Inventory inaccuracy costs retailers billions of dollars globally every year. That’s a staggering number and a massive blow to profitability. One of the biggest culprits behind these losses? Phantom inventory. This silent disruptor makes items appear in stock when they’re not, resulting in frustrated customers and missed sales. It’s like offering a product on a silver platter—only to have it disappear when a customer reaches for it.

So, what exactly is phantom inventory? And why should retailers care?

What is Phantom Inventory and Why Does it Matter?

Phantom inventory happens when your system shows a stock that isn’t physically there. Imagine a customer searching online for a product, seeing it’s available in-store, only to arrive and find empty shelves. The result? A lost sale and a disappointed shopper who may never return. This disconnect between what the system says and what’s actually on the shelf leads to not just lost revenue but also increased operational costs as employees scramble to find missing items or process refunds.

To give you a better sense of real-world examples of phantom inventory, consider:

  • Inventory Losses: Recent studies found that phantom inventory accounts for an average of 8% of all inventory losses. This implies that for every $100 in inventory, retailers could be losing $8 due to phantom inventory. 
  • Out-of-Stock Incidents: Phantom inventory can cause up to 80% of out-of-stock situations, significantly impacting sales and customer loyalty.
  • Customer Satisfaction: In Retail Insight’s poll, a third (33%) of customers said they had experienced errors with retailers’ store systems.

But it doesn’t end there. Phantom inventory distorts demand forecasts, disrupts supply chain operations, and creates a ripple effect that can harm profitability across multiple departments.

phantom inventory graphic

The Common Causes of Phantom Inventory

Phantom inventory isn’t caused by one single issue. It’s often a combination of several factors:

Theft and Shrinkage

Theft—whether by customers or employees—is one of the primary contributors to phantom inventory. Theft distorts inventory accuracy, making it seem like items are still on hand when they’ve actually been stolen. The average retailer loses over $112 billion due to theft and other inventory mismanagement issues. 

Investing in advanced loss prevention technologies, such as AI systems that detect suspicious behaviors, can significantly reduce theft-related discrepancies. 

Data Health Issues

Even in today’s digital age, the health of data remains a critical factor in effective inventory management. Healthy data is accurate, complete, and timely, enabling organizations to extract insights more efficiently and reliably. However, manual processes for updating inventory records can compromise data health. Errors such as incorrect quantity entries or mistyped SKU numbers are common and can lead to cascading issues over time. For example, if an employee records receiving 50 items instead of 5, it inflates stock levels and distorts decision-making. In large chain stores, such errors can accumulate unnoticed, exacerbating the problem.

Several factors impact data health, including human error, system integration gaps, and incomplete or missing data entries. By leveraging advanced tools like barcode scanners, automated data entry systems, and AI-powered alerts, businesses can reduce errors and ensure their data remains a reliable foundation for operations. Healthy data transforms inventory management from reactive firefighting to proactive decision-making, ultimately improving efficiency and customer satisfaction.

Supply Chain Disruptions

Supply chain disruptions can cause discrepancies between expected and actual inventory levels. For example, a shipment delay or an incorrect delivery can cause the system to reflect stock that hasn’t arrived yet. Similarly, damaged goods that are returned to the supplier might still show up in inventory records if not accounted for properly.

Using AI-driven supply chain management tools can help predict and adjust for these disruptions. Automation of inventory adjustments based on real-time data from suppliers and logistics partners can also improve inventory accuracy.

How to Identify and Prevent Phantom Inventory

Identifying and preventing phantom inventory requires a proactive approach. Here are some strategies retailers can implement:

  • Regular Stock Audits: Conduct regular physical counts to reconcile your inventory records with actual stock.
  • Leverage Real-time Data: Use automated systems that provide real-time inventory data to catch discrepancies as they occur.
  • Optimize Store Layout: Misplaced inventory is a major cause of phantom stock. Make sure products are stored logically and that employees are trained to follow a consistent process.
  • Invest in Loss Prevention: Theft is a major contributor to inventory inaccuracies. To deter potential theft, employ security measures such as RFID tags and surveillance.
  • Implement AI Solutions: Use AI-driven software to identify trends, predict shrinkage, and flag discrepancies through diagnostics before they turn into bigger issues.

How AI Can Combat Phantom Inventory

Advanced AI solutions can help predict and identify potential phantom inventory cases before they affect your bottom line. By analyzing SKU-level data and cross-referencing it with real-time sales and inventory patterns, AI can pinpoint discrepancies and alert store managers. Actionable steps include:

  • Automated Alerts: Get notified when stock levels don’t match sales trends.
  • SKU-level Analysis: Dive deep into product-level data to spot potential errors.
  • Real-time Updates: Make adjustments on the fly to ensure accurate stock records.

To maintain healthy data, organizations can take proactive steps, such as imputing missing data through intelligent algorithms and cross-checking multiple data sources. Implementing AI-driven systems can enhance data quality by automatically flagging potential discrepancies, such as inflated stock levels or mismatched inventory data. These systems can also alert users about anomalies like phantom inventory in real-time, empowering teams to address issues before they snowball.

Implementing AI isn’t just about technology; it’s about peace of mind. Imagine knowing that your inventory is always accurate, your customers are always satisfied, and your employees are no longer bogged down by endless stock checks.

Put a Stop to Phantom Inventory with Solvoyo

Phantom inventory may be a sneaky problem, but it’s not unbeatable. Solvoyo is a notable vendor recognized in the 2024 Gartner® Midmarket Context: Magic Quadrant™ for Supply Chain Planning Solutions.

Solvoyo offers AI-powered solutions that help retailers gain real-time visibility and keep shelves stocked correctly. Our platform allows you to address discrepancies proactively, boost operational efficiency, and—most importantly—keep your customers happy.

Are you ready to say goodbye to phantom inventory? Contact us today to learn how we can help transform your inventory management and turn these hidden costs into visible profits.