July 22, 2022

Amazon inventory management

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!

Why it’s important to get right Amazon inventory management right

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.

What can go wrong with Amazon inventory management

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.

Overstock inventory means…

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:

  • The working capital [kw research then internal link?] needed for a product line shoots up. If you’re already importing from abroad, that number may become huge fast .
  • Cash can crater to low levels.
  • You may have to borrow more [do kw research then internal link], increasing your costs as you pay interest
  • It will stop you redeploying that capital to start a new product line
  • It’s not an efficient part of your business. That makes your business as a whole less lendable.
  • It makes your business less sellable and less desirable.

Being out of stock.

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:

  • Weeks (or months) of zero profit
  • Zero cashflow from those products while out of stock.
  • Giving your competitors sales you could have had
  • Giving your competitors market share which may be hard to regain
  • Losing Amazon keyword ranking which you may not get back
  • Lower growth for your business
  • Lost future value of your business

How to forecast inventory

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.

How to restock inventory  for Early stage Amazon businesses

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.

Factors in inventory organization

There are a few important factors in good Amazon inventory management:

  • inventory organization [int link] and stock tracking
  • how to forecast sales using historical data [internal link]
  • Safety stock or buffer stock [internal links]
  • Lead time [internal link]

Inventory organization and tracking

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:

  1. Work in progress (WIP) in factories
  2. Finished goods in transit to warehouses
  3. Inventory in warehouses/3PLs/prep centres/your home
  4. Inventory in the Amazon FBA system

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!

Amazon seller central inventory management

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:

  • IPI score of course!
  • Returns
  • Removals
  • inactive SKUs
  • SKUs with a stock turn under 1 (ie they take more than 3 months to sell through all the inventory)

Lead time

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:

  • manufacturing lead time: time between placing an order and the goods being finished. Learning how to reduce lead time in manufacturing is mission-critical ongoing work.
  • shipping lead time or freight lead time: The time it takes the goods to go from the factory gates to your 3rd party warehouse. This could even be your home if you’re starting out.
  • inbound shipping lead time. Those only applies if you use the FBA (Fulfilled By Amazon) system. This is the time for goods to move from your 3PL/home or receiving warehouse to Amazon’s warehouses.
  • Amazon inventory prep time – the time it takes Amazon to get the goods ready to sale. Yes, this could be as little as 24-48 hours in normal times. Try it in Q4, however, and it could be as high as 2-3 weeks!

Forecasting sales

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:

  • “Next 30 days’ sales =roughly last 30 days”
  • “A Q4 Month = typical month X200%”
  • “June Sales this year= last year’s sales for June X 1.3”

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].

The Limitations of your own data in forecasting sales

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:

  1. Under 3-4 months. Seasonality has not been accounted for. You may be misjudging demand based on a single unusually slow or good sales quarter.
  2. Under a year. You have some perspective. You’ll have a low and a high month or months. Yet , you have no year-on-year comparison. This can still give you a poor prediction. That’s especially true if you’ve never sold the product in its peak seas on (eg Q4 for giftable products or summer for camping products, etc.). It’s common for peak month sales to double or triple an average month. But not guaranteed! Hence your dilemma…
  3. You have well over a year’s data. This gives you year-on-year comparisons. While more reliable, you should not take last year as a blind template for the coming year.

The solution: monitor your competition

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.

Safety stock or buffer stock

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:

  • how much cash you can afford to tie up in a product line (less cash means you have to have a lower safety stock and take greater risks of running out of stock)
  • how consistently well this product has sold (which implies having greater safety stock)
  • whether a product or product group represent a big % of your sales (if so, that also implies more safety stock)

Beware the “low expenses” fallacy

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.

The next stage – rules based inventory management software

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:

  • It’s labour-intensive and demands good skill (and thus real cost).
  • Manual prediction is often (mostly) very inaccurate.
  • The static nature of spreadsheet data means it’s not accounting for change over time.

The traditional semi-automated solution has been a rules-based system. While that saves your fingers typing on a spreadsheet, it still has limits:

  1. it’s primitive. Whether or your staff do this, Or a rules-based system… The result is the same: Your predictions do NOT match reality! They can be off by a solid amount.
  2. That treats all products as equally valuable!

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:

  • How much stock do you need for each product?
  • What is the budget for it?
  • And which products will you get the biggest return on your cash?

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.

The next stage of inventory management

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.

Machine-learning  inventory management software

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:

  1. “machine learning” means a system that learns from experience and adjusts actions accordingly. (NOT based on fixed rules)
  2. it ties in two other components.

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:

  1. Pricing

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.

  1. Advertising

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.

Best Amazon Inventory Management Software

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.

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Michael Veazey

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