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What is the Amazon Inventory Performance Index (IPI) and how can I prepare for it?

The Amazon Inventory Performance Index (IPI) rolled out as a measure for sellers to efficiently manage their inventory on Amazon. Amazon’s IPI measures the health of your inventory in the Amazon network.

Inventory health relates to either having too few or too many units. Having too few units of inventory results in out-of-stock items and lost sales. On the other hand, having too many units of inventory results in excess holding and storage costs.

Amazon’s inventory performance index is a number between 0-1000 that’s used to measure inventory health – capturing low inventory and excess inventory levels for your SKUs.

Amazon Inventory Performance Index IPI is a score between 0-1000
Amazon Inventory Performance Index IPI is a score between 0-1000

Amazon’s IPI can benefit both sellers and Amazon. Optimizing inventory will reduce lost sales and inventory holding costs for sellers. This also helps Amazon by ensuring sellers are stocking its warehouses with the right products in the right quantities, which increases the utilization of its vast warehouse network.

Factors Influencing Amazon Inventory Performance Index

Amazon is not disclosing the math behind the Inventory Performance Index. However, it does suggest that there are three factors that contribute to IPI.

Amazon Inventory Performance Index performance factors

  1. Excess inventory, to reduce inventory carrying and storage costs
  2. In-stock inventory, to prevent stock outs and lost sales
  3. Stranded inventory, to ensure your inventory is available for purchase and delivery

Inventory Performance Index = Function (In-stock inventory, Excess inventory, Stranded inventory)

Excess inventory

Excess inventory measures where your profitability may take a hit due to storage fees and holding costs for slow-moving FBA inventory. Excess inventory percentages help sellers plan when to stock more or remove inventory from FBA.

In-stock inventory

Amazon looks at the percentage of time your products have been in stock during the past 30 days, with additional weight given to items that have sold more units over the past 60 days. If you maintain a high in-stock inventory, it will result in fewer lost sales.

Stranded inventory

Stranded inventory provides information on products that aren’t selling due to a listing issue. This can happen because your listing doesn’t meet Amazon guidelines, or issues with a listing tool. In these instances, your products become stranded and unable to move, while still incurring FBA storage fees.

The magic number: 350

Keep your IPI 350 or higher to avoid storage limits
Keep your IPI 350 or higher to avoid storage limits

If your IPI falls below 350, then Amazon limits your ability to send more inventory and imposes a $10/cu ft fine on any excess inventory sitting in Amazon warehouses. The penalties are severe and can result in hefty storage fees and loss of sales on Amazon, so it is important for you to stay on top of your inventory performance index (IPI).

FBA’s new storage limits start July 1 2018. These limits will be computed for every account every quarter. If your Inventory Performance Index is less than 350 6 weeks before the end of quarter and at the end of the quarter, then you will have storage limits imposed. You will also be charged with a Monthly Storage Overage fee.

 

Here’s how to grow eCommerce sales with FBA

 

New FBA Storage Limits

 Inventory Performance Index < 350Inventory Performance Index >= 350
Storage LimitsUpdated QuarterlyUnlimited
Monthly Storage Overage$10.00 per cubic foot over the storage limitNot Applicable

From Amazon Seller Central

It is important to stay on top of your Storage Limits. Please mark August 19th 2018 on your calendar. You should avoid your inventory performance index falling below 350, otherwise you will have storage limits and storage overage imposed on your account for the critical holiday period.

2018 Inventory Performance Index Storage Limits Calendar for FBA

QuarterNotification sent six weeks before end of quarter if inventory performance index < 350Last day of quarterStorage limit effective period
3rd - 2018May 19, 2018June 30, 2018July 1, 2018 – September 30, 2018
4th - 2018August 19, 2018September 30, 2018October 1, 2018 – December 31, 2018
1st - 2019November 19, 2018December 31, 2018January 1, 2018 – March 31, 2018

From Amazon Seller Central

Significance of Inventory Turns Ratio

Inventory turns is a classic inventory measure that computes how many times you are turning your inventory over in a defined period of time. Many of you use it weekly as the classic time tested measure to plan inventory.

Inventory turn ratio can be calculated with following formula;

Inventory Turns (annual) = Amount of Units Sold / (Average number of units in stock for the year)

The higher the inventory turns, the better it is for business. A good inventory turn ratio for a business should be at least 6. Ideally, you should operate your business at 12. That is, your inventory should turn over 12 times a year, or you should be bringing in inventory for 30 days (1 month) 12 times annually.

Amazon turns its own inventory 9-12 times a year. The chart below shows Amazon’s inventory turns over years. The data is from morningstar.

Amazon's inventory turns from 2008-2017
Amazon’s inventory turns from 2008-2017

The question then becomes; why not just use inventory turns, a time tested measure?

One of the problems with the classic measure of inventory turns is that it masks missed sales due to stock outs. Any lost sales due to low inventory are not captured in inventory turns.

If your products go out of stock and you are not able to capture sales in the meantime, that is bad for you and your customers. Amazon, being one of the most customer-centric companies, cares if a customer cannot purchase a product they want because it’s out of stock.

So, while inventory turns is a time-tested measure, Amazon’s inventory performance index is more comprehensive. It accounts for both stock outs and excess inventory.

We do, however, believe that inventory turns will correlate to IPI. High inventory turns should result in a high IPI.

Overall, the inventory performance index (IPI) is a powerful tool that can be utilized by sellers to manage the health of their inventory. Although, it doesn’t come without challenges.

Inventory Performance Index challenges

There are 3 main challenges when it comes to Amazon’s Inventory Performance Index (IPI).

  1. Amazon does not disclose how it computes the IPI
  2. There will be significant costs to sellers
  3. The IPI is Amazon-centric

Let’s look at each of those in further detail.

Amazon does not disclose how it computes IPI

As a seller, you can see your score and corrective actions, but you do not fully understand what goes into your IPI. This can be frustrating for sellers, as it will feel like getting a grade without knowing the rules. We believe the lack of clarity here will create gaming of the system.

Costs to sellers

As Amazon’s IPI rolls out, there will be a meaningful increase of seller costs, forcing them to either liquidate their inventories or remove them from Amazon to prevent the additional storage costs. The costs and losses of this can be sizable for many sellers.

The Inventory Performance Index is Amazon-centric

It does not account for lost sales in the multi-channel business. So, if sellers use FBA for eBay, Shopify or Walmart channels, then IPI will not provide a true picture of your inventory health.

How to improve your Inventory Performance Index (IPI) score

There are 3 ways to improve your Amazon IPI.

  1. Keep your inventory turns healthy at 6 and above per year. Do not stock too much or too little inventory. If you maintain healthy inventory turns, your IPI should remain in good standing.
  2. Clean out your inventory every month and plan in advance for fluctuations in the demand, based on holidays, seasons, etc. Fix stranded inventory, review listings, and remove excess units from Amazon.
  3. Watch your IPI on a weekly basis. Ignoring IPI can have a significant impact on your ability to move more inventory into the Amazon network and could incur large storage fees.

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