The Hidden Costs of Ghost Inventory: What You Need to Know

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The stock list says that you have 100 units of an SKU. But just a couple of hours ago, two units were damaged during order picking. And two days ago a few units were reported stolen.

These physically unaccounted-for units of inventory called ghost inventory, or phantom inventory, are a more common challenge faced by retailers than you think. 

Often, the items accounted for in the asset register do not reconcile with what is in the inventory. And this data discrepancy is because of poor inventory management and tracking.

Ultimately, it results in struggles with business spending, purchasing, and productivity.

To ensure regular and thorough inventory management, a third party logistics (3PL) provider like ShipBob can really help.

What is ghost inventory?

Ghost inventory refers to missing, stolen, lost, obsolete, or damaged assets that have not been accounted for in your asset register. 

Even though the items are not physically present in your storage space or warehouse, the digital records show that it’s “in stock” or on hand. And since you cannot sell what is damaged or not in stock, you lose out on sales and are saddled with unsatisfied customers.

Ecommerce businesses need to urgently address and prevent this supply chain/inventory management issue. Else, it could impact operations, leading to lowered warehouse and inventory efficiency, paying taxes where not required, higher insurance premiums, and surprise stockouts.

The causes of ghost inventory

If you do not have the right count of the SKUs, your accounting, projections, and fulfilment operations are likely to go for a toss. 

And the larger your inventory, the tougher it gets to detect the phantom inventory.

To know how to combat this issue, you need to first know what causes it. So, in this section, we highlight the root cause of ghost inventory popping-up across the supply chain.

Inaccurate inventory tracking

Inventory tracking is a laborious and repetitive process. When done manually, you may not be able to count inventory as often as required. And you may end up missing out on the latest changes in inventory count leading to ghost inventory.

Human errors

Errors are likely to creep in during data entry if done manually. And if there is a mistake in inputting data in one system, it will affect your entire inventory management system.

Inaccurate inventory levels lead to stockouts and lost sales across channels, which can prove to be a very costly mistake.

Software glitches

When your tracking software doesn’t scan the inventory accurately or input it correctly into the schema it can result in the wrong inventory count. And this can result in phantom inventory.  

Supplier issues

If your supplier shares the wrong count of SKUs. And if you do not cross check the numbers, then you may end up assuming that you have more units than actually present in the warehouse.

To proactively combat the above-mentioned causative factors, you must aim to automate inventory tracking. With minimal human intervention, an intelligent inventory management system can be depended upon to track inventory levels in real-time, thus increasing inventory cycle frequency and scope.

The damage ghost inventory inflicts

Ghost inventory can cripple business operations and ecommerce finances. In fact, retailers lose between 1% and 3% of revenue owing to ghost inventory. And if phantom inventory continues to be part of your inventory ecosystem, over a longer period of time, it will lead to bigger issues.

Here is a deep-dive into what happens when ghost inventory goes unnoticed and unchallenged.

Customer dissatisfaction

Imagine that your customers see the product in stock, but upon checkout or after purchase are told that it’s not available. With ghost stock, this happens often. This leaves customers feeling disgruntled. Did you know that 33% of customers switch to another retailer after just one bad experience? 

Also, your staff will have to spend valuable time pacifying them and processing their refund.

Here is a tough customer experience that eco-friendly beach brand, Ocean & Co., faced which drove them to work with ShipBob:

“We had 10 orders on an address hold with the new fulfilment network over one weekend. All we were able to see is the orders were ‘on hold’—not why they were on hold.

By the time we were able to finally identify the cause and correct the addresses, we were out of stock of the items ordered. The SKUs weren’t placed on hold. We oversold by 10 items and had to email those 10 customers to let them know that we didn’t actually have stock.”

Gerard Ecker, Founder & CEO of Ocean & Co.

Loss in sales and revenue

When you think you have more inventory than what actually is in stock, you will stock out quicker than anticipated. And regular stock outs result in a huge opportunity cost, in terms of the sales that you could have secured.

Also, you upset customers when you stock out, leading to fewer return purchases.

