Navigating New Challenges to Amazon Inventory Forecasting
As an eCommerce seller, it sure would be nice to have a crystal ball, wouldn’t it? Seeing into the future would solve a lot of your everyday problems, especially on the inventory front. Costs would be down, orders would be up, and everything would be operating like a well-oiled machine.
Unfortunately, until that happens (hey, we can hope, right?), good inventory forecasting is the next best thing. At its core, inventory forecasting is simply the process of predicting how much inventory your business will need to fulfill future orders. It can be a little like hitting a moving target—limited access to past sales data, product trends, and seasonality considerations often complicate estimations—but the end goal is to a) not stock too much and b) not stock too little.
In brick and mortar stores, a stockout doesn’t quite have the same devastating effect as it does on Amazon. This hypercompetitive marketplace has around 1,800 new sellers joining every single day, so if you don’t have the inventory available, you’re giving competitors all the momentum—and your money. Your hard-earned sales ranking is also at stake.
So what is inventory forecasting? And how have recent changes in the marketplace affected your ability to manage your inventory? Let’s take a look.
Inventory Forecasting Has Never Been Harder
There’s a definite learning curve to inventory forecasting, and it’s only gotten worse. While you should try to lean on last year’s data as much as possible, this isn’t always realistic. Just look at how the COVID-19 pandemic has impacted eCommerce over the past couple of years.
Popular products that used to fly off the virtual shelves are now collecting dust in warehouses across the country. There was a significant shift in spending, and depending on your product line, your sales numbers may have dropped drastically. Hopefully they’ve started to rebound by now, but you might have to face the reality that online shopping looks different now—for better or worse.
Another issue concerns all of those newbies joining the Amazon ranks. With no sales history to rely on, it’s much harder to predict how much to carry.
How Much Inventory Do Amazon Sellers Need?
Generally speaking, six weeks of cover is a good target. However, keep in mind that peak periods like Q4, Prime Day, and your category’s busy season require much more planning and access to extra units. You must account for higher demand and, in many cases, meet specific inventory deadlines from Amazon.
There is good news for beginners, though. Once you have at least a year’s worth of sales data, it will be much easier to plan ahead and forecast more accurately. Amazon has a dedicated inventory dashboard available, but many FBA sellers also turn to third-party inventory software like eComEngine’s RestockPro to handle the daily demands of proper inventory management. This tag-team approach can help ensure nothing slips through the cracks.
But before you get too far into the numbers, you first need to be aware that Amazon has recently made a couple of significant changes to their inventory practices.
How Two Recent Changes Have Affected Amazon Inventory Forecasting
These changes have presented several new challenges for sellers, so keep reading for helpful tips and key information to learn about each one.
1) Restock Limits by Storage Type
One of the biggest challenges for FBA sellers right now has been Amazon’s unveiling of restock limits by storage type. Introduced in April 2021 as an attempt to solve storage space issues brought on by the pandemic, these new rules replaced ASIN-level limits and are instead calculated at the account level and by storage type.
There are four main storage types:
- Standard size
Restock limits also take into account your past and forecasted sales. You can check your restock limits in Seller Central on your Inventory Performance dashboard or by visiting the Shipping Queue page.
Note the utilization quantity in the image above. This number helps Amazon determine your maximum shipment quantity. It counts against your maximum inventory level and includes all current FBA inventory as well as incoming shipments, except those with reserved status or pending removals.
While some sellers were able to take these changes in stride (and were just happy to see ASIN-level quantity limits go), many were—and still are—left scrambling.
The Issue with Restock Limits
Remember, restock limits vary based on past and forecasted sales. And as we discussed earlier, the market itself fluctuates. Your past and forecasted sales can easily vary due to seasonality and peak selling periods. If this sales data doesn’t demonstrate to Amazon the need for higher restock limits, you’ll be faced with a situation where you may not be able to send in as much inventory as you expect to sell.
Sending in smaller shipments to Amazon on a more frequent basis isn’t ideal, but until further notice (or if you don’t want to fulfill orders yourself), it’s simply the best way to stay in stock. You must also be aware that in some situations, Amazon prohibits you from creating new shipments.
