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How much does your inventory really cost you?

March 9th, 2019 by Skip McGrath

I know among my readers, there are sellers of all sizes and levels of experience. Some of you dabble on eBay and/or Amazon; some of you are like me – an average sized seller in the $10,000 to $25,000 month range ; and some of you are very large sellers grossing over $50,000 a month in sales, or even much more.

But one thing we all share in common is inventory. If you want to sell products online, you have to acquire them first.
For some of you small eBay sellers, that can be nothing more than a few hundred dollars worth of goods you buy from flea markets, garage sales and thrift shops. For someone like me to generate over $20,000 a month in sales I have around $40,000 to $80,000 tied up in inventory depending on the time of year. Those of you who are huge sellers have much more than that. I met a few sellers at this years SCOE conference for sellers who have over $500,000 tied up in inventory.

In yesterday’s post you learned how to determine the true cost of products you sell. Determining the true carrying cost of your inventory is just as important because learning how to control those costs can put a lot of money in your pocket at the end of the year.
Let me use a mid-range example to demonstrate:

Say you have 500 different skus sitting in Amazon’s warehouse. And on average you have six of each item at any given time. That means you have 3000 total items sitting in FBA. Now let’s look at your costs:

Rather than make up numbers I am using some numbers I researched from my own account. Of course I have over 800 skus, but I am going to use 500 just to keep it realistic for more of you.
My average item cost is $21.00. So if I multiply 21 times 3000 items that means I have about $63,000 worth of goods sitting in a warehouse. So what are my costs?

First is the opportunity cost – how much interest could I be earning on $63,000 if that money were earning 4% interest? The answer – $2,520; so that is one cost.

Next is carrying costs – As I pointed out in the previous article we operate pretty much on a cash basis. We use credit cards to buy goods to resell so we earn the travel points which help offset the cost of attending trade shows and such, but we tend to pay off the card in full each month so we don’t incur interest costs.

But many sellers use their credit cards (or other funding sources like Amazon Lending or Kabbage) to finance their inventory. So let’s assume at any given time you have $30,000 outstanding in credit card balances. If your annual interest rate was 15%, that means your inventory is costing you $4500 per year to carry.

And then there are storage costs. Depending on the size and weight of your items, your monthly storage costs for 3000 items would run between $1350 and $3000. Let’s take an average point of $2000, which works out to $24,000 per year. If we leave opportunity cost aside and just look at carrying and storage costs, that means we have to earn $28,500 in profits just to cover our inventory carrying costs before we start making any profit.

So how can we reduce these costs?

Back in the early 1980s the Japanese carmaker Honda came up with something called Just in Time inventory. Since inventory cost of car engines and parts were so high, the idea was to work with their suppliers to coordinate the shipment of inventory to their factories to arrive just in time so they did not store any parts longer than one day. This saved Honda millions of dollars per year in opportunity costs, storage costs and carrying costs. Honda became so good at it over the years that today almost every car manufacturer does this as well as thousands of other manufacturing companies for all kinds of products. Although this method works best for manufacturing, you can use a version of it too.

For the first few years selling on Amazon I never really worried about my storage costs until one day I decided to actually delve into them and see what I was actually spending. I was shocked.

The thing about storage costs that can lull you into just accepting them is their very low cost. Some of my items cost as little as 2¢ or 3¢ per month; But others were as much as 30¢ or 40¢ per month. When I started adding them up it was a huge amount of money. So what to do?

I decided to start adopting my own version of Just in Time (JIT) inventory control. One of the problems I have is that several of the items I sell, I am buying at distributor pricing, which means I get lower prices, but I have to buy in very high volumes. Here is one example: I have a product that sells for $21.95 and the monthly storage cost is 10¢.

But I have to buy those in lots of 144 at a time to get my low distributor pricing ($8.75 each versus $11.50 each when I buy in smaller case lot quantities). In the past when I got a shipment, I would send all 144 of the items into Amazon. This particular product sells pretty well – about 1 or sometimes 2 per day. So it would take me about90 days to go through the entire quantity and I would be paying storage on the unsold product during that entire time.

Now I only send in about 24 units at a time. So yes I am making more shipments, but I am storing them in my garage for free rather than paying as much as $100 a month to store the entire quantity at Amazon.

For my normal products where I typically purchase in case lots, what I try and do is estimate the time to sell out and subtract the shipping time to determine when to send in more. For example I have some products that only sell one per week and in the past I might send a dozen of them to Amazon at a time. Now I break up my shipments so I am sending in, say, 4 of one item, 6 of another and so on.
Remember I have 800 separate items in FBA and typically carry several of each item. When I ran the numbers I saw I was on tract to save almost $10,000 in storage fees this year since I started getting smarter about my inventory management.

 

Comments

Comment from Louise
Time March 11, 2019 at 6:50 am

I know you depend on wholesale products for inventory but the way to increase profits is to sell secondary market new products from various sources. I pay $1 for a magazine that has $75 worth of articles in it that I sell to collectors about their hobbies. Some of the pages sell for as much as $2 each – depending on the subject. No, this can’t be sold on FBA but EBay and Etsy do just fine. It’s a tight niche and all I can handle, so I guess I don’t fit the profile of a high-end seller. But my competition is practically nil and my biggest expense, thanks to the price-gouging US post office is SHIPPING! Thanks for the formulas above – my husband made me calculate them years ago to know how much I really make. Some sellers make nothing just to get the Buy Button – how dumb is that?

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