Inventory management

Inventory management 101: essentials for ecommerce businesses

Whether you sell portable phone chargers, gourmet pickles, or high-end cosmetics, having the right stock levels in place to meet demand can help keep your business humming.

Summary

Inventory management comprises the processes and activities that take place between the moment you obtain your inventory and the moment you sell it to the final customer. Small tweaks to inventory management can have a big impact on your bottom line—for better or for worse. Done well, inventory management can boost sales. Missed opportunities, on the other hand, can mean lost revenue.

What is inventory management?

Inventory is the product stock you own and plan to sell through your business. Inventory management is the process of tracking and storing products to meet customer demand quickly and efficiently. It applies to how you source, store, and process products to get them ready for sale.

Inventory is an investment. The results of poor inventory management may not show up for weeks or months. When they do become apparent, it can be ugly: spoiled products, dead stock, high storage costs—or worse, depleted stock and unfulfilled customer orders. Additionally, storage fees and holding costs can decrease your profitability.

Amazon inventory and fulfillment stats

How many warehouses does Amazon run?

Globally, Amazon operates more than 175 fulfillment centers with over 150 million square feet of space.

How much shelf space is dedicated to third-party sellers in warehouses?

  • Around 800,000 square feet in size, sortable fulfillment centers can employ more than 1,500 full-time associates.
  • Ranging in size from 600,000 to 1 million square feet, non-sortable fulfillment centers employ more than 1,000 full-time associates.
  • Many centers span the equivalent of 28 football fields and can hold tens of millions of items on any given day.

What innovations has Amazon produced to help business owners?

Amazon invested $15 billion and launched 225 new tools and services in 2019 to help worldwide third-party sellers—mostly small and medium-sized businesses—grow and thrive.
“Over the last several years, Amazon has invested over $30 billion in the fulfillment network and fulfillment technology. These enhancements have included adding 35 million cubic feet of space to fulfillment centers.”
Leonora Fink
Amazon Principal Product Manager, FBA

What are inventory management systems?

Inventory management systems track products from procurement to shipment. An inventory management system can help you make critical business decisions such as how many units you need, your optimal inventory levels, when to reorder items, and which products to liquidate or remove.

The right inventory system can give you a realistic picture of what you have available and help you run your business efficiently. An inventory system can be a manual count and ledger combination, a spreadsheet, or an automated digital solution.

Choosing the right solution for your needs will depend on:
  • The size of your business
  • The nature of the products you sell
  • The industry you serve
  • Your selling channels
When the system works correctly, you know what products you have available, along with important metrics like available shelf space, the amount of units in stock, and the precise storage location of individual products.

Did you know?

Amazon offers a suite of inventory management tools for businesses selling in our stores.

Ecommerce businesses and entrepreneurs who use Fulfillment by Amazon (FBA) get access to a suite of tools and reports to help them track their inventory in Amazon’s warehouses. These tools are available through the Seller Central dashboard or on-the-go via the Seller Central App.

Why is inventory management important?

Product stock on hand is a business asset. But inventory can also hurt your business if mismanaged. As your business grows, you may run into issues such as:
  1. Excess inventory
  2. Low stock levels
  3. Stranded or dead stock
  4. Spoilage
  5. High storage costs
Let’s explore these common inventory problems and some ways you can avoid them.

1.

Excess inventory

Having enough stock to ship out customer orders quickly is a good thing; however, having too much inventory can hurt your business.

Excess inventory sucks money out of your business by tying up resources and running up storage costs. There’s an opportunity cost to holding too much stock. Aside from incurring unnecessary fees, you may be unable to respond quickly to shifts in customer demand, while aging inventory could force you to liquidate.

Learn the lingo:

Opportunity cost

Opportunity cost is any benefit you unavoidably miss out on when choosing one option over another. In inventory management, an example could be having too many units of a low-demand item that isn’t selling well, versus having the resources to obtain more popular products.

Did you know?

Amazon offers an excess inventory calculation alert.

