In this blog post, I want to discuss the implications of the coronavirus for brands that sell on Amazon. First, a little history.
Amazon and JIT
Following in the footsteps of lean manufacturing pioneers such as Toyota, Amazon’s supply chain strategy is based on the principles of Kanban - a large portion of which is “just in time” or JIT. For Toyota, JIT means that it produces vehicles based on the orders it receives through its dealers. This allows Toyota to minimize its inventory of vehicle parts. With JIT, a company produces and delivers finished goods 'just in time' to be sold. JIT cuts costs by reducing the amount of goods and materials a company holds in stock.
Amazon has extended JIT to include consumer packaged goods (CPG). For some brands, it has negotiated for space within a Vendor’s own warehouse. The vendor simply moves its products into the Amazon area and Amazon ships them to the consumers. These warehouses tend to be located close to major cities, so Amazon can deliver all kinds of consumer goods within a 24-hour window.
Amazon’s innovative approach to JIT gives it many competitive and cost advantages. For example, it can offer a wide range of SKUs and deliver them within 24 hours, while keeping inventory costs down. In fact, Amazon’s inventory turnover ratio is considered best in class.
Amazon and inventory turnover
Inventory turnover measures how fast a company turns over its inventory within a year. It is calculated as:
Cost of Goods Sold divided by Total Inventories.
Amazon's Cost of Goods Sold for the three months that ended in Dec. 2019 was $66,169 million. Amazon.com's Total Inventories for the quarter that ended in Dec. 2019 was $19,632 million. This means that Amazon.com's inventory turnover for the quarter that ended
in Dec. 2019 was 3.37. 1
Ideally, the ratio should be between 2 and 4, so you can see that Amazon certainly knows how to operate efficiently.
The Impact of the Coronavirus
A lean approach to inventory has great benefits, but an unforeseen crisis such as the coronavirus can disrupt supply chains and cause long delays and unfulfilled orders, both of which affect your standing on Amazon. In order to minimize the disruptions that the virus is causing, Amazon has been contacting a number of its suppliers to place large orders, so that it can stockpile products that are sold in the US but made in China. Amazon also notified its third-party sellers and said they should take precautions to make sure their sales performance is not impacted by the virus.2
I believe that Amazon’s actions will have the biggest impact on the Consumer Electronics (CE) category, but CPGs in the US that have suppliers in China will also be impacted. On the other hand, I believe that, in order to accommodate this stockpiling, non-Chinese equivalent products are going to pick up some of the slack. I would expect that these orders will be "noisy" and "spiky", which means there will be a lot of unpredictability, but lead times will be lower.
The Impact on the Consumer
The impact of the virus on the consumer is twofold. First, limited supplies mean that prices will rise. Second, there is the question of consumer perception. There’s a rising concern from shoppers who are shying away from or delaying their purchases of Chinese manufactured goods. A prime example is baby toys. There’s already been a drop in sales in that market. Of the two, higher prices because of reduced availability is more likely to affect sales than consumer fears.
The coronavirus isn’t the first time we’ve seen these sorts of disruptions and it certainly won’t be the last. Long before the coronavirus, Amazon third-party vendors were blaming U.S. tariffs on Chinese goods for increasing their costs. The tariffs, they say, have reduced their margins and pushed up prices for consumers. 3
The point is that you don’t want to be taken by surprise. The Amazon algorithms are relentless and impersonal. They don’t care if you’ve been caught unawares. The JIT principles that shaped those algorithms aren’t going away and it’s up to you to understand them. Pricing and availability will affect your standing on Amazon, virus or no.
My advice is to always engage in up-to-date business continuity planning (BCP). BCP is the process of creating a system of prevention and recovery from potential threats to a company, including natural disasters.
Consider the virus a wake-up call when it comes to protecting your supply chain. Risk and resilience need to be part of your BCP. I’ve seen many of my customers modify their BCP to include ways to diversify their supply chains so they’re not solely dependent on China. In terms of Amazon, it recommended that you consider cancelling previous orders that sellers are no longer able to deliver and placing their accounts on vacation status. 4
If you want to learn more about how CommerceIQ can help you manage your inventory, contact us at firstname.lastname@example.org.