Inventory management is our jam. Why? We would honestly argue that it’s one of the most important aspects of running your FBA or other ecommerce business.
Forecastly founder Jeremy Biron spent years running his own FBA businesses and initially built a solution that could help him to manage inventory more effectively. Having now spent a few years specializing in inventory management, we feel qualified to say that not only is it important, but arguably, it’s more important than ever.
Sometimes good inventory management is what separates a company from their competitors, or what gives one company a better handle over cash flow than another, as we’ll see.
In any case, how you manage your inventory can make the difference between staying in business or shutting up the shop.
Here’s why we think now is the time to ensure you’ve nailed down inventory management:
“Encouragement” from Amazon
Here’s a direct quote from Amazon, just in case you haven’t caught up with changes for 2018:
“In 2018, we are adjusting our FBA storage fees and policies to encourage improved inventory management, which will help your products be received and delivered to customers more quickly. These changes will take place throughout 2018. We are informing you now so you can plan for these changes.”
So in a nutshell, fees are going up, and you’re encouraged to improve your inventory management if you want to minimize the charges that your business will be liable for. Here are what those fee increases look like:
- Monthly Inventory Storage Fees: Starting April 1, 2018, monthly inventory storage fees will be increased by $0.05 per cubic foot for standard-size and oversize items. This change will first be reflected in May 2018 charges for storage that occurs in April 2018.
- Long-Term Storage Fees: Starting September 15, 2018, long-term storage fees will be adjusted and the assessment dates will be changed from a semi-annual basis to a monthly basis.
- Minimum Long-Term Storage Fees: On August 15, 2018, we will introduce a minimum charge of $0.50 per unit per month for items in fulfillment centers for 365 days or more. The greater of the applicable total long-term storage fee or minimum long-term storage fee will be charged.
That’s not all folks, here’s another important change that Amazon has introduced which will have an impact:
Inventory Performance Index
You may have noticed this new metric in your account (currently still in Beta), which scores you from zero to 1000 on inventory performance. Amazon has announced that as of July 1, 2018, they may limit access to sellers who score below 350. On the other hand, sellers who maintain a score above 350 can have unlimited storage access for both standard and oversize items.
Why are they doing this? Their goal is to free up roadblocks that occur during key shopping seasons. They want to allow inventory that is efficiently managed to flow freely while limiting inventory that is inefficiently managed to try to prevent bottlenecks.
Obviously, to have inventory rejected from the FBA warehouse would be a disaster for any Amazon seller, so the key question then becomes, how do you keep that score above 350? Below is a screenshot we borrowed from Seller Central, showing what the Inventory Performance Index section looks like:
You can see it’s quite a change from their usual reporting structure and has been set up to be viewed and acted on quickly and simply. Amazon states that your IPI is based on how well you keep popular products in stock, maintain healthy inventory levels, and fix listing problems. Your score is updated weekly.
You can also very quickly quantify how your inventory performance is impacting your profitability, with clear messaging about what you are paying in storage fees:
Basically, you need to follow Amazon’s recommendations and manage well those top influencing factors on your score. These are defined as:
- Excess inventory – The number of units for which the cost of holding your inventory would likely be more than the cost of taking action (such as reducing prices to increase sales or removing excess stock from the warehouse). This value is based on product demand and your costs.
- In-stock inventory – This is the percentage of time your various ASINs have been in stock over the last 30 days. It is weighted by the number of units sold for each SKU in the last 60 days.
- Stranded inventory – This occurs when you have stock at the fulfillment center, but it is not available for order fulfillment due to a problem with the listing.
At the time of publishing, you have two months to get your score into a healthy range above 350. However, given that measures like in-stock inventory are taken over 30 days, now is the time to make any necessary changes. Amazon has this to say:
“Starting July 1, 2018, storage limits will be evaluated every three months on a quarterly cycle. If your Inventory Performance Index is less than 350 six weeks before the start of a quarter, you will be notified of your potential storage limits. If your Inventory Performance Index score is still less than 350 at the end of that quarter, those limits will apply for the next quarter.”
The implications for the success or failure of your busy Q4 season are clear here – get that metric under control so that you can best leverage all those holiday sales.
A specialized inventory management tool like Forecastly can help to keep your metrics in the green. You can grab a free trial here, and take care of inventory issues ahead of the July 1 deadline.
The competitive landscape
Besides the fact that poor inventory management may now lead to you being shut out on Amazon, the fact is that good inventory management can give you a competitive advantage.
The Amazon marketplace has continued to grow, with latest estimates indicating that there are at least five million marketplace sellers on Amazon, with at least two million of those on Amazon.com alone. The bottom line is that people have a lot of choice and businesses can be broken by poor inventory management.
If you don’t have an item in-stock, your competitor probably does, and now they’re getting the buy box and the review from the sale. It can take a long time to claw your way back to the buy box if you’ve had a stockout period while competitors remained flourishing. You want to be the one that is in-stock while competitors are out, consistently holding the buy box, getting the sales, and getting the boost to your review numbers.
At the other end of the scale, poor inventory management can also mean excess stock on the shelf. Every unit represents money that could have been invested in products that sell, perhaps even a new product line that could become your next best seller. Cash flow management can be another business-killer, and a competitive advantage if you’re on the positive end. While you’re lamenting excess stock, a competitor could be making ground with faster-moving products.
Lastly, let’s not forget that you probably have a number of competitors in the ecommerce world outside of Amazon too. Estimates place the number of ecommerce companies in North America alone at around 1.3 million. Amazon gives you the advantage of reaching their wide customer base and being able to offer free shipping to Prime members, but people will shop competitor sites away from Amazon if they are offering a better experience, or perhaps a product that remains in-stock!
The point is, in the ecommerce world you need to remain on your toes to ensure you’re still ably competing. Good inventory management remains a key strategy for keeping you in a competitive position.
We can’t really emphasize enough how important it is to have a good system in place, ensuring that your inventory management is kept as tight as possible. Not only is Amazon encouraging this by charging more fees, but they’re introducing the Inventory Performance Index as a measure which will actually punish sellers who don’t manage their inventory well.
If you haven’t got a good system in place yet, now is the time to check out your options. Of course, we suggest you take a free trial of Forecastly and try it out for yourself. It’s a solution that implements automation that will not only keep you on the ball, but help your business to scale too.