FBA Inventory Replenishment
Typically, Amazon sellers are so focused on finding new products to sell on Amazon that they often forget about maximizing the profitability of their existing product set.
It is easier to boost your company’s profit through proper inventory management than it is to do the same through new product sourcing. Effective inventory management will ensure you don’t run out of products to sell when customers are looking to buy and your cash is properly invested in the right products so you can keep turning inventory over for a profit.
We spoke with Jeremy Biron, Founder at Forecastly to talk about the biggest pain points for Amazon sellers when it comes to FBA inventory replenishment including supply chain management and how to prevent stockouts.
Q. Why did you decide to build an inventory management tool?
Q. What are the biggest challenges associated with FBA inventory replenishment?
1) Calculating Sales Velocity:
A lot of the issues sellers faced (at the time we founded the company) were centered around incorrectly calculating the sales velocity. Some of the applications have since corrected that, which is good – but that was a big piece of our decision to start the company.
If a product is out of stock for half a month and you sell 100 units – that’s very different than if you sell 100 units and the product was in stock because your sales velocity should have been double what it was.
Now, if you don’t correct this at the beginning of the process – then essentially it doesn’t matter what other fancy calculations you run after that point. That’s the very beginning of the replenishment process, so if that isn’t correct then everything after that point is going to be flawed.
2) Incorporating Lead Time:
Another big piece of inventory management is accurately incorporating lead time. A lot of the applications don’t incorporate lead time in the right fashion – that is when stockouts occur.
If you think your lead time is going to be 30 days and it’s actually 45 days – then you have a high likelihood of having a 15 day stock out- which can be very expensive for a seller.
According to a Forecastly, “The effect of an FBA stockout on an Amazon business is often underestimated by sellers. Obviously, you’ll miss out on product sales if you don’t have inventory in stock. That’s the most evident problem, but you need to consider the effect that out-of-stock event will have on your inventory forecast moving forward.”
“Sellers will often underestimate their forecast if they have had a recent out-of-stock event on an item. This is problem intensifies when the stockout event has happened for an extended period of time.”
3) Predicting Spike in Sales:
The other challenge is how to accurately predict the likelihood of a spike in sales. If you can predict a spike, then you can most likely reduce the likelihood of stockout.
A spike in sales could include outside factors such as promos and seasonality. Those are two difficult pieces to tie into your predictions that you can’t simply determine in an excel sheet (where a lot of sellers calculate their inventory replenishment).
Excel works great when you are smaller seller but if you want to do it right and do it at scale then you need to be able to predict those spikes accurately and bring in those outside factors into your forecast.
A lot of it has to do with Amazon seasonality, which ties back to the category level during a certain time of the year. Sellers should be aware of the impact promos play as well. For example, if you give away 100 units at a 50% discount because you want to encourage sales – you can’t assume that 100 unit sales velocity is going to continue after you stop giving away units at 50%.
There’s a lot of “secret sauce” that is involved when it comes to inventory management. You don’t have to know exactly how it’s done but as a seller you should know what is being factored into your equation including seasonality and or promotional orders. Same thing goes for days out of stock. It’s important to know what the system is doing but not necessarily how it’s doing it.
Q. What trends or predictions do you have for inventory management in 2016?
As it relates to inventory management on Amazon, what I think will happen in 2016 is that Amazon will release a new version of their replenishment tool to help sellers better incorporate lead time and place orders with suppliers.
A really important thing for sellers to consider is whether or not they think it’s a good idea or worth it to give their supplier and cost data directly to Amazon.
I don’t think Amazon’s replenishment tool is going to be as good as some of the other tools on the market, but at the same time it could be good for some of the smaller sellers out there – serving as a point to get started.