Amazon inventory management: a guide to warehouse optimisation

The correct management of Amazon inventory is one of the key elements for success in running your business on the marketplace. Without delving into the considerations we will discuss in the following lines, good warehouse management can indeed ensure the entrepreneur lower costs, more sales, and an increase in productivity.

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But how can we achieve optimal and effective Amazon inventory management aligned with our goals?

We have created a simple guide aimed at all sellers to learn more and manage this aspect with the right awareness.

What is Amazon inventory management and how does it work?

For a seller on Amazon, inventory management is a crucial aspect of their business: the Amazon warehouse is the beating heart of your operations, whether you use the Fulfillment by Amazon (FBA) service or manage your warehouse independently (Fulfillment by Merchant – FBM).

Amazon inventory management, or Amazon warehouse management, is a complex and sophisticated system of activities that allows the seller to effectively manage their products in their own warehouse or in one or more Amazon warehouses around the world.

The goal of proper management is clear: to ensure that products are available when customers order them, while minimising storage costs and maximising operational efficiency.

Of course, management methods will vary greatly depending on the programme chosen.

In the FBA model, for instance, your inventory is stored in Amazon warehouses, including those in the domestic market. Amazon takes care of storage, packaging, and shipping of your products. As a seller, your task will be to ensure that there are always sufficient stock levels in Amazon warehouses to meet customer demand.

If you opt for FBM, then you will need to manage your Amazon warehouse independently. In this case, you will be responsible for all stages of inventory management, from receiving goods to storage, from picking to shipping.

We are therefore dealing with two very different approaches. However, they are linked by some common aspects. In particular, in both cases, effective Amazon inventory management involves:

• Constant monitoring of stock levels
• Accurate demand forecasting
• Timely restocking
• Efficient returns management
• Optimisation of storage costs.

The benefits of warehouse optimisation

Now that we have clarified what is meant by Amazon inventory management, it becomes easier to understand why warehouse optimisation can offer significant advantages for any business:

• Cost reduction: You can minimise storage expenses by avoiding excessively high stock levels.
• Increased sales: You can maintain an optimal inventory, avoiding missed sales due to out-of-stock products.
• Improved ranking: Amazon rewards sellers with well-managed inventory by improving their visibility in search results.
• Optimised cash flow: Prevent excessive capital from being tied up in surplus stock.
• Greater operational efficiency: Optimised processes allow you to handle more orders with fewer resources.
• Better customer experience: Timely deliveries and consistent product availability increase customer satisfaction.

The best techniques for managing inventory

Now that we understand what warehouse optimisation means and the benefits of good inventory management, let’s explore some of the key techniques for optimising stock management.

Standard Stock Levels

The first technique that can be adopted for managing Amazon inventory is maintaining standard stock levels. This involves keeping a consistent level of stock for products with stable demand.

This method is very simple to implement. However, as such, it is only appropriate if you have products in your portfolio that sell consistently on Amazon.

If, on the other hand, your products are highly seasonal or if sales are difficult to predict over several months, this technique may be less suitable for optimising your Amazon warehouse management.

FIFO

The FIFO (First In, First Out) method is particularly useful for products with an expiration date or those prone to obsolescence. Through this approach, you ensure that the oldest products in your inventory are sold first.

A traditional example of using the FIFO method is in the food industry. Imagine selling perishable products like milk. When a new supply of milk arrives, warehouse staff place it behind or beneath the existing stock. This way, when units of this product are picked for sale, the oldest stock, located at the front or on top, is selected first.

This technique ensures that products with the nearest expiration date are sold first, thereby reducing the risk of waste.

However, it’s not only the food sector that can benefit from the FIFO method. Consider its application in an electronics warehouse. Even though these products don’t have a formal expiration date, they can still become obsolete over time. By using FIFO, a company ensures that older components are used first, preventing them from sitting unused for too long.

From a logistical standpoint, the FIFO method doesn’t necessarily require physical arrangement of goods based on arrival order, although this can certainly be beneficial in some warehouses. In many modern warehouses, however, the system is managed through software that tracks the arrival dates of each batch of goods. When a product is picked, the system automatically indicates which batch should be used. The algorithm ensures compliance with the “first in, first out” principle.

LIFO

The LIFO (Last In, First Out) method is the exact opposite of FIFO. It assumes that you sell the most recently added items to your warehouse first.

