Phantom Inventory: Why It Happens + How to Spot, Solve, and Prevent It

Phantom inventory

Phantom inventory is a mismatch between the inventory levels shown in your system and the products you actually have in stock.

When your inventory management system’s stock levels aren’t accurate, it’s hard to make the right decisions for your store.

Product merchandising, limited-time promotions, your store’s layout—they all become difficult to plan and track if you don't know the real number of inventory you have on hand.

Phantom inventory can lead to incorrect data, lost sales, and unhappy customers. This guide will help you navigate the phantom inventory problem and find its root cause.

What is phantom inventory?

Phantom inventory, also known as ghost inventory, is what you have when products are shown to be available by your point of sale (POS) system, but aren’t actually available in your store. 

In addition to on-shelf availability problems, phantom inventory can mislead you about stock levels in your stockroom or warehouse, so when you go to replenish shelves, you won’t find the products you need.

The bigger your store and the more SKUs in your inventory, the harder it is to detect and prevent phantom inventory.

It comes down to a simple question: can you trust the information you see in your POS software? The goal is to make your answer a consistent ‘yes.’

The impact of phantom inventory

Lost revenue

When a specific product isn’t on your shelves, it can’t generate any revenue: it’s not there for the customer to buy. You can lose additional revenue when customers who would have bought more than that particular product give up and go to a different retailer.

If your inventory records tell you a product is in stock, but it’s getting zero sales, it might take you weeks to identify a phantom inventory issue and replenish that stock.

If you use automatic reordering—for example, when a product stock level comes down to 15 units—the new order won’t be triggered if there’s ghost inventory in the system. This can lead to a stockout.

The longer phantom inventory goes unnoticed, the greater the potential loss.

💡 PRO TIP: Ship-to-customer order fulfillment is the easiest way to prevent phantom inventory from hurting revenue. Rather than being limited to selling products you have in stock, you can sell products in-store and ship them to customers from your warehouse or another store location that has inventory.

Bad data

Bad data–such as misinformation about what you have in stock–leads to a poor decision-making process. Let’s say a product that always does well with your customers suddenly stops selling. 

This is a significant problem, so you explore possible reasons and make assumptions.

Maybe the product is no longer the best option for what your customers need. Maybe it received some bad press you haven’t noticed yet. Maybe new competitors have swooped in. Maybe the product has become too expensive… And so on.

You might make dozens of changes to your product offering before you notice the phantom inventory problem. You might cancel future reorders for this product and tweak other product prices. You also might change the store layout and launch new marketing campaigns.

But none of this will help. The product isn’t selling because customers can’t find it on your physical or virtual shelves. 

Inaccurate forecasting

Accurate data helps you budget accurately, maintain positive cash flow, hire enough staff, and promote the right products at the right time. It also sets your supply chain and stock replenishment up for success.

Inventory data is an essential piece of the demand forecasting puzzle. When you look back on the past season or year, phantom inventory will hide the true demand for products and skew your forecast.

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Poor customer experience

Imagine an excited customer, someone who can’t wait to buy a specific product from you. They’ve been thinking about it for days—a friend recommended it, and they saw their favorite influencer talk about it.

But when they walk into your store, they find a gap on the shelf where that product should be. If you sell online, they breeze through the checkout, only to get a refund hours later along with an apology email from you.

Phantom inventory has caused you to miss an opportunity to delight new and existing customers.

What causes phantom inventory

To catch these issues before they create long-term problems, you need to know possible causes of phantom inventory. Here are its most common sources:

  1. Shrinkage
  2. Receiving errors
  3. Issues recording sales
  4. Misplaced inventory
  5. Lack of inventory audits

Shrinkage

Shrinkage is loss of inventory caused by shoplifting, employee theft, fraud, and other, unknown reasons.

According to the National Retail Federation, retail shrinkage was $61.7 billion in 2019, or 1.62% of sales.

Receiving errors

Any manual data entry comes with the risk of human error, and receiving inventory is no exception.

For example, a staff member can record a higher number of units than they actually received, or forget to account for any breakage. This usually happens when the person receiving the inventory is having to multitask or work with complex tools while physically taking in the inventory.

