Many consumers choose to shop at specialty retailers to enjoy great customer experiences. When shopping at these stores, they expect better product availability and wider varieties of specific product categories than big box stores typically offer. In fact, one recent survey found that nearly 50% of U.S. consumers have trouble finding what they are looking for or discovering something unique at big box retailers.
To consistently deliver great customer experiences that shoppers have come to expect, specialty retailers should address inventory challenges that can lead to unnecessary stockouts. While many issues can contribute to out-of-stock situations, one cause is very common, very hard to spot and very damaging to any retailer’s business: phantom inventory.
What Causes Phantom Inventory?
Phantom inventory occurs when there are inconsistencies between a retailer’s inventory system and what’s actually on the shelf and available to buy. In these cases, the system will list a product as in stock, but it’s not actually on the shelf for customers to find and purchase. Sometimes, the items may not be in the store at all. Common causes of phantom inventory include:
- Errors made during inventory recording
- Items stocked or priced incorrectly on shelves by employees
- Items picked up and placed back in the wrong spot by shoppers
- Undetected retail theft
- Items stored in the back room but not replenished on shelves
- Wrong item gets scanned at the POS
- Product gets damaged and is unsellable
Since the inventory systems don’t indicate anything is wrong, retailers don’t even realize stockouts are happening. Typically, retailers do yearly or quarterly physical inventory counts, but this method is inadequate for detecting phantom inventory in real time. When phantom inventory issues go unnoticed, it leads to disrupted allocation and replenishment, ongoing long sales, lost customer loyalty and, ultimately, lower profits.
The solution? Artificial intelligence (AI).
AI for Quick Identification and Resolution of Discrepancies
By integrating AI solutions for phantom inventory detection with their current inventory and sales systems, retailers can detect and correct instances of phantom inventory before each problem grows. AI evaluates a retailer’s demand forecasts, inventory records and sales data, then uses probabilistic forecasting to identify products in each store that should be selling but are not. It highlights which SKUs are potential cases of phantom inventory for each individual store location. With this analysis conducted continuously for every SKU-store location combination, AI swiftly pinpoints phantom inventory issues throughout the retailer’s entire operations.
However, AI insights into phantom inventory are only valuable if they are actionable. Retailers should look for an AI solution that also generates a manageable amount of automated alerts specific for individual store locations. These alerts get sent directly to store managers via their smartphone or handheld device, detailing each suspected case of phantom inventory by SKU for their location.
Upon receiving an alert, managers can promptly investigate each item listed. Managers then simply indicate “yes” or “no” within the app based on their findings, and the AI solution updates all systems and orders more inventory accordingly. This streamlined process simplifies the task of addressing phantom inventory, eliminating the need for managers to spend excessive time searching shelves for potential inventory discrepancies.
To mitigate future occurrences of phantom inventory, AI also tracks recurring issues associated with specific SKUs. With these insights, managers can implement proactive measures to prevent repeated problems. For instance, if certain items are frequently targeted for theft, managers can implement monitoring strategies for those SKUs.
Improving Availability and Customer Satisfaction
To remain competitive against big box stores, specialty retailers need to ensure a great selection of products are on shelves and available to customers. Modern AI solutions for detecting phantom inventory are fast and easy to deploy, and they can start working behind the scenes right away to reduce instances of unnecessary stockouts. With the power of AI, specialty retailers will be well equipped to deliver exceptional customer experiences with popular products readily accessible at all times—leading to a 2-5% increase in sales per store.
Tav Tepfer is the CRO at Invent Analytics.
