Effective inventory management and forecasting is key for your overall Amazon platform success in addition to maximising profits and saving yourself some cold hard cash.
Fees can rack up quickly so it is important to stay on top of it all in order to keep the ship both lean and afloat!
But with so many moving parts and lots of options to pick from, where do you begin and how do you best identify ways to optimise, manage expenses and cut costs?
Below are 10 actionable tips and tricks to help you optimise your inventory strategy to turbocharge your store’s success. We will be covering:
- Inventory Forecasting
- Understanding how much inventory you need
- Monitoring your inventory health
- Automatic replenishment
- Storage fees
- Inbound shipment tools
- Planning for seasonal demand
- Measuring inventory strategy and performance
- Third-Party Tools
- Funding
So let’s dig into it. But before we do, it is important to flag some of the common mistakes made when it comes to managing Amazon inventory.
Inventory management mistakes, however small they may seem, end up costing you valuable time and money and therefore impact overall profitability (not to mention can have a negative environmental impact as well). Some of the most common mistakes to watch out for include:
- Over or under ordering inventory
- Not tracking inventory turnover rate
- Mismanaging or missing trending stocks
- Not properly labelling your products
- Mismanaging seasonality
- Underestimating demand for popular products - Stockouts
- Overstocking perishables
By being aware of these common mistakes and taking steps to avoid them, you can ensure that your Amazon FBA inventory management strategy is optimised for maximum profits.
Now let’s dive into our top 10 tips:
1. Understand your inventory turnover
Knowing how fast your products are selling will help you to determine when you need to reorder and how much inventory to hold to ensure you are not over or under stocked.
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To understand your Amazon inventory turnover and in turn make informed decisions on reordering etc, you first need to calculate your inventory turnover ratio. This ratio measures the number of times your inventory is sold and replaced in a given period.
The formula for calculating inventory turnover is:
Inventory Turnover = Cost of Goods Sold / Average Inventory
Here's how you can break down the formula:
- Cost of Goods Sold (COGS): This is the cost of the products you sell during a specific period. Find this info on your income statement.
- Average Inventory: This is the average value of your inventory over a specific period. Find this information on your balance sheet.
To calculate your average inventory, add your beginning inventory to your ending inventory and divide the result by two.
Once you have your inventory turnover ratio, you can interpret it in the following way:
- A high inventory turnover ratio indicates that you're selling your products quickly, which is generally a positive sign. However, it can also mean that you're not keeping enough inventory on hand to meet demand.
- A low inventory turnover ratio indicates that you're not selling your products as quickly, which could mean that you're overstocked or that there's not enough demand for your products. Maybe you could be doing a better job on the marketing front? Exploring Sponsored Ads and the like does come with a cost but luckily Point 10 can help with that too. ;)
It's important to keep in mind that your inventory turnover ratio may vary depending on the type of product you sell, the season, and other factors but it is a great place to start to better understand your inventory position.
2. Monitor your inventory health
Luckily for Amazon brands, there are many tools and reports in existence that allow sellers to monitor the health of the inventory and analyse data to enable informed and streamlined decision making.
Below are 5 we think you should consider to get on top of your inventory health:
Inventory Performance Index (IPI)
Using factors like stranded inventory, excess inventory and stockout rate, the IPI generates a score to determine how well you, as a seller, manage your inventory. The higher the IPI score, the better your inventory management performance. Find this tool in your Seller Central Account.
Manage Excess Inventory
As the name indicates, this tool will help you to identify and manage any excess inventory you have lying around. Using this tool can help you to create removal orders for slow-moving or overstocked inventory as well as set up automatic removals should you need them. It also comes armed with numerous options to receive recommendations on how to optimise your inventory levels tailored to your store.
Stranded Inventory Report
When products aren’t available to customers, they will end up looking elsewhere. The Standard Inventory Report prevents this by flagging the products currently not available for sale due to problems such as missing product information or incorrect listings allowing you to plug the gap before it becomes a larger problem and start losing customers to the competition.
Restock Inventory Report
After looking at your sales history and inventory levels, this report can recommend which products are priority for restocking and what quantities to order.
Inventory Health Report
The aptly named Inventory Health report gives a snapshot of the covered information such as stranded inventory, excess inventory, and inventory age. Use this full picture to guide your decisions.
By keeping an eye on your inventory health metrics you can better identify any issues, take corrective action quickly and in the end optimise your inventory management from the offset.
3. Set up automatic replenishment
Amazon’s automatic replenishment tool can save numerous headaches when it comes to helping you stay on top of your inventory levels.
Using sales data and other factors to automatically calculate when you need to reorder products, this feature will let you know when your stock levels will need some love and attention.
Here's how automatic replenishment works on Amazon:
- You set up automatic replenishment for a product in your inventory.
- Amazon tracks your sales data and inventory levels for that product.
- When your inventory levels reach a certain threshold, Amazon automatically places an order to restock your inventory. (N.B. You have to have stock reserves AND this does come at a cost, especially during peak sales periods, so it could be time to consider external funding support to ensure you have all the necessary stock levels and tools at your disposal)
- You receive a notification that the order has been placed, and the new inventory is delivered to your fulfilment centre.
Without the manual monitoring of your inventory and subsequent stock ordering you would otherwise need, this tool can save astronomical amounts of time and effort automating the process.
You also ensure that you maintain happy customers by always having enough inventory on hand to meet demand.
