FBA Inventory Management
Your inventory & the management of it are key factors in the success of an FBA business.
This is especially true if you’re looking to build something sustainable and scalable, rather than simply keeping a small side-hustle. Many FBA owners have set themselves back when poor inventory practices have lead to stock-outs, for example. You might just ride these out as a “hobby” business, but as a growing startup, you can find yourself scrambling to regain lost ground.
At Forecastly we specialize in inventory management and help many top FBA businesses to keep their inventory in tip-top shape. Through all of this, we have noted several mistakes which commonly seem to crop up, especially among newer FBA businesses.
Want to avoid the worst inventory mistakes? Here are seven we see repeatedly:
#1. Not doing enough product homework
It’s not easy to make great inventory decisions, especially when you’re just starting to test the waters, but FBA sellers can save themselves all sorts of hassles by doing a thorough job of product homework in the first place.
This mistake actually encompasses a few areas which are important to have researched prior to jumping headfirst into ordering and selling the product, such as:
Competing with Amazon:
Who is already selling the product? If Amazon is a vendor of the product you’re looking to sell, our recommendation is to stay away. The fact is, as a small merchant you just don’t have the purchasing power and accessibility to deals that Amazon does.
If they wanted to (and they have done before), they can afford to sell a product at a slight loss for a while in order to drive down prices. This naturally will end up driving other merchants out of the market because they’re unable to compete at a loss.
Double check that you’re not setting yourself up to compete directly with Amazon.
Assuming you’re the Amazon customer:
There’s more to product research than your own gut feeling that you like a particular product. Many FBA sellers make the mistake of believing that because they think something is cool, it will be popular to sell on Amazon.
Are you really the customer you’re going to be selling to? You need to be able to stand back and look objectively. Why would someone buy this? Is it a good deal or more convenient to buy this from you on Amazon than run down to their local store?
Look at “most popular” lists and take a look at how similar products have performed. A tool such as Camel Camel Camel can help you to view price history and see which products are popular.
Choosing an “awkward” product:
Some people do very well selling certain products we’d consider “awkward”, but our recommendation is to avoid them. What do we mean? Well, what you really want is a product that is lightweight, durable, small and therefore easy to ship, yet difficult to damage.
There are a few possible consequences if you don’t consider these things, such as:
- Higher shipping costs for your items.
- More returns due to goods being damaged.
- Higher storage costs for inventory which takes up more room.
Sometimes those extra costs can outweigh any possible profit from selling the product, so be clear on what you are prepared to deal with.
Questionable product quality:
The homework you do for finding a good supplier has to be a priority. Many FBA sellers have been burned by poor product quality, delayed deliveries or just not receiving what they thought they were going to get.
Wherever you’re looking for suppliers, make sure they have been well-reviewed and rated by others. You should also be aware that suppliers will always send you a sample which represents the best of their work, but what you really want to know is how well they produce batches of products.
Don’t base a large initial order on the quality of the sample you were sent – we’d negotiate to start with a smaller initial order so that you can check that you’re getting what you expected.
#2. Failing to negotiate
Following immediately on from that last point, a failure to negotiate with suppliers is our next common inventory mistake. As a general rule, anything is negotiable when you’re talking to suppliers, so do your best to negotiate better terms.
For example, you should be looking at:
- Minimum order requirements. Manufacturers or suppliers will often set their minimums quite high, so ask about smaller quantities especially if the product is new to you.
- Payment terms. Naturally, every supplier would love it if you paid them 100% upfront, but this is not ideal for your own cash flow situation. The longer you’ve dealt with the supplier the better the position you’ll be in to negotiate, but try to pay less upfront. Some sellers work on 30% upfront with the rest after a successful quality inspection or when the items are shipped out.
- Manufacturing times. For you to make the best use of your cash flow and inventory holdings, shorter lead times are the most ideal. Talk to your suppliers about what they can do with lead times – you’ll often be told the longest time because they’re expecting you to ask for less.
#3. The huge initial order
This is what often follows when someone a) didn’t do their homework and feels over-confident about being onto a great product or b) doesn’t negotiate terms as above!