Amazon evaluates product demand, price elasticity, seller costs, and seller inputs to help ecommerce sellers manage their inventory effectively.
Amazon considers a product to have excess inventory if it has:
  • Over 90 days of supply
  • At least 1 unit aged over 90 days
  • A better ROI opportunity (such as reducing the price to increase sales)
These tactics can help your ecommerce business avoid holding excess inventory by increasing sell-through, reducing storage fees, and earning a return on investment.

Learn the lingo:

Sell-through rate

Sell-through rate is a measure of how well you are balancing your inventory levels and sales.
FBA sell-through rate is a measure of how well you are balancing your FBA inventory. For Amazon sellers, it’s updated daily in a Seller Central dashboard. Whether you use FBA or not, a high sell-through rate can show you carry popular, fast-selling items.

2.

Low stock levels

On the flip side, it’s essential to have enough units to meet demand. Low stock levels can hurt your sales and brand. No one likes to order an item only to find it’s out of stock.

The right inventory level for your business may depend on seasonality, sales history, or customer demands. Run a demand planning analysis to arrive at the optimum inventory level.

Did you know?

Amazon offers a free Restock Tool to help manage inventory efficiently.

The tool is built on a machine learning model. It helps you determine how much inventory to send and when to send it. The restock tool is included for sellers who use FBA, and provides custom recommended replenishment quantities and recommended ship dates.

The machine learning model is based on Amazon’s inputs on demand forecasting, seasonality, fees, seller inputs on lead times, replenishment frequency, and cost of goods sold. Taking into account what is currently in stock, the restock tool calculates the ideal inventory quantity to store.

Learn the lingo:

Cost of goods sold (COGS)

Cost of goods (or cost of purchase) is what you pay your supplier for a unit of an item, if you buy products from a manufacturer. If you make and sell your own products, COGS can also refer to the cost of producing the items.

3.

Stranded or dead stock

Stranded inventory is sellable inventory that may be in a fulfillment center or warehouse but isn’t listed for sale on your site. It hurts your business because it ties up your cash. You paid for the products, you are paying for storage, yet customers can't buy it.

Stranded inventory is a triple whammy: lost sales, storage costs, and lost storage capacity.

The Stranded Inventory Tool within Amazon’s inventory system can help track and fix stranded and dead stock issues.

4.

Spoilage

Some items like food products, supplements, or cosmetics have a sell-by or expiration date. When you hold inventory past its sell-by date, your investments go down the drain.

Tracking your items through a system can help you avoid spoilage, allowing you to run promotions or discounts on items at risk of spoiling in the near future.

5.

High storage costs

Optimizing your storage space can help you lower costs and stock fast-selling items. Not tracking your inventory can lead to higher costs of storage, removal, and liquidation. Even if you use a third-party inventory management system like FBA, you still want to track how much inventory you have in storage to avoid incurring unnecessary fees.

Use an inventory system to track info like:
  • What you have in stock
  • How your inventory is aging
  • Optimum inventory levels
This type of tracking will go far to help you avoid high storage costs.
man with a mask looking and product inventory

COVID-19’s impact on inventory management

COVID-19 exposed vulnerabilities in supply chains globally. According to a survey of 715 supply chain professionals, the pandemic disrupted 78% of supply chains in the U.S.

While no one could have predicted the COVID-19 “black swan” event, the pandemic highlighted the need to have well-running and dependable supply chains and inventory systems in place.

Amazon’s inventory management dashboard can help your business manage stock efficiently

For FBA sellers, Amazon offers a suite of inventory management tools right in Seller Central.

These tools help entrepreneurs and ecommerce businesses manage inventory efficiently and offer faster order fulfillment.

The inventory performance dashboard sends an alert when stock quantities are running low and provides demand planning and forecasting to suggest recommended optimum inventory levels and shipment timelines.

The dashboard displays essential inventory information such as sell-through rates, aging stock alerts, and recommended actions to optimize storage.

This suite of tools is included with your seller account, and accessible through Seller Central and the mobile Seller App.

How does Amazon inventory work?

