Inventory Management 101: How to Leverage the Power of Amazon | Chelsea Cohen
Do you have goods that are in-demand on Amazon? You're not alone. There's a massive opportunity for any business owner, mompreneur, or entrepreneur who has products they want to sell online. The question is: how do you manage it all?
Chelsea Cohen joins Matt in our final episode of season seven to share secrets of how to leverage the power of Amazon for inventory management.
Chelsea Cohen is an Amazon inventory management expert and the co-founder of SoStocked.com, which is an Amazon inventory management software. Chelsea’s also a 7-figure Amazon seller, speaker & consultant. Her regular clients include 7 & 8-figure sellers. She has been featured on AM/PM Podcast, Seller Stories with Jungle Scout & the Amazing Summit Stage, among others.
Chelsea’s story
I started selling on Amazon in 2014 and year after year I was wondering where my profit was going. In 2017 I was looking at my profit and loss statement and the margins were getting worse. I was realising that although I can't control what Amazon decides to charge me in fees and I can't control what happens with my competitors, I can control avoiding stock outs and not over ordering, paying storage fees and loan interest on inventory costs. I was making bad mistakes, and when you make a mistake with inventory, it becomes very, very expensive either in stock outs or in fees because of your overages. I decided that I had to figure this out and dove into inventory. It became a whole other job, so much time was being wasted by putting together inventory projections. I realised there's got to be a better way to do this. The software I was using wasn’t doing what I wanted it to do. So I went to a mastermind community that had other sellers involved, and asked them what they were doing. And they kept saying nothing works, everything sucks, we're back to spreadsheets - if you ask most people what they use, a lot of them will still use spreadsheets. It was because nothing was working, and I figured, being an entrepreneur, that's an opportunity.
“Entrepreneurs are taught to find a problem that needs solving and go solve it. So I decided that was what I was going to do.”
I had no experience in software at all. And I really didn't want to find someone on Upwork to lie to me about how it works. Two weeks later, I met somebody to help me. We both showed up at an event, and he kept saying he was bored, he needed a new software project, I had a software project that I wanted done, I somehow convinced him to do it with me. And three years later, we have built SoStocked into what it is now. We have never seen each other again in person, so we’ve built the company virtually. You never know who you're gonna meet and how it's gonna change the trajectory of your business life.
Why did you start selling online?
Selling on Amazon wasn’t even on my radar. I wanted a business and so I got roped into a multilevel marketing company. We were going around bugging our friends to join our deal, and our friends kept saying; ‘That's great, but I'm committed to this course - they teach you how to sell on Amazon.’ Our ears perked up, and we started asking around, we had a friend who had done this course previously and she was now doing 60,000 a month on Amazon, no experience. And we thought, well, if she can do it, we can do it. So we decided to do it, and launched a product within seven weeks of signing up for the course and made a sale before we even had inventory in stock, which is a whole other story in itself. But that first product took off and started things out for us, we were able to quit our jobs and go full time.
Chelsea’s elevator pitch
There's this whole idea that an algorithm is smarter than a person, but if you don't know what goes into that formula, you're not going to trust it. So you had all these software's that were saying, trust us, here's your magic number, just trust us. People couldn't trust the number because they couldn't figure it out, so they went back to spreadsheets. So we took the concept of what's working with spreadsheets, what's not working with spreadsheets, how can we build something that you understand that operates like a spreadsheet, but it's more automated, and then you can also plug in your marketing plans, because the other thing that these other software's weren't doing was letting us plug our marketing plans into our inventory plans, which is huge, because, Amazon doesn't know that I'm going to do an email campaign to my list to push this product so it helps you to do all that and to plan out an entire year for every single product to keep track of.
How has selling on Amazon changed over time?
It's definitely harder than it used to be. There's more rules that you have to follow. There are people that can launch a product and have extreme success quickly if they know what to do, and they are following the right people and following the right things. But it is definitely more challenging now. Back in the day we used to send a person a product and ask them to try it and write a review. Now you have to have verification, there's review manipulation rules, there's now ranking manipulation rules that Amazon has been slamming down on. There were people who had software connected to Amazon and they lost their API connection, due to the fact that they don't want any of these incentivized or ranking manipulation. So there's all these regulations that you need to understand, it’s a lot more complicated now.
Are you advocate people sell on Amazon?
Yes! If you have a reasonable product and you have the right mindset. It’s not a get rich quick thing. You have to ask yourself if you want to do this as a legitimate side hustle. Most of these things start as a side hustle. You’ve got to be willing to put in the time and not to go to the barbecues for a while and not go out to the movies for a while so you can actually build something and see it grow.
“Things are changing all the time so you have to consider whether this feels like the right career path and whether you’re willing to sometimes work harder than your current 9-5.”
Are Mastermind courses worth it?
