Amazon FBA is one of the greatest things to happen to entrepreneurship in the recent decades. The fact that we can simply ship in inventory and sell on the largest consumer market on Earth is like a dream come true. Amazon FBA sellers don’t have to worry about the overhead, don’t have to hire workers to work in a store, no electrical bills, no rent, only FBA fees. However there is one thing you want to worry about: Amazon inventory management.
The fact that Amazon sellers are so far removed from the physical process of stocking inventory makes managing that inventory all the more important. Managing your inventory is not complicated, however it is one of those things that can have dire consequences if you are not paying attention. Of course, being able to anticipate the right amount of inventory is an acquired skill and it really depends on the product. Also, the way you make adjustments to the way you bring in your inventory can affect your margins.
The great thing about being an Amazon seller is that in terms of your inventory, you only have to worry about your stock. Everything else is taken care of. This is precisely why Amazon sellers have a luxury to commit extra effort and attention to their stock and reap the benefits from it.
Being overstocked vs. going out of stock
A big part of managing your inventory is finding the “goldilocks zone.” This is when you are stocked enough so that you don’t sell out of your inventory but, at the same time, don’t have too much stock, which can result in spending on storage fees or long-term storage fees. Neither scenario is good and every seller is likely to face both of these circumstances at some point. Let’s first take a look at what exactly is the drawback of both of the scenarios:
Going out of stock is more damaging unless you have committed an obscene amount of units to inventory and you cannot move them. There are several reasons why going out of stock can be a devastating turn of events:
- 1. Your organic rankings start to plummet – It is in Amazon’s interest that shoppers make purchases as often as possible while browsing the platform. This means that Amazon’s A9 algorithm is designed to help the shoppers find exactly what they are looking for as easily as possible.
If you go out of stock your listing will not be “removed” from all the searches, it will just drip lower during each search. Your rankings will suffer since your listing is still indexed with all of your search terms. When you are out of stock, all your competitors’ listings that show up in searches alongside yours will reap the benefits.
The only way to pseudo-offset this process is if you’ve responded quickly and have a new shipment of product on the way or being loaded into the FBA system. Then, shoppers will be able to make purchases. Here’s an example of a listing that Amazon recognizes will be back in stock on March 12:
Of course, this isn’t ideal for the instant-gratification shopper, but at least your product is still seen.
2. You cannot run PPC ads – If your product goes out of stock it will automatically become ineligible to be displayed as a sponsored ad. On the other hand, if you have an out of stock product in rotation in a campaign, it will automatically start to be displayed as soon as it gets back in stock without you needing to do anything.
PPC is how you raise your organic ranks and how you both maintain your position and challenge competitors. The fact that you will spend the entire period while out stock being absent from sponsored ads will have an even more devastating impact on your organic ranking.
3. Losing momentum – If you run out of inventory, it could be the result of a sudden rise in your sales. This is the most painful aspect of going out of stock. If your sales were on an upwards sales trajectory and you weren’t prepared with inventory, you could miss out on your product being a Top Seller.
4. The cost of going out of stock – In order to recover from going out of stock ASAP, you may be forced to run aggressive PPC ads in combination with coupons and social media promotions. You might be faced with weeks of inflated advertising costs that you might never get back.
Obviously, going out of stock is a big deal. Keep close track of your inventory and be aware of how recent sales volumes affect your stock. If you see an increase in sales over a short period of time, begin to calculate how long your stock will last if the trend continues. Amazon can provide this insight for you under your Inventory Dashboard … you can see how long your stock is expected to last and how many units you should put in stock for your next batch.
But don’t rely on the prediction system. Amazon will give you warnings if the algorithm calculates that you might be going out of stock on some items, but sometimes it can be too late.
Overstocking is also an issue that is more easily avoided. This happens when new sellers come into a market and are overconfident about how well their product will do. This is why it’s crucial to test Amazon’s waters first. If you’re thinking of diving into a new product, get a batch of items with a plan to reorder a new batch before they sell out.
So let’s say that your optimistic sales volume for a new product is 5 units a day, and it takes 12 days to get a new batch from ordering to delivery. In this scenario, it’s smart to get a batch of between 60 and 80 units.
This way if the sales start going up you will have enough time to replenish your inventory.
There is one primary negative factor when it comes to getting overstocked and that is the storage fees. Storage fees are charged monthly based on how many cubic feet your inventory takes up and the category of your product. The storage fees change in the 4th quarter due to higher volume of sales on the platform and in turn larger traffic in the FBA warehouses.
The standard storage fees also change based on how long your inventory has been in storage. After an item has spent 365 days in storage, Amazon starts charging long-term storage fees. This long term charge has been greatly reduced back in the changes from February 2019.
