Poor inventory management could wreck your business

These Three Amazon Inventory Management Mistakes Cost Me $10k (and counting)…

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Amazon FBA inventory

Amazon inventory management. This logistical game of order management, sales, forecasts and operations is the unsexy nitty gritty of an Amazon business that could literally put you out of business if executed poorly.

Well, unfortunately Jungle Stix has encountered the fate of having no inventory to sell on Amazon. Right at the start of our peak selling season, we don’t have anything to sell!

And while we can’t sell anything at the moment, there are some good lessons to learn from this circumstance, and adjustments I could have made to lessen the blow of being out of stock.

So, as our cargo takes its time crossing the Pacific Ocean by boat, let’s dig into the details here…

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Jungle Stix: sales to date

If you saw the last update of Jungle Stix, sales were sizzling, around $16k per month:

sales_dashboard_for_last_30_days

And with summer right around the corner, we are riding right into our peak season.

jungle_scout_peak_season

Well, this is the most recent snapshot of sales:

jungle_stix_sales_summary_5.30

Jungle Stix has been out of stock for 14 days. Not the ideal position to be heading into the summer, but a couple of challenges will only make success that much sweeter!

When we started this case study of launching a private label product, I vowed to be fully transparent with the good, the bad, and the ugly. Guess where I’d categorize this? Yep, as an instructive lesson for me and you. So let’s keep going!

The impact of having no Amazon inventory

No Sales:

This goes without saying, but without inventory you can’t get any sales. In fact, you will be “ghosted” on Amazon, and no one will be able to pull up your listing, even if they tried.

The unfortunate thing isn’t that you can’t generate money; it is the decreased keyword rankings, Best Seller Rank plummeting, and allowing the competition to catch up.

This is our listing in late February, where we had the #1 spot for a primary keyword:

jungle-stix-paid and organic search result

Competition gaining ground:

When we launched Jungle Stix, one of the main factors that made it an attractive opportunity was that there was not a lot of competition. In other words, the top ranking products for the keywords “marshmallow sticks” did not have a lot of reviews. This is a key factor in how we got to the #1 ranked product in 53 days.

By not having a live listing for a month or so, we are allowing other competitors to accrue reviews. Meanwhile, our listing is stagnant, the number of reviews for Jungle Stix remaining the same.

For example, if you look at the example above for the Amazon search results in late February for “bamboo marshmallow sticks”, the third result is by the MalloMe brand. At the time, they had 55 reviews, and it looks like all five-star reviews.

I wanted to see how they were trending recently, so I pulled up their most recent sales data in Jungle Scout.

You can see in the data below (found using the Product Tracker) that they are averaging 25 sales per day, even after they were out of stock for eight days. That means they’re netting $9.18 per unit (after the $9.77 in Amazon fees is deducted).

mallo_me_data

Also interesting to see is that during their stock-out, their Best Seller Rank (represented by the green line) increases every day, until they are back in stock on May 27th. Then the BSR snaps right back into place, almost to where it was before the stock out.

This could bode well for us as a similar product. Our Best Seller Rank should recover rather quickly when we are back in stock.

No Sales Velocity:

In addition to not generating more reviews, our standing in the Amazon rankings for keywords related to “marshmallow sticks” is dropping. Who knows exactly what it is at the moment; our dear item is resting in the graveyard of Amazon listings, temporarily.

However, when you consider that we are not getting impressions for any “marshmallow stick” searches, no clicks, and obviously no sales, we will have to wait until our listing is live again to figure out exactly how big of an uphill battle is.

Until then, we can take a look at what changes we could have made along the way to avoid the position we’re currently in.

Mistake #1: Not monitoring sales velocity vs. inventory available

Sales velocity is simply the rate at which items are selling. It’s generally applied to longer sales cycles, where there are specified leads and deal values and ‘win rates’.

And it applies to our Amazon sales as well. We simply take the average number of units sold per day, and figure out how many days of inventory we have left.

For example, we were selling approximately 50 units per day in late April and early May. At that point we had several hundred units left (let’s say 500, to keep it simple). In that case, if we had taken the total units available and divided it by our sales per day, we could have determined the number of days remaining before we ran out of inventory.

500 units / 50 units per day = 10 days of inventory remaining.

