Amazon Inventory Management Tips with Orion Avidan

hi everyone this is Jelena from Amazonia PPC and today with me I have a very special guest which is Oreo and everything from retail adventure she is an inventory balancing expert with 10 years of experience Orion welcome to my podcast and thank you for being a thank you letter for having me here it's a great pleasure might as well can you tell us a little bit more about yourself I started and what is it that you actually love about inventory balancing yeah well I started very like in the very common way through academia I studied industrial engineering and management I've got my MBA and about 10 years ago I started getting sucked into the world of Theory of Constraints which from my point of view is managed management by logic it's not just management but it's a lot of logic work making things make sense and a lot of things you learn when you go to business school or this is how it is and that's it and I really like the logic work in Theory of Constraints and then I realized they were talking a lot about inventory in production in retail and being a retail lover myself I'm great believer in retail therapy but I am strange in my size in my face so I rarely find what I really wants I was like oh this is good stuff as I can go into the shop and you can go into the shop and everybody can go into the shop and find exactly what they want and have this great shopping experience and at the same time the shops will have a really good business and there won't be any more talk about retailer Magadan and their stuff because that doesn't make any sense shopping is not going to go away and as much as ecommerce is amazing and it is amazing it's not going to replace all shopping ever so the problem is not where everybody is looking from my point of view there is a place for shopping malls and there eases a real place for shops on the streets in the shopping experience and there is place for e-commerce and the e-commerce experience and the instability the problem that shops and retailers have with money isn't because of this kind of fight between the platforms it's somewhere else and when I was looking at it I was like wow I have to do this interesting what are the main problems that you see sellers faced with inventory I'm guessing your implication with the problems between you know these retail brands in Quito events that they're facing on offline and online environment is the inventory management so what are some of the main issues that they see in main stakes you see repeat over and over again so inventory problems come in two flavors and they usually come together you either have too much of stuff or you have too little of suffering not enough and it basically goes like this the good stuff sells out faster than you expected so fast runners are stopped out and you cannot sell them anymore and the it's not the bad stuff it's the stuff that is not doing what you expected of it off its and running slower than you expected gets stuck there is an mismatch between our supply and the demand we see in the market and it's in time and it's in quantity and it's in value so we bring in a certain variety we buy ahead of time and we bring it in and some of it runs out of stock if we are fast enough we can increase the price on it just came out more value form it for the business and then still it's still valuable to the customers it's okay the problem the big problem sellers see is with the items that are priced above the value customers give them and those just don't sell and eventually they go into sale mode and we have the sale months of November when we go from one selling holiday to the next in Israel we have shopping il and then you have the Chinese 11:11 and then you have Black Friday and you have Cyber Monday and all of these are man-made dates tell people get your shopping juices up because we're going to reduce our profits we're going to reduce our margins for you because basically we pushed our merchants up too high just so that we can take it down low we are actively teaching the markets to be more and more price sensitive but there are some items that never reach sales you know why because they sold out ages ago and we don't have them and we understand there is no reason to sell them at a reduced margin because they sell well as full price and the reason they sell well at full price is because they give real value to the purchaser to the customers actual price there is something about them whatever it is color size that brand that satisfies their need and they do not need us to reduce the price they are getting enough value at price interesting how do you how do you know when a price is too much and when a price is too low well the market tells you if it sells and a good enough case at a card price you just test what happens if you'd bring up the price a little bit does it still sell until you you slowly bring it up until it stops selling and then you say this is the price point this is the sweet spot and it depends on strategy and it depends on supply if you can supply all amounts then you can add a reasonable price then you can price lower and still make a profit where do you want your brand to be where do you want your supply to be it's a give-and-take but if something is selling very very well you can usually increase the price a bit especially if you're very if you have been very very price conservative if you've been pricing lower to try and drive sales if the sales are high volume high volume start picking up the price see where the volume tapers off and figure out where you want to be there I'm not an expert on price elasticity but there are people who can just look at your numbers and give you that number that equation and you