Amazon’s New Inventory Restrictions May Impact Your Amazon FBA Business
May 24, 2021 Jenna Craig
In April, Amazon announced changes to the ASIN-level quantity limits (i.e. inventory restrictions) that were first enacted in July 2020.
“Effective April 22, 2021, FBA products will no longer be subject to ASIN-level quantity limits. Instead, restock limits will be set at the storage-type level, offering you more flexibility in managing your shipments.”
To help make sense of the changes, I turned to two Thrasio experts: Mounir Ouhadi, our Chief Supply Chain Officer; and our VP of Strategic Planning & Analysis, Aditya “AD” Rathod.
I put together their insights on the new inventory policy and how sellers can best position themselves going forward.
Amazon’s new inventory restrictions, explained
“To understand the updates, first you need to know that there are two limitations for housing inventory in an Amazon warehouse: storage volume and restock limits,” says Rathod.
This has always been a restriction for FBA sellers. It only applies to accounts with low IPI (Inventory Performance Index) scores. Amazon wants to ensure sellers aren’t using Amazon warehouses as long-term storage facilities. So for accounts that have historically kept inventory levels Amazon deems unreasonably high, Amazon is limiting their cubic volume useable for each storage type.
The limits are reassessed every quarter based on the latest IPI score & current sales velocity. Meaning your limit could go up or down.
Sellers are charged a monthly overage fee of $10 per cubic foot for every additional cubic foot a seller utilizes beyond their prescribed limit.
This rule is here to stay – if not permanently, then for the foreseeable future. The only way to avoid being hurt by this limit is to make sure you maintain a good IPI score.
This is where Amazon’s changes come into play. Since the start of the pandemic last year, Amazon started putting limits on the number of units for each product in an account irrespective of its IPI score. They based each seller’s unit limit on recent sales velocity. This rule created many issues for new products, seasonal products, and high-growth products.
This product-level unit limitation is now changed to account-level unit limitation, thereby providing more flexibility to the seller on what they want to keep in the account. That means you can now send in your new products that you are bullish on, but only at the expense of some other product that may be out of season or that you expect to drive less revenue.
It can be a tough choice, but still better than no choice.
What do we know vs. don’t know but can maybe guess?
• We know all incoming shipments are included towards the utilization of the limit.
• We know that reserved inventory pending removals is not included.
• We know that Amazon is unlikely to charge a fee for overutilization, but of course, you can’t inbound anymore if you’re over-utilized.
• We know the limit is based on recent sales history, and it is assessed regularly—possibly weekly, but maybe even more frequently.
• We do not know if this sort of limitation is here to stay; but, it’s safe to say it will be here at least for a quarter, and hence spanning over Prime Day.
• We do not know how much of the recent sales history is taken into account. It is probably 90 days, but there could be a higher weighing of the latest 30 days of sales.
• We do not know for sure if there is anything other than sales velocity impacting the limit. There is some errant data that leads us to believe there might be, but we can’t be sure.
Amazon’s fulfillment centers are overutilized
Mounir Ouhadi, Chief Supply Chain Officer:
When Amazon imposed the ASIN-based restrictions, they got many comments from sellers about how they cannot launch new products. Sellers didn’t have any recourse either.
Now they are telling us: it doesn’t matter whether you’re selling new products or existing products, here is your quantity limit, now go. If you want to launch new products, do it within the limit you’ve been granted. Or, use that limit to sell existing items, but make sure your inventory turns are high.
What is unclear is how they can come up with those limits. They are likely related to the IPI score and historical sales.
This is a disconnect because when Amazon is looking at historical sales, they are looking backward. As sellers, we are looking forward because we are trying to grow brands. So what happened historically is not necessarily what will be happening going forward in terms of sales volume.
They are managing the utilization and their capacity. We’re told an overall account limit will be less restrictive than imposing limits on specific ASINs because at least it allows sellers to prioritize.
“It’s not giving us a lot of freedom,” says Ouhadi, “But that also depends on the portfolio of each seller. If an account is full of all crucial ASINs, this is an issue. If you have one hero ASIN and a few other products that are just making noise and not doing much—that’s good. That’s a perfect situation for someone to deprioritize those. There would be consequences as well. When you deprioritize, you have to be out of stock for a certain period because you cannot replenish. Or you have to increase pricing, shut down PPC, and closely manage the sales for those low-priority items.”
How should FBA sellers manage inventory now?
Ouhadi says, “You have to prioritize among your ASINs.”
Now, instead of having an ASIN-based inventory restriction, you have account-based inventory restrictions. Depending on the number of the ASINs that you have, the nature of those ASINs, you’ll approach these changes differently. Some of you are selling high volume and low price, some of you are selling low volume, high price, it depends on your portfolio.
Assess your current situation. Whatever you have on hand is already there. The only way to reduce that limit is to sell it.
For inventory transit, you have two options:
1. Send them where they were supposed to land directly in Amazon, or
2. Send them somewhere else. That somewhere else could be dependent on the seller—a garage, at 3PL, your own fulfillment center, and so forth.
