FBA this month announced new fees for low inventory levels and, separately, an AI tool to help merchants avoid those fees.
The announcements offer a glimpse of what’s to come for retail inventory management.
Low inventory fees
Fulfilled by Amazon low inventory fees takes effect on April 1, 2024.
The fees affect “standard-sized products with consistently low inventory levels relative to customer demand.”
Amazon noted that these products affect FBA’s distribution capabilities and shipping costs, adding that the fees “will only apply when a product’s inventory levels compare to historical demand (called days of historical supply) are less than 28 days » in the short term (last 30 days) and long term (90 days).
Fees vary based on product size and historical days of supply: 0-14 days, 14-21 days, and 21-28 days.
New sellers and new products benefit from exemptions for six months or a year.
To minimize or avoid low inventory charges, sellers can send additional units, ensuring that short-term historical days of supply exceed 28 days.
Minimum inventory
Also shipped by Amazon announcement that starting April 1, 2024, this would provide a new measure to help sellers maintain the appropriate inventory level in order to both maximize sales and, apparently, avoid fees.
The new minimum stock metric, unsurprisingly, uses machine learning and artificial intelligence models to forecast demand and replenishment.
Thus, this measure constitutes a recommendation to sellers regarding the minimum number of units they should keep in Amazon’s fulfillment centers.
Maintaining this recommended level will likely help meet customer demand and provide faster delivery times as FBA will store items in distribution centers closer to sellers’ potential customers.
I have seen first-hand how predictive inventory management can help a business. I worked for a regional omnichannel farm and ranch retailer a few years ago that implemented a machine learning model for their purchasing and inventory management. The model helped reduce inventory by approximately $2 million. It also boosted sales because it had the right products at the right time.
The minimum inventory level measurement will join Amazon’s other inventory monitoring metrics, including:
- Historical days of supply,
- Stock performance index,
- Capacity limits,
- Restocking recommendations.
Inventory AI
Together, Amazon’s low inventory level fee and the minimum inventory level metric offer a glimpse of what could happen on other e-commerce platforms and marketplaces.
Consider three implications.
First, Amazon confirms what most large retailers already know: inventory levels impact shipping costs. SMBs can use Amazon’s methods to factor in shipping costs when deciding what to buy.
Second, the new minimum inventory level metric provides FBA sellers with a goal that optimizes sales. Many great software tools now do this, but the cost can be relatively high for smaller brands. The new metric is a testament to available, cost-effective computing power. If Amazon can offer AI-based sales forecasting, Shopify and many other e-commerce platforms probably can too.
Third, look to even smaller sellers to improve purchasing and supply chain management, as Shopify and others roll out their own AI-powered predictive inventory tools.
These improvements likely generate higher profits through reduced shipping and inventory transportation costs, since businesses would know with more certainty which products could sell in the next 90 days.
In short, AI will impact e-commerce and retail. Amazon’s model for optimal inventory is probably one of the first of many.
