In this episode, Robyn goes over keeping the right stock levels with our senior analyst at Marketplace Blueprint Nate Johnson.
Why Stay in Stock
Amazon, compared to other eCommerce platforms, requires a different managing strategy when it comes to stock. Because of the ranking/sales system, if you run out of stock and you start to slip and lose sales, you begin to move down on the organic rankings, which reduces your conversions and, in turn, hurts your search ranking. It’s a slippery and vicious cycle, so staying in stock is crucial.
You can optimize your listings, spend on advertising, and do everything to achieve the coveted first result page; however you can lose all your hard work and ranking by running out of stock.
An inventory-based business requires a delicate balance. If you run out of stock, you lose market position, but if you overstock heavily, you incur excessive storage fees due to stagnating inventory. So, it is a balancing act between making sure that you stay in stock and not having too much inventory.
Nate explains why he recommends that you have anywhere from four to six weeks of stock in inventory at any given point. If you’re a reseller under an arbitrage model where you’re buying from a retailer and reselling, you might be able to get away with a shorter lead time and be able to restock more often. But in general, we want to try to aim towards that four to six-week window. Anything past that, you will start to see storage fees accumulate. Especially in Q4, where monthly storage fees practically quintuple.
How to stay in stock
Amazon provides an Inventory health report that includes weeks of coverage for your current stock. It matches the current sales velocity, how many units you’re selling per week, and a forecast over a specified period.
You can use that coverage number to get an idea of how much inventory you need to keep in stock and to stay ahead of your sales. Keep in mind you need to factor in your supplier’s lead times to accurately send inventory into Amazon at the right times.
If you find spreadsheets overwhelming, there are some excellent third-party tools like Forecastly you can use to create your stock level forecast. You can even use the Amazon built-in forecast tools. Regardless of how you do it, the important thing is that you are continually monitoring and adjusting your stock levels, establishing and monitoring your replenishing alerts, and staying within your predetermined stock levels. And always keep in mind garbage in, garbage out. So you have to be looking at what kind of the data you are basing your calculations upon.
Calculating lead time
In order to properly establish your stock levels, you need to determine every time frame for every step in the distribution chain. How long does it take from the time you order until the products get finished. Then how long till it gets to you? How long does it take for you to turn around? How long does it take to ship to Amazon? How long does it take to check-in? After you have all your numbers, then you need to consider potential disruptions in the supply chain. For example, if you’re heading into seasonality, you want to give yourself a cushion.
If for any reason, your supply chain is disrupted with something you could not predict or your selling through faster than anticipated, there are ways to slow down velocity to remain in stock until your replenishment comes through.
When trying to avoid a stockout, look to reduce or eliminate mechanisms that you have in place to drive sales velocity. If you have any coupons running, cancel them. Think about increasing the price and obtain profitability out of it while slowing down sales. Pause or reduce your advertising budget in order to limit the amount of exposure and traffic your products are getting. This might sound counterintuitive, but it the end, it’s better to maintain your organic ranking and make the current inventory last a little bit longer until resupplying, rather than stocking-out and losing market position.