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What You Need to Know About Amazon’s Inventory Performance Index

What You Need to Know About Amazon’s Inventory Performance Index

By   June 28th, 2018

One of the core competencies that separates Amazon sellers that can scale from those who can’t is inventory management.

This is especially true for sellers utilizing Fulfillment by Amazon (FBA), a well-oiled process that both minimizes storage costs and maximizes customer satisfaction with healthy stock rates. While walking this tightrope, FBA policies and terms change frequently. These updates can affect seller fees and therefore bottom lines.

Let’s get right to the timely bit. July 1st, 2018 is a mini-Judgment Day for third-party sellers on Amazon. This will mark the end of the per-unit storage limit in favor of a weight-based system. More critically, a new policy goes in effect that utilizes Amazon’s Inventory Performance Index (IPI)—a measure that Amazon calculates for each seller—to determine product storage limits and overall inventory health.

What’s an IPI?

IPI stands for Inventory Performance Index and is comparable to a FICO credit score. Sellers are provided the general inputs that factor into the equation but not the specific formula that outputs the score given the inputs (in other words, a black box). Just as FICO protects their formula from abuse, Amazon retains the IPI calculation with proprietary status.

There are four factors used to determine the score:

  • Sell-through rate (we’ve seen this be the most important factor)
  • In-stock rate
  • Excess inventory percentage
  • Stranded inventory percentage

If any of these are unfamiliar, Amazon Seller Central breaks it down in detail and provides transparency into each factor for seller accounts in the Inventory Dashboard.

Amazon selling

The Policy Change in a Nutshell

A final score check will be performed on the last day of each quarter starting June 30th, 2018.

Seller accounts who fulfill with Amazon with a score lower than 350 will have a storage limit imposed that will persist through the following quarter, regardless of score improvements in that quarter. Additional overage fees will be charged at a rate of $10 per cubic foot per month. Ouch!

Seller accounts with a score at or above 350 will have no limit on storage (normal FBA storage fees and long-term inventory fees still apply).

How This Affects Sellers

For obvious reasons, there are major benefits to having an IPI score above 350. Sellers can avert headaches and growth can continue uninhibited. For those seller accounts above 350, rest easy, though there are still strategies to consider that help maintain good standing and improve IPI score. For sellers who find themselves under, never fear.

For sellers on both sides of the IPI score threshold, understand that there is a lag between when actions are made and re-calculations to update the score. Sellers have reported that inventory takedowns and re-stocks usually update on the same day, while updates to sell-through rate typically only happen once a week. Especially if you’re near the IPI threshold, plan and adjust restocking and adding new products with care. Remember: the IPI score on the date of the final check is the most critical and will have implications for a full quarter with regards to storage space.

New Policy, New Playbook

For sellers who are on the wrong end of the score, let’s go through how to not just survive but thrive with storage limits.

  1. Determine new storage limits. Amazon assigns separate space for apparel, standard size, and oversize units. If the catalog spans multiple categories, this will relieve at least some of the squeeze.
  2. Be confident the storage limit will be no less than 25 cubic feet per item type, according to Amazon. Especially if there is decent selling history on the account, the platform should provide space above that minimum. Though it’s unclear how exactly limits are determined (we do know limits are based on Amazon’s available space as well as seller account performance), the limits are designed to provide an efficient amount of storage that makes sense for both Amazon and the seller. Amazon ideally wants to be able to reap sales commission with the seller being able to stay ahead of demand for customer satisfaction.
  3. Prioritize minimizing inventory. If seller accounts are exceeding the limit, there is still time until the end of the month to draw down before overages apply. The two options to draw down are to increase sell-through rates or remove products from FBA warehouses. Utilizing one of Amazon’s marketing services like Sponsored Ads or Lightning Deals may help boost orders and lighten inventory enough to minimize overage fees. Additionally, removal orders will help pull back excess inventory and also improve sell-through rate. Creating a removal order is a relatively painless (and cost-effective) process. Amazon allows sellers to select products to be disposed of or preferably, shipped back to sellers at nominal cost (currently, no shipping is charged on returns).
  4. Maintain a clean catalog. For all sellers on Amazon, this new policy is designed to shine light on products that are underperforming or inefficient and help improve the seller experience (at least in Amazon’s eyes). Sellers can leverage the new tools that support the new policy to clean up catalogs that may be overdue for attention. Beyond storage limits, the Inventory Performance Index gives sellers a current scorecard with specific components of inventory management that can use the extra focus.

Updates to Amazon’s seller policy can throw a wrench into what was once conventional practice. The Inventory Performance Index and storage limit changes for third-party sellers are no exception. The only thing to be certain of is that this won’t be the last update of its kind. Don’t let policy be the one thing that hampers progress. Happy selling!