Amazon inventory management doesn’t sound very sexy. Sadly, it’s not just necessary. It’s critical. The great news is this: get this right and you can improve everything you care about as an entrepreneur.
It can actually transform your business. Especially its cash flow and profitability. If those aren’t sexy words to you yet, they should be! Cash flow keeps you in business. And profit enables you not only to pay yourself. It creates 100% of the value in your business!
All systems selling products need to manage inventory well. Certainly, that’s especially true for physical products. The sheer sales velocity on Amazon makes inventory management particularly critical on Amazon.
It’s a classic case of balance sheet management. You can make the same sales with lower working capital. That’s less money invested. You can have stronger cashflow. Meaning it’s safer. In addition, you can also make more sales. A LOT more sales. AND more profits!
There are HUGE wins to be got from this. Nailing Amazon seller central inventory management is mission critical.
But what happens if you get it wrong? Why does it matter so much?
Well, there are two big potential pitfalls. The first is having overstock inventory [internal link]. The second is having Amazon out of stock [internal link]. Both have serious consequences.
If you’re overstocked, you’ll get a ton of issues.
That’s kind of easier to understand than being out of stock but worth listing here.
First of all, you’ll end up tying up a lot more cash in inventory than you need. That has many bad effects:
What’s badly misunderstood is the danger of being out of stock. The reason is simple. Those losses don’t show up in any kind of financial document. Even so, the loss is real. And it’s often huge.
Carrying insufficient quantities of inventory on hand [internal link] is worse than it sounds. It can lead to many cash flow issues, including:
This is not a quick win if you insist on doing this yourself! That’s why I spent so long telling you how important it is. You’re either going to end spending a few hours a week on it yourself. Or you’ll hire someone competent and pay good money. Or you’ll use some high-quality software system. There’s no short cut. But
That said, it does depend where you are at with your business growth. The size of your business makes a difference.
Early stage businesses with under $3000 a month in sales may need to do manual stock management. In essence, you’re deciding
– when to restock inventory into which part of your supply chain
– how much stock to get or move.
There are a few important factors in good Amazon inventory management:
Knowing how much you have of any product, and where it is are basic facts. But it can be surprisingly hard to do!
The basics for any system can be broken down in different ways. But the easiest is to break down the supply chain from beginning to end.
For beginners, it’s going to end up something like this:
You can do this by hand with a handful of SKUs on a spreadsheet. Once a week, check in each system or with each supplier how much of each product line/SKU is in each location.
Hint: get facts – don’t assume or guess! Always check the facts. They’re often not what you think they are. Or hoped!
Managing inventory that is currently in the FBA system is also important. One area is managing your IPI Inventory p
Performance Score. Amazon is constantly judging how well you’re using their warehouse space. Amazon gives you (on your Seller Central dashboard) a score out of 1000 called the IPI score. Low can slam your ability to ship stock into the FBA system. To keep your IPI healttracktor your Seller Central account weekly for:
Lead time is one of the critical factors in Amazon inventory management.
What does lead time mean in shipping? Well it means how long it takes between asking for an action and stock moving.
Here are the parts of the supply chain where lead time is usually measured:
Learning how to forecast sales using historical data is not 100% science. It does include art to a degree. That said, using data as a starting point and as a check on your theories is critical.
If you’re starting out, you may use rules like:
These are a start but usually not good enough. You need to base your forecasts on the best quality data you can get. Otherwise, you could quickly find yourself with Overstock inventory [int link]. Or you could be out of stock [int link] in your bestsellers. Both of them are terrible for cash flow. And going out of stock is terrible for sales AND profits. So it’s worth working hard on to improve demand forecasting [int link].
People worry about how to forecast revenue based on historical data . But, it’s important to be realistic about the true value of your historical data. The value of the data for any product line will depend on how long it has been selling:
If you have little data or short time periods, it’s best to take your internal data with a pinch of salt. I’d advise you to use software to monitor your competitors’ sales over time. Then you can see trends within your market niche. Take your internal data and blend it with market data. That gives you a much better chance of forecasting demand well.
