Understanding Amazon’s Restock Algorithm
Let’s dive into Amazon's restocking algorithm!
After reading this article you’ll have a better understanding of Amazon’s restock suggestions and walk away with five actionable tips for restocking inventory.
Let’s start by looking at some of the seller questions about Amazon's restock limits and Amazon's restock suggestions.
In this Restocking Inventory guide for Amazon, we’ll take a look at:
Will Amazon's restock suggestion better disperse my product between warehouses and improve sales?
That's an excellent question. This is something that we’ve often talked about in terms of buffer stock. The Amazon algorithm uses “Geo-Ranking” to look at how much inventory you have dispersed across the country.
What is Geo-Ranking? This is the Amazon algorithm making ranking and ad placement decisions and changes in different geography areas to help them to improve the customer experience and ease Amazon logistics. Let’s talk about this in more detail.
The most crucial part of Amazon’s business is making sure that the Amazon buyer is happy and keeps coming back and buying more products from Amazon. A couple of the ways they do this are with a good refund policy and the promise of two-day shipping to their Prime members. Knowing that Amazon is working with such a short delivery timeframe, you, as a seller, want to avoid depleting the distribution of your inventory across the country. You don't want to continually sell through your inventory, nearly run out, and then have to restock quickly. Let me explain why.
Consider this: if you don’t have enough inventory available in Amazon’s warehouses and you are low on inventory in an area like the Midwest and someone in the Midwest searches for your product, you may get pushed down the ranking in that area based on Amazon’s Geo-Ranking. They would rather funnel that sale to someone else so that they can fulfill the product to the customer within that two-day shipping promise.
This also means they are potentially awarding the bid for PPC ads in that same area to the sellers (your competitors!) who have inventory there. If you don't have inventory in stock in that geographic location and you're bidding for the same keywords as your competitor, your competitor might win that ad placement instead of you.
All that said, I am still not confident that you can trust what Amazon says for replenishment. You don't want to run too lean, but you need to know exactly what Amazon is basing its recommendations on in terms of restock suggestions. Are they factoring in your lead time? Order frequency? How often you’re transferring inventory from your third party warehouse? Without Amazon knowing all these things, their restocking system isn't likely to get it right. There are apparently ways to add some of this data into Amazon’s calculation but it isn’t exactly user-friendly. However, if you can combine those additional factors into Amazon’s calculation, you can potentially put a little more trust in those restock numbers.
If we consider the COVID-crazed fourth quarter of 2020, many products had great sales but still had very narrow restock limits imposed by Amazon. So much so that they created stockouts for many sellers. Using this as an example to support the reasoning, we can see that Amazon's algorithm isn't very good at tracking a product’s velocity or demand. They claim to have “future demand forecasting” calculated into their recommendations, but Q4 2020 tells a different story.
If you had trouble with 4th quarter and were selling more than you were allowed to send in (which was almost everybody), then based on what we’ve seen, trusting the Amazon restock suggestions as your only system is not a good way to go.
Amazon can't factor in your marketing plans either. Amazon is generally looking at your past sales data and maybe also on what other similar products have done and are doing for that time period, which would be great! But Amazon can’t factor in, say, your plans for an upcoming promotion with an influencer or an email campaign. It’s also uncertain as to whether Amazon even factors in scheduled Lightning Deals.
Unfortunately, Amazon’s restock suggestions are very basic and faulty. That’s why most Amazon sellers use an Amazon FBA inventory spreadsheet template, or an Amazon inventory management software, like SoStocked.
How reliable is the Amazon restock inventory report for FBA?
We touched on this in the previous question; I don't think it's very reliable at all. It's missing a lot of variables. It also doesn't know whether you're sending from a supplier or sending from your warehouse. This requires that you make two different calculations because you have two different lead times: your supplier lead time and your warehouse lead time, what we refer to as transfer time.
For instance, if you have to order from China versus send from your warehouse, and you follow the restock suggestion that notifies you based on what you have for inventory in the warehouse, you're going to have an issue. If you're not doing simultaneous forecasting – forecasting your transfers and your orders as two separate forecasts – you could get into some trouble when you get low on stock.
