For any business operating on Amazon, mastering inventory management is not just a necessity but a strategic asset that can significantly impact your bottom line. Sellers benefit when they have a strategic blueprint for inventory that can propel growth and safeguard against operational pitfalls.
Use the information below as a first step toward a better inventory management program for your brand. Then, you can begin to implement the best insights and inventory strategies for your business and turn your inventory management into a competitive advantage.
The cost of poor inventory management
Inventory management is critical to running a successful Amazon business. It requires the art and science of ensuring you have the right amount of stock at the right time. And it can directly impact your profitability, customer satisfaction, and overall business growth.
Mismanaging your inventory can make avoiding stockouts difficult. A stockout occurs when you run out of a product that customers want to purchase. The immediate impact is a loss of sales revenue. But the actual cost of a stockout is much more than just the lost sale. When a customer can’t find the product they want in your store, they may go to your competitor, potentially resulting in a permanent loss of that customer. In addition, frequent stockouts can harm your seller reputation on Amazon, lower your search rankings, and lead to negative reviews, all of which can significantly affect your long-term sales and profitability.
On the other hand, having excess inventory also has its drawbacks. If you have too much stock, your capital is tied up in products that are just sitting in a warehouse. This decision can strain your cash flow, preventing you from investing in other aspects of your business, like marketing or new product development. Also, if the products don’t sell within a certain period, you may need to sell them at a discount, reducing your profit margins. Overstocking can result in expensive storage fees for sellers, especially those relying on Amazon’s FBA services.
Effective inventory practices are about striking a balance. You need to manage stock levels to meet customer demand and avoid stockouts, but not so much that your capital is tied up and your costs increase. While finding this balance can be difficult, there are inventory strategies to guide the way. Understanding and implementing them can help you maintain customer satisfaction, optimize your cash flow, and support Amazon business’s success.
Strategies to optimize Amazon inventory levels
The first step to inventory optimization for Amazon sellers is to put tools in place to eliminate some guesswork from the equation. But it’s not just about the latest automated systems and technology. There are several more traditional techniques that can be employed to ensure that you have the right amount of stock at the right time.
Obviously, demand forecasting is one of these essential aspects of optimizing inventory management. It involves predicting the quantity of a product that your customers will purchase in the future. Demand forecasting covers a range of approaches, models, and formulas. However, for companies, choosing the proper method is crucial for success. There are typically six types of demand forecasting to consider, divided into active versus passive methods, short-term versus long-term horizon, and internal versus external focus from the business’s perspective.
For stable sales, passive demand forecasting is reasonable. This method involves an automated “set it and forget it” process that uses historical and other data to project trends. This isn’t the best method for fast-growing companies or markets with disruptive activities.
On the other end of the spectrum, active demand forecasting is a more hands-on process that uses customized forecasts and specialized knowledge. This method is necessary for companies in dynamic marketplaces and fast-growing industries because past performance isn’t enough to predict future results.
Short-term demand forecasting is vital; however, different firms have different timelines, so defining what qualifies as “short” can be challenging. Nonetheless, it’s typically between a quarter to a year. An effective way to test the accuracy of this method is forecasting weekend sales using trailing year trends or identifying sales for an upcoming holiday weekend, given the last three years of data for that weekend.
Long-term demand forecasting can be complex and less precise than short-term ones. Bird’s eye projections tend to be limited, primarily due to misassumptions and unforeseen business decisions, no matter how well planners collaborate with forecasters. However, long-term forecasts can help make roadmaps that posit where things might go under different assumptions. They’re perfect for brainstorming “what if” scenarios and becoming a little more precise to help with planning.
Internal demand forecasting is an analytical technique that uses firm-level data along with information about a client base to predict demand for specific goods and services. These data sets include historical sales, past and present financial metrics, and sales team predictions. On the other hand, external macro-level demand forecasting helps incorporate more significant trends into a company’s planning and projections. It considers factors like industry growth, customer socioeconomic status, innovation trends, and other factors that may impact business expansion and development.
While passive forecasting still has a role to play, active forecasting is the way forward for companies that want to remain competitive. Artificial intelligence forecasting combines the strengths of both passive and active forms, providing non-human input and statistical techniques. Today, software automates forecasting processes for companies using enterprise resource planning systems.
Mitigate Risks in Amazon Inventory Management
No matter how it’s accomplished, relying on macro-level consumer demand forecasts can help weigh risks and trade-offs, such as investing in an existing product versus expanding and launching a new one. However, it’s not the only way Amazon sellers should seek to minimize the hurdles they face in inventory management.
