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What Is Phantom Inventory? Here’s How to Spot It

Are there ghosts haunting your shelves? No, not real-life ghosts: phantom inventory. Walk through the aisles and see empty shelves and out-of-stock products. Check the system and see that everything looks good. It looks like there is enough inventory in the back room and on the shelves to meet demand. But your eyes don’t lie. Something is off. 

What’s wrong is called phantom inventory.  

What is Phantom Inventory? 

Phantom inventory is inventory reported that does not exist. It is what happens when perpetual inventory—the number of items in the front and back of the store—is greater than on-shelf availability.  

Phantom inventory is particularly challenging because your inventory management system says the products are in-stock, but the shelves are empty. You can’t fix what you don’t know is even a problem. There are several potential causes of phantom inventory, including: 

  • Shrinkage – Shrinkage occurs when a product is lost due to employee theft, shoplifting, or another unknown reason.  
  • Receiving errors – Errors can happen as merchandise is received and processed at the back of the store. 
  • Employee errors – Store associates may make an error when entering data, processing returns, or picking inventory to fulfill an online order. 

displays inside brick-and-mortar store

How Phantom Inventory Hurts Retailers 

Phantom inventory is a problem for retailers because it generates zero dollars in sales. It’s inventory that you believe is on the shelf but doesn’t exist, which means nobody can buy it. 

Furthermore, phantom inventory creates more issues beyond lost revenue. The unknown nature of this type of inventory means you can’t attribute a poor-selling product or underperforming store to phantom inventory. Your data isn’t accurate, and any insights you’ve gleaned from that data may be incorrect. 

For example, you may evaluate a new product launch and see that it isn’t selling in-store as well as you predicted. So, you go back to the drawing board, cancel reorders, or remove that SKU from the shelf altogether. In reality, your perpetual inventory was incorrect, and nobody was buying the SKU because it wasn’t even on the shelf. 

You just wasted time and resources judging a product launch on incomplete information. 

Phantom inventory is when perpetual inventory—the number of items in the front and back of the store—is greater than on-shelf availability.

How to Identify Phantom Inventory 

The challenges associated with phantom inventory increase with scale. The more SKUs you have, and the harder it is to identify and prevent phantom inventory. 

Therefore, the best solutions to this problem involve retail analytics and software solutions. You need eyes and ears inside stores checking on-shelf availability, and then you need more help to compare that data against perpetual inventory to pinpoint any phantom inventory.  

One such solution is mobile crowdsourcing. Smartphone-enabled shoppers can be leveraged to audit retail locations on your behalf. These modern mystery shoppers can provide brick-and-mortar data from more store locations than otherwise possible and can be guided to check specific shelf conditions that could uncover phantom inventory.  

Shelf of Clif Bars in grocery store

Smartphone-enabled shoppers can provide images from the shelves along with data on inventory levels, so you can quickly and easily see shelf conditions. Images are crucial because it’s clear evidence of a problem at the shelf-level. Once you have that evidence, you can work backward to identify the cause of the phantom inventory and prevent a repeat incident in the future. 

In summary, identify and prevent phantom inventory by: 

  1. Leveraging mystery shoppers to report on shelf-level conditions 
  2. Comparing on-shelf availability to perpetual inventory 
  3. Backtracking phantom inventory’s path to the shelf to identify the cause of the problem 

Take Advantage of Shoppers Already In Stores 

Fixing phantom inventory begins with resources. You need the right tools to analyze hundreds—or more—SKUs across thousands of store locations. Manual data collection and entry won’t get the job done. 

Instead, take advantage of the shoppers that are already inside those stores to provide data via retail auditing. Smartphone-enabled shoppers are incentivized to share key datapoints via a mobile app back to your business. They’re shopping anyway—use that to your benefit by getting critical shelf-level insights that can uncover where phantom inventory is eating away at your sales. 

Matt Ellsworth

Matt is the Content Marketing Manager at Wiser, the leading provider of actionable data for better decisions. He holds a BA from Salem State University.

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