On April 1, 2024, Amazon started charging a fee for inventory that falls below 28 days of supply. But this penalty is just the tip of the iceberg if you are a business looking to grow. Here is the real hit: according to Profitero, a fall in inventory levels from around 90% to below 30% can cause a drop in sales by as much as 42%!

Even if you were to restock by the next day, they estimate that you would still need an average of four days to regain your lost momentum. 

A strong inventory management system will help stop your business from bleeding out money. 

Yet the argument for mastering your FBA inventory management extends beyond preventing losses. It's also an offensive strategy for growth.

In announcing the new fee, Amazon revealed that keeping stock above its recommended minimum could increase sales by over 15% in just four weeks. When Amazon tells you what works for selling on Amazon, it pays to listen. 

A weak inventory management system can subbotage even the best marketing and product in the world. It won’t mean much if the amount of business you direct towards your account ends up overwhelming your ability to deliver. So, how do you build a robust system from the ground up? Let's start from the beginning. 

Understanding Amazon FBA Inventory Management

When a customer orders your product, someone has to handle the fulfillment process. You can either ship the product yourself (Fulfilled by Merchant or FBM) or let Amazon handle storage, packing, and shipping for you (Fulfilled by Amazon or FBA).

FBA can be a great tool for business growth, but only if you understand Amazon's inventory requirements and manage your stock effectively

Meeting Amazon's Inventory & Labeling Requirements

Before sending inventory to Amazon's fulfillment centers, your products must meet strict packaging and labeling guidelines. These rules exist because Amazon handles millions of units from different sellers, and everything needs to be easily scannable, efficiently stored, and protected from damage.

Here's what you need to get right:

Proper Labeling - Amazon requires a scannable FNSKU label on most products to track inventory. If you don't label correctly, Amazon may reject your shipment or charge a labeling fee.

Box & Pallet Labels - Every box and pallet must have Amazon-generated shipping labels for tracking. Missing or incorrect labels can lead to delays or loss of your shipment.

Packaging Rules - Amazon has strict guidelines for packaging items for its fulfilment centers to prevent damage and maximize warehouse space. Non-compliant shipments may be refused, delayed, or charged penalty fees.
Managing these details manually can be time-consuming. Fortunately, some tools, such as AZLabels, which allows sellers to print FBA and shipping labels instantly in the correct format, simplify label printing and help you stay compliant.

Why Compliance Matters

Ignoring Amazon's requirements doesn't just result in fees or rejected shipments, it can hurt your bottom line. Delays in processing inventory mean you risk stockouts, which can lower your sales rank and make it harder to recover momentum.

By following Amazon's requirements and using the right tools, you can avoid unnecessary penalties and speed up your inventory intake. They also help keep your products available for customers, ensuring your business runs smoothly.

Essential Inventory Metrics for FBA Success

Now that you know what goes into preparing your shipments to Amazon fulfilment centers, you can consider how to manage your inventory from Seller Central.

There are key performance indicators, which, if you look out for, will help ensure that you're never leaving money on the table through a weak inventory management system. 

Days of Supply

Days of supply is a critical inventory management metric showing how long you can expect your stock to last based on average daily sales. You find it by dividing the total inventory by the average daily sales rate. For instance, if you sell an average of 50 units daily and have 500 units in stock, you have a 10-day supply. 

This is an important metric to keep track and stay ahead of. Real-life sales can fluctuate in a way that may decrease your actual days of supply; your shipment may get delayed due to several reasons, or any other unpredictable variable. Using your days of supply to act ahead of time helps you avoid stockouts and also helps you minimize excess stock that could lead to increased storage fees.  

Historical Days of Supply

Where Days of Supply looks ahead, Historical Days of Supply looks back to see trends in your inventory flow. It shows you the average time that inventory has lasted in the past based on sales data over a specific period. This metric is essential for forecasting future demand because it shows how sales have varied over time, including seasonal fluctuations and market changes. It is calculated by dividing your average daily inventory on hand by the average daily units shipped, measured over a long-term period (usually the last 90 days) and a short-term period (typically the last 30 days). 

Unlike the basic Days of Supply, which gives you a snapshot of how long your current stock will last at today's sales pace, Historical Days of Supply offers a look back at your inventory management performance over time.