As mentioned, by fostering a good rapport with your suppliers, you can ensure better communication and cooperation, which can help prevent inventory problems. For example, if there’s a delay in production or shipping, a supplier who values your relationship is more likely to inform you in advance, allowing you to adjust your inventory plans accordingly. Moreover, having multiple suppliers for each product can serve as a safety net in case one supplier cannot fulfill an order.
Safety stock and buffer inventory are also important concepts in inventory management that can avoid a costly hiccup. Safety stock is additional inventory that you keep on hand to protect against variability in demand or supply. It serves as a cushion to meet unexpected increases in demand or delays in supply. Buffer inventory, meanwhile, is the extra stock kept between different stages of your supply chain. This helps ensure smooth operations even if there are delays or disruptions at any stage. The key to effectively using safety stock and buffer inventory is to calculate the right amount based on your sales data and supply chain dynamics.
Many companies utilize inventory diversification as another strategy that can help mitigate inventory risks. By stocking various products, you’re not putting all your eggs in one basket. If one product doesn’t perform as expected, you have others to fall back on. Diversification can also help attract a broader customer base, potentially increasing overall sales. However, it’s important to balance diversification with focus. Offering too many products can dilute your brand and make inventory management more complex.
Technology tools to help manage Amazon inventory
Of course, technology plays a vital and growing role in inventory management, especially for Amazon sellers who often deal with large volumes of inventory. One of the primary ways that technology aids inventory management is through inventory management systems. These systems help with managing stock levels in real time, automate restocking processes, and provide valuable data on sales patterns and trends.
Inventory management systems can aid in maintaining the right balance of inventory by providing accurate and up-to-date information about stock levels, which can help prevent overstocking and support the goal of avoiding stockouts.
These systems can also automate the process of reordering stock when levels fall below a certain threshold, saving time and reducing the risk of human error. Additionally, by providing data on sales patterns and trends, inventory management systems can help sellers make more informed decisions about which products to stock and in what quantities.
Amazon’s critical inventory management metrics
With most inventory management technology, there will be several Key Performance Indicators (KPIs) that are designed to guide decision-making and break the analysis of product movement down into more user-friendly metrics.
One such KPI is the Inventory Turnover Ratio, which measures how often a company sells through its inventory in a given period. A higher turnover ratio indicates that merchandise is being sold and replaced quickly, which is generally a good sign. However, a ratio that’s too high could mean that the company is frequently running out of stock and missing out on sales.
Another important KPI is Days Sales of Inventory (DSI), which indicates how long it takes to sell through current inventory. A lower DSI means that stock is being sold more quickly, which is typically beneficial as it reduces storage costs and minimizes the risk of obsolescence.
Gross Margin Return on Investment (GMROI) is another useful KPI. It measures the profit return on each dollar invested in inventory. A higher GMROI indicates that the company is effectively turning its inventory investments into profits.
More specifically, Amazon FBA Sellers should monitor several KPIs from their Amazon seller dashboard to optimize their inventory management.
Under these circumstances, one of the most important KPIs is the Inventory Performance Index (IPI). The IPI metric measures how effectively a seller manages their FBA inventory. It considers factors like excess inventory, sell-through rate, in-stock rate, and stranded inventory. A higher IPI score indicates better inventory management.
Another crucial KPI is the order fulfillment time. This operational metric focuses on the efficiency and effectiveness of a seller’s operations. A shorter order fulfillment time can lead to higher customer satisfaction and better reviews, which can, in turn, boost sales.
The Sell-Through Rate, which is part of the IPI, measures the rate at which your inventory is sold over a specific period. A higher Sell-Through Rate indicates that your products are in high demand and you manage your inventory well.
Similarly, the In-Stock Rate measures the percentage of time that your product is in stock. A higher In-Stock Rate means that you’re less likely to miss out on sales due to stockouts.
Of course, monitoring the number of days your product is out of stock can provide valuable insights. If a product is frequently out of stock, it may indicate that you need to adjust your reordering processes or find more reliable suppliers.
Sellers can use the data provided by these KPIs to make strategic decisions about inventory management. For example, if the Inventory Turnover Ratio is low, the seller might decide to advertise to boost sales and reduce stock levels. If the DSI is high, the seller might look for ways to improve sales or reduce order quantities.
Fast-track your Amazon success with Amify
As you face inevitable increases in Amazon seller fees and shifting demands on your company, you need a partner ready to respond with the right approach. The team at Amify can make your path to growth on Amazon easier than you imagined.
More than 60 experts in Amazon optimization are waiting to help you focus your efforts where they matter most. Contact us today for a free consultation, or read more about the $400 million in sales we’ve already helped our clients generate on Amazon. Hurry, don’t let your business be left behind.