Winning on Amazon forces sellers to overcome an array of challenges. Excess inventory is one that is easy to overlook yet carries a significant impact. Failing to account for this difficulty can wreak havoc on your financial health, operational efficiency, and even your brand’s reputation.
However, understanding the implications and developing strategic solutions is possible. Let’s explore ways to prepare for these challenges and the practical strategies to help you navigate this tricky terrain.
The causes of excess inventory
In the context of Amazon sellers, excess inventory refers to the surplus of products that are not sold within a specific timeframe and continue to remain in the Amazon warehouse. This accumulation of products is more than what’s needed to meet shopper demand and can result from various factors.
One key factor contributing to the accumulation of excess inventory is inaccurate forecasting. Sellers often predict future sales based on past sales data, but there can be discrepancies between the forecasted sales and actual sales. If a seller overestimates the demand for a product, it may lead to overstocking, resulting in excess inventory.
Another significant factor is seasonality. Certain products have high demand during specific seasons or periods and low demand during other times. When sellers fail to account for these seasonal fluctuations while stocking their inventory, they may end up too much.
Product life cycle is also an issue that can contribute to excessive inventory on Amazon. Every product has a life cycle – introduction, growth, maturity, and decline. If sellers fail to consider this cycle, particularly the decline phase, they may continue to stock products that are no longer popular among consumers, leading to an accumulation of surplus inventory.
Similarly, changes in consumer preferences and market trends can also lead to inventory issues on Amazon. The market is dynamic, and trends change rapidly. If sellers do not stay updated with these changes, they might continue to stock products with little demand.
Excess inventory is bad for business
Regardless of the cause, excess inventory can significantly impact Amazon sellers financially and operationally.
Financially, one of the first areas affected is storage costs. Amazon charges fees for storing products in their warehouses, which can quickly add up when a seller has a large amount of excess inventory. The longer items sit unsold in a warehouse, the more storage fees accrue. This can quickly eat into a seller’s profits, even if the items eventually sell.
Fundamentally, the storage portion of any Fulfillment by Amazon (FBA) fee is determined by the number of cubic feet the inventory takes up inside Amazon’s facility. Currently, individual selling accounts have a storage limit of 10 cubic feet. Depending on their inventory performance index and how long they have been an FBA seller, professional selling accounts may or may not have storage limits.
In May 2022, Amazon adjusted its policy regarding older warehouse inventory. Previously known as a long-term storage fee, the new aged inventory surcharge adds a fee of $1.50 per cubic foot for each piece of inventory stored by Amazon for between 271 and 365 days. Once the inventory age of an item passes 365 days of storage, the surcharge increases to the greater of $6.90 per cubic foot or 15 cents per unit.
Another financial impact comes from the need to reduce prices to move the excess inventory. When a product isn’t selling as expected, sellers often resort to markdowns or clearance sales. While this can help to move the stock more quickly, it also reduces the profitability of each sale. Sometimes, the price might need to be reduced so much that the seller makes little to no profit or even incurs a loss on each sale.
Operationally, excess inventory can also cause issues. Managing inventory takes time and resources, and the more items a seller has, the more complex this task becomes. This imbalance can lead to increased costs and reduced efficiency.
Additionally, having a large amount of excess inventory can tie up capital that could otherwise be used elsewhere in the business. For example, the money spent on excess inventory could have been used to invest in new, potentially more profitable products or in marketing efforts to increase overall sales.
There is also the risk of inventory obsolescence. If the excess inventory consists of items that become obsolete or go out of style and ultimately become impossible to sell at any price. The result can be a total loss for those products, which is a significant risk for Amazon sellers.
From increased storage costs and reduced profitability to increased operational complexity and the risk of inventory obsolescence, the dangers associated with excess inventory are numerous and significant. Maybe worst of all, they can also impact customers as well.
Too much inventory can hurt customers, too
When Amazon sellers face excess inventory, it can significantly impact both the customer experience and a seller’s reputation on Amazon.
From a customer perspective, excess inventory can lead to a lack of product variety. When sellers are overstocked with certain items, they may be less likely to introduce new products because their capital is tied up in the existing inventory. As a result, customers may find the product range limited, which can negatively affect their shopping experience.
As mentioned, the problem can also lead to outdated products remaining on sale for longer periods. These products may not meet the current market trends or customer preferences, leading to customer dissatisfaction. Customers today are well-informed and prefer to buy the latest products. If they consistently see outdated products from a seller, it can negatively impact their perception of the seller’s brand.
When it comes to the impact on a seller’s reputation, excess inventory can indirectly affect a seller’s performance metrics on Amazon. When a product doesn’t sell as expected, sellers might be tempted to use aggressive marketing or deep discounts to move the stock. While this might help in the short term, it can lead to customers questioning the value and quality of the seller’s products in the long run.
Alternatively, if a seller has a large amount of excess inventory that remains unsold, the increased storage fees can force an increase in prices, which might further deter customers and harm the seller’s reputation for affordability.
Preventing and reducing excess inventory
Due to the potential for adverse consequences, Amazon inventory management is an integral part of running a successful Amazon business. One strategy sellers can use to prevent or reduce excess inventory is to foster a close relationship with their suppliers. This relationship allows for more flexible order quantities and delivery schedules, which can help sellers avoid overstocking.
Another effective approach is to continually maintain optimal supply levels. It’s common for sellers to aim to have around 60 days’ worth of supply. This allows them to meet demand without accumulating excess inventory. Regular inventory checks using tools like those in Amazon Seller Central can assist in maintaining this balance.
Bundling products is another way for sellers to reduce excess inventory. They can bundle slower-moving items with best-selling products, increasing the desirability of less popular items and helping move them more quickly.
When needing to liquidate excess inventory without significant losses, sellers have several options. One of the fastest ways to address surplus inventory challenges is by selling it to liquidators. These companies specialize in buying and reselling excess inventory, providing sellers with a quick and straightforward way to free up storage space.
Another common strategy is to offer discounts on products that have been in inventory for too long. While this may result in lower profit margins, when done appropriately, it can help move stock quickly and free up resources for newer, more desirable products.
If the inventory is not selling and storage fees are piling up, Amazon sellers can create a removal order. The company will then either dispose of the inventory or return it to the seller, both for a fee. Despite resulting in a loss, it can be less than the cost of continued and potential long-term storage fees.
Effective inventory management strategies can limit the Impact of excess inventory on profitability, improve cash flow, and contribute to a successful Amazon business. Every seller should monitor their inventory levels closely, maintain a close relationship with suppliers, and consider innovative strategies like product bundling to minimize their risk of excess inventory.
Amify can help
The team at Amify can make your path to growth on Amazon easier than you imagined. More than 60 experts in warehousing, logistics, optimization, content and more are waiting to help you focus your efforts where they matter most.
Trust a partner with the experience to respond effectively to the countless demands placed on your Amazon business. Contact us today for a free consultation, and learn how we can help your brand thrive in the world’s most competitive marketplace.