Not having a clear picture of the inventory levels on hand will also not allow you to make smart inventory purchasing decisions for your brand. Thus you lose revenue in the form of inefficient restocking or carrying costs.

Inventory is money. The longer ghost inventory is ignored, the more your revenue is hit.

Operational inefficiencies

Delays in reordering of stock, stockouts, or over stocking, and issues with meeting demand forecasts are some of the top operational issues you will face with ghost inventory.  Since ghost inventory hides the true demand for products, your forecasts get skewed.

Ecommerce brand, FlutterHabit, recognised how operations inefficiencies creep in with manual inventory management. And that is when they switched to ShipBob.

“Once we could see the pitfalls in our old manual system of fulfilling orders, we just realised we need something else to scale with. To get where we were going, we would need more structure to support all of our growth — so we switched to ShipBob.”

Bethany Peterson, COO of FlutterHabit

Banish ghost inventory with ShipBob

Tired of not being entirely sure if the warehouse has as many SKUs as mentioned in your records? It is possible to say goodbye to ghost inventory and optimise ecommerce fulfilment, across the supply chain, with ShipBob.

Here are some of the features of our 3PL service that can help:

Real-time inventory tracking

Whether you are a retail startup or an established ecommerce enterprise, know exactly where each SKU is located and how many units are stored, at any point in time. Always have a firm grasp on your inventory thanks to our inventory dashboards that are updated in real time.

Automated reorder points

You can predict when to reorder stock based on how many stocks you have in your inventory and what the demand forecast is. To find out when your stocks are expected to run out, you could use the reorder point formula

But continuously calculating this reorder point can be tiresome. ShipBob automates the process. It regularly calculates the reorder point. And sends you a notification the moment stock falls below a certain level so that you can ask suppliers to replenish stock.  

Advanced inventory analytics and reporting

Is a particular product performing well? Is the shipping costs to a particular customer location looking unprofitable? Is there a supplier that replenishes orders in a more timely manner? Answers to these questions and more can be answered by ShipBob’s inventory analytics software.

We also help you track KPIs such as gross merchandize value (GMV), inventory turnover, and putaway accuracy rate.

Industry-leading warehouse management solution (WMS)

Whether you want to increase warehouse accuracy, visibility, or productivity, our WMS can deliver. ShipBob’s easy-to-use and cloud-based platform and apps help power operations at one or multiple warehouses.

We also offer access to fulfilment centres across the globe, from Asia to Europe, North America, and Australia.

Exceptional customer service

Whether you sell in-store or in the online B2C or B2B marketplace, never disappoint a customer again, as ShipBob seamlessly manages inventory, orders, and transportation. In this way, the right orders will always reach customers on time and in the right physical condition. 

Ultimately, it ensures that your social media is filled with positive recommendations and viewpoints from happy buyers.

Get started with ShipBob

Interested in learning more about ShipBob’s fulfilment solution? Connect with our team to get started.

Ghost inventory FAQs

Below are answers to common questions about ghost inventory.

How does ShipBob help in managing ghost inventory?

No need to rely on spreadsheets to manually count inventory anymore, as ShipBob digitizes and automates the tracking of SKUs in real-time. You will always know how much inventory is available across each storage location. 

We also offer enough insights to help you figure out how to best manage deficit and surplus inventory (or excess inventory) – be it by liquidation, offering SKUs at off-price rates, or reordering the right quantities at the right time.

What are the common mistakes that lead to ghost inventory?

Movement of goods without recording them, spoilage, receiving errors, damage, lack of inventory audits, or data entry errors all contribute to ghost inventory. You need regular inventory tracking and assessment to overcome these challenges. 

In this way, it will highlight any discrepancies, point you to the source of your phantom inventory issue, and help you quickly notice and prevent future ones.

What’s the difference between ghost and phantom inventory?

Ghost and phantom inventory are the same thing, whether you sell electronics, home goods, or machinery. They both refer to the items that are recorded in your ledgers but not physically present in the stockroom or warehouse.

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Written By:

Meredith is a Content Marketing Specialist at ShipBob, where she writes articles, eGuides, and other resources to help growing ecommerce businesses master their logistics and fulfillment.

Read all posts written by Meredith Flora