In the end, the global economic outlook and your knowledge of your industry must also factor in.
Forecasting sales is a black art. Frankly, nobody gets it right 100% of the time. Or gets it 100% right any of the time! But the more accurately you can predict, the better your business will be. So it’s a great investment learning how to forecast revenue.
Once you’ve forecast your sales, and set your lead time, you’re not quite done. You need to calculate your safety stock. This is the inventory that you add on top of your lead time forecasts once you think you’ve got the right number! This is to account for the fact that you’l probably get it wrong. Above all it’s to try to minimise the danger of going out of stock.
A rule of thumb is to add a month’s worth of stock. But this needs tweaking depending on:
A general early-stage business delusion can appear here. That error is: failing to account for the real costs of an operation. Let’s assume you (the stressed business owner-operator) are doing the Amazon inventory management.
Well, just because you’re not paying yourself doesn’t mean there’s no cost to your work. Yes, it doesn’t show up in any standard financial statements. But the opportunity cost [external link?] of you not doing other work is real.
You should definitely work hard to get better at inventory forecasting. But you need to get the mechanics off your desk.
Rules-based stock management software limitations.
If you’re beyond the first few $10,000 in monthly revenue, or into 2 digits of SKUs, it’s time to move up. You’ll need to move beyond this level for some serious reasons:
The traditional semi-automated solution has been a rules-based system. While that saves your fingers typing on a spreadsheet, it still has limits:
Almost everybody has heard of “The 80/20 Rule”… One mastermind member actually did such an 80/20 analysis. Out of 300 product lines, Just TEN were giving over half of his profit! (pure 80/20 in fact) AND YET… So few of us actually do this.
Why? Because It’s hard to do – And because it’s hard to find the time!
When you’ve identified which products to restock, you’ll need to answer a few questions:
These systems are better than manually implementing stock management rules. But you should definitely monitor these systems yourself at this stage. Or have a trusted experienced employee do so.
By the time you’re doing over say $20,000 a month in sales or have over 20 SKUs, it may be time to move on up to move up again.
What you need at this stage is a system, not a spreadsheet. It needs to be based on proper algorithms, and be based on solid data. We’ve discussed the limitations of using data only from your own seller account. So ideally such a system can gather data from many other Amazon seller accounts in your category.
It needs to be a system that learns based on results; one that will show the cash required. Above all, it should show which products will get you the highest return if you restock them.
All business growth is about getting the greatest return on cash, effort and time invested. It’s the same with Amazon inventory management.
The machine-learning inventory management software could give you the biggest and quickest profit increase. Justifying the costs at this stage of business growth are pretty easy. Just make sure that the system ticks a couple of boxes:
What, two more things to think about, Mike?
Sorry yes. It’s reality. If you want to make more money in the real world, that’s what you have to deal with!
It’s vital to tie in two other components to inventory management:
If you lower your price to get sales… …but you run out of stock… you make lower profits. Pricing to stay in stock is crucial. And there is a dynamic relationship between stock levels and pricing. This us why in the end you need the sophistication of an artificial intelligence system.
If you run ads to get sales… …but you run out of stock… Again you’re losing potential profits. Plus you’ve just wasted all your ad spend!
This is why a dynamic system is the only way to solve this problem.
I recommend Eva as the best Amazon inventory management software at this stage – use the code GET50OFF to get 50% off your first month!
That said, a final thought: While you work on your laptop, there is no substitute for the old necktop computer (as my old business coach used to put it)!
Delegate but don’t abdicate. Delegate the day-to-day stock management to your system. But remember: you’re responsible for your business’s success. And stock management is too central to its success to ignore. Educate yourself and use your systems wisely. That is in the end the surest path to wonderful financial security, juicy profits and life-giving cash flow that come from mastering the art of Amazon inventory management.