figure out where you want to be on that it's a lot to do about branding how do you know that price is too high people aren't buying hundred percent correct so in a case is when you have excess inventory what's the best way to handle it handle that kind of situation that's a great question because not all excess inventory is the same you can have actually nine different types of excess inventory and I'll share with you and the resources you can share out afterwards the matrix that shows them on how much excess you have for the item and what type of item there that is if it's a good seller I'm a top seller a medium seller and or a bottom seller so does it belong with the 25% of top sellers the 50% of the middle or the 25% of the slowest sellers now how much inventory do you have do you have an excess that is just for short term excess middle term excess or long-term excess all of this changes the way we look at the inventory but basically if it's a good seller it's just sit down and just continue working as normal track it manage it maybe give it a little shove I would not reduce prices might spend a little bit more on marketing on PPC on I don't know influencers or something to get some more drive to people driving people to the items but those are good sellers they will sell out middle sellers this is where I say be a bit flexible with a price but try to do I call it piggyback marketing I'll give you a reduction on this excess inventory unit if you buy that excess inventory unit from the best sellers so buy a best seller at full price yes a medium seller upsell with a good discount not too much about 15 to 20 percent at most I don't think you need more than that again depending on where that item is on your demand curve if you go and have a lot of excess in the slow sellers which is where usually people have a lot of excess inventory sometimes you have a lot of excess inventory when you're looking at how long will it take to sell this inventory but if you look it's less than box its few units but they're not done itself totally different way of looking at it here I would like you to start thinking of what can you do to make this move now fast and furious and eventually just cut your losses how can you make some kind of value out of this inventory even if it's not monetary even if it's just a big campaign about donations mm-hmm get something out of it cut your losses because it's costing you money and it's taking away your attention as a manager and it's not making money interesting so when we have a completely opposite situation when you stock out like many of the sellers right now are facing the situation what's the best way to handle that well there is the best way and there is what are we going to do now because we have a virus I'll start with the corona virus and I will say there's a phrase that I really really like it says that a crisis is too precious to be put to waste mm-hmm so yes there is a crisis right now and it means that sometimes it's harder to get source your usual sources cannot supply or make your [Music] units supply times are longer things are not quite clear demand is also shifted a bit that's just a bit and this will work itself out pretty quickly I know there's talk about how corona virus is going to keep impacting the world for at least six months business world is not going to wait that long businesses are going to start then getting back online faster what I would like you to do if you're facing this crisis effect is to think about how are you going to manage differently on the day after because there will be another crisis right will be and another epidemic I mean this is not my first ride in the rodeo I think through SARS I've been through swine flu I I was working as a hired engineer in a factory when 9/11 occurred and the world stopped completely know going in no going out people were stuck everywhere all over the world and event eventually - three weeks later everything came back to normal for Moses so the question is okay what can we learn for the future and remember you cannot plan your inventory for this out layer events you don't know when it will happen how strongly happen so if you put your money on protection for such a surprise just going to waste it and run out of money the idea is to start thinking about business processes and risk mitigation in a different way so if right now you're only sourcing from China once this is over and you can recover start thinking about how can you source a backup source that is not in China even better that is much closer to home No maybe even in your country and don't look for a cheap competitor to China this is a backup source it could be much more expensive because in a case of emergency keeping your business running is much more important than keeping your prices low and on the other hand on the regular day-to-day basis stock outs are something that you should never get into it's not something that you should result it's something that you need to prevent by managing your inventory flow and the only way I know how to do it is by moving away for big orders that are set up months in advance to smaller frequent orders that are slowing in and allow you to adjust and change even if your lead time is long just by creating this flow and reducing the size of decisions you need to make and making the more frequent you will create a situation that is much more stable and reduce your risk of stock-outs because if I ordered my best runner no to be supplied three months down the line and I made a huge big order because I wanted to last for another four months after that and eventually I ran out of it ahead of time and I contact my supplier and I said listen I need to expedite maybe he can and maybe he can't but