Amazon’s Seller Central dashboard makes these calculations easy for you, with the Amazon Selling Coach. You can find the report here:

amazon_selling_coach

Do your own calculations!

So take a look at your own Selling Coach, and note how many days until you are out of stock. This is a good gauge for when you should start restocking, and also how much you should restock.

Here are some other important things to consider when managing your inventory:

  • How long does it take your manufacturer to produce a new supply, from your first contact to getting it out of the warehouse?
  • Are there any holidays that may affect the timeline? Obviously, this is most relevant in February, with Chinese New Year, but there are other Chinese holidays to keep in mind as well.
  • Does the production time change, depending on how many units I order?
  • Do I have my whole supply chain set up? Once the order is ready to go, can my freight forwarder get it on the first ship bound to America? You can read more about shipping in our webinar with Shapiro here.
  • What are the time and cost differences between ocean freight (slowest and cheapest), air cargo (a bit faster than ocean, and a bit more expensive), and air express (fastest and most expensive)?
  • Is it worthwhile to batch the supply in different shipments, to get some product to the warehouses faster and we have less downtime without a listing? This is completely dependent on your product and competitiveness of its niche. I don’t foresee too many challenges getting back to our top position for our main keywords, but for some hyper-competitive niches, a slip in rankings can have negative consequences long-term.

Mistake #2: Continuing to run pay-per-click campaigns

If I had done the calculation above at the time, and thought that I would run out of inventory, I could have slowed sales.

The easiest lever to control that would have been to pause my pay-per-click campaigns immediately. These campaigns were converting at around 15% Average Cost of Sales (ACoS), which means they are profitable campaigns to run. However, with limited inventory, it doesn’t necessarily do me any good to accelerate the depletion of said stock.

This is especially true for a product like Jungle Stix. It had already secured the top organic position for many of its main keywords.

In the screenshot below, you can see that we are the number one ranked organic product, and have a great position for sponsored ads (on the right column) too:

paid and organic listing

We were running paid ads for these keywords to increase our real estate on the search results page, and therefore increase the click through rate, whether on the organic listing or paid ad. If we had removed the paid listing, we would have seen fewer visitors to our product page, and fewer sales.

Having low inventory levels is one of the few times that we’d hope to get fewer sales!

Mistake #3: I didn’t adjust my price

The other simple change I could have made to slow the inventory depletion was to raise the price. This is Economics 101. The higher the price point, the lower the demand. As the price decreases, sales increase:

supply demand curve

When we first launched Jungle Stix, they were priced at $27, as that was what our competitors were charging. But, there were a few competitors who launched similar products for about $20. Soon after, we saw sales slow down.

As a result, we lowered our price to $20. Our profit was only a few bucks per unit sold. Yet it’s better to generate small profits with many orders, as opposed to larger profits with just a few sporadic sales!

So, once we had seen that inventory was running low, if we had changed the price of Jungle Stix back to the original $27 fee, we could have slowed our sales velocity and made the inventory last longer.

Now that we’ve laid bare the mistakes made along the way to running out of inventory, what additional changes could we have made?

Inventory management solutions: how to avoid stock-outs in the future

Stock more inventory!

Sure, it would have been SO easy if we had just stored more units. But we had been ordering in quantities of 1000 (that’s a healthy inventory number to launch with) and, frankly, I wasn’t sure how long this case study would continue.

I figured that there were still some instructive lessons to learn from running the product and advertising campaigns, so I just kept restocking at levels of 1000. Running out of inventory was an unintended lesson!

For your own product, though, once you have proven customer demand, found a reliable supplier who can execute as planned, and established that the unit economics are profitable, I recommend stocking more inventory at one time to avoid running out of stock.

Of course, there is a downside of holding too much inventory at once. There is the opportunity cost of tying capital up in inventory. That money can no longer be used for other opportunities, like launching a new product, or running more promotions.

Plan for sales increases and seasonality

Like I mentioned above, the summer and fall months are high season for marshmallow sticks. To help plan our inventory levels for these months, we could look at Google Trends. It acts as a representative for what the increase in sales may be for this half of the year.

This is not going to be a wholly accurate prediction, however. Instead, it will help by showing us how many more people are searching (on Google) for marshmallow sticks in July vs March (as an example).

