One of the biggest questions I get and one of the things I think a lot of people simply don’t talk about in the Amazon world is really inventory management. Like so many people especially in this digital era come from a background where you’re selling digital products. When you’re selling digital products, you’re really just reselling something that’s in a binary code type of thing. There’s no physical aspect to it.
When you start to sell physical products it’s a whole different set of management issues involved in being able to manage inventory and keep your inventories at the right level to be able to support the right amount of sales. What happens when you don’t get this right?
All your money ends up being tied up in inventory and then all your doing is switching your profits for inventory value and really never seeing any of your money. What I really want to talk about today is just kind of making sure you understand some of the concepts of inventory management.
Talk about some of the things you can do to do it better and introduce you to a couple of terms that ultimately will help you be able to focus on better inventory management. Way back what seemed like a whole lifetime ago, I had a degree in economics and one of the things that back then when I studied economics, you studied physical products. That were no really such things as digital products at the time.
It was drummed in over and over again that one of the things you had to manage was what’s called, well two things really, one was what’s called inventory turns and the other was what’s called your velocity of money. Which are basically economic theories of how to better manage your inventory.
Here’s what happens to so many people. As they go in they’ll buy their first product maybe they’ll spend a couple of thousand dollars get a couple hundred units, whatever it is. They’ll go through those, they’ll start to see an increase in sales and be able to support that additional amount of inventory. You’ve got to put your profits back into your inventory so you have enough inventory to support that. You start out you go through your first couple of months. You think, “Man this is great. I’m getting a lot of sales. I went up to 10 a day, 15 a day, 20 a day. I’m adding other products.”
Whatever it is you seem to be reinvesting everything back into the business. Your spouse is looking at it and says, “I though you said you were making money. I don’t see any difference in the checking account.” She says, “Hold on but we’re making, we’re doing lots of business.” Then end up by month 3, month 4 your sales have increased.
You go out and you’re having a nice dinner. You’re celebrating and your spouse says, “Where’s the money in the checking account?” And you look at this and maybe by 6 months may you built, whatever number you built a $50,000 a year business. Call it 5,000 a month, 10,000 a month, 20.
Whatever number you created but what has happened is all of your money has gone back into building and supporting that inventory. If you can figure out a way to save, let’s say you’ve got $100,000 in sales over say a period of time and it takes you $50,000 to be able to support that inventory. You would literally have an inventory turn of 2 your quantity, into your inventory value, into your amount of sales.
What if you could find a way to be able to only carry $25,000 of inventory to support $100,000 worth of sales. You now in this case, this is what’s called an inventory turn. How many times your inventory turns over to be able to match and support you sales. Obviously the higher number of inventory turns, the less number dollar figure you’ve got invested into your inventory.
Which leads to the second part of this which is called velocity of money and that’s how many times money turns over when you sell a product, you reinvest it back in and then to make money. Let’s say in this example you cut your inventory turns from 2 down to 4. $25,000 goes into $100,000 four times right? So that will be an inventory turn of 4.
It’s typically done on an annual basis. We’re getting a little more complex here on some of the things we were talking about but I think this is important for you to be able to process and be able to apply to your own business.
Now in this example you’ve gone from 50,000 to 25,000. Well the next question is how are you really going to do that? Well one of the things that people don’t talk about in the Amazon business is how long it takes for you to be able to get your goods from China to the United States. Sometimes when you tell a supplier, it takes then 6-8 weeks, sometimes it’s 2 weeks.
Now what I would go back and suggest and we’re not going to do all the math here today but if you were able to find a supplier or you could order if that would have a faster turn around time or either will allow you to get smaller quantities so you could replenish your inventory faster and get down to that smaller or that greater inventory turn of 4 in this example.
That would free up $25,000 for you to reinvest back into your business or take as profit for your business. Whatever you choose. Let’s say you found a supplier now that you can cut your production times, you can cut your shipping times.
One of the questions here and we can do this in another video but should you do air freight or sea freight? Air freight sometimes, well is always more expensive than sea freight.
However, you can get in smaller quantities and you can get it delivered faster too. Sometimes even though you’re paying more it’s better for your velocity of money which where we’re going next, to be able to pay air freight than to have it take 2 months for it to get here. From a sea freight you have to invest all your money and inventory. You’ve got no money left over and anything else in some examples.
Anyway, so okay if you understand inventory turn. You’ve been able to work on that, been able to work with your suppliers. The next things is let’s just say you have another $25,000 to invest. In this example and again just to make the math easy, let’s say you go and buy 5 more products. You watch your inventory turns, you manage your inventory, you keep your inventory value very low relative to your sales.
Just by increasing that 1 product from 50 down to 25 you’ve been able to buy 5 more products and as you sell that throughout the course of the year let’s just again, who know whatever else but let’s say you turn those other products into another $100,000. By managing your inventory and assuming you’ve got a 50% margin.
Just by decreasing your inventory better managing your business you’ve been able to generate say, another $50,000 just by better inventory management. These things can all get as complex as you want then to be and this is really not a complex theory but it’s something a lot of people don’t teach because I don’t think they’ve ever gone through it.
They really don’t understand some of these economic principles. Not in the last study but also applied in some of my physical businesses leading up to what I do now on Amazon.
What you’ll also find too is that if you can decrease these numbers you’re going to have a competitive advantage overall of your other competitors and in regards to what you can price line them if you choose to go low, which you should do.
If you choose to go lower, you’ve got all types of options on being able to promote more than other people are. You’re putting yourself in a stronger better position to compete in the marketplace. Anyway, I don’t want to go into a whole lot of depth on this but I just wanted to touch on a concept of inventory management because as you think through this, look at where your inventory value is now relative to your sales.
I really like to think an ideal number in Amazon sales scenario is somewhere 10-$12,000. If you are doing $100,000 of sales say over the course of the year and a course of a period and you got $10,000 in inventory. That would be an inventory turn of 10.
If you got 50,000 that would be an inventory of 2. The higher your inventory turns the better. Go back and ask yourself what are your inventory turns. I’m betting most of you don’t know that.
Go back and start tracking that number and see if you could figure out ways to decrease your inventory and get that money back to increase your inventory or your loss of money into other items and that way at the end of the calendar year, I promise you you’re going to have a whole lot of money in your bank account that what you do now.
Then you’ll finally be able to go out and have dinner with your spouse and say, “Look at the bank account that’s growing now.” Anyway thanks very much for listening and if you’d like some more information you could always go to our website which is: MarkScottAdams.com/free-training.
Again, thank you for being here whether it’s on iTunes, YouTube or on the blog. See you next time.
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Mark Scott Adams is a serial entrepreneur who has started, built and sold six businesses. He has sold millions of dollars of physical products on and offline over the last two decades. He is currently a speaker, author and successful Amazon Seller. To take his free amazon sellers training click here. To Get his free product checklist list click here