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Inventory management is key to maintaining low costs. In management accounting text books we often discuss inventory management systems like ‘Just In Time’ – the examples we analyse are often manufacturing companies.  However, inventory costs are just as important for companies where their operations are based around fulfilment centres, such as Amazon. A significant risk identified in Amazon’s 2015 annual report relates to the risk of inventory holding.

Internet retail companies often operate on providing large scale offerings; however, they typically have to respond to seasonal trends and rapid changes product lifecycles. Overstocking and understocking can result in loss of sales and increased cost of sales, both of which impact on the operating margins. Companies such as Amazon, who operate on very small operating margins require strict monitoring of their costs. For example, at Amazon basically every 100 dollars of revenues more than 95 are absorbed by cost of sales and operating expenses.

For companies like Amazon it is essential that the inventory costs are monitored and the operating teams are proactive in adapting to the purchasing trends of consumers. This is where the use of big data and data analytics is integral with the management accounting systems because algorithms predicting changing consuming patterns can help to reduce the costs of sales, which include the inventory costs.