As an Amazon seller, there’s a good chance that you’ll be aware of how costly stock-outs can be for your business. But, if you aren’t, we have put together some nuggets of information that can help you to understand why you really need to get on top of your numbers.
Inventory forecasting is, quite simply, a vital feature for all businesses selling physical goods. By looking at the past sales of each item in your inventory, forecasting systems can predict future stock levels.
So what are you actually trying to achieve through forecasting? The main goal is to maximize the number of orders you fill and minimise the number of items you stock. When you break it down, you essentially need to supply the number of goods that will fill demand. Having said that, it’s almost impossible to determine precise numbers for this.
Therefore, putting a system in place to forecast this will increase the ability of your Amazon business to estimate future sales. As a result, you can reduce stock shortages or overstocks, as well as their costs – but why is this important to avoid?
Why it’s important not to run out of inventory on Amazon
Firstly, you always need to keep the customer at the heart of what you do with your business. Think about it – when you run out of inventory, any of your customers who had your product saved in their cart obviously now won’t be able to buy it. Imagine how disgruntled this shopper will be when it gets removed from their cart entirely. This is what happens when a product is out of stock. Not only is this an opportunity and money lost, this is also future business possibly gone due to poor customer experience.
Not only this, but when your product runs out of stock, it loses its spot in the Amazon rankings. You know what this means – more money and more work from your end! Unfortunately, when you do eventually replenish your stock, you may need to use promotions to get things moving.
The final point is that you’ve already gone through the process of waiting for your ads to “warm up” in the Amazon system to get your ACoS down. Once your stock is back, unfortunately you could, once again, experience high ACoS.
Why you don’t want too much inventory on Amazon
You will really want to avoid Amazon’s long-term storage fees. In February and August each year in the UK, Fulfillment By Amazon (FBA) conducts an inventory cleanup. The inventory items that have been in fulfilment centres for between 6 and 12 months will be charged a long-term storage fee of £12.50 per cubic foot and items that have been for more than 12 months will be charged a long-term storage fee of £25.00 per cubic foot. So as you can see, that’s totally unnecessary cost for your business.
Also, for common sense’s sake, you don’t want to be left with a bulk of expensive stock if, for whatever reason, things don’t work out. Hopefully it won’t ever come to that but you can’t be too careful.
So, how does it work?
Even though the inventory software system you have selected for your business will do the bulk of the work on your behalf, it is important for you and your business that you understand where these numbers come from. You definitely need to have an understanding of what you are entering into your system and whether that data is correct.
Below are three key stages of inventory forecasting you will need to consider:
Lead time: This is the time in which it takes an order to reach Amazon’s warehouses from the time you placed that order. It’s important to have enough stock to last your business during this time – don’t leave it too late! It’s essential that you ensure your inventory levels will meet with customer demand.
Safety stock: Safety stock does what it says on the tin – it protects your Amazon business from running out of inventory before you are able to restock it. During the time you are waiting for your new stock to arrive you can encounter many stumbling blocks – a supplier could delay a delivery, for example. To make sure you are prepared for such instances, you could keep some extra inventory as safety stock at the suppliers’ warehouse.
Keep in mind that a shortage of inventory means your customers won’t receive their orders and, as stated earlier, will receive a poor customer experience. The clear danger of this is damage to your business through diminished reputation and your customers moving on to use the services of your competitors instead. Ensuring you maintain your levels of stock will help you retain customers and, with them, your reputation.
Reorder point: Another vital part of managing your Amazon inventory is working out when you need to reorder. The ‘reorder point’ will forecast when you should replace your stock before getting to your safety stock.
Inventory forecasting can be tricky, but it is vital for the profitability of your Amazon business. Ensure you are aware of peak seasons and when there are factory stoppages. For example, if you are ordering from China, they take around one month off from late January to mid February. This means you will need to plan for the first quarter ahead of time. Through understanding the process and employing the appropriate software you are ensuring the safety of your stock levels and, in turn, satisfying your important customers.