The new year is filled with the promise of new opportunities to come, so it’s a perfect time to do a bit of reflection on how your business has done over the last 12 months.
What went well? What didn’t? What do you hope to do better this time around?
For Amazon sellers, an absolute core aspect of their business is their inventory. Without it, you simply don’t have a business and any mismanagement of that inventory can cost you dearly.
Did you experience a stockout at any time during the last year? If not, well done! If so, a great 2018 goal for you may be to prevent that from happening again. Here’s why.
Here’s what really happens when you run out of stock…
There are many sellers who take a stockout as a good sign – hooray, we sold everything! Sure, in the short term it’s great that you made the sales, but in the longer term, stockouts can be bad for Amazon sellers and indeed any other kind of retailer.
First of all, a stockout isn’t just a sign that you’ve successfully sold your products – it’s a sign that you’re missing out on sales! If customers aren’t able to buy from you, they’re probably clicking over to a competitor and making their purchases from them. You risk not only losing that immediate sale but the future business of that customer, particularly if they are satisfied enough with the competitor to go back to them.
Secondly, as an Amazon seller, you will feel the negative effects of a stockout for quite some time after your products are back in stock. Without steady sales and the possible good reviews and feedback that come with them, you give your competitors an opportunity to push you down the best seller rankings and out of the buy box. What happens next? You have to try to claw back that lost ground, so you’re probably going to spend extra funds running promotional deals or advertising your products. It can take weeks, even months to gain back what you lost.
That stockout just became not only lost immediate sales, but lost future sales due to lack of visibility, and loss of capital you might otherwise have retained because you now need to spend it on promotion.
Things just got costly, right?
What are the key causes of stockouts?
Sometimes there are circumstances that are largely out of your control which can lead to a stockout situation, especially if there’s been some kind of disaster at the manufacturing facility or a port strike holding up your order. Most of the time though, stockouts could have been prevented with some proactive involvement by the seller.
Common causes include:
- Completely misunderstanding good inventory management. When you reorder is a more important focus than how much you order. You’ve got to understand a few key inventory figures (such as lead time and sales velocity) to get this right and sometimes incorrect calculations can be a culprit, especially if days out of stock aren’t accounted for in sales velocity.
- Not building in a “buffer” of safety stock.
- Supplier-side issues. Perhaps the supplier doesn’t deliver within the agreed upon timeframe for any number of reasons. It might not even be due to something that they’ve done; if there have been issues with your payment arriving on time, they might not want to release the order.
- Issues with product quality. If you’re experiencing this, you’ve probably got a high rate of returns back to the supplier and less inventory available for sale.
- Too much cash tied up in excess inventory of a particular product. This leads to not enough working capital to place sufficient orders of your better-selling stock. This can especially be a problem for newer sellers who might not have the capital coming in to absorb the problem.
A theme you can see emerging from a number of these is that good inventory management can help you to more effectively manage your cash flow. You get the steady stream of income from maintaining your sales while avoiding having too much of your cash tied up with inventory that sits on the shelf.
The limitations of Amazon’s inventory reporting
It’s worth noting here that it can be easy for sellers to get into inventory management issues if they rely heavily on the reporting provided on the Amazon dashboard. There are often issues with accuracy, such as showing your current inventory correctly, but not accounting for what you have inbound. You also can’t tell if that inventory is being moved around the country or is reserved because it has already been sold. Take a look in seller forums and you’ll find plenty of discussion on topics such as “my inventory reports are screwed up.”
Another thing that Amazon won’t accurately do for you is account for your in-stock percentage when calculating sales velocity. This is important; let’s say you sold 300 units in the last 30 days and currently have 400 units in stock. If you were to take Amazon’s calculation which is based on the full 30 days, that would suggest that your sales velocity is 10 units per day.
What if you were out of stock for 15 of those days? Your true sales velocity would be 300/15, or 20 units per day. At this rate, of course, you need to reorder stock much sooner than you would for a velocity of 10 units per day. 400 units would be 20 days of stock left, not accounting for any “safety stock” room. Doing the math there, if your lead time is a relatively short 21 days, you should have ordered more stock at least a week ago to avoid a stockout and to have some safety buffer.
Many sellers start out using a system of spreadsheets to try to keep on top of inventory management themselves, but this usually ends up being too much work and of course, spreadsheets are out of date as soon as you’ve updated them.
How to avoid stockouts
By now you’re absolutely ready to avoid any stockouts this year, right? Here are some ways to keep your inventory management humming.
Be on top of your numbers
We’ve talked about these before, but it’s always worth a quick refresh. The vital metrics you need to be on top of when it comes to inventory are:
- Lead time – the number of days from placing an order with your supplier to having your inventory available for sale on Amazon.
- Sales velocity – the speed with which you sell your inventory, usually calculated as number of units per day.
- Safety stock – the amount of “buffer” stock you allow yourself. This will vary between sellers and products, but the trick is to have just enough, rather than too much excess sitting on the shelf. Sellers usually either use a number of days stock or a percentage of total inventory.
- Your reorder point – the number of units remaining at which point you must reorder inventory.
Here’s a calculation of reorder point using the earlier example:
Units in stock: 400
Inbound inventory: 0
Sales velocity: 20 units per day
Lead time: 21 days
Safety stock: 7 days (140 units)
Reorder point: 21 x 20 = 420 units (no safety), 420 + 140 = reorder point of 560 units with safety stock.
In this example, an order should have been placed 8 days ago for new inventory, when the units in stock were at 560.
Note: Forecastly was created to provide an automated solution to inventory management problems that works seamlessly with your Amazon account. These calculations are taken care of by the software and predictive analytics help to produce more accurate and real-time forecasts. No more need for that spreadsheet!
Manage your supplier relationships
So much comes down to the relationship you have with suppliers. For example, you need to find suppliers who will be communicative with you if there are any issues going on that will result in longer lead times. How much better would it be if a supplier contacted you prior to your next order and let you know that they need 7 days longer at the moment? You’d immediately plan to order at least a week earlier than you expected.
To achieve this kind of communication, you need to work on building good interpersonal relationships with them. It’s about trust and reciprocity.
One thing that you’ll see experienced sellers do is set up payment terms with suppliers, for example, offering 70% upfront and 30% upon delivery. This also enables them to put conditions in their contract that they can easily enforce, such as a penalty clause for late delivery. Some sellers use a penalty of 10% per week late for this.
If you’re brand new, a supplier is unlikely to want to offer payment terms, but make this something to look at this year if you’ve been working with them for a while. This makes sense for your cash flow overall as well.
Look at products individually
Rather than creating blanket rules to cover all of your SKUs, look at products individually and give particular focus to your best sellers. For example, it might be advisable to use a bigger safety stock margin for your best sellers than your slower products, especially if you’re heading into seasons where sales increase.
Every product you sell will have some kind of seasonality attached to sales trends. If you are not yet sure what that looks like, use a tool like Google Trends to analyze searches over time.
Ready to make 2018 a year of no inventory stockouts? If this has been an issue in your business, bringing inventory management under control can make a serious difference to your bottom line.
Know those critical metrics and keep a close eye on the individual performance of your products. Build good supplier relationships and work together to keep communication open.
Need a tool to help you out? You can sign up for a 14 day free trial of Forecastly here.