Inventory management can be one of the toughest parts of ecommerce, but it’s also one of the most important. Especially if you sell through Amazon, proper inventory management can make or break a product’s success. And, it’s not easy, since it requires a fine balance between too much and too little inventory.
This week, we’re going to explore why inventory management matters, and then talk a little about some of the strategies you can use to avoid doing it wrong.
The Downsides of UNDERSTOCKING
We don’t like to be downers here at Whitebox, but we do like to be honest. Unfortunately, out of stock days do happen. Whether it is a sudden jump in popularity, a lost shipment or simply a miscalculation, you’re bound to run up against it at some point. Here’s what’s likely to happen when your product goes out of stock.
At the most basic level, you’re obviously missing out on potential sales while the item is out of stock. How many times have you personally tried to order an out of stock item from Amazon? How many times have your ordered a substitute product from another seller? Chances are, you go with the substitute item more often than not, especially if it isn’t clear when that initial product will be back in stock.
Beyond this though, there can be more lasting effects on your product’s success.
The first one is a drop in product ranking. This is pretty simple to understand, given that ranking is drawn from sales… and sales obviously stop when your item is out of stock. Think about it this way: what would happen if a New York Times bestseller ran out of copies? Probably, it would drop off the list, which is why publishers never allow this to happen.
Goodbye, Buy Box
The second thing that can happen when your item is out of stock is the loss of the Buy Box. This is especially an issue if you deal with a lot of resellers. If you’ve worked hard to perfect all the things that are supposedly behind the Buy Box (there’s no certainty about what exactly wins it for you as a seller), going out of stock could deal a devastating blow to your standing.
The downsides of OVERSTOCKING
It may seem tempting to overstock an item to avoid the negative effects that can happen to your products with out of stock days, but it’s rarely worth it. In the case of overstocking, storage fees very quickly stack up. Obviously, Amazon doesn’t want their warehouses full of unmoving inventory, so they purposefully design these fees to motivate sellers. To get a sense of what this means, take a look below.
Costs of storage
The longer an item sits on the shelf at the Amazon warehouse, the more money you’ll lose. Now, depending upon the cost and size of your item, this can get very pricey, especially around the holidays when inventory is expected to move faster. You can check out the prices below:
January - September
$0.64 per cubic foot
$0.43 per cubic foot
October - December
$2.35 per cubic foot
$1.15 per cubic foot
With added long term storage fees of $11.25 for cubic foot for 6-12 months, plus long-term storage fees that hit every 6 months it sits, it can cost you a lot if you overestimate your inventory. Let’s say you have an item that is 18” x 18” x 12”. Each month, this item costs you $1.44 in storage fees. If one hundred units of that item sits in Amazon’s warehouse for four months, it will cost you $576. And, just one month of sitting in the holiday season will be $529. This cost can really deplete your margins, especially if your item is less expensive.
Here’s the bottom line: inventory errors will happen
... especially if you’re managing this yourself. Fortunately, there are a few things that you can do to limit these screw ups.
If you aren’t making use of past data, start now
You should always be tracking inventory levels throughout the year, which means you’ve already got some data that can really help you. Some of it may be obvious – bathing suit sales will spike in late spring and summer for instance – but other trends might surprise you. If you’ve been selling for sometime, try looking at trends over the years to see when you might pad inventory, and when you might scale it back.
Build storage fees into your margins
Hopefully you’re already thinking about storage fees as part of your margins. If you have a product that has less predictable sales, it might be worth upping the cost to your consumers. That way, you can have some flexibility with your inventory with less of a big cost to you.
Consider outsourcing your ecommerce
The last option is letting someone else manage this. At Whitebox, we live and breath ecommerce, and inventory is one of our chief concerns. We are constantly tweaking our software to provide more accurate data for inventory for every client. Whitebox systems are designed to keep your inventory levels in a ‘sweet spot’. This way, we don’t have out-of-stock days and we also avoid the pricey long-term storage fees. And, when inventory levels are low, a request is sent to you automatically – so that you can get the product on the way as quickly as possible.