In case you do get overstocked you have 2 viable options:
1. Sell off your inventory and make pennies on the dollar. This is not the wisest course of action in many cases. Getting rid of inventory in this manner usually ends up costing money rather than even making the penny on the dollar. You might try to put a severe discount, maybe even start a 7-Day Deal or a Lightning Deal. Running both of those deals come with a cost, and this might only work for products that are already well-indexed and ranked that have been discontinued for some reason. Sellers with overstocked products are almost always products that don’t sell well. Trying to push them even harder might require aggressive PPC or other types of promotions. It might be an unnecessary financial risk.
2. Remove your inventory from the FBA warehouse. Under “Manage Inventory,” you’ll find “Edit” with a “Create Removal Order” option.
You can have your inventory shipped to another location and possibly try to sell it via other sales channels, you can dispose of it yourself, or you can have Amazon dispose of the inventory for a fee.
What you should do is consider all the options and make the most cost-effective choice. You even have the option of mixing each method. Try to sell off some of your product at a discount to cut your losses and dispose of the others to clear up storage.
Your main goal should be saving as much money and effort as possible, you don’t want the overstocking issue to overwhelm you to a point where you shift too much focus from your main revenue generating duties.
Air shipping vs. shipping by sea
Managing inventory is not only a matter of ensuring you have a sensible amount of product in stock. Finding ways to reduce production costs is also very important and highly impactful. Most private label sellers send inventory from suppliers by air (if they are smaller parcels). Going from air shipping to shipping by sea is a great leap that can heavily impact your margins.
Shipping by air is much faster and reliable, but it’s also expensive. While shipping by sea takes longer and hard to predict the wait time, you can save yourself some money if you reserve an entire container for your products only. Delivery issues can arise if you share a shipping container with other items that may have a harder time getting through customs.
It can take a batch sent by sea 40 days or more to get from China to the US under normal circumstances. For many sellers this can be a very long time and might be hard to make this commitment for several reasons:
1. Making sure they are stocked enough so they don’t run out before the shipment arrives.
2. Spending the funds necessary for a larger batch that would make sending the inventory by sea a viable option. The cost per product will be lower, however, since this would be a large batch the total expenditure for it will be high.
3. Being confident that the large amount of new inventory will sell in the future. Basically betting on the fact that the new large volume of inventory coming in will not end up being unable to sell.
Finding the right moment and creating the right set of circumstances is a matter of planning awareness and taking a calculated risk. However, once you find yourself in a situation where you get all your shipments by sea from that point on, you could be in a great position. You would have better margins, or even the option of lowering your price in order ro be more competitive and carve out a larger portion of your niche market.
You can achieve the same effect to a lesser degree by keeping in mind the different per-unit price points based on the size of the order. So even if all your shipments come in by air you can plan and order batches of larger quantities at a lower price. Just make sure you have the price points from your supplier.
Keeping track of things
We’ve gone through the fundamental factors when it comes to managing your inventory effectively. In order to be on top of things and be as effective as you can be with managing your inventory there are a set of indicators you need to keep a close eye on:
Stock levels – Amazon does a decent job of notifying you on how long your current stock will last, but you shouldn’t just rely on this. Using software for Amazon inventory management is extremely useful, especially if you have a large catalogue of products. Do some research to see which software works for you!
Manufacturing/Shipping times – A very wise thing to keep track of is the time it takes for every batch of product you order to be completed and reach your FBA warehouse. This is crucial information, by keeping track of this you will understand how long you can expect a batch of items to arrive—even at specific times of the year.
Sales volume – Amazon sellers should also focus on trends of selling. Knowing when to expect an increase in sales and planning for it in advance is extremely important. Forgetting to stock up just before a period of time where your sales are likely to go up is a common way that gets sellers out of stock. The more seasonal a product is the more of an effect this can have.
Important dates – Your calendar is your best friend! It’s important to plan shipments around important dates, possibly months or weeks in advance. When high-traffic days are on the horizon, Amazon sends out a notice to all sellers that they should send inventory by a certain date (Black Friday, Prime day, etc.).
Also, if you have suppliers in China you must be aware of how long the factories will be closed due to the Chinese New Year and make sure you get your items manufactured in time and that you have the funds available for them. Oftentimes you will need to consider the frequency of your orders and plan ahead.
In conclusion, Amazon inventory management is a matter of being fully aware of what is going on and planning ahead. Don’t allow yourself to be too immersed in your daily sales and your PPC conversions to a point where you don’t take the time to “zoom out” and look at your Amazon store from a broader perspective. Because managing inventory requires exactly that sort of thinking. As you can see there aren’t many factors to consider, it’s the way that they interact that matters. It’s a balancing act. It’s about making sure you have just enough stock to not go out of stock but on the other hand not overstocking to a point where it can become a problem. It’s about anticipating the important shifts in the market and balancing them with your finances and spreading out your orders so that you can hit the proper timing. It’s about balancing your finances required for stocking up while having enough funds to facilitate a more aggressive marketing effort. Most importantly, it’s about balancing expectations against the reality of the circumstances you are in.
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