if I do let's say an order every other week and my best runner will probably be 90 95 % of those orders and something happens and demand site and I ran out I can call my supplier and see if he can expedite I can call the Quality Assurance warehouse in China and say maybe we can shift one shipment from c-2 airfreight I can call the freight company and see if I can move to it faster route or a faster ship at cost of course but I have so many other options other touch points where I can intervene and see what can be done do you have any for some of the countries that might be good sourcing points for sellers outside of China that not necessarily had to be that technically developed but still be good reliable sources everywhere the best thing from my point of view is to source inside your country or if you're in Europe inside Europe somewhere where you don't have to where the shipping is less than a week up two weeks time shipping and truck for example is really much easier to handle than three weeks or three months in shipping on Z so it's not a country because from my point of view it's it doesn't really matter if it's the cheapest option or not sometimes buying cheaper ends up being costlier and losing you money how does what I'd like to get what what I want you to do when you're sourcing is look for flexibility um yeah I can show you a little example mathematical example of how buying smaller and a more expensive ends up being more profitable yes for sure let's see that well let's let me just share this quickly so can you see my presentation yes so this is a very simple mathematical example it's not a real-life example I put it together but it's pretty close to what you can find in real life and it's two options to purchase the same type of item you're gonna do $5 per units purchase and then the minimum order quantity will be 100 or you can afford er much more a thousand and pay three dollars per unit and as you can see it's much cheaper to buy at a thousand units and this is a totally deterministic market I know the lead times I know the selling price I know how many units per day there is demand I know how many days I can sell it it's a very seasonal item I can sell it only for the next 45 days and so to sellers made the decisions one went with the smaller amount and decided to buy 400 units at $5 apiece paying two thousand dollars the other seller said oh no five dollars a piece is too much I'll buy a thousand units of three dollars a piece and ended up paying three thousand because of the difference in supply by time the first seller managed to sell 400 units the second seller sold on thirty three hundred and fifty and eventually the first seller made a profit of 2,000 years dollars and the second seller only five hundred dollars and if you look at the effective price for units sold you will see that the first seller still paid fine dollars for each unit that was sold but the second seller because he sold less units actually paid 8.5 dollars per unit and in this case it actually made more sense to buy the more expensive units what if they sell the same amount of items what happens then at 400 still so the first settler paid 3,000 for his units and therefore he will be left with $1,000 profit instead of the $2,000 profit there is a break-even here there are scenarios where of course it makes more sense to buy the bigger amount if both of them sell a thousand units and it doesn't make sense but from a cash flow point of view isn't if you know you're going to sell a thousand units it sometimes actually makes sense to buy them at the smaller amounts because you are committing less money into your inventory at each point of time and it's the difference between a huge huge air carrier and a little speedboats where you can pivot very very fast if something happens so there's a huge balance between there's a balance between profitability and if the economy of scale but knowing your business really well with me where knowing where you're at in terms of between these two scenarios basically it that means yes it might make more sense to order bigger quantities and then get that better price only if you have a guaranteed sales velocity that will sell out fast so that you don't get stuck with for example like ba fees and stuff like that so what are the main causes of what are the main causes of losing profitability when when you have bigger amounts of business boy well when you have bigger amounts of inventory let me just try and shut this down yeah [Music] Lent when you start when you look when you stop a lot of inventory you look up a lot of money in it and inventory needs to be taken care of there are storage fees some of it may become obsolete some of it may be maybe break down but get lost etc etc it's just harder to control and [Music] we can manage and it's a business process thing if you know you want to run small and lean you can actually develop your business processes to get the economies of scale with less inventory by communicating with your suppliers about your your economies of scale over time you don't have to just commit we're used to talking about the economies of scales off a transaction but we live we do business over time so if we raise this issue and try to look at economies of scale over time you will fight and you get a lot of cooperation so tell your supplier I don't want to buy ten thousand units at once I want to buy them over six months and we do that and we can fight and a lot of times just by bringing this up and presenting the idea that you're open to ideas a solution a resolution will come up so that being said it's super important to analyze your price per unit sold in order to understand which is the best approach for inventory management you should