When sellers choose to use FBA, they automatically gain access to Amazon’s machine learning-based inventory management system. This system uses inputs like the cost of goods sold, shipment time, and Amazon data to forecast customer demand and set optimum inventory levels.

Did you know?

You can automatically track how well you manage your inventory with Amazon.

Inventory performance is a measure of inventory management and replenishment. The Inventory Performance Index (IPI) is a metric for Amazon sellers that measures how efficiently you manage your FBA inventory—similar to a credit score for your inventory efficiency.
Your IPI score is based on how well you:
  • Replenish popular products
  • Maintain healthy inventory levels
  • Fix listing problems

Improve your IPI score to minimize storage costs

Just as a high credit score will give you benefits, so will a high inventory score. On average, sellers with a higher IPI score generally pay less than 1% in storage fees as a percentage of revenue. Keep your IPI score high to lower storage costs and make more profit.
An Amazon IPI score above 400 lowers your storage costs and gives you additional storage capacity in Amazon fulfillment centers. Storage limits adjust quarterly based on your sales volume, IPI score, and available fulfillment capacity. This can help you lower your operating costs and increase the number of products you can sell on Amazon with two-day shipping.

8 tips to help you manage your inventory effectively

There are several small yet effective steps you can take to optimize your inventory processes. For instance, how much product information can you track? In addition to tracking individual units, maybe you could boost sales by tracking the dimensions and weight of products, or barcodes. Data like this can, in turn, allow you to make the most of empty storage space or avoid ending up with too much stock on hand.

To push sales in the right direction and delight customers, follow these top inventory management tips.

Learn the lingo:

Supply chain

The supply chain is the combined network of people and processes that take an item from the raw materials to a final delivered product. Whether you sell organic deodorant or men’s footwear, you will source products through your supply chain.
The Amazon Service Provider Network can help you source products or improve your supply chain processes.

Here are a few tips to help you manage your inventory efficiently.
  1. Build and maintain relationships with suppliers
  2. Monitor your sell-through rate
  3. Restock popular products quickly
  4. Run promotions to reduce aging inventory
  5. Keep an eye on your margins
  6. Reduce excess inventory to increase your profitability
  7. Choose the right inventory management system
  8. Maintain four weeks of inventory cover

1.

Build and maintain relationships with suppliers

Your suppliers are vital stakeholders in your business. Your success can help their business too.

A few ways to sustain healthy relationships with suppliers include:
  • Paying your bills on time
  • Treating your suppliers with respect
  • Communicating frequently and regularly
  • Offering constructive feedback
  • Building goodwill by referring business
Promote positive interactions with the key players in your supply chain to get the right products on time and anticipate any manufacturing or shipment issues.

2.

Monitor your sell-through rate

Sell-through rate measures how well you’re balancing your inventory levels. The key is to strike a healthy balance between incoming and outgoing inventory.

Use a sales forecasting method or gauge past order quantities to anticipate demand. Don’t stock more than you may be able to sell, as this will run up your warehousing costs.

Learn the lingo:

Recovery rate

Recovery rate is the percentage of costs (such as storage fees) you can recover by removing products from your fulfillment center.

3.

Restock popular products quickly

While you want to avoid excess inventory, it’s also essential to keep enough stock on hand to meet customer demand even during your busiest seasons.

Monitor sales in order to strategically plan how much inventory you will need throughout the calendar year. You will also want to keep enough backup units to ensure you won’t run out of inventory due to supply chain mishaps, whether a storm that snares shipments or a mistake in fulfilling orders.

Tracking the days of supply for bestselling products will help you plan and reorder to avoid running out of stock and losing potential sales. Stocking popular products can also help your business earn or maintain profitability and grow.

Learn the lingo:

Days of supply

These are the forecasted number of days the current quantity of inventory will remain in storage before selling.

4.

Run promotions to reduce aging inventory

Avoid spoilage or unnecessary storage fees. Zero in on products eligible for promotions to increase sales and free up storage space in your warehouse.