When You Can’t Create a Shipment
There are four instances when this is the case:
- The units in your shipping plan exceed your storage type’s maximum shipment quantity.
- Your sort-type utilization has exceeded your restock limit.
- The storage volume limit has been exceeded for the storage type.
- There’s an ASIN policy restriction, such as one for dangerous goods.
However, there are a few things that you can do to try to resolve these issues and create additional shipments for the future.
How to Create Additional Amazon Shipments
While you can’t change the storage type for your product, you can still try to create additional shipments. To do this, you can decrease the amount of inventory you have in a fulfillment center by selling more or creating a removal order. Or you can cancel any open shipments of products you no longer plan to send to Amazon. Both of these options will reduce the utilization of your restock limits.
Along with your restock limits, you should also understand how Amazon calculates your storage limits. It can get a little confusing—restock limits are based on units and determine how much inventory you can send to FBA. Storage limits, which are measured in cubic feet, are based on volume and determine how much fulfillment center space you can use.
You will not be subject to storage volume limits if you maintain your IPI (Inventory Performance Index) at the required threshold or above. Now that’s good news!
You can find your storage volume information in Seller Central on the Inventory Performance dashboard and the Shipping Queue page.
2) Amazon Inventory Performance Index
As you can see, your IPI score is something you need to keep an eye on as it essentially grades the performance of your FBA operation. As of Q3 2021, the current IPI threshold for FBA sellers is 450, but it does fluctuate. Again, it’s imperative that you pay attention to your score.
Amazon calculates your IPI based on the following metrics:
- Excess inventory rate
- Sell-through rate
- Stranded inventory rate
- In-stock inventory
The higher your score, the better. You can see your IPI score in Seller Central in several places, including a number of inventory pages and the main seller dashboard.
Your IPI Impacts Your Future
Here’s the lowdown on your IPI: if your score is too low, it could lead to overage fees and limits being placed on your FBA storage. If it’s bad enough, you may not even be able to send items to Amazon warehouses.
That being said, you will be notified before any of this happens. If your IPI score is below the current threshold when your account is reviewed, you’ll receive a notification from Amazon and have six weeks to improve it. At that point, if it’s still below the target level, storage limits will be set for the next quarter.
How to Improve Your Amazon IPI Score
You should do everything in your power to maintain a good IPI score. If your score needs some work, here are a few ways you can begin to improve it.
Sell or Remove Excess Inventory: Amazon calculates excess inventory based on what it thinks you will need to restock over a 90-day period. You may try lowering your price, undergoing a listing optimization, and/or running more ads to ramp up sales. The “last resort” options may include liquidating, removing inventory, or creating a disposal order.
Boost Your Sell-Through Rate: This metric is also viewed over 90 days and looks at the number of units you’ve sold divided by what you had in FBA warehouses during that time. Bundling products, discounting items, and removing inventory are all ways you can help increase your rate.
Stay in Stock: Your FBA in-stock rate is the percentage of time your FBA ASINs have been in stock during the last 30 days. However, it’s only concerned with replenishable products, so if you don’t plan on replenishing the items, mark them as non-replenishable in Seller Central to exclude them from the rate calculation.
Fix Stranded Inventory: When you no longer have an active listing but leave inventory with Amazon, the end result is lost revenue and rising storage costs. Amazon will let you know your number of stranded units, so make sure you’re paying attention to this and regularly checking for stranded inventory yourself.
These are always good inventory strategies, but when you have a low IPI score, they’re even more important to implement.
Putting it All Together
Keeping inventory in stock is critical; we all know this much is true. The wild cards here are the two key factors in inventory forecasting: timeliness and accuracy. Recent Amazon changes and supply chain disruptions have made this more challenging, but with smart inventory practices, you should be able to prevail.
FBA sellers, try your best to find that magic number that keeps your inventory at the lean levels that Amazon wants without stocking out. Have a backup plan ready and be able to meet orders no matter what—even if that means fulfilling them yourself. If you need more help with your FBA inventory management, RestockPro can help you restock at the right time, streamline shipments, build kits, calculate profitably, and more. Good luck!
How does Amazon’s inventory restocking algorithm work?
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