focus on the cash flow and getting that control and flexibility at the same time if possible that'll be what some of the non-financial goals of running your inventory management but at the same time they have very very big influence on how you how could you actually be at the end of the month basically yes cost of unit of unit sold he has a problematic parameter because you need to know how many units you sold and we usually know that only in retrospect we can do an assessment usually marketing people know how much demand they're expecting for different items they can speculate how many units they are thinking they could realistically sell so looking at how much is it going to cost me per unit realistically instead of for the unit's I buy because we're tempted a lot of times to buy units we don't need because we might need them we can sell them later on we don't want to stock out so do that I would recommend starting by doing the retrospective analysis loop a year or a quarter back in time and see where you stand and assume this is going to be your standard moving forward and see if I knew this before I made that purchase would I make different decisions on purchasing and how does that lead you in your neck purchasing events any tips for newbie sellers for people who don't have that kind of historical data well there is data in the market about similar products other products in your niche and the other thing is to just start small learn to walk before you start running exactly okay you touched base on when you spoke about coronavirus so what are some of the ways that sellers can deal with the sudden situation of running out of stock and what is what is your final sum of the or final advice for dealing with this kind of situation except from learning from it what is something that they can actually do right now to help their business that's struggling currently okay so of course if you can try to sort from a different source even if it's a bit costlier or a lot costlier other thing is if you haven't run out of a Nestea you yet but you are thinking you might do an analysis how long do you think you have with this SKU and the current demand what are you doing to generate this demand can you pull back if you're putting money into generating demand for an item that will stop out before you can restock it it actually makes sense to stop sending that money and let the item slow down and because you are currently wasting money on your marketing efforts you're creating demand that would come in anyway but you are paying for that if you have other items that are not that are higher in stock this is a good time to get that stock that overstock flowing out the market is more forgiving right now your competition is in the same boat as you so this is a good time to do something that I really don't like and that is forcing your market to buy alternative items that you haven't stuck it's not a time to start doing price reductions on that excess stock just try to flush it out move the attention to it and try to pace out your best sellers so that they don't stop out as fast because the algorithms that we use in Google and Facebook in Amazon basically have no man they build their database when you start them and as soon as you shut them down they forget everything and they have to build it again the next time you run them for that item or for that shop so you need to stretch out over time what you have right now and shift the attention to the less effective to the slower items to get them moving and keeping your business alive interesting points that's best of some kind of damage control but when it comes to that supplier side what kind of damage control can someone do for their business right now something like like a fast solution that will prevent them from stock-outs any advice it's so business specific that I cannot give you one tip everybody some people have very unique items maybe handmade items and finding a replacement supplier for those doesn't make any sense at all other people have very regular of not regular items they have items that are very simple to source elsewhere so sourcing is a good idea if you are going to find an alternative source right now try to make it a very temporary source they're gonna suck the blood out of you it's their chance to get really good pricing so think ahead and try to think this is going to be a one time to time deal and then I'm going to pull back on them if they're good I'll come back later but you need to improve your negotiating stance with them you can't you don't want to keep on the terms off coronavirus deals happen exactly by five I I really like the open card kind of mentality I would go to the supplier and say I understand this is the coronavirus kind of terms that's okay if you're good and I want to continue working with you you're going to give me better terms after that because we're open and we understand this but be be aware that you are going into a deal from a point of this advantage and manage it don't get emotional about it right Lorien thank you for being my guest on the podcast today and sharing all these wonderful tips if anyone wants to reach you I will put a link in the description of the video great thank you very much and as I said I will give you I will send you some links to my giveaways I have a tool for handlink excess stock realizing where your exit stock is and what my recommendations are then and a tool for shortages and where they are in the system and what you did you about them and they are free to use and I hope they help everybody brilliant I'm sure a lot of people will find them useful so we'll make sure to add them to the video description great thank you very much I enjoyed the art talk very much nice now