FBA or FBM, how to calculate optimal stock level

Handling stock is an important issue for any seller, both for those who use Amazon’s warehouses and for those who have their own logistics network.
However very few sellers have a clear view of how to optimize the warehouse levels of their products whilst reducing their handling costs to a minimum.

To solve this problem you must consider these two factors:

1. the costs for restocking orders that diminish as the stocks increase
2. the warehouse storage costs that grow as the stocks increase

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Costs for restocking orders

Let’s suppose that a certain product has a sales velocity of 11 per day, this means that the annual sales volume is about 4000 units.
This quantity of the product can be ordered in lots, and the smaller the lot the higher the number of lots that will have to be ordered yearly.
For example, you could order 2 lots of 2000 pieces or 20 lots of 200 pieces each.
Each restocking order has fixed costs (that do not depend on the size of the lot) that can be determined according to the work necessary for:

• ordering the goods from the supplier
• handling the billing
• handling the shipment and loading the quantities on seller central

Therefore, the annual restocking cost can be found by multiplying the number of orders by the fixed costs of each order,

Co =  Cf * N (Annual cost for handling orders)
Cf (Fixed cost per order) [€] N = Va / Q (Number of order per year) [orders/year] Q (Lot Quantity) [units] Va = Sv * 365 (Annual turnover) [units/year] Sv (Sales Velocity) [units/day]

Co =  Cf * Sv * 365 / Q    (annual cost for handling restocking orders)

Continuing with our example, and supposing we have a fixed cost of 50€ per order, we can see how the cost for reordering stock varies according to the quantity of the lot.

Storage cost

The yearly storage cost of a product can be calculated by multiplying the average volume it occupies by the yearly warehouse cost per m3.
Supposing each lot is sold out at the time of arrival of the next lot, the average quantity of the product present in the warehouse will be half the lot.
For example for a lot of 400 pieces, the average quantity in the warehouse is 200 pieces.

If the product with its packaging has a volume of 0,01 m3, then it will occupy and average of 2 m3 of warehouse capacity.

To determine the yearly storage cost we can multiply the volume occupied by the cost per warehouse m3.

In case you are using Amazon Logistics services you can find their storage costs on the following link:
FBA storage costs

If you use your own logistics the warehouse storage cost per m3 will be established by the seller taking for example all the warehouse-related costs of the previous year and dividing them by the overall storage capacity of the warehouse.

At this point we can calculate the yearly storage cost of a product:

Cs = Cm * Vm
Cm (yearly warehouse cost) [€ / m3] Vm = V * Q / 2 (Average volume occupied by the product) [m3] V (volume of the product including packaging) [m3]

Cs = Cm * V * Q / 2 (annual storage cost)

With the data of our example and supposing an annual storage cost of 433€/m3

The economic lot

Having the cost for reordering stock and the storage costs that vary according to the quantity of the lot, we can now estimate the overall cost represented by the sum of these 2 amounts:

Overall cost = Cost for reordering stock + Storage cost

The minimum overall cost is obtained when Co is equal to Cs.
Thus we can find the optimal quantity as follows:

Co = Cs

Cf * Sv * 365 / Q  = Cm * V * Q / 2    (optimal quantity equation)

Formula for obtaining the optimal reorder quantity and minimizing costs:

In our example:

Conclusions

By activating the optimization of your warehouse levels and choosing the most economic lot for each product based on its sales velocity and size, you will be able to considerably save on the logistics management of your products, whether it is done through FBA or FBM.

Thanks to ZonWizard Analytics Tool you will have the calculation of the optimal level of your stocks and the notifications to reorder the products that are running out, in addition to many more features that will optimize your business on Amazon.