Why you should care!
Categorizing your inventory as an Amazon seller is important as your item grows count grows. Even inexperienced sellers know that certain items contribute more to your monthly profit than others. If this is true, why do most sellers give the same priority to all items when replenishing their inventory?
We don’t mean that they replenish items that are unprofitable. We mean that they don’t account for greater lead time and demand variability for their highest priority items.
What’s the right way?
Professional inventory managers use the Pareto Principle when classifying their items, and you should too. We suggest an ABC analysis to help manage your inventory properly. With this analysis, you should rate items from A to C based on monthly revenue, profit, or cost of a stock-out. Using the cost of a stock-out is the preferred approach, but it may not be as easy to determine versus monthly revenue.
Top 80% of your revenue. This segment is typically 10-20% of your total items.
Second 15% of your revenue. This group is made up of all the items between the A-items and C-items. This will most likely account for 30% of your total items.
Lowest 5% of your revenue. This group typically accounts for 50% of your total items.
Inventory Management Principles Applied
As you can guess, not all of your groups should be treated equally when setting up inventory management policies for your business.
You’ll want the strictest control over these items. Make sure that you account for worst-case lead times and high demand variability. Replenishment orders should frequently happen with this group of items. We highly suggest using a professional-level inventory management tool with these items to ensure you don’t run out of stock.
You can take a slightly more relaxed approach on this segment versus the A-items. However, it is important that you still monitor these items closely because they have the potential of moving into the A segment.
This group should have a relaxed replenishment policy. You don’t want to tie up too much cash in inventory for this segment because the return on that investment is rather low. Your cash will be better invested in A-items. You’ll likely have stock-outs frequently in this segment but it the total missed profit is rather low. You may find that these items aren’t worth stocking at all, and you should remove them from your product selection.
You can set up these segments using different reports inside Amazon Seller Central. There are also software tools, like Forecastly, that can help you assign your products to the proper segment. No matter which option you choose, the important part is that you have the list and use it.
Have questions about setting up an ABC analysis for you Amazon products? Submit your questions in the comments and we’ll get back to you ASAP.