If you're a new Seller on Amazon or your business is in the beginning growth stages, you may not have a lot of experience with inventory management and planning. Here is a quick overview of the process and some key information that will help you be successful as begin to optimize your inventory.
What is inventory management?
Inventory management is how a company tracks and controls inventory from the point of purchase through to sale. The goal is to ensure you have the right quantities of the right item at the right time.
There are 5 main stages of this process:
- Purchasing: buying raw materials or buying products
- Production: manufacturing process; does not apply to resellers
- Holding Stock: storing raw materials and finished goods
- Sales: getting your products to customers, and taking payment
- Reporting: analyze how much stock is selling and how much money is being made
Considering the stages there are a few concepts that should be highlighted to help you interpret the data and make decisions for your business. For each product in your catalog, you should know the following information and be able to easily reference it when creating your replenishment plan.
Cost of goods sold (COGS): How much does it cost to acquire and sell a product? What’s the average unit cost? This is important information for measuring profitability and provides insights on how much capital you have tied up in inventory. Since this includes both variable and fixed costs, COGS should be reviewed and updated on a regular basis.
Supplier: Where do you purchase your raw materials or products? If you have multiple suppliers or sell many different types of products, the replenishment lead times may vary.
Lead replenishment time: What is the typical time it takes to obtain that product from your supplier? As a manufacturer, you will need to consider both the purchasing and production stages in your lead time. Factoring in your lead time when evaluating inventory quantities will ensure you always have enough inventory on hand to avoid stock out. Tip: Use this information when reviewing weeks of supply in Flywheel.
Minimal viable stock: Minimum amount of product you need to have on hand in order to keep up with consumer demand and fulfill orders without delay. This number may change over time, but having an understanding of how many units you need to have on hand to remain in stock will allow you to create thresholds for inventory based on your business needs. Using a method such as the ABC analysis (below) will help you create these minimums.
ABC Analysis: A method for prioritizing your existing inventory using three categories to ensure you're not tying up too much capital in inventory. Your goal here is to understand which products need the most attention from you from an inventory management perspective.
(A) high-value products with a low frequency of sales. For example, big-ticket items like workout and sporting equipment.
(B) moderate value products with a moderate frequency of sales. For example, electronics and jewelry.
(C) low-value products with a high frequency of sales. For example, clothing and food.
For example, products that fall underneath your A category may need to be ordered more often than products that fall underneath your C category because the amount you keep on hand is much smaller.
Having a solid understanding of these concepts for each product in your catalog will empower you to make the decisions for your business.