Amazon Inventory Management tips with Orion Avidan

hi everyone this is Yelena from Amazonia bpc and today with me I have a very special G guest uh Mrs oron avidan from retail Adventure she is an inventory balancing expert with 10 years of experience Ori and welcome to my uh podcast and thank you for being here thank you Elena for having me here it's a great pleasure uh might as well can you tell us a little bit more about yourself how you started and what is it that you actually love about inventory balancing yeah well I started very um 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 manage 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 are 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 a great believer in retail therapy uh but I am uh strange in my size and my taste so I rarely find what I really want I was like oh this is good stuff if 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 magin or stuff because that doesn't make any sense shopping is not going to go away and as much as e-commerce is amazing and it is amazing it's not going to replace all shopping everywhere so the problem is not where everybody's looking from my point of view there is a place for shopping malls and there is a real place for shops on the street Street and 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 uh what are the main problems that you see uh sellers face with inventory I'm guessing your implication with the problems between you know these retail brands in retail brands 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 many mistakes you've seen 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 stuff or not enough and it basically goes like this the good stuff sells out faster than you expected so fast Runners are stock 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 off it 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 to scheme out more value from it for the business and if then still it's still valuable to the customer 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 iil and then you have the Chinese uh 111 and then you have Black Friday and you have Cyber Monday and all of these are man-made dates to 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 margins up too high just so that we can take it down low we are actively teaching the market to be more and more price sensitive but there are some items that never reach sales do you know why because they sold out AGS 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 at full price and the reason they sell well at full price is because they give real value to the the purchaser through the customers at full price there is something about them whatever it is color size uh B brand that satisfies their need and they do not need us to reduce the price they are getting enough value at full price interesting um how do you how do you know when a price is too much and when the price is too low the market tells you if it sells at a good enough Pace um at a current price you just test what happens if you 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 at at 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 uh 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 uh conservative if you've been pricing lower to try and drive sales if 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 uh equation and you figure out where you want to be on that it's a lot to do about branding how do you know if price is too high people aren't buying 100% correct so in a cases when you have excess inventory what's the best way to handle it or handle that kind of situation that's a great question because not all access inventory is the same you can have uh actually nine different types of excess inventory uh and um I'll share with you in the resources you can share out afterwards The Matrix that shows them it depends on how much access you have for the item and what type of item there that is if it's a a good seller a top seller a medium seller uh 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 access middle term access or long-term access 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 uh I would not reduce prices might spend a little bit more on marketing on PPC on uh um 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 the price but try to do um I call it piggyback marketing I'll give you a reduction on this uh ex's inventory unit if you buy that excess inventory unit uh from the best sellers so buy a bestseller at full price yes a medium seller uh upsell with a good discount not too much about 15 to 20% 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 access 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 a box it's a few units but they're not done to sell 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 compa about donations 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 stuck out like many of the sellers right now are facing the situation what's the best way to handle that F well there is the best way and there is what are we going to do now because we have Corona virus and the world is Crisis mod I'll start with the Corona virus uh and I will say um there is a phrase that I really really like that says that a crisis is too um precious to be put to waste so yes there is a crisis right now and it means that sometimes it's harder to get um Source your usual sources cannot Supply your M your um uh units uh Supply time are longer things are not quite clear demand has also shifted a bit but it's just a bit and this will work itself out pretty quickly uh 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 getting back online faster what I would like you 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 there will be another epidemic I mean this is not my first ride in the rodeo I've been through SARS I've been through swine flu um I've I was working as a hired uh engineer in a factory when 911 occurred and the world stopped completely no going in no going out people were stuck everywhere all over the world and EV eventually two three weeks later everything came back to normal for most of us so the question is okay what can we learn for the future and remember you cannot plan your inventory for this outlayer event you don't know when it will happen and how strongly it will happen so if you put your money on protection for such a surprise you 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 daytoday basis stock outs are something that you should never get into it's not something that you should resolve 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 from big orders that are set up months in advance to smaller frequent orders that are flowing in and allow you to adjust and change even if your lead time is long just by creating this flow and reducing the am the size of decisions you need to make and making them more frequent you will create a situation that is much more stable and reduce your risk of uh stockouts because if I ordered my best runner now uh 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 run out of it ahead of time and I contact my supplier and I say 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 in 90 95% of those orders and something happens and demand spiked and I ran out I can call my supplier and see if he can expedite I can call uh the quality assurance Warehouse in China and see maybe we can shift one shipment from SE to air fright I can call the Fright company and see if I can move to a 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 recommendations for some of the countries that might be good um sourcing points for sellers outside of China that not necessarily have to be that