Coronavirus and Inventory Planning: Why Traditional Models Are Failing

Allison Lee

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March 20, 2020

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Highlights

  • Supply chains are being disrupted across the world, but many sellers are still bullish on the state of their ecommerce businesses, with nearly 30% of sellers predicting that their sales will be “somewhat up.”
  • Product categories like health, nutrition and home goods are seeing 10 to 20 times more sales from buyers avoiding public places. Sellers who weren’t prepared to handle this influx are temporarily putting their listings on “vacation” mode.
  • Many sellers are now restructuring their supply chains, looking for suppliers outside of China and rethinking how they plan for new inventory.
  • Businesses bearing the brunt of coronavirus impacts are ones that purchased stock on a standard 30-day cycle and are either out of stock or carrying too much of nonessential items. 
  • Sellers are in a frenzy after Amazon FBA shut off its services to items other than home goods, beauty supplies, groceries and other “essential” products. Many seek the help of a 3PL and a long-term solution apart from FBA. 

The Fragility of Modern Inventory Planning Strategies

Before March, many U.S. companies were running business as usual. Even as Amazon signaled its first warning about shortages in supply, few businesses felt reason to panic.  

March was the turning point. More than 80 major retailers shuttered their stores, and Amazon announced several more moves to keep up with the massive surge in sales. 

Now, as more and more buyers are shifting their focus to online purchases, some sellers face empty warehouses and limited resources (such as separation from their regular Amazon FBA services), forcing them into a state of comatose. 

The reality: not all sellers are set up to benefit from the surge in ecommerce sales. Even before the virus hit, Zentail surveyed sellers and found that 31% regularly run out of top-selling products. Fifteen percent lack working capital to purchase new items, while a whopping 54% of sellers still calculate demand by hand.   

chart of the top demand planning challenges that ecommerce sellers face

The virus has only exacerbated these issues. Some sellers simply don’t have enough stock to push out the door or a nimble system to make up for lost ground. 

“We Don’t Have Forecasting Software” 

Sellers traditionally stick to a standard 30, 60 or 90-day forecasting cycle, crunching numbers (by hand) and simply reordering enough stock to last them the next 30 days. 

But this one-size-fits-all approach rarely works in ecommerce. Already, stockouts cost retailers nearly $1 trillion in sales every year—and those who try to swing the pendulum the other direction sit on nearly $1.36 of inventory for every $1 in sales

Overstocking provides a false sense of security, meanwhile eroding a business’s judgement and crippling their ability to act quickly. Holding costs will generally eat up 20% to 30% of total inventory costs, stopping businesses from investing in better products or new technology to increase their efficiency. 

The only solution requires flipping traditional thinking on its head. Sellers must be flexible with their reorder timing and adopt software that can forecast in real time. 

Inventory software not only saves sellers the hassle of compiling spreadsheets, but also centralizes data to improve their accuracy when forecasting sales. The top inventory planning systems factor in much more than sales history; they’ll factor in lead times, holding costs, profit margins and dozens of other SKU-specific attributes. This allows the system to pick up on abnormal customer behaviors early on, so sellers can repurchase products ahead of demand without necessarily committing to a large volume of products.

Food for Thought 

Take a moment and think about the people you know who have the most toilet paper and hand sanitizers stocked up at home. Some of them were lucky (their closets were already overflowing with hand sanitizers and other old stocking stuffers), but others had the foresight to make a Costco run weeks before pandemonium hit. 

As a seller, you need to be part of the crowd that catches wind of new shopping patterns early. You need to be able to pick up on the right signals and stock up on products long before new trends make landfall. That’s where real-time forecasting software comes in handy.  

Over-Reliance on Amazon FBA

Aside from lacking the resources to anticipate sudden changes in customer behaviors, sellers faced another harsh reality in March: if you rely on Amazon for fulfillment, you’re at the mercy of their policy changes.

On March 17, Amazon stunned third-party sellers and some wholesale partners with the announcement that it would ban non-essential items from its warehouses.

“Amazon just put tons of businesses out of business,” one Amazon seller wrote after hearing the news. “Destroyed thousands of jobs amidst a crisis. Horrible joke. Absolute joke. No warning. Expect major lawsuits coming from sellers who now will go bankrupt.”

Of course, this isn’t the first time something like this has happened. Just last year, Amazon cut small suppliers off from their main source of income. News broke out overnight, leaving many sellers reeling and frantically setting up new Seller Central accounts. 

Many sellers this month are cut off from inventory that’s already in FBA warehouses. While Amazon will continue fulfilling orders for these products, sellers are left trying to find an outlet for just a small, orphaned batch of their products. 

Read Also: The Risks of Relying on Amazon Multi-Channel Fulfillment (MCF)

More are turning to third-party logistics partners (3PLs) to replace Amazon’s services. Others are considering hybrid approaches, fulfilling what they can from their own stores or warehouses and outsourcing a portion to a 3PL. 

These solutions are not simply for the short term. For some, Amazon’s latest stunt was the final straw. As coronavirus is causing them to take a hard look at their inventory systems, the last thing they need is for Amazon to drop new policy changes and further disrupt their normal flow of business in the future.

How to Build Your Business’s Immunity to Sudden Crises

  • Update your approach to demand forecasting. Think outside a standard 30-day window and find a reorder frequency that increases your cash on hand in any given week. Find a software solution (like Zentail) that offers real-time visibility into your inventory and proactively picks up on heightened demand for your products.

  • Centralize and automate your inventory tracking. Replace manual systems with inventory planning tools that increase the accuracy of your forecasts. Forecasts should be as close to real time as possible and take into consideration lead times, holding costs, manufacturing costs, profit and other key data points.
  • Find a different solution than Amazon FBA. Consider fulfilling from your own stores, hiring a 3PL or taking a hybrid approach. Don’t let Amazon manage a majority of your inventory and strongarm you into whatever new policy they announce.
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