We all know what a big deal it is not to consider the difference between warehouse transfers and orders from China when we, for example, lose track of our inventory and think we have warehouse inventory to ship only to discover we’re all out and need to wait for our China inventory order to finish production to air freight. Nightmares such as this were not uncommon in my spreadsheet days of managing inventory.
For this reason, it is extremely important to track your data against your order and transfer lead times. Understanding and planning with all of the factors is the key to good inventory management.
Why does Amazon’s Restock Inventory page show I have 1,100 units when I only sent in 500 units?
In this given example, it looks like this seller’s inventory is being double-counted. They have 100 units in stock and 500 that they've just sent in, but the restock inventory page says 1100 units.
In this instant, 500 units turn into 1,000 units. Most likely, this seller is using the NARF program (North America Remote Fulfillment Program). We have found that there is a bug in the NARF program that’s double counting. It counts the same inventory twice, once for the U.S. and once for Canada. (For some reason, it doesn't count for Mexico.) We've seen this happen in several different accounts; the NARF program seems to have some conflicts with the Amazon restock algorithm and doesn’t allow you to send in inventory when you should be able to because the algorithm thinks you have twice as much inventory as you do.
So keep in mind, if you are using the NARF program and seeing odd numbers, and you're not able to send in inventory when you think you should be able to, check to see if your inventory is getting double-counted. Your Inventory Restock Report will show you what your inventory limit is, how much you have available to send in, and how much Amazon counts as inventory that you already have at FBA or on the way. If that number is double or close to double, then there's a good chance you are experiencing a conflict with those two Amazon algorithm pieces.
To fix this, try unsubscribing from the NARF program. Running out of stock due to this restocking algorithm error will usually cost you more than no longer being able to sell in Canada, at least temporarily until the restock limits situation improves. If you sell a lot in Canada, that might not be the case, but it’s often the case for most businesses: they would lose more money by stocking out in the U.S. than they would by just turning the NARF program off and cutting off Canada sales.
Next, we have a question about Restock Inventory limits logic.
Why is Amazon’s inventory limits logic so skewed?
I feel this question big time. Amazon’s limits have been way off the mark. For starters, there is a list of things that could have been implemented into this calculation with minimal data checking. To begin with, there is little to no seasonality being factored in; products with high Q4 sales seemed to have the same or similar limits as any other product.
One of the results of poor seasonality is that seasonal products go out of stock due to these inventory restrictions. In turn, the limits are further lowered due to the missing sales caused by the out-of-stock period.
Further, in this restock calculation, there is no Amazon check on out-of-stock days. They just don’t seem to factor this into their estimates. Sometimes out-of-stock days are caused by this first scenario of no seasonality. But another factor is that stock limits are only calculated based on 30-day averages, and it doesn't matter how many of those days are in-stock days and how many were stocked out.
They aren’t incorporating what we call “Adjusted Daily Velocity.” Adjusted Daily Velocity looks at how much you are selling on a typical day when you’re not out of stock. Instead, Amazon is looking at 30 days’ worth of sales. They should be looking at the average of 30 days worth of sales minus the, say, ten days you were out of stock and seeing that the adjusted velocity is, say, 50 units a day. If you're looking at 30 days of sales with only 20 of those days being in-stock days, that number will be very different.
Because of this, Amazon is skewing your demand much lower and giving you a lower restock limit. These are very shoddy calculations. Unfortunately, this is the way Amazon's algorithm works. It's not very well thought out.
However, I do have one tip for you. If you do run out of stock at FBA, turn on FBM. The FBM sales will help to sustain your restock limits. When Amazon is counting those 30 days of sales to make their calculation, they’re counting total sales, FBA and FBM, not just FBA. If you find a way to switch to FBM, you’ll be able to continue selling, so long as you can fulfill these sales. This is all the more reason to have a fulfillment center on standby so that you don't crash your restock limits and hurt your business.
As we’ve discussed in previous posts, Amazon wants to be a distribution channel; they don’t necessarily want to be a storage facility. They're forcing us to get better at inventory management and to have our own storage facilities.
