The Curious Case of Phantom Inventory

What is phantom inventory?

Phantom inventory is defined as inventory that appears available in your inventory system but does not physically exist. Phantom inventory is an inventory inaccuracy or inventory discrepancy in a retailer’s physical stock levels, usually caused by miscalculated product theft, product damage, spoilage, poor returns management, or return fraud. When perpetually mismanaged, these inventory discrepancies lead to lost sales and lower profit margins.

On-shelf availability is the core element of a retailer’s actual inventory—items that physically exist within a store’s backroom, warehouse, or distribution center, which lead to higher in-stock rates for the retailer. Studies have shown that a 1% increase in on-shelf availability can lead to a 0.5% increase in sales.

Retailers need to know exactly what products are in stock, where they are located, and in what quantity, because research shows that two-thirds of consumers will leave a physical retail store when an item they want to buy is out of stock. The same attitude also follows the consumer ecommerce buying experience as well.

6 common causes of inventory discrepancies

Inventory discrepancies has a waterfall effect: inaccurate inventory data eventually leads consumers to out-of-stock shelves. When shoppers encounter out-of-stock items, 36% either buy the item at another store or do not purchase it at all. However, the common causes of phantom inventory aren’t all complicated; some inventory discrepancies are just plain human error, while others are human greed.

1. Data inaccuracies and system errors: Retailers still employing outdated inventory systems tend to involve more manual processes, which are more prone to error. For example, a retailer’s inventory receiving team may accidentally fail to account for the damaged products or miskey a higher or lower number of products received.
2. Miscommunication between staff and systems: Even when inventory reaches the backroom properly, it may not be accounted for if items aren’t scanned accurately when moving between locations. Physical inventory can get lost or misplaced due to human error, but if not correctly accounted for, the items appear available to stores or consumers.
3. Inventory theft and shrinkage: Inventory inaccuracy occurs when items are stolen in person but appear available within inventory systems. The same goes for loose or perishable items that expire or become damaged but are not properly marked as unavailable.
4. Poor returns management: Product returns also drive inventory discrepancies. Products that are, or become, damaged in the returns process can appear as phantom inventory if not appropriately handled. Even products that aren’t damaged are problematic if they aren’t accounted for as available; smarter returns management results in positive cash flow.
5. Return and claims fraud: According to a research collaboration between Appriss Retail and Deloitte, consumers returned $685 billion worth of items in 2024—13.21% of total retail sales—with $103 billion in losses tied directly to return and claims fraud in 2024. Fraudulent returns that are missed can lead retailers to the false hope that the returned products are viable and able to be sold, which is phantom inventory at its best (or worst).
6. Overstocking: Too many items available are also a byproduct of phantom inventory, a significant concern when the products involved are perishable, seasonal, or expire. The expenses associated with storing products before they are sold keep retailers from selling high-demand, higher-margin products.

The impact of phantom inventory on retailers

Phantom inventory ultimately has a long-term impact. Accurate inventory visibility allows retailers to quickly trend the specific items selling out to determine when to reorder and avoid out-of-stocks. Unfortunately, 50% of retailers claim they have less than 80% accuracy in their inventory data. Retailers must assess the data and inventory discrepancies they already have insight into and remediate them quickly.

Even the most loyal customers will switch to a competitor to avoid the frustration of not finding the products they need.

Phantom inventory left unchecked leads to an average of 8% of all inventory losses, so for every $100 in inventory, retailers may lose $8 to phantom inventory. The National Retail Federation has also reported that total retail shrink, with a third attributed to inventory theft and loss, costs retailers about $112 billion. These losses carry the immediate impact of lost revenue due to a product’s availability. Still, they can also fracture the long-term customer value if they avoid future purchases due to a lack of product availability.

More than 60% of consumers have changed or expect to change their shopping habits because of the recent tariff announcements, which is why inventory management and inventory visibility is hypercritical for retailers. A more skittish consumer is harder to win back if phantom inventory tricks them into believing in product availability, but results in them leaving stores unsatisfied.

Strategies to prevent inventory discrepancies

Inventory discrepancies result in an inaccurate view of a retailer’s inventory assets, which can lead to poor decisions that eventually impact actual profit due to incorrect sales forecasts and inventory inaccuracy. The strategic concepts below are the initial path forward to combating phantom inventory.

Implementing robust inventory management systems

• Retailers must invest in inventory management systems that allow for tracking on-hand available inventory to the unit; broader data that can’t be drilled down to the unit leaves retailers more vulnerable to internal theft, vendor fraud, and poorer inventory forecasting. Additionally, retailers must conduct regular inventory audits to identify and correct any errors in their inventory records.

Dialing in on vendor and supplier issues

• Retailers must work closely with their vendors/suppliers to ensure that inventory is received correctly and vendor credits aren’t issued due to falsely increased or decreased total inventory values. Unfortunately, a dishonest vendor/supplier can attempt to manipulate inventory inaccuracy to meet financial projections, so AI-enabled inventory audits are essential.

Training staff on best practices

• Implement training programs to enhance employee performance and reduce loss by ensuring your staff can accurately handle and track inventory. Adopting a data-driven training program allows retailers to see which employees adhere to inventory accuracy policy and which may be the source of inventory discrepancies.

AI solutions such as Secure Inventory

• Secure Inventory bridges the gap left by traditional inventory management systems. It automates anomaly detection, enabling retailers to proactively address fraud, theft, and operational challenges before products mysteriously become phantom inventory. Secure Inventory leverages advanced AI and anomaly detection algorithms to help instantly identify suspicious inventory records, delivering faster, more accurate results.

Long-term retail success begins with accurate inventory data

Traditional inventory systems track product locations but miss where losses occur. Designed for supply chain efficiency, they ensure product flow but overlook theft, fraud, and operational risks. That’s where Appriss Retail provides the insights needed to detect and prevent loss through Secure Inventory.

Secure Inventory allows retailers deeper insight into warehouse shipments (BOL), vendor direct-to-store data, store transfers, consumer returns, adjustment manipulation, POS transactional data, theft/fraud data, and return to vendor data.

Secure Inventory additionally uncovers issues such as excessive waste/damaged goods that may indicate poor product quality, theft, or fraud; adjustment anomalies that point to shrink manipulation or theft/fraud through improper adjustments; inventory growth leading to stockroom theft, shipping discrepancies, or even return fraud; and finally vendor issues that identify overstocking, understocking, promotional manipulation (e.g., unauthorized discounts), or missing vendor credits.

Eliminate phantom inventory, improve inventory inaccuracy, and solve those mysterious cases of inventory discrepancies through Secure Inventory, an add-on for Secure EBR from Appriss Retail.