Let’s look at an example. Imagine you sell tiles. When a new shipment arrives, warehouse staff place the tiles on top of the pile or in front of the others. When you need to pick tiles for a customer, you can take the most easily accessible ones, which are those that arrived last. This approach can be advantageous for materials that do not have an expiration date and whose quality does not deteriorate over time.

Once again, it’s important to clarify that the LIFO method doesn’t necessarily require a physical arrangement of goods in reverse order of arrival, although this can simplify operations in traditional warehouses. In modern warehouses, however, the system is often managed through software that tracks the arrival dates of each batch of goods. As with the FIFO method, when an item is picked, the system automatically indicates which most recent batch should be used.

JIT

The JIT (Just In Time) method theoretically involves producing or acquiring a product only when it is requested. However, this approach is risky on Amazon due to the delivery times required and the FBA model’s operational demands.

Amazon’s platform requires sellers to maintain a certain level of product availability to ensure quick deliveries and meet customer expectations. Therefore, it is very difficult for a seller using the FBA warehouse to integrate this with a JIT approach.

The same applies to sellers managing their operations independently. Amazon rewards sellers who can ship quickly, which necessitates having ready stock. A JIT approach could lead to frequent “out of stock” situations, damaging the seller’s reputation and visibility on the platform.

Additionally, demand on Amazon can be highly variable and influenced by factors such as customer reviews, promotions, or seasonal events. This unpredictability makes it challenging to perfectly synchronise the arrival of goods with demand, as required by the JIT method.

Safety Stock

The safety stock method requires sellers to maintain a buffer of inventory for their best-selling products on Amazon. This buffer allows you to handle unexpected spikes in demand or delays from suppliers.

Setting up safety stock in a warehouse is thus essential for ensuring a balance between product availability and operational efficiency. It involves determining the minimum quantity of goods that a company must keep in stock to handle unexpected fluctuations in demand or supply. But how do you determine the right level of safety stock?

To determine the correct safety stock levels, several factors must be considered. First and foremost, you need to analyse demand variability. For example, a clothing store experiences significant fluctuations in demand during seasonal changes. In this case, the store might decide to increase safety stock for the most popular seasonal items, ensuring they can meet sudden spikes in demand.

Another important criterion is supplier reliability. Imagine a company that manufactures home appliances and relies on a supplier known for occasional delivery delays. In this scenario, the company might opt for higher safety stock levels for those critical components to avoid production interruptions in case of delays.

Lead Time and Supplies

When managing inventory, it’s essential to consider lead time, which is the time required to receive new supplies. A company that imports raw materials from abroad, with delivery times of several weeks, will need to maintain more substantial safety stock compared to a company that sources locally with deliveries within a few days.

Additionally, you must balance the cost of holding stock against the cost of potential stock-outs. For instance, a supermarket might decide to maintain higher safety stock levels for essential products like milk, accepting higher storage costs to avoid the risk of losing sales and disappointing customers.

Mathematically, safety stock is often calculated using statistical formulas that take into account the standard deviation of demand, the desired service level (the probability of not running out of stock), and lead time. The result is typically adjusted based on practical market knowledge and direct experience.

Reorder Point

The reorder point strategy involves setting a stock level that, once reached, automatically triggers a new order. This strategy is particularly useful when using FBA. By setting the correct reorder point, a seller can send the necessary quantities to the Amazon warehouse, avoiding stock shortages.

To calculate the reorder point, you need certain statistical data such as:

• Average daily demand: This value is obtained by analysing historical sales data and calculating how many units of the product are sold on average each day.
• Lead time: As mentioned earlier, this is the time between placing an order and receiving the goods in the warehouse.
• Safety stock: This was also discussed previously.

Given these factors, the basic formula for calculating the reorder point is:

Reorder Point = (Average Daily Demand × Lead Time) + Safety Stock

Let’s imagine managing an electronics store that sells smartphones. From historical data, we know that we sell an average of 5 smartphones per day. Our supplier takes 10 days to deliver a new order. We’ve determined that our safety stock for smartphones should be 20 units.

Applying the formula, we get:

Reorder Point = (5 smartphones/day × 10 days) + 20 units = 70 units

This means that when smartphone inventory drops to 70 units, it’s time to place a new order. During the 10-day wait for the new supply, you’ll have enough stock to meet average demand (50 units) plus a safety stock buffer (20 units) for any unexpected spikes.

Additional Examples on Reorder Point

However, calculating the reorder point isn’t always this straightforward. In many cases, additional factors need to be considered. For example, if demand is highly seasonal, the calculation might need to be adjusted according to the time of year.

