In any ecommerce business, inventory management is critical. Effective inventory management allows you to consistently fulfill orders, manage your supplier outgoings, manage busy seasons, and results in better profit and business performance.
For Amazon FBA sellers, inventory management is crucial to the success of your business. The online marketplace uses the Amazon IPI (Inventory Performance Index) metric to measure your inventory performance and the health of your inventory. Amazon will use this metric to ensure you’re keeping items in stock for customers and reducing lost sales.
At a high level, the score is designed to help sellers understand how their inventory is performing and how well they are managing their stock levels for improved profitability.
Amazon uses the IPI score to ensure that its warehouses are being used as efficiently as possible. Therefore, the marketplace prefers sellers with an ideal Amazon IPI score and penalizes those below a certain number.
Amazon sellers need to understand their IPI score, what it is, how it impacts their business, and how to improve it.
The Amazon IPI score stands for Inventory Performance Index. The metric measures how well you are managing your inventory within Amazon’s FBA service. The IPI score can range from 0 to 1000.
Amazon assesses your IPI score every three months to analyze it at the end of each quarter and six weeks before the end of the quarter. Assuming you meet your threshold, you can take advantage of extra storage options.
The higher the IPI score, the more efficiently you’re managing your inventory with Amazon’s fulfillment service. Overall, you want to aim for the highest IPI score possible.
Amazon provides storage improvements for those with higher scores and removes storage options for those that don’t meet requirements.
However, there is a threshold that all sellers must meet. The threshold is subject to change but typically sits around 400 on the scale. Anything above 400 is considered a good IPI score, and you can avoid storage limits, ultimately limiting your saleability.
Amazon outlines four key elements that contribute to your score overall. Each of these factors is entirely based on how you’re managing your inventory, and demand forecasting.
Ultimately, the primary aim of Amazon’s FBA service is to keep inventory moving. The fulfillment centers don’t want to have excess inventory sitting around for an undetermined amount of time since the space could be better used by another seller for moving stock.
According to Amazon, excess inventory is a product line that has more than a 90-day supply in storage. This figure is based on the expected demand, based on previous sales. Typically, it’s best to have around 30-60 days of supply within Amazon’s FBA warehouses. This ensures you can meet a spike in demand while remaining below Amazon’s excess threshold.
Amazon will provide additional metrics, including the number of excess units and estimated total storage cost. They will also provide you with a detailed list of SKUs with unnecessary inventory. These details can help you to manage your excess inventory.
Stranded inventory is stock that is in Amazon’s warehouse, but has no way of being sold. This could be due to inactive listings or listing removal. Customers cannot purchase the items, therefore they remain in storage.
For the seller, listing issues and stranded inventory means lost sales, and lost revenue. Sellers also continue to pay the storage fees for inventory that isn’t selling.
The metric is measured by the percentage of your inventory within the warehouses that aren’t able to be sold or have no listing.
Thankfully, this metric isn’t too challenging to improve. If you have stranded inventory, Amazon’s Inventory Performance dashboard will show a “fix listings” option. Here, you will see a selection of products, why they are stranded, and how many are stranded. You can fix any listing problems and reduce your stranded inventory percentage.
This metric is based on your ability to keep popular products in stock. It’s critical that you keep well-stocked to ensure you can meet customer expectations and avoid lost sales. So, this metric is critical to Amazon sellers outside of the IPI.
The FBA restock rate is “the percent of the time your replenishable FBA ASINs have been in stock during the last 30 days, weighted by the number of units sold for each SKU in the last 60 days.”
Within this metric, Amazon will also give advice on an estimation of how many sales you have lost due to a lack of stock in the last 30 days. You will also find a “restock” list. This list outlines items that are forecasted to run out before you can restock them.
Keep your in-stock rate up by utilizing effective demand forecasting. Place orders with suppliers before your stock runs out. Automation services or reminders can help manage this factor.
