Piston assembly is a phantom, you only build the 8 you need while you are building the Engine Block assembly. You normally do NOT store a piston assembly (phantom assembly) in stock. 

4) However, sometimes a customer calls and wants you to send them all of the components for One Piston Assembly. 
By having it set as a phantom assembly, even though you don't usually create seperate production orders, in this case you CAN create a production order for one, pull the components, close the PO, and send the parts off to your customer. 

5) You complete a Engine Assembly. 
As you are walking it back to the stockroom, you drop it on the floor, and it breaks! Damn, but you can still save the piston assemblies. Since they do have a SAP material number, you CAN put those back into stock. Most MRP systems WILL recognize that you happen to have 8 piston assemblies in stock, and will issue those whole assemblies to the next order for a Engine Block. 

Related Links:
Provide a link between BOM component and Storage Location
How to link BOM component to storage location?

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