How Much Inventory Should I Store in Amazon FBA?
Amazon’s logistics network received quite a bit of attention in 2020. Quarantines led to surges in online buying, and Amazon’s fulfillment centers struggled to keep up (although Amazon grew 40% year-over-year in Q2). To cope, Amazon temporarily restricted which product categories it would accept into fulfillment centers, increased the minimum performance requirements for utilizing their systems, and limited the maximum number of products that could be stored in their warehouses.
But even before COVID-19, Amazon logistics were a hot topic. In the great game of supply and demand, the question has always been how to provide enough inventory without overstocking. Here at Kaspien, we live by the idiom “always buy enough, but never too much.” That, however, is much easier said than done.
Running out of stock can result in cascading repercussions that damage the velocity of a listing, so it’s imperative that we consistently strike a balance between having enough but not too much inventory. – Joy Kuykendall, Account Manager
There are many factors to consider when deciding how much inventory to ship and store at Amazon, several of which we’ll cover here. Your first step: determine your goals before assigning a strategy.
What are My Company Goals?
Is your strategy geared towards cash flow management? If so, you’ll more than likely consider a more conservative approach, what we call a “lean model” here at Kaspien. If your goals are focused more on revenue this year, you’d probably consider a more aggressive approach, pushing higher quantities to market and supporting sell-through with pricing and marketing strategies.
Inventory Management Strategies
Once you have goals in place, you can determine if you want a lean model or an aggressive model. Obviously, both come with their own set of considerations and risks. But what exactly are the consequences for stocking too much or too little inventory at Amazon?
Overstocking Results in Fees
Most Amazon sellers are aware that Amazon charges monthly storage fees per item (by cubic foot). If, for one reason or another, you wind up with too much inventory at Amazon, you’ll be subject to what are referred to as “Long-Term Storage Fees” in addition to monthly storage fees. Per Amazon, “Inventory that has been in a fulfillment center for more than 365 days will be charged a monthly long-term storage fee (LTSF) of $6.90 per cubic foot or $0.15 per unit, whichever is greater.” These fees compound the longer the inventory sits in the warehouse without selling, eroding your bottom line.
At Kaspien, we have a devoted team to monitor our inventory levels and ensure listing price supports a healthy sell-through rate.
“It’s important for sellers to find the optimal level of inventory. Overstocking inventory increases storage costs and can negatively impact a seller’s IPI score.” said Autumn Roybal, Pricing and Inventory Manager.
The best way to avoid these fees would be to not overstock at the warehouse or to conduct a removal, which has its own set of associated fees.
Understocking Costs Sales & Impacts Marketing
Sellers also face repercussions when they run out of stock at Amazon. If you run out of stock, then competing sellers or competing brands will win the sale. But running out of stock has more than just an immediate impact. Once out of stock, your listing won’t hold its rank, and product rank ties directly to product searchability and discoverability. As a result, marketing and sales performance suffer even after you replenish inventory.
As Joy Kuykendall, Partner Optimization Account Manager, puts it, “We must closely monitor inventory cycles of each listing to ensure there is enough inventory to prevent stocking out, especially in listings for which we are the only Prime seller. Running out of stock can result in cascading repercussions that damage the velocity of a listing, so it’s imperative that we consistently strike a balance between having enough but not too much inventory.”
How Much Inventory Should I Buy?
As with most things, a balanced approach is generally the safest and most impactful route to managing inventory levels. One of the most valuable tools for determining your ideal inventory level is historical sales data, ideally for 30-60 days. You can also reference year-over-year trending, if you have the data available, to further help forecasts.
Using historical sales data, you can predict how the product will sell over multiple months, though it’s not quite linear. You must also account for seasonal trends and channel details, such as seller saturation, rank, and reviews. Third–party sales estimators can give you a good idea where to start if you don’t have access to historical sales data, such as when you’re launching a new product or product line.
Also, keep in mind product– specific nuances. Is the product at a high price point? Does Amazon consider it oversized? Is it meltable? Hazmat? Not only will these items have different sales velocity, they will also have different implications when it comes to fees associated with long–term storage at Amazon.
Amazon Inventory Storage Fees
The below fees are accurate as of November 2020.
Monthly Amazon Inventory Storage Fees (Non-Hazmat)
- January – September $0.75
- October – December $2.40
Monthly Amazon Inventory Storage Fees (Hazmat)
- January – September $0.99
- October – December $3.63
Determine Amazon Inventory Carrying Costs
In addition to storage fees, you should also keep in mind other costs your inventory will accrue so you can factor it into your margin calculations. Amazon inventory carrying costs refers to the total expenses associated to managing, shipping, and storing inventory at Amazon. This includes the aforementioned storage fees, as well as general operational costs to your business in discovery and planning, manufacturing or acquiring, shipping and handling, and any insurance or taxes for the item. Lastly, FBA fees should be considered part of the Amazon inventory carrying cost: “The Fulfillment by Amazon (FBA) fee is a per-unit fee, based on the dimensions and weight of the item.”
How can I Prepare for Supply Chain Disruptions?
As we all learned in 2020, supply chain disruptions can be a very real threat to a seller’s ability to “always buy enough, but never too much.” Some of these disruptions can be accounted for, such as major holidays in the countries where you produce products (Chinese New Year is a great example). In these cases, you can plan ahead and prepare for these events. You can also extend forecasts and stock up more than normal to account for the months where the lead times won’t support timely inventory fulfillment.
For unexpected disruptions like we all experienced with COVID-19, it may behoove you to develop a “backup plan,” such as a dropship listing you can turn on in a pinch in the event that your FBA inventory runs out. Seller Fulfilled Prime (SFP) and Fulfilled by Merchant (FBM) are other worthwhile options to protect against out of stocks if you have the means to support them.
How Should I Plan for Peak Seasons?
Sellers generally see improved sales across the board during peak seasons. You can determine peak seasons for your specific product or brand based on historical sales, but generally, trends on the marketplace are common sense. Sunscreen sells well in the summer months; Toys sell well around the Christmas holidays.
Make sure you prepare early to ensure you have enough inventory allocated for the higher velocity season. You could consider negotiating discounts or improved payment terms to offset the larger cash investment for allocation. Obviously, be mindful of your normal best practices for ordering, and always expect Amazon to impart some sort of kink in the chain (see Amazon Inventory Restrictions at the top of this post).
Peak seasons also tend to have longer lead times due to port delays and increased freight velocity/surcharges, so be sure to account for those during your planning.
There’s plenty to consider when determining how much inventory to ship into and store at Amazon, and when you’re first developing your strategy, it can take some trial and error. Remember that not all SKUs are created equal and tailoring your most effective strategy can take some time. Using the above tips and tricks will help you on your way!
Learn More about Inventory & Supply Chain Management