Yes. Two of the mastermind groups that we have had a lot of people come to us through is the Titan network. Titan network is an exclusive membership organisation for Amazon sellers run by Athena Severi and Dan Ashburn. What I really liked about the Titan network is they have a structure for helping each section to grow. If someone's just starting out they have specific training on that, but they also have these group huddles where they meet on a regular basis. If someone's not getting their product, and they need a talking to, they're not afraid to challenge you and say, ‘Hey you guys, you need to pick your product. What are you doing? Quit right now if you're not going to pick your product.’ Sometimes people need that and it causes people to actually take action. They also have groups who are at different levels with specific training and guidance to what they need. The key is to pick the right type of group for you. I started with a course called The Amazing Selling Machine way back in the day. Those are some of the places that a beginner would start and then there are people that you can follow afterwards.
What problems did you see the need to solve?
I had a problem with Amazon not getting my inventory checked in before Christmas so we lost a whole Christmas worth of sales. We over ordered on a product and we had taken a loan out to pay for that inventory, then it didn’t sell like we thought it was going to sell. So we were paying loan fees and storage fees on that and you think it's not bad, it's just this and it's just that, and it's just an extra fee here and a mistake that caused me $2,000 there, but eventually all of that eats up all of your profit. This happens to so many people, so the inventory portion of things is where I noticed I could probably have the greatest impact on my bottom line.
Is Amazon Fulfilment complex?
Yeah, it's interesting. Your warehouse with your third party, your external warehouses, shipping agents, and your carriers are some of your best allies, not enough of us are utilising them. I was speaking to my 3PL (third party logistics) owner about trucking, and he started talking about how Amazon is built, and why we are having these delays. Amazon created something called Amazon Freight, where they bought hundreds of truck trailers and they will let trucking companies or independent truckers sign up to say I'll be a driver and I'll drive some freight. So they'll drive the freight but they are contractually bound, and it's a similar thing with something called an Amazon partner carrier. When you sign up for Amazon partner carriers you get much cheaper freight and much cheaper shipping. But what Amazon has contractually bound to these truckers to is you drive your stuff up and you drop it, you drop your trailer, you can pick up an empty one, and you can leave. And that was working really well until it wasn't. They started having labour problems, there were 350,000 workers that ended up quitting days or weeks after starting. So the couldn’t unload these trailers fast enough, so truckers were dropping their trailers and then leaving, because there's no empty trailer for them. So, then those trailers just sit there, and they don't get unloaded. My stuff has been delivered for five weeks, and it still hasn't been checked in, it's because it's sitting there in a parking lot somewhere. Whereas non Amazon partner carriers, the ones that are not contractually bound to drop their trailer, they are able to pull up to the loading dock and unload their stuff. Because they each have an appointment, then your stuff is actually going to get checked into Amazon.
With these non Amazon partner carriers, you're paying more, but your stuff is getting checked in and you're not stocking out, so you're continuing to make sales. It's one of those things where, for years, the obvious choice was Amazon partner carrier and it was only from having this conversation with this 3PL owner that I actually discovered what we've been doing. It could be three months from now that that's completely cleared up. Usually, Amazon partner carrier is the better choice because it's cheaper, but right now it's not. That's why all the chaos is happening at Amazon, that we're dealing with right now.
Sell just on Amazon
If you’re starting out I would say, definitely focus on Amazon. It's a completely different business model to have a website versus Amazon, it's a completely different skill set. You'll have Amazon sellers, where 98% of their businesses is Amazon. They have a website, but it's a different skill set, and there's some products that don't do well on your own website like commodity products that don't have their own unique positioning, people aren't gonna seek you out for that. Amazon has that trust, they do have the audience, there’s already traffic there, it's just getting your product in front of those eyeballs. It's a lot harder to get someone to trust you and put their credit card into some random website, and then charge them for shipping. Amazon has kind of conditioned us to think to feel that way, it's easier to just, get it on Amazon. So, I would say focusing on Amazon, definitely taking advantage of FBA (fulfilled by Amazon) and also having an FBM (fulfilled by Merchant) backup even if it's just where you would send inventory if Amazon couldn't check your stuff.
How to analyse inventory
Inventory can be very complex because of a lot of moving parts. But really, the thing you want to know is how much do I need to order or send by when? Those are basically the two things and then of course you want to consider logistics, how do I send it?
How much do I need to order is all based upon getting the first number, right, and that number is your daily adjusted velocity. So it's how many units am I selling per day of this particular product. We call it adjusted velocity, because sales spikes that are not going to recur and stock outs are supposed to be factored out of that. If you're looking at your 30 day average, and you want to say my daily adjusted velocity based on my 30 day average is x, but you’ve stopped out for five of those days, then you need to re analyse that data and adjust it to ensure that your average doesn't include that stock out. So daily adjusted velocity would be the first thing to understand and to get right.