When products haven’t sold in over 90 days, you can take action to avoid aging stock. Amazon’s Inventory Performance Index can provide custom recommendations such as removing items or liquidating stock with promotions or limited-time offers.

5.

Keep an eye on your margins

Healthy sales margins are a sign of your business’s vitality. Track all your operating costs, including the cost of procuring goods, shipping, storage, and order fulfillment.
“Put all costs into consideration. Have a good sense as to what the fees are and how much margin you'll have leftover once you sell your products.”
Leah C.
FBA Inventory Optimization Team

6.

Reduce excess inventory to increase your profitability

Mark down products or create special deals to liquidate aging inventory or overstock products. While you may be selling products for less than you envisioned, this will help you avoid sunk costs of continuing to stock the products in your storage facility.

Learn the lingo:

Sunk costs

The phrase sunk costs refers to money you have already spent and can’t recover. If stock sits on the shelf for over three months, you may not be able to recover the expenses you’ve incurred in acquiring and storing the item.

7.

Choose the right inventory management system

Inventory management software can help maintain appropriate inventory levels.

There are many software options out there to choose from. Be sure to select a system that:
  • Syncs with your order fulfillment or selling website
  • Provides demand forecasting
  • Alerts you when items are running low
  • Allows quick and easy barcode scanning
  • Tracks all relevant product information
Amazon’s inventory management system in Seller Central uses models to provide custom recommendations based on each business’s unique inventory needs.

Whether you choose FBA or use an alternative resource for fulfillment, inventory software should:
  • Provide stocking refill recommendations
  • Integrate with your online sales channels
  • Track and provide reporting on product types, quantities, and dimensions
  • Track the number of days you’ve stored a product in the warehouse
“Amazon’s inventory management tools use world-class machine learning algorithms to create customized restock strategies, taking into account current inventory levels, restock preferences, supply chain constraints, and anticipated demand.”
Kevin G.
FBA Inventory Optimization Team

8.

Maintain four weeks of inventory cover

It’s no surprise ecommerce sellers who offer faster delivery commonly see higher conversion rates on their products.

Having enough inventory to meet demand on a rolling four-week basis is generally ideal. Four weeks is a sweet spot because it provides enough time to:
  • Distribute inventory and save on order fulfillment costs
  • Facilitate faster delivery speeds to please customers
  • Minimize lost sales opportunities and stock shortages
  • Avoid excess inventory, helping you save on storage costs
FBA sellers should maintain four weeks of cover to allow Amazon to distribute inventory across multiple warehouses. Ecommerce orders come from across the United States. Having distributed stock helps provide faster delivery to customers.

It’s about balance

Simple steps have the power to transform lackluster sales into a booming business. The more efficiently you manage your inventory, the more profitable your business can become.

Cornerstones of healthy inventory management include shipping products as quickly as possible, maintaining enough stock to meet demand (even during peak seasons), and insulating your supply chain against hiccups due to weather and other unpredictable factors. In particular, focus on areas where you can cut back on costs, such as storage and order fulfillment.

Adopt inventory best practices and apply them consistently. Keep on your toes and stay on the lookout for delays in listing, selling, or delivering products. Respond to problems as they arise to help minimize costs, maintain a good sell-through rate, and improve inventory performance overall.

Good inventory management is about balance. You want to make sure you have enough inventory to cover demand, but not so much you become overstocked. Continuously manage your inventory to get a return on your investment.

Fulfillment by Amazon lowers the barrier to entry and cost of running your ecommerce business.

Amazon offers a free suite of inventory management tools for ecommerce business owners through FBA. You can access this suite of tools through the Seller Central dashboard or the Seller App on your smartphone.

