Lower profit margins.
This is one of the most commonly cited challenges among Amazon sellers at least according to 68% of the sellers interviewed.
And while it is impossible to completely eliminate certain cost elements, optimizing other costs is most certainly doable and highly recommended. Among these is the cost of inventory storage, management, and fulfillment, especially for FBA merchants.
Amazon FBA offers sellers many benefits. But its services come at a price. And if your FBA inventory is not managed efficiently, these costs can quickly add up and eat away at your profits.
Therefore, efficient inventory management is key to minimizing profitability issues for FBA sellers. Fortunately, Amazon has a metric designed specifically for that purpose.
Its called the Inventory Performance Index or IPI score.
What is the Inventory Performance Index score and how is it determined? We answer these questions and more in this blog.
Understanding the Amazon Inventory Performance Index (IPI) Score
Amazon cares about your profitability, sure. But it also cares about its own warehouse space and wants to make sure you use that space efficiently to help Amazon have more space for in demand products that earn you and Amazon both good revenue.
For these reasons, Amazon has designed a score called the Inventory Performance Index to help sellers understand how they are doing from an inventory perspective and enable them to take the right steps to optimize it.
Amazon scores your inventory performance index on a scale of 1 to 1000. The higher the score, the better your inventory health is thought to be. But that’s not it. Amazon also sets a threshold limit on how low your IPI can be to motivate sellers to do better.
Currently, the threshold value for the IPI score is close to 400. However, double-check with Amazon before fixating on this figure.
You can find your IPI index in your inventory dashboard on Seller Central.
For new sellers, calculating IPI doesn’t make much sense since their inventory may have just arrived in the fulfillment centers and their products are newly launched. Therefore, new sellers do not have an IPI score in the beginning. If you are a new seller, you may get your IPI score around 15 weeks after shipping your first products to FBA.
So, about the threshold limit, what happens when your IPI dips below it? We share that in the next section and explain what makes IPI so important.
Why is the IPI Score So Important?
Amazon wants to ensure the space in its fulfillment centers is being used efficiently. Therefore, it helps sellers manage their inventory in a way that Amazon also gets to offer its space to deserving products and sellers while sellers can optimize their inventory performance and save FBA costs.
This is why, Amazon penalizes sellers whose IPI score drops below the threshold by limiting the FBA storage capacity for the seller.
Sellers with low IPI scores may also have to pay higher storage fees.
Both these penalties come at the risk of increasing your operational costs and/or eating away at your profits.
Limited storage capacity would mean Amazon lets you keep fewer products at their fulfillment centers. This may result in a higher risk of stockouts and missed sales. Higher storage fees, on the other hand, may result in you making a lesser profit per product sold. Both of these situations are not ideal for a business trying to make it big on a platform as competitive as Amazon.
How can you maintain a decent IPI score? We need to understand what affects your inventory performance before answering that.
Factors Affecting the IPI Score
Amazon is very secretive about certain. How the IPI score is calculated is also one of these.
When asked, Amazon only gives vague answers to how the IPI score is calculated. However, what we know for sure is, that the score is influenced by certain factors including:
Excess Inventory
Amazon wants its fulfillment centers to act like fulfillment centers and not become long-term storage facilities. It prefers that the inventory that comes in keeps moving through the fulfillment centers quickly. Therefore, it discourages excess inventory and may as well punish the sellers who overstock Amazon’s warehouses with products that may not be selling any time soon.
Amazon wants its sellers to maintain not more than 90 days' worth of supply. This is why, any products that exceed the 90-day supply based on forecasted demand are thought to be in excess or overstocked.
At Accrue, we look at how different products are performing for any given brand and usually recommend maintaining 30-60 days of supply to avoid both extremes: excess inventory and stockouts.
If you manage your Amazon account independently, you can rely on Amazon’s FBA dashboard to help you understand product demand and manage your supply accordingly.
