The Unforgivable Sin On Amazon (And How To Use "Safety Stock")
One thing’s for certain; we all make mistakes and life can be unpredictable.
That’s a fact and it’s best to “face the music” of reality.
What is not good is to repeat the same mistake over and over again.
One of the key ingredients of success is feedback and iteration. This means you listen to feedback (most often mistakes) and improve based on your experiences.
This is why I’m completely baffled why sellers continue to make a particular mistake over and over again…
I see sellers making this mistake over and over again and not doing anything about it!
And it’s a BAD mistake to make.
I actually call it “the unforgivable sin” when selling on Amazon.
Because it's detrimental to your long-term success and it's completely avoidable.
What is it?
It's running out of inventory.
I can already hear you saying things like “my supplier was late!” or “I didn’t expect to sell this much!”
...and I believe you!
But why aren’t you doing something to make sure it never happens again?
It’s terrible to run out of inventory… especially on Amazon. Not only does your business lose out on vital revenues & profits - but you also lose momentum and rankings.
This is VERY COSTLY in the long-run when you look at the big picture. And when you consider all the implications. Especially if it happens over and over again.
If you have stock-outs in your physical products business they must STOP.
Because you can ensure they do not happen.
And the solution is surprisingly simple.
Yet most sellers don’t implement this simple principle of supply chain management.
It’s called “safety stock”.
To help you avoid "the unforgivable sin" I'm going to explain how safety stock works.
So in a perfect world, you’d be able to predict the exact amount of inventory you need and when to re-order. No unpredicted surges in sales or supplier production delays. No unexpected hiccups at customs and no typhoons or snowstorms... Basically, nothing unexpected happens (ever).
But this is not a perfect world. We live in the real world and it is unpredictable.
So instead of fighting this fact of life it's much better to embrace it and to factor it in. In other words; expect it.
Instead of trying to time your re-orders perfectly (which if you haven't realized by now, is impossible) we use "safety stock".
I'll Pull The Definition Right Off Wikipedia To Explain What Safety Stock Is:
" Safety stock is an additional quantity of an item held in inventory in order to reduce the risk that the item will be out of stock. "
" Safety stock acts as a buffer in case the sales of an item are greater than planned and/or the supplier is unable to deliver additional units at the expected time. "
So it's very simple.
But it's also very important.
If you are making consistent sales with any product and you want that to last and grow - you MUST use safety stock.
Here Are Two Important Principles When It Comes To Safety Stock:
It can be held in FBA or at another warehouse; what's important here is that it's available immediately if you need to use it.
Do NOT sell the safety stock unless you have to. The safety stock is "holy stock" that you cannot touch. That is unless you've genuine made a mistake or something unpredictable has caused you to run out of your regular stock. That's when you use it. Do not treat it like your regular inventory!
It's worth noting that there are holding costs associated with safety stock. However, the holding costs when selling on Amazon are less than the costs of losing orders, customers and rankings.
Not running out of inventory also improves the customer's experience for recurring products. And if you have variations on your listing, having the full selection available contributes to a higher conversion rate.
Using safety stock will help you avoid stock-outs and in the long-run that will have a dramatic impact on your business.
(You'll thank me for this advice later.)
How do you determine how much safety stock you need, to be safe? (no pun intended)
This is an important question because while you want to carry enough to get through surprises without running out of inventory... you also don't want the carrying costs to strain your finances or cashflow.
There are several complicated formulas that you can use but for practicality, I like to keep it simple.
Here Is The Formula That I Use:
Safety stock = (max daily sales x max lead time) - (average daily sales x average lead time)
- Max daily sales is the highest amount of daily sales you've had during the last 60 days (not counting giveaways, etc).
- Max lead time is the longest lead time you've had with this product.
- Average daily sales is the average amount of daily sales you've had during the last 30 days (not counting giveaways, etc).
- Average lead time is the average lead time you have with this product.
NOTE that your safety stock levels will fluctuate up or DOWN based on your sales volume. And make sure to factor in seasonality as well.
Here Is An Example Of How To Use The Formula:
Let's say that during the last 60 days your best sales day for this product was 20 units. The longest lead time you've ever had with the product is 58 days. Your average number of daily sales for the last 30 days is 10 and your average lead time is 45 days. This means you should have 710 units in inventory put aside as safety stock.
(20 x 58) - (10 x 45) = 710.
I know this may seem like a lot of safety stock, but it should be a factor in your reorder point calculations too. So you'll aim to time your reorders perfectly with your safety stock level.
--> Instead of aiming to never run out of inventory, you want to aim to never have to use your safety stock!
I hope this has been helpful and I strongly encourage you to implement "safety stock" for any product you have that is making consistent sales.
Of course safety stock is not the only strategy or variable in avoiding stock-outs - but it's one of the most useful.
To Your Success!
p.s. last week I released a video and gave away my free tool to gain a genuine competitive advantage with any product. If you haven't seen it already, check it out by clicking here.