If you decide to keep sending it to Amazon, you have to see how this will correlate with your limit because they will keep adding more to the quantity total. And if the limit is really low, it will be harder to create any shipments for any items that will be out of stock.
To create an effective prioritization exercise, you need to start with an assessment exercise.
• What do I have on hand?
• What are my sales projections?
• What do I have inbound?
• And what do I have planned?
A lot of people who have already created shipments are in the working phase. They should be careful when tempted to cancel those shipments. They’ll think, let’s delete what I have already in the works, and let’s relieve my ability to create new shipments. But we need to make sure that you can once you delete those, you’re bringing in inventory on another ASIN that will drive more revenue while taking up less space.
According to Rathod, there are quite a few things a seller will have to decide to do. A holistic list of potential actions are:
1. Cancel inbounds
2. Remove or dispose of products
3. Increase sales at lower margins – promo/ pricing updates, higher marketing, give-aways, etc.
4. Adjust MCF volume
5. Move to FBM/ SFP
Lastly, make a case for higher limits to Amazon—this is your classic hail mary pass.
All of these decisions will depend on your strategy and forecast for each individual product. As I said before, this is a difficult decision—you’ll have to select which product you want to win with & put these limited resources towards it. This is why putting on your planning hat becomes very important.
Look at the next 6-8 wks of the forecast, keeping in mind that this goes over Prime Day, for each product & determine:
1. Which product/s has an excess inventory? Any inbounds for products with excess inventory should be canceled.
2. Which product/s do not currently have excess inventory but have inbounds in excess of demand? As feasible, cancel/ reduce inbounds for these.
3. Now look for removal/ disposal opportunities. Make the easy decisions where ever you’re egregiously overstocked. Note that you’ll start raking up removal/ disposal charges and thus do it judiciously.
The above two things will open up some utilization.
Determine what high-priority product (or products) that you want to send, and have inventory available to ship in. This helps determine how much you need and how much you can send in. Now determine how much more you need. Depending on this gap, you’ll need to start determining actions around increasing velocity through lower margins or using FBM/ SFP.
The use of 3PLs is a must right now
Ouhadi says this may be stating the obvious, but it’s just worth noting the use of 3PLs would now be a must. If you can have inventory there and replenish it in short cycles, that would be helpful.
Watch your IPI like a hawk
If there are any standard items or things that impact IPI, that would help, which will likely help the limit allocation because that allocation is likely directly correlated to the score.
Sales need to be moving. And until their next review. We don’t know for how long this [policy] will stay, but it’s likely here to stay for several months, probably until the holidays. Maybe a relief in the summer, but we don’t know. Some type of restriction like this will remain in force for a couple of months, at least.
Use FBM (Fulfilled by Merchant) & SFP (Seller Fulfilled Prime)
SFP is tough to qualify for and wouldn’t be possible for someone who isn’t already working in that program. But FBM is an excellent opportunity to mitigate some of the losses from not selling FBA.
FBM is the most democratically available solution for everyone to keep moving their lower prioritized ASINs while filling their inventory capacity with their hero product.
Help your rank and your sales, as they [Amazon] continue to analyze your historical data. You don’t have the Prime badge with FBM, so you’ll lose some sales, and therefore some sales velocity, but not 100% like in a stock-out.
Situate your account to make the most of Prime Day
You don’t get deals with FBM. So everything that you can do to boost your hero ASINs and new hero products, you need to make sure those are well stocked. The products that drive less revenue can be allocated to FBM. Without the prime badge, those FBM products would take a hit, but not as big as the hit that you’ll take if you can not even sell your hero products.
Each product will require one or many of the above actions played out in a particular sequence to make the most out of it.
What is Thrasio doing?
We’re doing all of the above with the help of data analysis & detailed planning. Overall basis, we hedge towards selling through products instead of doing removals.
At Thrasio, we’ll continue looking at our accounts and do exactly what all the other sellers will do.
At Thrasio, we’re looking at our forecasted sales and our revenue. We are assessing where we are with what we have in stock today, the ongoing committed shipments, and what our needs will be. We’re making decisions about inbound sales, FBA/FBM/SFP tradeoffs, replenishment cycles and we are even considering inventory removals. That’s just like every other FBA seller, we’re weighing all our options and creating strategies tailored to each brand and product.
Mounir Ouhadi has been Thrasio’s Chief Supply Chain Officer since early 2019. He’s studied at Ecole Nationale Supérieure d’ Electricité et de Mécanique (ENSEM) and MIT. In his personal time, he enjoys spending time with his wife and daughter, cooking & and rowing when Cambridge weather allows.
AD Rathoud joined Thrasio in January 2020 as VP of SP&A. He was born and raised in India. AD has a Bachelors in Engineering (Electronics & Communication) with 3 years of experience as an engineer. After receiving his MBA in Finance, he’s been working in operations and finance for the last decade. When he’s not working, he’s spending time with his wife and two kids entertaining them with endless dad jokes.