Then it's how many days of stock do I need? And usually days of stock are based on how much you need to order, what is your lead time from the point of order to the point that arrives? Maybe that's 60 days, take 60 days to get my inventory into Amazon, and then I want an extra cushion. So you have your lead time, how long does it take and then you have your cushion. For example, I want an extra 30 days just in case anything goes wrong, so I want 90 days of stock. So now, when you place your order you place your order knowing that you have to have 90 days before you stock out and those are the kind of the basic formulas for figuring out inventory
Inventory management structures for Black Friday
You need historical data, this is really important. If it's a new product, then usually you can look what was the increase historically for our other products or similar products? If for example, there was a 200% increase for Prime Day you can start planning those things out. With our software, we created something called an inventory timeline. I've never seen it anywhere else, but I think it's crucial. For a whole year, or whatever time period you're looking let's plan out into the future. If I know that it takes 90 days for me to get inventory from point A to point B, then I'm going to have to plan at least four or five months into the future so you look at historically what you’ve done, and your daily velocity, and then you look at the all the sales along the way. That was a big piece that was missing for Amazon marketers. We're marketers first, and we like to try new things, so we would market in a vacuum and we wouldn't plan these things out.
I had a client who did a Mother's Day sale, and it was on a whim. The next month I said, ‘what about Father's Day?’ He goes, ‘Oh, we're cancelling lightning deals, we're running out of stock.’ And it was because he did that Mother's Day sale on a whim. Now he's pumping the brakes and running out of stock. He just gave 20% off coupons on inventory, that he could have sold full price and not run out of stock. So being able to create this timeline and planning out if you actually have enough inventory to do this campaign. Being able to plan those things out and tie your marketing plans to your inventory plans, and play it out for the next six months to a year becomes extremely important, especially when it takes so long to get inventory restocked.
How does the Amazon algorithm handle inventory?
Badly. They have daily velocity, but they don’t have daily adjusted velocity. Amazon don’t take into account stock outs, so whatever you’ve sold they will make recommendations on how many units you should send them to be shipped out based on data without factoring in stock outs. This didn't seem to be much of a problem at first, because most people didn't listen to it or pay attention to it. But when Amazon put these restock limit restrictions, where they said, you can only say send in this many units and once you sell down you can send more in, when they put that restriction and the calculation that they used, meant that if you stocked out, you might get into a stock out cycle, because you'd stock out limits would would drop, then you would be unable to send in what you really needed to get yourself back and rolling again, then you would stock out again, and it was this vicious restock cycle. Amazon has different types of sellers: private label sellers, they're the only ones who are selling that product. But then you have other sellers who are selling other people's brands, and there are multiple sellers on that listing. There's a whole competitive side of things where Amazon are not going to say, ‘if you had lowered your price, like this other guy did, you would have sold more.’
Advice for new Amazon sellers
For new people starting out they have the ability to send it up to 1000 units. So if they just wanted to sell one product they could send all 1000 units if they wanted to. They may get a storage fee if they're not able to move it, so it might make sense to either send it the cheapest thing if you truly believe that you can move enough inventory. So we would send it in, drive sales, get that product selling, but be paying very, very close attention because if that stock sells out in three months and is extremely successful, you need to have ordered, two months ago. You could try multiple products, but we’d recommend starting with one product and solidifying that. Find out what images work, what copywriting works, what ads work. Figure out the best way that works for you to get a successful selling product and then rinse and repeat.
Chelsea’s advice for non Amazon sellers
Find someone who knows how to run Amazon, because Amazon is different than anywhere else. We see a lot of big brands will just put stuff on Amazon, and it’ll start selling if it’s a recognised brand because people are typing in the brand name. So people will think it’s selling really well, but you’re not actually getting any new customers, you’re getting your old customers to buy on a different platform and giving money to Amazon while you’re at it. So that's not the best approach. The best approach is find someone who knows what they're doing, then gradually roll out your line based on what's going to be the most effective in the market. Look at what we have available to sell and do research to see, based on competition and keywords. Create a plan to figure out a rollout on that, and then start launching that rollout making sure that whoever you have in charge of Amazon does really know what they're doing. If you're moving into a brand new account on Amazon, even if you're a bigger company, you still have only 1000 units. So you need to then build up the sales velocity. From an inventory perspective, it'd be better to send the one product if you think it's going to take off and build up the sales quickly, so that you can increase that restock limit, then once that restock limit is starting to grow, the amount of inventory you can send is starting to grow, then you can add another product, and so forth.
What will be selling on Amazon looking like in the future?
For eComm we need to learn the other side of the business. We've been marketers for a long time, and it's finally catching up to a lot of entrepreneurs who don’t know the other side of the business like the supply chain, the inventory, the logistics, the cash cashflow portion, that side of the business that we have covered our eyes too and pretended didn't exist. We were lucky to be profitable, because it was such a golden age for Amazon for e-Com. We are now seeing how not understanding those things is extremely costly. I think in the next five years, people are going to become a lot smarter. I personally am focusing 2022 on educating people on recovering profit within their supply chain. There's hundreds of 1000s of dollars to be regained throughout clever optimization - pallet optimization, container optimization, container mapping so when your container is unloaded there’s a map of where things are, this will massively speed up the process.