Take the example of a sporting goods store that sells ski equipment. During winter, the average daily demand might be 10 pairs of skis per day, while in summer, it could drop to 1 pair per day or even less. In this case, the reorder point should be calculated separately for the winter and summer seasons, considering the different average demands.

Another factor to consider is the variability of demand and lead time. If these elements are highly unstable, it might be necessary to increase safety stock and, consequently, the reorder point. For example, if our smartphone supplier frequently experiences delivery delays, we might decide to increase safety stock to 30 units. The reorder point would then rise to 80 units.

It’s also important to note that the reorder point can change over time. Companies should periodically review this value, adapting it to changes in:

• demand,
• supplier performance,
• business strategies.

For example, if our electronics store launches a promotional campaign that increases average daily sales to 7 smartphones, the reorder point should be recalculated accordingly.

Tips for Better Managing Amazon Inventory

Now that we have clarified some of the main Amazon warehouse management strategies, let’s dive deeper into optimising our efforts with some practical inventory management tips.

Supplier Relationships

Building strong relationships with reliable suppliers who can ensure timely deliveries and flexibility in order quantities is an essential first step in creating a successful Amazon warehouse management strategy.

Contingency Plans

Unfortunately, even with the best intentions and the most suitable preparation plans, things don’t always go as expected. Therefore, preparing strategies to handle unforeseen situations such as delivery delays or sudden spikes in demand can be a suitable approach to prevent small or large setbacks from harming your business’s sustainability.

Warehouse Checks

If you manage your Amazon warehouses using the FBM model, regularly conduct physical inventory checks. If you use FBA, regularly verify that the inventory reported by Amazon matches your own records.

ABC Product Analysis

Classify your products based on their sales volume and profitability. Then, focus your inventory management efforts on the most important products, and only secondly on others that reflect lower revenue and margin volumes.

Outsourcing Warehouse Management to Amazon

As is well known and as we have often discussed in our insights, many sellers choose to rely on the Fulfillment by Amazon (FBA) service for better warehouse management. But why might this be a beneficial choice?

While every seller should conduct a thorough and specific analysis of their business, we’ve summarised below some of the main advantages you should not overlook:

• Access to Amazon’s logistics network: Your products are stored in Amazon warehouses and benefit from the company’s extensive distribution network.
• Professional management: Amazon handles all warehouse operations, from storage to shipping, allowing you to focus solely on growing your business.
• Customer service: Among the many tasks Amazon handles, it also manages returns and customer service in FBA. These are two significant burdens for an individual seller or a small business, reducing your workload significantly and freeing up time for other activities.
• Scalability: It’s easier to manage demand spikes and business growth without needing to invest in warehouse infrastructure.
• Prime eligibility: FBA products are often eligible for Prime shipping, further increasing visibility and attractiveness to Amazon customers.

Of course, considering that using Amazon FBA is not free, it’s always important to carefully assess the costs of this strategic warehouse management approach. Compare them to your profit margins and sales volume.

We have discussed the differences between FBA and FBM in a separate reference guide, which we recommend you read.

Zon Wizard Solutions for Inventory Optimisation

This is a great opportunity to remind you that at ZonWizard, we offer numerous solutions that will help you optimise your inventory management.

Among the tools available in our suite are demand forecasting tools. Our advanced algorithms allow you to predict future demand, enabling you to plan your inventory accordingly and avoid excessive stock levels.

Additionally, you can receive suggestions on the optimal quantity of stock to maintain for each product, helping you balance availability with storage costs. You’ll also have access to automated ABC analysis, where we classify your products based on their importance to your Amazon business.

We also remind you that ZonWizard dashboards allow you to monitor your inventory status in real time, enabling you to quickly identify potential issues. Our seamless integration with the marketplace allows you to synchronise your inventory for smooth management.

Furthermore, analyse detailed inventory performance reports to gain additional insights for improvement.

Future Trends in Inventory Management

As a professional Amazon seller, you should be prepared for the upcoming changes that the future of inventory management will bring to your market.

One key trend is likely to be the increasing automation of processes. If you manage a physical warehouse using the FBM model, consider adopting automated inventory management solutions. This aligns with the best practices long adopted by Amazon, from which you could draw inspiration.

Another significant factor that will impact inventory management in the coming years is the growing integration of artificial intelligence. AI-based tools could provide more accurate demand forecasts and, as a result, facilitate real-time inventory optimisation.