What Is Phantom Inventory? How to Identify & Prevent It

Allison Champion
5 min read
November 22, 2023

Phantom inventory is the elusive stock that exists only on paper, but not in reality. Whether it’s caused by damage, theft, or simply becoming obsolete, phantom inventory can wreak havoc on a business. It drives up costs and consumes precious time as employees scramble to locate items that don’t even exist.

This article will provide practical insights on what causes phantom inventory and how brands can effectively address it to ensure they never lose another sale to inventory that just can’t be found.

What Is Phantom Inventory?

Phantom inventory is a term used to describe inventory that exists in your records but not in your warehouse. It can be caused by a variety of factors, including theft, shrinkage, receiving errors, misplaced inventory, and data entry errors.

Phantom inventory can be caused by a number of factors, including:

  • Incorrectly entered data
  • Missing or incomplete information about who has what item(s)
  • The use of multiple systems that don’t communicate with each other

Here are a few real-world examples of phantom inventory:

  • A retail store’s inventory records show that they have 100 shirts in stock, but when they do a physical inventory count, they only find 80 shirts.
  • A warehouse’s inventory records show that they have 500 boxes of cereal in stock, but when they receive an order for 100 boxes, they can only find 400 boxes.
  • A manufacturing company’s inventory records show that they have 1,000 raw materials in stock, but when they start production on a new order, they realize that they only have 900 raw materials.

The Impact of Phantom Inventory

This discrepancy can have several impacts on a brand, including lost revenue, poor inventory data quality, and a poor customer experience.

Lost Revenue

When a product is listed as available in inventory records but is actually missing or unavailable for sale, it can result in lost sales opportunities and revenue. A customer can’t purchase an item if it’s not on the shelf—physical or digital—for them to actually buy. A potentially worse situation happens when a customer buys an item online, but the physical item can’t be found in the warehouse to fulfill the order. 

Poor Data Quality

Phantom inventory can lead to inaccuracies in sales and inventory data, making it difficult for businesses to make informed decisions and optimize their operations. 

Customer Satisfaction & Experience

If a customer places an order for a product that is listed as available but is actually out of stock, it can lead to disappointment, frustration, and potential harm to the customer-business relationship.

Common Causes of Phantom Inventory

The common causes of phantom inventory include theft, spoilage, breakage, misplacement, inaccurate data entry caused by human error, system errors, and counting or quantity errors.


Inventory shrinkage, which includes employee theft, shoplifting, and fraud, is a common cause of phantom inventory. Inventory Sshrinkage can have a significant impact on businesses, affecting their bottom line and profitability. In fact, retail shrinkage reached an all-time high in 2020, costing retailers billions of dollars. 

Receiving Errors

Receiving errors during the delivery and processing of inventory can lead to phantom inventory. The most common type of receiving errors include incorrect or failed scanning of products during delivery, which results in inventory discrepancies. For instance, during the receiving process, the retail team may incorrectly scan the amount of product that comes into the store.

Misplaced Inventory

Misplaced inventory is another common cause of phantom inventory. This occurs when products are not in their designated inventory location or are on the wrong shelf due to an error in stocking or product placement. This can result in incorrect inventory levels in the system, leading to missed sales opportunities and inaccurate order fulfillment.

How to Identify Phantom Inventory

Brands can identify phantom inventory through several methods and practices including regular inventory counts, analyzing POS data, and leveraging technology.

Regular Inventory Counts

Running a routine physical inventory audit can help compare the actual stock levels with the recorded inventory. Discrepancies between the physical count and the recorded inventory may indicate the presence of phantom inventory.

Analyzing POS Data

Brands can analyze sales and reorder patterns using their POS data to identify inconsistencies or unexpected changes. If the recorded sales and reorder requests do not align with the available inventory, it may indicate a phantom inventory issue.

Leverage Technology

Barcode or RFID systems can provide accurate and real-time tracking of inventory movements. By scanning products during receiving, stocking, and sales transactions, brands can maintain a more precise inventory record and detect any discrepancies that may point to phantom inventory.

Preventive Measures

By adopting preventive measures, brands can significantly reduce the occurrence of phantom inventory and optimize their inventory management processes.

Invest in Inventory Management Software

Implementing a robust real-time inventory management systems can help brands track and manage inventory more efficiently. These systems can provide real-time inventory visibility into product availability, automate inventory tracking, and generate reports that flag discrepancies or anomalies indicative of phantom inventory. Software-powered third-party logistics partners like Flowspace, can provide an easy-to-implement solution for brands. You can learn more about AI in logistics and how we are implementing the newest and most efficient technologies to bring companies like yours better results.

Employee Training

Brands can provide training to staff members involved in inventory management to ensure they understand the importance of accurate inventory records and the potential impact of phantom inventory. This can help minimize errors and improve overall inventory accuracy.

Regular Monitoring

Regular physical counts and audits of inventory can help identify any discrepancies between the recorded inventory and the actual stock levels. This allows brands to address issues promptly and maintain high inventory accuracy levels.

Here are some inventory management KPIs to be aware of if you’re looking to help prevent phantom inventory.

How Flowspace Can Help Prevent Phantom Inventory

Flowspace’s platform provides brands with real-time visibility into their inventory levels. This means that merchants can always see what products they have in stock and where they are located. By having accurate and up-to-date information, brands can easily identify any discrepancies between recorded stock levels and actual inventory, minimizing the risk of phantom inventory.

Flowspace’s platform is designed to send automatic alerts when inventory levels reach a specified threshold. This proactive feature allows brands to stay ahead of the game by reordering products before they run out. By receiving timely notifications, brands can ensure a steady supply of goods, reducing the chances of phantom inventory causing issues with stockouts.

Brands can leverage their historical sales data and other factors, and use Flowspace’s platform to forecast future product demand. By analyzing trends and patterns, brands can make informed decisions regarding inventory levels. This helps prevent overstocking and ensures that inventory aligns with actual customer demand.

Utilizing Flowspace for order fulfillment, brands can optimize their order processing workflows. With a +99% on-time shipping rate and +99.9% pick accuracy, Flowspace ensures that orders are picked, packed, and shipped accurately and efficiently. Flowspace’s order fulfillment software reduces errors and minimizes the chances of incorrect inventory records leading to phantom inventory situations.

Get in touch today to find out how Flowspace can help you identify, prevent and manage phantom inventory!

Written By:

flowspace author Allison Champion

Allison Champion

Allison Champion leads marketing communication at Flowspace, where she works to develop content that addresses the unique challenges facing modern brands in omnichannel eCommerce. She has more than a decade of experience in content development and marketing.

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