In this article, learn about:
What phantom inventory is, and how to spot it
The $1.75T price tag that affects the global supply chain
How to problem-solve inventory issues with pros and cons of each method
Suppliers know things in the retail world aren’t always what they seem. If you sell to the 86% of retailers who rely on computer systems and automation for their inventory, it’s common to encounter a spooky situation: phantom inventory.
What is Phantom Inventory and Why is it Haunted?
Phantom inventory occurs when a retailer’s digital records show a product is in stock and available for sale, even though it’s physically missing or never existed. For example, a GameStop employee might check stock levels in the afternoon and see nine brand-new PS5s in their system, even though they know they physically had only four on hand that morning.
The divergence between digital perception and physical reality is the essence of phantom inventory. This incredibly common issue fuels a "Ghost Economy," a staggering $1.75 trillion global impact stemming from out-of-stocks, overstocks, and preventable returns.
These invisible gaps create a cycle of replenishment failure that erodes consumer trust before a single associate realizes there is a problem and, when left unchecked, can majorly diminish both supplier and retailer profits.
Related Resources: Understanding On-Shelf Availability
How Does Inaccuracy Erode Profits?
Phantom inventory is often referred to as a "silent killer" because it bypasses standard operational alarms. While a dashboard may show 98% in stock levels, the actual level may be lower. These digitized computational errors drain profits, lose sales, and, unfortunately, corrupt the data of an entire enterprise.
Here’s how phantom inventory causes profit loss:
Automated Under-Ordering
Most retailers rely on automated systems to reorder products. If a computer system thinks there are five units on hand when there are actually zero, it won’t order new products. No new products means no items on the shelf, and sales drop.
Lost Sales and Churn
With modern customer expectations for instant gratification, the data speaks for itself. 66% of shoppers will switch to a competitor if a product appears to be available online but isn’t available at checkout. This means both retailers and suppliers immediately lose profits, causing long-term damage to customer loyalty.
Omnichannel Fulfillment Failure
Inaccurate records lead to high cancellation rates for Buy Online, Pick Up In Store (BOPIS) programs. Order cancellations and refunds are frustrating for customers who may not return to the retailer or purchase the product again.
Operational Waste
Phantom inventory forces store employees to spend time performing back-room searches or hunting down items that don’t exist in the first place. There is often significant time wasted during problem-solving, leading to substantial operational inefficiency.
Forecasting Suppression
When phantom inventory prevents real sales, the system assumes there is no demand. It then "artificially suppresses" future forecasts, because digital records show the product isn’t regularly being reordered. This unavailability or inconsistency means your product looks slow or risky on paper. This isn’t because the product is unpopular, but because the data was compromised.
Spoilage and Overstocks
Inaccurate records can lead to over-ordering items that are already in stock. This leads to diminished warehouse space and spoilage for perishable goods.
It’s easy to see how phantom inventory impacts multiple levels of a supplier’s business. Now, let’s look at how it happens.
Related Reading: Managing Inventory and Accounting
Why Does Phantom Inventory Occur?
False inventory isn’t normally chalked up to one single failure; it’s a complex interplay of dynamics on both the supplier and retailer side.
This chart outlines a few areas suppliers should be aware of when phantom inventory causes problems:
Category | Phantom Inventory Causes |
Human Errors | Scanning and recording mistakes, counting errors during audits, mis-picks, failure to update accidental damage inventory, and mis-receipts at the delivery dock contribute to inaccurate digital inventory. |
Operational Factors | High inventory density and stock levels, replenishment frequency leading to higher errors, outdated software systems failing to update in real time, and labor shortages all contribute to misaligned records. |
External/Logistical Factors | Customer theft and organized retail crime, misplaced items (in back rooms or fitting rooms), and incorrect delivery discrepancies easily lead to over-exaggerated stock counts. |
Related Reading: How to Combat Supply Chain Theft
How Can Suppliers Identify Phantom Inventory Trends?
The first step for any supplier who suspects phantom inventory is haunting their profits is to identify where it’s happening, down to the store level.
You can run a phantom inventory analysis by comparing recent point-of-sale (POS) activity at the store or item level with the store pipeline. A store should be flagged if it has historically steady sales but suddenly stopped, even though the system shows sufficient product in the pipeline. It should be noted that this process can be quite tedious and time-consuming, especially as the number of SKUs increases.
Another option is to hire third-party companies that run physical inventory counting and inventory auditing, to get physical eyes on products. This can range from $30 - $60 per hour for small and medium businesses, which can be prohibitive.
Combating Phantom Inventory
Once problematic stores are identified, suppliers have several tactical and technological options to correct the records and resume sales:
Method | How it Helps | Pros | Cons |
Manual Phantom Inventory Analysis & Store Actions | Suppliers compare recent sales, inventory data, and past trends to spot stores where sales suddenly stop even though inventory shows available stock. | Low cost and can be done as often as needed. Helpsspot suspicious patterns. | Very time-consuming without automation. No physical check of the product. Store audits are hard to get approved and depend on store staffaccuracy. |
Third-Party Physical Audits
| Outside companies count actual products in stores to confirm inventory levels.
| Provides real confirmation of what’s on the shelf. Can fix errors and improve sales. Targeted audits can lift sales by about 11%. | Expensive, especially across many stores. Only shows inventory at one moment in time. Errors can return soon after. |
Predictive Analytics & AI | Uses machine learning to predict where inventory errors are likely to happen before sales are lost. | Proactive instead of reactive. Helps focus audits on high-risk items. Saves time and labor. Improves forecasting by using SKU-level demand patterns. | Requires strong, real-time data and good system integration to work well. |
RFID (Radio Frequency Identification)
| Uses RFID tags and readers to track items without scanning each one by hand.
| Very fast and accurate. Can raise inventory accuracy from about 70% to over 99%. Makes frequent cycle counts easy and helps find misplaced items. | Requires new labels and investment in RFID tags and readers. |
WMS & 3PL Integration
| Uses warehouse management systems or third-party logisticsproviders to track inventory in real time. | Real-time inventory visibility. Reduces overselling. Automates reports and cycle counts. | Old or disconnected systems can still create data gaps between sales and fulfillment. |
Store-Specific Orders & DC Pushes | Suppliers manually send product from a distribution center to a specific store when phantom inventory is suspected. | Low cost and repeatable. Getsphysical product back into stores quickly. | Very labor intensive. Fixes short-term stock issues but may not correct the system error. Forecasts may stay suppressed. |
Phantom inventory is a challenging, complex issue in the supplier-retailer world that warrants attention. This multifaceted problem isn’t always easy to fix, so we recommend that suppliers consider several of the above methods to find the best solution for your business.
SPS Analytics Can Help
Don’t let a lack of visibility make your profits feel spooky. SPS Analytics provides full visibility into product performance and can save you time on the manual legwork required to identify products at risk of out-of-stocks and overstocks. Find out what SPS Analytics can do for you.