FBA Sell-through Rate
Products that move fast through the fulfillment centers are the ones that have the most sales, and hence, are more profitable for both sellers and Amazon.
Therefore, Amazon wants to ensure you stock products that sell fast in its fulfillment centers. For this, it offers a metric called the sell-through rate.
The sell-through rate is calculated by dividing the total units sold during any given period by the number of units that were in stock during that period.
For example, if you had 400 units available during a given period and sold 200 units during the same period, your sell-through rate would be 0.5.
The higher the sell-through rate the better as this ensures you pay a storage fee for products that you generate money on and make a profit.
Stranded Inventory
Any inventory that sits in Amazon’s fulfillment centers without any active offers on the platform is referred to as stranded inventory.
A product may not have any active offers for numerous reasons like listing issues which can result in lost sales and consequently your inventory not being able to move from the warehouse.
Resolving stranded inventory issues is typically super simple and we will discuss more on how you can do it in the next section.
In-stock Inventory
Having your most popular ASINs in stock during the times they are most in demand is often recommended when talking about IPI scores.
But going out of stock on your best sellers does not impact your IPI scores negatively. Ensuring they are stocked up can, however, help improve it. This is because best sellers typically move fast through the fulfillment centers improving the sell-through rates and avoiding excess inventory issues, both critical factors influencing IPI.
Improving the IPI Score
Improving the IPI score can ensure your inventory health is optimized and you are managing your inventory as efficiently as needed.
Working on increasing your IPI score essentially means optimizing the factors that influence it. This means:
Improving the Sell-through Rate
Sales have a direct correlation with the sell-through rate. Higher sales would mean your inventory moves through the fulfillment centers faster and can help ensure your IPI score remains optimal.
There are many ways you can improve your sales including:
Optimizing your product listings to increase conversions. Make sure all elements of your listings are retail-ready to help speed up the decision-making process and close more sales.
Using the right keywords. This can increase organic visibility.
Advertising. Consider investing in Sponsored Ads especially Sponsored Product ads to improve sales. Make sure your ads are targeted right!
Run promotions. You can make your products more visible and appealing to customers by running coupons or deals on them. See if your profit margin allows for a discount and run that on your products.
These are just a few of the ways you can increase your sales and improve sell-through rates. If a product does not sell fast enough, consider moving it out of FBA and fulfill it yourself.
Reduce Overstocks
Since excess inventory sits in Amazon’s fulfillment centers incurring not just FBA fees but possibly also long-term storage fees, therefore, it makes sense to proactively avoid having it.
Try and forecast demand as accurately as you can. One simple way to do this is to look at previous 90-day sales and calculate a monthly average. Then use this monthly average to understand 30-day demand. Don’t forget to factor in seasonality!
If a high-demand season like holidays or Prime Day is coming up, expect an increase in demand and factor that into your supply forecast.
Avoid Long-term Storage Fee
Amazon charges a long-term storage fee on inventory that has been sitting in its fulfillment centers for longer than 365 days. Make sure you remove any inventory before that to avoid an aged inventory surcharge.
Resolve Listing Issues Proactively
Keep an eye on your account health dashboard to identify and resolve any potential listing issues before stranded inventory takes a toll on your IPI.
Conclusion
Maintaining decent profit margins can be a challenge when selling on marketplaces like Amazon. However efficient inventory management can help you optimize your costs while maximizing your chances of increasing revenue.
Inventory Performance Index is a score designed by Amazon to help its selling partners optimize their inventory performance. This score also helps Amazon ensure that FBA merchants are using the space in its fulfillment centers more efficiently.
You have to maintain your IPI above a certain threshold to avoid getting penalized by Amazon.
There are a bunch of factors that can affect your IPI score including excess inventory, stranded inventory, sell-through rate, and stock levels of popular ASINs.
Need help with sales, inventory, or anything related to Amazon? Discuss your issues with us and our experts will be there to help!