Not recording sales correctly

If a product isn’t correctly scanned at checkout, it won’t be accounted for in the real-time inventory.

This is typically the result of an in-store sales error. For example, if you sell two sweaters of the same model but different color, and choose to scan one of them twice because the price is identical, it will skew stock levels for both colors and create phantom inventory for the color you didn’t scan.

Misplaced inventory

At store level, you might end up with inventory in the wrong place. This means that the actual inventory exists—it’s just hard to locate.

Warehouse

One way this happens is if customers move your products to a different part of the store after trying it on or changing their mind. You could also leave a returned product in the back room instead of returning it to the shelf. 

To avoid misplacing inventory, routinely tidy your sales floor after each day, have a process for organizing your stockroom, and ensure staff consistently follow the process you put in place. 

Lack of inventory audits

Individual instances of phantom inventory might seem minor, but they can compound with time. Big issues arise when you don’t conduct regular inventory audits to catch small mismatches.

It’s recommended to do a physical inventory count at least once a year, while cycle counting smaller batches of inventory—such as your best-selling products, a specific vendor, or the stock that contributes the most to revenue—more frequently. 

How to identify phantom inventory

It’s worth taking a holistic approach to identifying and solving phantom inventory issues. You need to keep an eye out for possible phantom inventory for as long as you run your store. Here’s how.

Conduct regular inventory counts

Regular inventory reconciliation has many benefits: it keeps your data reliable, demand forecasting accurate, and safety stock up to date.

It also helps you catch phantom inventory days or weeks after it happens, rather than six or more months down the line.

Your inventory counts should follow four simple steps:

  1. Count your physical inventory.
  2. Compare physical count and digital records.
  3. Identify items with lower physical count than digital records.
  4. Take note of SKUs with phantom inventory and reconcile.

Depending on the product range you offer, inventory counts can be tedious. This is where cycle counting comes in handy. It’s a perpetual inventory auditing process you do on one category of inventory at a time, rather than the whole inventory at once.

Analyze POS data

Your POS data can give you the most complete picture of an instance of phantom inventory: the day or week it happened, the products in question, the storage location that’s part of the issue, and more.

The inventory and sales data your POS system collects is your best tool for tracking and inventory and proactively handling phantom stock.

POS inventory data tracks the inventory you received and sold, as well as what customers returned or exchanged. It tells you how many units of an item you have and where they’re stored.

POS sales data shows you the number of products and units sold over various periods of time. It reveals when demand for specific product peaks and dips, and feeds into your inventory reports for easy reordering.

By looking at inventory and sales data side by side, you can see when the discrepancy started. Once you do that, you can track back to the day or week in question and review:

  • Supplier deliveries that happened during that time
  • CCTV footage to identify or rule out shoplifting
  • Records of moving inventory from one store to another

Like inventory counts, regular POS data analysis will help you catch the issue quickly.

Leverage technology that does this for you

You can use retail technology solutions to do phantom inventory tracking for you.

For example, some retailers use RFID technology to tag their products. RFID is wireless technology that involves tags and readers. It can provide real-time microlocations of products.

This means that retailers can track items that left their store but weren’t registered at checkout (if they were stolen or not scanned correctly), as well as those that were misplaced or relocated in warehouses and stockrooms.

Macy’s has been using RFID technology since 2013. In early 2022, the company announced they’re also using it to investigate and combat a surge in organized retail crime.

Another approach involves artificial intelligence solutions to track and analyze real-time and previous sales data to spot outliers.

Thanks to machine learning, such a solution can look at product demand patterns, previous stock levels, ideal inventory, and hundreds of relevant data points. Based on this, it notifies you of a potential phantom inventory issue.

Reduce phantom inventory at your store

Phantom inventory can be costly and detrimental—but it doesn’t have to be. Integrate these practices into your store to catch and solve phantom inventory issues before they turn into lost revenue and reconciliation headaches.

Compare the inventory and sales data from your POS system for a head start. It will highlight any mismatches, point you to the source of your phantom inventory issue, and help you quickly notice—and prevent—future ones.

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