If you are selling on Amazon and using FBA for fulfillment of your orders, you might have thought of ways to reduce the different Amazon FBA storage fees, because they are putting a lot of pressure on your final P&L.
Types of Amazon FBA Storage Fees
Amazon charges sellers different kinds of fees. Some of the fees are related to selling and processing and other fees are related to storage of your products at Amazon’s warehouses.
The different storage fees include:
- Inventory Storage Fees: Charged on all stored items and calculated based on daily average of inventory.
- Long-term Storage Fees: Charged on items that have been at the warehouse for more than 365 days.
- Removal Order Fees: Charged on items that you want to remove from the warehouse.
The Challenge with Inventory Management
Managing your inventory is very critical, because if you can’t maintain the right level of inventory at the fulfillment center you might face some or all of the below problems:
- Losing your sales ranking
- Missing sales opportunities
- Not receiving one day & same day delivery orders
- Paying extra fees on excess inventory
- Facing expiry problems with some product types
- Having high level of aging inventory and less fresh merchandise
- Having your cash trapped in unsold merchandise
- Having to discount your products and losing more margins in the process
- Removing items from the warehouse to your brick & mortar store and paying removal fees
All of this leads to more strain on your final profitability and your cash flow management.
Amazon FBA Restock Tool
Amazon is already trying to help sellers with their inventory management through a set of tools available to them in the seller central.
One of those tools is the restock tool, which calculates the amount of stock that needs to be there, based on sales forecast and historical sales data for the same SKU.
However; as many sellers have already realized, this doesn’t apply to all products.
If you are selling a basic product that is replenishable and is sold all-year-round, then this tool can be of good use. It will simply calculate the demand based on last 30 days of sales and tell you how much days of supply you have at the moment. Then based on your order lead time, it will tell you when you should be ordering this to have it at the warehouse on time.
If on the other hand you are selling seasonal products, as is the case with the majority of fashion products and other products that are released in drops, then this tool will not be useful.
If you are selling a winter jacket, it will have a unique SKU and it will be totally different from the winter jackets you sold last year. Also because you will only launch it in winter, there will be no sales data for the last 30 days before launch and by the time there will be sales data, the season will already be ending.
If you are selling iPhone 6 and Apple released iPhone 6s, you cannot expect the sales demand for the older model to be the same and to be based on history of sales alone. Also chances are you will not need to replenish it at all.
The Best Way to Reduce Amazon Storage Fees
The best way to reduce Amazon storage fees is to create an Open to Buy plan that is based on your own sales budget for the next period (say 6 months) and to place your orders with your suppliers based on this plan and their order lead times. In fact, this is how professional retailers plan their own product sourcing.
Your sales budget will take into consideration all the factors of seasonality, marketing promotions, and new launchings, and hence can be the best way to predict demand that is based on future planning and not on historical data alone. Of course the sales budget always takes into consideration historical data, but it also adds to it forecasts of growth or de-growth based on other market/product factors.
It is very difficult for any software or algorithm to predict the required quantities of inventory, because as we mentioned before, there will always be new products with no historical data and there is the seasonality factor. Human judgement is always needed when it comes to buying decisions.
There are also new trends emerging in the market everyday and as a buyer you need to act on them with the buying budget that you have, and take the call on re-allocating your budgets towards them if you believe they will pay off. This can not be done through an algorithm.
When you set your retail buying plan (see below) it will show you your purchasing amount by category, rather than SKU, because SKUs will change from season to season. Based on this you will place your orders from your suppliers using the specified budget for each category. You will then choose the products within each category to source, based on current trends, as well as historical performance of similar products in your market.
You orders will then start to come based on the month you have planned for them to arrive. This will mean that you will only have the inventory that you need to achieve your sales budget and have the required forward stock cover (specified by you as well) that prevents you from running out of stock and missing sales opportunities or losing your sales rank.
We explain the entire OTB process in details in our free Open to Buy Guide and you can download the template from members downloads.
Mastering the Open to Buy process over time will help you reduce your Amazon storage fees, improve your overall margins and improve your cash flow.
Read more in our Inventory Management guide for retail & ecommerce.
Retailer & Founder of Retail Dogma, Inc.
Rasha has 14 years of retail & ecommerce experience. She has started an ecommerce business in 2008, and later worked at H&M, Bath & Body Works, Victoria’s Secret and Landmark Group. She’s lived in 4 different countries, speaks 3 different languages and holds a BSc in Pharmaceutical Sciences and an MBA in Strategic Management & Marketing.