Tackling the Trillion-Dollar Phantom: How Retailers Can Address the Cost of Phantom Inventory

Phantom inventory is the hidden problem haunting retailers, creating costly disconnects between what their systems say is in stock and what’s actually on shelves. It’s a phenomenon where inventory records show products are available but the physical stock is missing, leading to stockouts, missed sales, and frustrated customers.

The impact of phantom inventory goes far beyond lost sales. It quietly erodes profits, disrupts operations, and causes long-term damage to customer loyalty. For retailers, addressing this issue isn’t just about fixing inventory systems — it’s about safeguarding their bottom line and competitive edge.

The True Cost of Phantom Inventory

Phantom inventory leads to immediate lost sales and reduces customer loyalty as repeated stockouts drive shoppers to competitors. Beyond this, it disrupts operational efficiency, causing inaccurate demand forecasting and inefficient replenishment. The problem exists in reverse, where inventory records are less than reality. Retailers may over-order products they already have, leading to costly overstocks, inventory placed in the wrong locations, and wasted labor. In perishable goods, phantom inventory can result in spoilage from overstocking, further increasing financial losses and harming profitability.

Phantom inventory stems from several issues, starting with human error, such as mis-scanning items, counting mistakes during audits, or improper tracking of product movements, which gradually create significant discrepancies in stock records. Outdated or disparate systems further exacerbate the issue, as they fail to track and update in an effective and timely manner.

External factors like theft and misplacement of items add to the problem, with stolen or incorrectly shelved products leading to inaccurate inventory data. Additionally, infrequent audits allow these discrepancies to accumulate, while too-frequent audits can waste time and resources checking things that don’t need to be checked without addressing the underlying causes of phantom inventory.

Harnessing Technology to Combat Phantom Inventory

Retailers are turning to technology to combat phantom inventory, with predictive inventory systems leading the charge. These systems use machine learning to analyze data and predict where issues are likely, allowing for proactive management. Instead of conducting broad audits, predictive technology enables targeted checks, saving time and labor by focusing on high-risk areas.

One grocery retailer has achieved impressive results since implementing a predictive inventory solution in 2023. It has seen a 1 percent sales lift through reduced lost sales, a 1 percentage point improvement in availability without increasing spoilage, and a 27 percent reduction in total inventory errors vs. its ERP system.

Improving system integration across the supply chain also helps eliminate discrepancies caused by outdated or siloed technologies. Additionally, many retailers are enhancing staff training for better inventory management. By using data-driven audits and targeting problem areas, retailers improve inventory accuracy and minimize disruptions to operations.

Moving From Reactive to Proactive Inventory Management

For too long, phantom inventory has been treated as a reactive problem — i.e., something retailers address only when the consequences, like stockouts or spoilage, become too severe to ignore. But the future of inventory management lies in taking a proactive approach.

Predictive inventory modeling offers a way forward. By leveraging machine learning to anticipate where inventory discrepancies are likely to occur, retailers can prevent phantom inventory issues before they happen. This shift from reactive to proactive management not only saves money but also improves the overall customer experience. Fewer stockouts mean happier customers, and fewer inefficiencies lead to smoother operations.

The key to success is integrating predictive inventory systems into broader supply chain and replenishment operations. By doing so, retailers can ensure their inventory records remain accurate, their shelves stay stocked, and their operations run efficiently. This not only reduces the financial toll of phantom inventory but also positions retailers for long-term resilience and growth.

Phantom inventory may be invisible, but its impact is real — and costly. Retailers can no longer afford to ignore this trillion-dollar problem. By adopting proactive strategies such as predictive inventory technology, improving audit processes, and integrating more robust inventory management systems, they can effectively combat phantom inventory.

Stuart Douglas is the product lead, forecasting and replenishment, RELEX Solutions, a market-leading supply chain and retail planning platform.