So even if Amazon’s your only sales channel, they shouldn't be your only distribution channel. You must be able to take on sales and fulfill them yourself. If you send in all of your inventory and Amazon loses it, doesn't check it in, or it doesn’t go live, and you have no other inventory on-hand, you can't make any sales even if you have FBM available to you. You won't even have the opportunity to continue maintaining your restock levels with FBM because you sent Amazon everything you had.
I did this in 2015 and sent all of the inventory for my best-selling product to Amazon and had no backup plan. They lost it until after Christmas, and I missed out on an entire Christmas’ worth of sales for my best product. I learned the hard way that even if Amazon is your only sales channel, it's crucial that it not be your only distribution channel. Consider having a 3PL Logistics Backup For Amazon.
The last question I'm going to cover talks about methods of restocking.
What’s the best method for restocking inventory without having all of your cash tied up on the shelf?
My suggestion is something called “Min-Max Restocking.”
I developed the Min-Max Restocking for SoStocked after I visited a warehouse that is a print-on-demand facility. I noticed that they had a ton of ink and a ton of paper on rolls that they'd feed through the machines to do their digital printing. They always needed to have these supplies available to keep producing.
They keep the paper & the ink on weighted scales. Each was used to a certain weight, and then once it hits that minimum weight, they reorder up to a pre-set maximum weight and then restock the paper and refill the vats of ink to the maximum weight. Then they'd use up the ink & paper again to the minimum weight then reorder again back to the max weight and so. This is the essence of Min-Max Restocking.
We implemented this concept into SoStocked because it's vital to have a system for restocking inventory. One reason people have a hard time passing their inventory tasks off to someone else is that they don't have a system; they have to do it by gut feeling or racking their brains about it.
Min-Max Restocking is a system that will allow you to free up your time and give that task to somebody else. This system will help to ensure that:
For example, let’s say you want to set up a min-max restocking for 30 days of minimum stock.
I always recommend setting your minimums & maximums in “Days” because that can fluctuate based on your velocity within the season; 300 units worth of stock may be great if you're selling ten units a day, but then in your high season, if you're selling 30 units a day, that's only 10 days worth of stock. Making these settings in Days means that minimum will change based on the sales velocity for each period of time.
For Private Label sellers, I recommend 30 days of buffer stock and then 60 or 90 days of your max stock. So, you’d send in 90 days’ worth of inventory, sell-through to 30 days, stock back up to 90 days, and then continue on in that pattern. You can set this for every single product you sell. The number of units will vary, but the number of days will be consistent.
Implementing Min-Max Restocking will empower you to build out a consistent inventory restocking system so that you can pass this task on to your VA or supply chain manager. That way you can focus on things like product selection, marketing, and scaling your business. In systemizing this, you will also ensure that you don't run out of stock or have too much money tied up. It becomes a very important tool to aid in scaling your business. The real trick to scaling your business is making sure that you have enough cash flow. Inventory directly impacts cash flow in many different ways.
If you are having trouble with cash flow, you need to start looking at your inventory systems.
You may either have too much inventory not selling and therefore too much cash tied up in that inventory, or you are stocking out, losing out on sales, and wasting money on expensive air shipping.
For example, we had a new customer come into the SoStocked’s Amazon inventory management software who was paying $1.20 per unit to airship. This seller just wasn't on top of the shipments and was constantly cutting inventory restocking way too close and then needing to airship. Once they started using SoStocked, the shipping cost per unit dropped to $0.45 or $0.55 per unit! By getting their inventory under control, they were able to save an estimated $150,000 as they were selling thousands of units a month. As you can see, you can save so much money just by foregoing the air shipments and shipping by regular ocean freight.
Addressing these types of issues in your inventory will enable you to recover some of that money and invest it in new products. If you're truly going to scale, you have to control your cash flow by getting control of your inventory, so that you can launch new products and expand your business the way you truly want to.
As you can see, Min-Max Restocking can be extremely valuable for streamlining your business.
Tips for Restocking Inventory on Amazon
Here are a few essential takeaways to remember from this post:
Use SoStocked’s Amazon inventory management software to sync up your past sales, future marketing plans, seasonality, past stockouts, blackout dates, and many other factors to more accurately track demand and avoid stocking out.