Your sell-through rate advises how well you’re selling the product you have in stock. It’s calculated by taking your units sold and shipped in a 90-day period and dividing that number by the number of units available/in storage during that time.
The key is to maintain the right balance of inventory and sales. You need to have enough inventory to meet demand without having too much inventory sitting in the FBA warehouse.
Amazon will make suggestions for poor sell-through rates and advise you on the long-term storage costs associated with your sell-through rate. The longer you keep items in storage, the more they cost you in the long term. It’s in your interest to focus on improving your sell-through rate.
Overall, to improve your IPI score, you need to focus on improving the four primary factors that make up the score. Take a proactive approach, and continue monitoring your stock levels and listings. A seller that keeps on top of their inventory with the following tips and understands the impact of inventory management, will naturally improve their IPI with Amazon FBA.
At Amazon, not only does old stock penalize your IPI score, but it can also create hefty fees. Amazon increases the storage fees for items that remain in the warehouse. The longer you leave inventory in a warehouse, the more it will cost you to store them there.
It’s also worth noting that stock should not be stored for longer than 365 days. Old stock is subject to large storage fees. You do have the option to have Amazon destroy your inventory, or have it removed. This is less than ideal, as destroyed stock is the revenue going to waste.
Always keep your stock moving, and only store what you really need with Amazon FBA.
Demand forecasting is critical to ecommerce businesses, regardless of their selling platform. It’s important to ensure that you’re meeting customer demand to avoid disappointing anyone. You don’t want to miss out on sales, as lost sales can be costly for a business.
Demand forecasting is also important to avoid overstocking and the subsequent Inventory Performance Index drop.
Utilize your purchase history and inventory metrics to understand your product demand. By forecasting demand well, you can purchase enough inventory to meet your sales requirements.
Ultimately, optimizing your processes will save money on inventory purchases, and storage fees. Additionally, keeping stock levels low will improve your IPI score.
Your listings are the face of your business. If your consumers don’t know that a product is available, then they can’t buy it and your inventory will be sitting in the FBA warehouse with nowhere to go.
You need to ensure that all of your listings are currently live and match the available stock in the warehouses to avoid having any stranded inventory.
Regularly monitor your listings and ensure there are no errors or problems. You do not want a listing to be outdated and you do not want Amazon to take down your listing because it doesn’t meet their standards.
Listing issues impact your IPI score as well as your sales. If your consumers cannot see a listing, then they cannot make a purchase from you. Regular monitoring of listing health ensures that buyers have every opportunity to make a purchase.
When you’re struggling with too much stock, a sale or discount can help to streamline your inventory. You can bundle products together, reduce product prices, or offer voucher codes for a limited time.
Incentivizing customers and increasing sales also improves your sell-through rate, which impacts your IPI score. A good sell-through rate helps to keep storage fees low and improve your profit margin in the long run.
Consider what products are overstocked and increase sales of those items by being the cheapest option versus competition, or adding them to a popular bundle of products. As with every factor for the IPI score, the key is to keep inventory moving.
The Amazon IPI score is critical for Amazon ecommerce sellers, as an improved score means that storage fees decrease. The better your inventory performance, the more sales revenue you get to keep.
However, the score is merely an indicator of what Amazon sellers should already be doing. Keeping your inventory moving, and avoiding long-term stock storage and the resulting fees, is key for your profit margins.
Whether you sell on Amazon, or on your own ecommerce site, you need to ensure that you only have the inventory that you need. Utilize demand forecasting and sales history to understand your inventory requirements, and continue to meet demand whilst managing storage fees.
Use the Amazon IPI score to measure your performance, and guide your business. For a growing ecommerce business, it’s important to maximize profit margins wherever possible to free up revenue and continue to scale.
At Yardline, we know it can be challenging to manage inventory and make the right purchase choices. Our Seller Success Team is here to advise you throughout the Amazon FBA process and ensure you retain maximum revenue from sales. Get in touch with us today to discuss your capital requirements, and where you should invest for growth.
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