Inventory Performance Index (IPI)

Your Inventory Performance Index is a score of 0 to 1000, measuring how well you manage your inventory. It usually takes about 15 weeks from the time you start selling on Amazon for you to start receiving a rating on this core on Amazon FBA. It reflects how well you balance your stock by factoring in excess inventory, sell-through rates, stranded listings, and overall in-stock performance. 

A low performance will affect your FBA storage capacity, reducing your ability to stay stocked during high-demand seasons. You are also less likely to be eligible for Buyer Box; the levels of stock you'd need to sustain the spike in sales being in Buyer Box will trigger can not be sustained if you've already been struggling with inventory management on a normal Sunday. 

What are the factors contributing to your IPI?

●Having stock exceeding 90 days                         of supply

●Keeping inventory in Amazon fulfillment centers for extended periods(e.g., More than 365 days Having stranded inventory, where  a product is in a fulfilment center but doesn't have an active listing, making it unsellable. 

●The speed at which you are selling your products(sell-through rate), indicating sales velocity and demand Your FBA in-stock rate, which  reflects if you are managing to  keep up with fluctuations in customer demand, especially for  your most popular products. Keeping around 30 to 60 days of inventory for these high-demand products is a good idea. 

Taking care of the above will help ensure your IPI stays healthy and give you the best chances at e-commerce success. 

Stock Turnover Rate

Equally important is your stock turnover rate. It measures how often your business finishes and replaces its stock. How long does stock sit in a warehouse once you buy it? If it takes you too long to replace your stock, it must mean something; something is not going right in your inventory management. 

Stock turnover rate is calculated by dividing the cost of goods sold (COGS) by the average stock during a specific time frame. This rate provides insights into a company's efficiency in managing inventory, indicating how well products are selling relative to the amount held in stock. 

If your products are moving quickly (with a high turnover rate), it's a great sign as it means less long-term storage fees. But if you have a low turnover, then it might also be a sign that you are holding too much stock, tying up capital unnecessarily, and incurring extra costs. By closely monitoring your stock turnover rate, you can adjust your ordering and pricing strategies to maintain that ideal balance, ensuring you meet demand without overstocking.

Understanding Reorder Points

One of the most important things that all these metrics will help you calculate is reorder points.Think of the reorder point as your inventory early-warning system. It's the precise level at which you must place a new order to avoid a stockout. The fundamental idea is to cover your lead time between when you place an order and when the new stock arrives, plus a little extra to safeguard against surprises.

The basic formula is:Reorder Point = (Average Daily Sales × Lead Time) + Safety Stock

Let's break that down. First, determine your average daily sales. This is simply the number of units you sell per day on average. Next, multiply that by the lead time, the number of days it takes for your supplier to deliver your new stock. That gives you the amount of product you're expected to sell during the lead time.

But since real life rarely follows a perfect forecast, you add safety stock, a buffer that covers unexpected surges in demand or slight delays from your supplier.For example, if you sell 50 units daily and your supplier takes 7 days to deliver, you'd expect to need 350 units. However, if you've noticed that sometimes sales spike unexpectedly or your supplier occasionally runs late, you might add 50 units as safety stock, setting your reorder point at 400 units.

Putting It All Together: Building Your FBA Inventory Management System

Inventory management is a subject many have dedicated entire textbooks to, but you can start here and have operational confidence that you are indeed monitoring the pulse of your system and that you are set up to win.

Defensively, you are avoiding stockouts, excess inventory fees, and a declining IPI score. Offensively, it positions your business to capitalize on all potential sales, maintain Buy Box eligibility, and free up capital instead of letting it sit in a warehouse as stock.

You are taking all this information and building an airtight system. A good way to start is by:   

1. Auditing your current inventory against all the metrics discussed in this article, especially your Days of Supply and Stock Turnover Rate, to identify what needs your attention immediately.   

2. Calculating precise reorder points for your best-selling products, taking into consideration lead times and relevant safety stock levels.

3. Setting up a regular review schedule to help monitor your IPI score and make adjustments to your inventory management strategy in a way that adjusts to continual changes in market conditions.

If you want to join top sellers who use inventory management as a tool to increase profitability and reduce losses, then you won't leave it to chance. By building systems optimized to keep your stock at optimal levels, you'll not only avoid Amazon penalty fees but also position your business for sustainable, profitable growth. In the increasingly competitive world of e-commerce, your inventory management strategy might be one of the top tools you can sharpen into a competitive advantage.