technically developed but still be good reliable sources everywhere best thing from my point of view is to Source inside your country or uh if you're in Europe inside Europe somewhere where you don't have to uh where the shipping is less than a week up to a week's time shipping in truck for example is really much easier to handle than three weeks or three months in uh shipping on SE 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 that I want you to what what I want you to do when you're sourcing is look for flexibility um do I can show you a little examp 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 uh 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 can do a $5 per unit purchase and then the minimum order quantity will be 100 or you can order much more a th000 and pay three dollar per unit and as you can see it's much cheaper cheaper to buy at a th000 units and uh this is a totally deterministic Market I know the lead times I know the selling price I know how many units per day uh 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 two sellers made the decisions one went with the smaller amount and de Ed to buy 400 units at $5 a piece paying $2,000 the other Seller said oh no $5 a piece is too much I'll buy a th000 units of $3 a piece and ended up paying 3,000 because of the difference in Supply time the first seller managed to sell 400 units second seller sold only 30 350 and eventually uh the first seller made a profit of $2,000 uh dollars and the second seller only $500 and if you look at the effective price per unit sold you will see that the first seller still paid $5 for each unit that was sold but the second seller because he sold less units actually paid $8.5 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 uh items what happens then uh at 400 um still so the first seller paid 3,000 for his units and uh 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 um if both of them sell a thousand units and they buy everything in advance it doesn't make sense but uh from a cash flow point of view even 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 um air carrier and a little speed boat where you can pivot very very fast if something happens so um there is a huge balance between there's a balance between profitability and the economy of scale but knowing your business really well would mean where knowing where you're at in terms of uh the between these two scenarios basically and that being said it might make more sense to order bigger quantities and then uh 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 um for example FBA fees and stuff like that so what are the main causes of uh what are the main causes of losing profitability when when you have bigger amounts of P sorry well when you have bigger amounts of inventory um let me just try and shut this down uh [Music] here when when you start when you look when you stock a lot of inventory you lock 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 get lost etc etc it's just harder to control and um 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 Comm your economies of scale over time right you don't have to just commit we're used to talking about the economies of scales off a transaction but we we do business over time so if we raise this issue and try to look at economies of scale over time you will find you get a lot of cooperation so tell your supplier I don't want to buy 10,000 units at once I want to buy them over six months can we do that and we can find 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 uh in order to understand which is the best approach for your inventory management you should focus on the cash flow and getting that control and flexibility at the same time if possible that would be what some of the non-financial goals of um running your inventory management but at the at the same time they have very very big influence on how you how good you'll actually be at the end of the month basically yes cost of uh of unit sold is a problematic um parameter because you need to know how many units you sold and we usually know that only in retrospect but we can do an assessment uh usually marketing people uh 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 units 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 the I would recommend starting by doing the retrospective analysis look 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 have that lead you in your next purchasing event any tips uh for newbie sellers for people who don't have that kind of historical data r on well there is data in the market about similar products other product product in your Niche uh and the other thing is to just start small learn to walk before you start running exactly um okay you touched based on uh when you spoke about Corona virus so what are some of the ways that sellers can deal with uh the sudden situation of running out of stock and what is what is your final some of the final advice uh 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 Source 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 an SKU yet but you were thinking you might do an analysis how long do you think you have with this SKU at 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 stock out before you can restock it it actually makes sense to stop spending that money and let the item slow down and uh because you currently wasting money on your uh marketing efforts you're creating demand that would come in anyway but you 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 isn't 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 have in stock 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 um 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 memory they build their database when you start them and as soon as you shut them down they forget everything and they have to build in again the next time you run them for that item or for that uh shop so you need to stretch out over time what you have right now and shift the attention to the less to the to the slower items to get them moving and keeping your uh business alive interesting points that's um that's the some kind of uh damage control but when it comes to the 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 it's so business specific that I cannot give you one tip that will fit everybody some people have very uh unique items maybe handmade items uh and finding a a replacement supplier for those doesn't make any sense at all other people have very uh regular not regular items they have uh items that are very simple to Source elsewhere so sourcing is a good idea um 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 two-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 of Corona virus deal exactly exactly T times uh I I I really like the open card kind of uh mentality I would go to the supplier and say I understand this is the Corona virus 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 exactly but be be be aware that you are going into a deal from a point of disadvantage and manage it don't get emotional about it right that's 100% true orian um thank you for being my guest on the podcast today and sharing all these wonderful tips um if anyone wants to reach you I will put uh 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 uh links to my giveaways I have a tool for handling uh exit 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 do about them and uh they are free to use and I hope they help everybody brilliant I'm sure a lot of people find them useful so we'll make sure to add them to the video description great thank you very much I enjoy the the our talk very much me too