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4. Watch out for those storage fees
One of the potential downsides to using Amazon FBA is that it can come with some hefty storage fees. In order to keep your costs under control, it's important to implement strategies to minimise these fees.
Effective strategies include:
- Regularly review your inventory levels and identify any slow-moving product
By removing slow or stagnant products from your inventory stockpiles, you can dramatically reduce the amount of space you're taking up in Amazon's fulfilment centres, which will in turn reduce your storage fees.
- Use Amazon's FBA storage fees calculator or Uncapped’s profit calculator
Use the calculator in order to understand what the potential incurred costs will be. That way you can make the necessary decisions to save yourself a buck or two!
- Amazon Removal programme
Amazon offers a couple removal options for slow moving products. It comes at a fee but they do offer a free removal once a year.
Storage fees can rack up so it’s important to stay on top of it to keep a lean ship.
5. Utilise inbound shipment tools
Inbound shipment tools can play a critical role in managing inventory and fulfilling orders effectively. These tools help sellers streamline the shipping process and reduce the risk of errors, delays, and additional costs.
Here are some of the key reasons why inbound shipment tools are important for Amazon sellers:
- Accurate tracking
These tools give you visibility and tracking capabilities for your inventory from the moment it leaves their suppliers to when it arrives at Amazon's fulfilment centres. This therefore helps to stay on top of where your inventory is and provide accurate shipping and delivery estimates to their customers. Also minimise errors and losses.
- Cost savings
By using FBA’s Inbound Shipping tool, sellers can take advantage of Amazon's discounted shipping rates therefore saving money on shipping costs that can be passed on to customers
- Faster processing time
Processing times can quicken resulting in an array of positive outcomes such as delivery time improvement, customer satisfaction, reduction in loss to competition and much more.
All in all, these tools can be used to manage inventory more efficiently from start to delivery as well as potentially reduce the risk of stockouts and backorders.
6. The importance of accurate inventory forecasting
As with a lot of business functions, accurate forecasting can be a crucial aspect of managing your Amazon FBA inventory.
By accurately predicting customer demand and levels of inventory needed to meet those demands, you can ensure that over or under stocking is not a problem encountered.
It is also important to ensure customer satisfaction. As a consumer, there is nothing worse than seeing the dreaded ‘Out of Stock’ signs all over your favourite or go to products. So to avoid disappointing your loyal customers, forecast appropriately especially with seasonal products. See below.
There are a variety of tools and software programs available to help you with forecasting, including Amazon's own Forecast tool.
7. Plan for seasonal demand
Prime Day. Christmas. Black Friday, Cyber Monday. All of these seasonal moments can put a strain on inventory as an increased demand and changing shopping habits rain down on the ecommerce world.
This is made doubly difficult when selling across multiple platforms. So as stated in point 1, it is important to plan for expected sales across all platforms, not just Amazon, to avoid disappointing customers.
It is vital to be as prepared as possible, forecast accurately and ensure reserves are available during peak seasons to avoid stockouts and take advantage of the opportunity at hand.
Depending on products, these days can make or break your quarter or even your year so there is no other option than getting it right or risk losing out to competition.
Should you need help ensuring stock levels are met but have cash flow concerns, please see point 10 ;)
8. Plan your inventory strategy
Without knowing what’s happened, you cannot guide what’s to come. It's crucially important to look back on data so you can best inform future decisions and identify areas where your strategy is working well, as well as areas where you might need to make some adjustments.
In your Seller Central dashboard, you are provided with a wealth of data, metrics and guiding information about the performance of your inventory management. Listen to it and use it to guide your inventory strategy day-to-day or going into major sales moments such as Prime Day or Black Friday, Cyber Monday.
Additionally, there are a variety of third-party tools available that can help you track and analyse your inventory data for planning purposes. Which leads us smoothly into our next point:
9. Automating inventory management with third-party tools
It's worth considering automating your inventory management with third-party tools. These tools can help you streamline your inventory management processes, saving you time and improving your overall efficiency.
There is a huge variety of third-party tools available for Amazon FBA sellers. Below are a couple of our standouts:
By using these tools, you can automate many of the tasks associated with inventory management, allowing you to focus on scaling your business.
10. Apply for funding to ensure healthy stock levels
As we have mentioned in previous articles, funding can be a great way for Amazon brands to scale their business especially when it comes to securing additional inventory. As discussed above, it can help you to:
- Avoid stockouts
- Maximise on seasonality opportunities
- Invest in crucial tools or software
- Manage storage
- And so much more
Let’s take Hunter & Gather, a leading Keto & Paleo friendly food provider, as an example. They were growing at a fantastic rate (34% per quarter) but needed cash in order to meet the demand.
Using Uncapped, Hunter & Gather were able to access £315k to bolster inventory at critical times in their year. With inventory capital taken care of, they were able to unlock and as a result were able to unlock marketing potential to support this inventory injection.
As a result, they saw some staggering results:
- Saw a 235% return on investment
- Rocketed to #2 Best Seller on Amazon UK for Ketchup
- Traffic to their Amazon store and ecomm site grew by 106%
- And much more
Funding helped dispel inventory worries allowing them to focus on other areas to scale their business.
Conclusion
Effective Amazon FBA inventory management is essential for maximising your profits as an Amazon seller.
By understanding the basics of inventory management, seeking external support, you can set yourself up for success and ensure operations are optimised for maximum impact.
If you want to learn more or be connected to our extensive Amazon partner network, get in touch with Uncapped today.