Along with daily inventory and storage reports, Amazon uses machine learning models to provide data-driven recommendations through features such as:
  • FBA Restock Tool
  • Inventory Performance Index
  • Inventory Age Report

Inventory Management FAQ

How do you measure to see if you are successfully managing inventory?
There are several ways to measure your inventory management. Three common methods are:
  • Sell-through rate
  • Inventory Age Report
  • Inventory performance index
Sell-through rate measures how well you are balancing your inventory levels and sales. It’s calculated by dividing the number of units sold by the number of units received:
Sell-through rate =
number of units sold
number of units received
x 100
FBA sell-through rate is calculated by dividing the total units shipped to customers in the past 90 days by the average number of units in your FBA inventory during the same period.
FBA sell-through rate =
total units shipped to customers in the past 90 days
average number of units in your FBA inventory during the same period
Inventory turnover rate is a measure of how quickly you sell and restock products. It’s calculated by dividing the cost of goods sold by average inventory:
Inventory turnover rate =
cost of goods sold
average inventory
It can help you determine when to restock items, make pricing changes, or run promotions to increase sales and improve turnover.

The Inventory Performance Index is an Amazon scoring system based on how well you manage your inventory. A higher performance score indicates inventory efficiency and can earn you more storage capacity in Amazon’s fulfillment centers.
What does an inventory management system do?
An inventory system helps you manage your stock. A good inventory management system can:
  • Keep track of your inventory
  • Integrate with your order fulfillment process
  • Alert you of product shortages
  • Provide restock alerts
  • Allow barcode scanning to help you process inventory faster
  • Provide on-the-go information across devices
What is the simplest way to manage an inventory?
Using a third-party inventory management service like Fulfillment by Amazon (FBA) allows you to automate inventory management aspects such as demand planning, maintaining healthy inventory levels, and avoiding aging inventory or spoilage.

Third-party providers can also manage inventory at scale, helping you save on costs such as order fulfillment while offering fast shipping.
What’s the difference between order management and inventory management?
Order management refers to how you receive and process customer orders. Inventory management refers to how you manage products through your storage facility or warehouse. Integrating your order management and fulfillment management systems and processes can help you run your business smoothly.
What is the inventory turnover ratio?
Inventory turnover ratio is a measure of how well you manage your stock. It can help you determine when to restock items or make pricing or promotion changes to increase the number of sales and improve turnover. It’s calculated by dividing the cost of goods sold by average inventory:
Inventory turnover ratio =
cost of goods sold
average inventory
In general, a good inventory ratio is between 5 and 10.
  • A higher inventory turnover ratio can mean you stock the right quantity of products to meet customer demand.
  • A low inventory turnover ratio can mean you are holding too much stock, products aren’t selling well, or you’re facing low customer demand.
What is inventory control?
Inventory control is the process of checking to make sure you have the right amount of products to fulfill customer orders. With the Amazon Seller App, you can check inventory levels on the go and stay up to date on what units and quantities are available for purchase.
What is supply chain management?
The supply chain is the combined network of people and processes that take an item from the raw materials to a final delivered product. If you make your own products, the supply chain includes where you source your raw materials. If you purchase finished products from a manufacturer, your supply chain includes the parties that produce the goods and get them to your business.

Supply chain management is how you manage your process for acquiring or creating products up until the products are sold. Streamlining the supply chain and sourcing high-quality products are common ways entrepreneurs can earn a better return and build a loyal customer base. The right approach to growing your brand depends on your business, but the supply chain is a great place to look for areas where you can make improvements.
What’s the role of the supply chain in relation to inventory management?
Inventory management is a part of the supply chain.

The supply chain affects many aspects of your inventory. Here are a few common ways:
  • Sourcing quality items can help you avoid negative customer reviews and build your brand.
  • Shipping times affect how quickly you can restock products.
  • Improving your supply chain efficiency can help your business acquire products at a lower cost, increasing margins.
Inventory management refers to overseeing the process of acquiring products for sale.
Manage inventory efficiently with third-party inventory management and fulfillment
As you scale your business, it may be beneficial to allow a third-party fulfillment provider to handle aspects of inventory management for you.

If you choose to work with a fulfillment vendor, check to ensure it provides an inventory and order management system—including accurate reporting to give you a clear picture of what’s on your storage shelves at any point in time.

Some fulfillment solutions, like Fulfillment by Amazon, can give you access to benefits such as a distributed warehouse system and fast shipping.

Start selling today

$39.99 a month + selling fees