We already have an idea of how many sales we were averaging per day and month in March, and we can just apply that growth rate in Google searches to the number of Jungle Stix sold. And, of course, next year (if we were still selling Jungle Stix), we could just reference annual sales trends, which would be more accurate.

Use a forecasting software

The processes outlined above are great, in a perfect world. However, my world isn’t perfect. Life gets busy. Some small details may get overlooked.

For example, days of inventory remaining. This is the exact-use case for using an inventory management software. It helps track these metrics to give you a better sense of when you need to restock your supply.

A software solution to this issue–knowing how much inventory to restock, when to order it, and where the shipment actually is–can save you time and, ultimately, money.

And proper inventory management is probably the easiest, yet least talked about area where most people can improve their FBA businesses. Order too much and your precious cash is tied up. Order too little and you’re losing out on sales.

For that reason, I researched a LOT of companies and all signs point to Forecastly as being the best in the business at inventory management. For Jungle Stix, we’re in Forecastly’s lowest tier, meaning their services will only cost $50/month.

Considering the fact that each day we’re out of stock costs us $80-$150 in lost profits, $50 a month to help us avoid the same problem in the future is worth it. Even if Forecastly stops us from being out of stock for just five days each year, it will still save us money.

When I think about it like that, it’s a no-brainer! I’m a little disappointed in myself for not signing up for it a lot earlier.

Next steps

As you can see, the cost of the Jungle Stix stock-out is not just our lost revenue. It also includes losing our Best Seller and keyword rankings, and the competitive edge (measured by reviews) we had over our competitors.

I hope to avoid this fate in the future, and hope that this experience is a cautionary tale! Take proper measures to stay well-stocked!

Update since I first wrote this article: Jungle Stix are now back in stock!  I will be running an aggressive promotional campaign on Review Kick*. Previously, I started with promotional giveaways of 30 units, but this time I may increase that number in order to accelerate our BSR recovery for peak season.

*Update – Due to changes in Amazon’s Terms of Service addressing incentivized reviews, utilizing promotions to get honest reviews is no longer allowed. Review Kick has now been relaunched within Jungle Scout ! Head on over to the website to learn more about all of the new features available.

We will keep you posted on how this process goes and what we experience after being restocked. What strategies do you use to avoid running out of stock? And what are your effective strategies for bouncing back, quickly and painlessly? Drop your insights in the comments below!

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6 coments on “These Three Amazon Inventory Management Mistakes Cost Me $10k (and counting)…

  1. Great post. For groceries, what key Amazon reports come in handy to keep track of? Do you just look at the previous month?

  2. This is Jeremy, the founder of Forecastly. Thank you to those of you that asked how we are different than other tools out there.

    One of the main areas where Forecastly shines is the prediction of ‘when’ to replenish inventory. Many sellers are focused on ‘how much’ to replenish, but it is actually more important to accurately predict ‘when’ you should be making that replenishment order accurately. We don’t need to talk about what specifically makes our algorithm different, but it is important to note that our system has been developed by professional inventory managers and statisticians to make an incredibly accurate prediction of future demand.

    There are some other tools that do a great job at automation in the replenishment process. Forecastly is tightening that up now, but it is important to remember that automation doesn’t prevent stock-outs. Accurate replenishment timing prevents stock-outs. With Jungle Stix, Greg just needed an accurately timed warning of when to place a new order with his supplier, and he would have prevented a stock-out. An automated ordering process wouldn’t have helped in this case.

    I hope this info is helpful. Cheers!

    1. Jeremy, thanks for your post. nice meeting you here!

      What about a promotion for Greg’s team? we are a huge group following Greg, and we will all grab it!

  3. Hi, thanks for the great post, and get the sticks back on their feet quick…

    Did you checked out RestockPro for inventory management? If yes, can you please give some details what Forecastly is better?

    Thanks in advance
    One of your many followers

    1. Hey Sam! Yep, we tried out RestockPro, Teikametrics and a number of other solutions. We also asked around to see what others in the industry were using and recommending. Forecastly was a clear winner for us. The forecasting predictions are the most accurate, the user interface is the easiest to use and it includes a number of other bells and whistles that were a nice bonus.

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