The biggest risk for third-party Amazon.com sellers in the fourth quarter is likely to be inventory storage limits. Amazon’s Inventory Performance Index (IPI), which measures things like sell-through rate and age of inventory to determine what it costs Amazon to warehouse your inventory, is the primary factor the company uses to calculate sellers’ inventory storage limits. Amazon doesn’t divulge what the other factors are.
One naturally assumes that if your IPI score goes up, then your inventory storage limits should be the same or higher. However, in some cases the opposite is true; IPI scores go up, while storage limits have decreased.
You might think that removing some stale inventory would increase your storage limits, but that doesn't appear to be the case either. Some people have removed units only to find their storage limits decreased.
In order to manage a robust inventory with Amazon, you need to first do what you can to ensure good inventory sell-through. Don't have inventory at Amazon for more than about 45 days. That means smaller, more frequent shipments to Amazon to keep inventory available for shoppers. Secondly, you should be prepared to sell directly from your own inventory (MFN) when you can't get FBA inventory to Amazon.
How do you best select your Amazon inventory? If you only have 5,000 units of storage available, do you send in 5,000 units of your best-seller, or 3,000 of your best-seller, 1,000 of your second-best seller, and 1,000 of your third-best seller? How do you decide?
- Only send in enough inventory to have 45 days of inventory at Amazon when it arrives. If your sales are consistently 1,000 units a month, that means you need to send Amazon a new shipment every two weeks. It’s better to send Amazon smaller shipments more often.
- Can you ship some of your products FBM (Fulfilled by Me/Merchant)? Can you ship some of them Priority Mail with two- or three-day delivery? If your product is small enough, shipping yourself is usually doable. Conversion rate will be lower, but not as low as with five- or six-day delivery.
- Consider rank and badges. You never want to lose a best-seller badge. If that means your third-best product needs to go to FBM because you can only send inventory for your best-seller with the best-seller badge, then that’s what you have to do.
- Pro tip: Look for category moves. Apparel and standard have two different storage limits. Do you have products that would fit into a category under apparel? If so, that inventory will be counted in the apparel limits and may free up inventory for standard limits.
You need to be able to switch your listings from FBA to FBM if you run out of inventory. That means you also have to be able to fulfill within the Amazon window, submit tracking information correctly, and be ready for what might be a large number of orders. There’s software, like ShipStation, that can help. Make sure you have boxes and tape and labels stocked up. Make sure you know the fulfillment costs.
Lastly, prepare your listings. You should set up a FBA and FBM listing for the same ASIN. Have them both active, that way if the FBA goes out of stock it automatically fails over to the FBM.
The coming holiday season promises to present logistical challenges for retailers, and the best thing anybody can do is prepare and stay nimble. If the pandemic has taught us anything, it’s that reality can always swamp the best-laid plans. The successful retailer will be the ones that have prepared for what’s coming while keeping a healthy attitude and rolling with the punches.
Brian Burt is CEO of CANOPY Management, a full-service marketing agency that's the force behind many of the most successful brands on Amazon.
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