We’ve seen a number of FBA sellers burned by making a huge initial order of something which then doesn’t sell as well as expected.
What happens next? They either end up marking it down drastically to get rid of it or just junking their inventory. Inventory which sits on the shelf is costly to FBA sellers. Not only does it represent cash flow on the shelf, but you can end up having to pay Amazon long-term storage fees, which are charged on stock that has sat for six months or longer on February 15th and August 15th.
Again, our suggestion here is to negotiate a smaller initial order. You might need to pay more per unit price to get the supplier to agree to the smaller order, but if the product does work out, you can always seek a better deal for bigger orders.
#4. Not running the numbers properly
Does that product really work out in terms of profit margin? Many FBA sellers have made the mistake of not accounting for all costs involved when they’re working out whether the product will be worthwhile.
We mentioned the size of the item and what it costs to ship out to customers earlier – shipping will be taken from your sales and will cost more for bigger items.
You also have to be good at knowing Amazon fees and what you will be charged. These fees, such as sales fees and storage costs, tend to make up the majority of costs for FBA sellers and people often assume there’s no way they can lower their fees. Sometimes a simple switch (such as from an over-sized to a regular product) can be enough to make a product with decent sales numbers worthwhile.
#5. Trying to run on bare minimum
It’s always a fine line we tread between too much inventory sitting on a shelf and so little that you run the risk of stock-outs. Ideally, you want a “just in time” setup, where replenished inventory comes into stock just as your last one from the old batch sells.
This is rarely the case though, especially if you’re purchasing from off-shore. Even with short lead times negotiated, you’ve got to be prepared for the unexpected, including things like shipping or customs delays.
Running on bare minimum is a mistake because of those “unexpected” events. A stock out incident isn’t just an inconvenience, it can have longer lasting implications for your FBA business. You not only lose sales, but your product can drop in rankings or, where you have competitors, you could lose a coveted position in the buy box.
If you face these consequences, it can take you weeks or months to get your listing back up to where it was once you have products in stock. Keep sufficient safety stock and avoid stock-outs in the first place!
#6. Diversifying too quickly
It can be tempting for FBA sellers to try to diversify and grow their inventory range quickly, but a grow slow approach is often preferable.
Where people have grown too quickly, we’ve often seen FBA business owners who find themselves unable to manage those large ranges of inventory well. They lose track and often products fall through the cracks, where perhaps some kind of action should be taken with them.
It helps to have good systems in place first and to focus on doing well with the initial products that you have so that it’s easier to scale.
The other thing that can happen is FBA owners end up putting too much focus on products which just shouldn’t be a priority. Some of the top FBA sellers make most of their profit from just one or two popular products – the Pareto principle applies, where 80% of profit is made from just 20% of products.
Make sure your 20% is well-managed first, before making the decision to diversify.
#7. Trying to manage everything manually
While you’re relatively small, it can be easy to think “I’ll remember that” or “I can just do that myself” but if you start to grow, you find a number of things compete for your attention. It becomes difficult to have a good overall view of what’s happening with products.
What happens next? You don’t notice that you’ve had a run on certain products and that you should have placed a new order for stock three days ago. You can end up running out of stock on key items.
Managing everything manually becomes a mistake, especially when you can get ahold of good, automated software to help you monitor stock, make projections and make recommendations for reordering. Forecastly was built to help FBA owners automate the monitoring of their inventory – don’t leave things up to chance!
FBA Inventory Management – Final Thoughts
Managing inventory and all of the ancillary tasks that go with it should be a priority for every FBA seller.
Avoid making the key mistakes we’ve outlined and hold on to the position you’ve worked hard to attain (or work to improve it!). Do your homework on products and use automated tools where you can.
Importantly, know what your “20%” products are and work to manage those well. Building good inventory management processes will help you to scale your business later on.
Jeremy Biron is Founder / President of Forecastly, an inventory management software for selling on Amazon. Using proprietary algorithms that are unmatched on the market today, Forecastly simplifies the Fulfillment by Amazon replenishment process to help you boost profitability and reduce stock-outs.