Inventory is the backbone of retail. Every retailer strives to optimize inventory flow through its supply chain, ensuring the right products are in the right locations at the right time. But getting inventory to the right place is only half the challenge. Retailers also need to ensure that products are properly placed on the sales floor and available to customers. 

Unfortunately, discrepancies between inventory records and what’s actually available are all too common. Retailers end up with “phantom inventory,” where products are listed as in-stock in the inventory system, but are not actually on the store shelf.

Problems stemming from phantom inventory start at the store level and extend all the way up the supply chain. At the individual store level, phantom inventory issues lead to lost sales and unhappy customers. These losses add up fast, since they’re occurring across a retailer’s entire store network for weeks or months. Beyond that, phantom inventory disrupts allocation, replenishment and planning It contributes to incomplete sales data for demand forecasts, leading to either unnecessary stockouts or excess inventory down the line. It’s not just about having empty shelves, but about lost revenue, and ultimately the loss of customers to the competition.

To proactively address phantom inventory, retailers need to understand how these situations occur and how AI can help tackle the problem on a wide scale. Following are the top five causes of phantom inventory, other than theft:

Inaccurate product placement. Products are often placed on a shelf where they don't belong, either when an employee makes a stocking error or when a customer picks up an item then puts it back on the wrong shelf if they decide not to buy it. These misplaced items make it harder for shoppers to find that product, and the items might not be counted correctly during inventory audits. Wrong product placements cause inaccuracies in data, making it difficult to track stock levels and order the correct amount of products. 

Visibility issues. Sometimes, an item may be pushed to the far back of a top shelf, or it may fall from its peg where it’s no longer visible. If customers can’t see the product they want to buy, they may end up leaving the store frustrated and empty handed, resulting in a lost sale and possibly a lost customer. 

Infrequent inventory audits. Many stores only do physical inventory counts once or twice a year, which is far too infrequent to catch phantom inventory issues. Errors may remain unnoticed for extended periods, leading to inaccurate inventory data and issues with reordering. Retailers end up with excessive or insufficient quantities of products.

Items left in case packaging. When a product that is meant to be sold individually is left in a case, it can discourage customers from purchasing the item — especially when they only need a few pieces. There’s also a risk of retailers miscounting the cases as single units, rather than the total number of products within each pack.

Excess inventory in stockrooms. Storing excess inventory in a stockroom prevents products from being displayed on shelves where they’re visible to customers. When products sit unsold in the stockroom, they run the risk of becoming outdated and less appealing to shoppers — potentially leading to markdowns and additional losses. 

To begin tackling the problem, retailers need a strategy to address phantom inventory at each and every store location. However, store managers have hundreds to thousands of SKUs to oversee on top of their other daily responsibilities, making it nearly impossible to catch inventory discrepancies and resolve the phantom inventory issues.

Artificial intelligence is creating a new way to identify and solve phantom inventory. According to Gartner, retailers that fail to implement critical AI-led processes now to support customer centricity will not survive.

With the help of AI-powered tools for phantom inventory detection, retailers can take proactive measures to maintain accurate stock levels and ensure smooth operations. Such a system analyzes forecast and sales data for each store’s location to pinpoint items that should be selling but are not. Then, it solution alerts store managers via personalized notifications to manually investigate these possible cases of phantom inventory and fix the issues quickly.

Introducing a phantom inventory application doesn’t have to be complicated. Retailers can select one that’s simple and user-friendly, to avoid having to retrain store managers on new systems. AI does all the heavy lifting behind the scenes; all store managers need to do is access a phone app that sends customized alerts directly to their fingertips. It’s quick and easy to learn, and can save store managers countless hours trying to track down potential inventory issues.

Now, store managers benefit from a simpler process: 

• AI automatically identifies potential phantom stock;
• Store manager gets an alert;
• Manager checks the item;
• Based on their findings, the manager clicks “yes” or “no,” and 
• All systems are updated and product is shipped. 

The right system will be quick and easy to roll out across a retailer’s store network. The result is better availability, fewer out-of-stocks, and improved customer satisfaction on a wide scale. With the help of an AI-driven tool, retailers can boost inventory accuracy, elevate customer satisfaction, and keep phantom inventory from affecting supply chains, sales and the bottom line. 

Tav Tepfer is chief revenue officer with Invent Analytics.