Inventory management plays a crucial role in the success of an eCommerce operation. Mismanagement of stock levels can result in delayed orders, elevated overhead expenses, subpar profit margins, and, worse of all, unsatisfied customers. The concerns over inventory management extend to retailers that sell on Amazon, especially after introducing Amazon IPI, or the Inventory Performance Index.
In 2018, the eCommerce giant started tracking inventory performance through what is called the Amazon IPI. During the launch, executives explained that the new metric was due to the influx of sellers opting into the FBA program. FBA warehousing capabilities are finite, and the platform needs to maximize its space for in-demand items.
The Amazon IPI made selling on the marketplace all the more competitive. If you’re a retailer who wants to sell their wares on the platform, you need to understand the intricacies of this metric to be successful.
What is Amazon IPI?
At its core, Amazon IPI measures the efficiency of a retailer’s inventory management process. The no.1 eCommerce marketplace imposed this metric to maximize the platform’s warehousing capabilities.
The Amazon IPI scoring matrix only applies to FBA sellers. It gets measured on a scale of 0 – 1000, with the thousand being the best score. There is a minimum threshold score that sellers are required to meet to remain in good standing with Amazon’s FBA program. Failure to meet the IPI score can result in storage limits.
A seller’s IPI score is measured every three months by the end of each quarter. The marketplace sends an update to their retailers six weeks before the quarter-end to give them the chance to improve their scores. If the score is above the threshold, sellers get to enjoy unlimited storage space.
The IPI threshold changes from time to time, similar to the Amazon FBA storage inventory limit. At the time of writing, the minimum score to qualify for unlimited storage is 450.
What Influences the Amazon IPI Score?
Amazon has yet to disclose its exact method in computing for the IPI. However, the platform has released the criteria that influence a seller’s IPI standing, including recommendations on how to address issues within each factor:
- Sell-Through Rate
The sale-through rate measures the number of inventory against the number of sales during 90 days. It reflects the speed by which a retailer can sell through their FBA inventory. Amazon calculates it by accounting for the total number of unit shipments in the last 90 days and dividing that figure by the number of the same products in inventory during the same time.
Sellers would get a low-sale-through if they overstocked on a slow-moving item. On the other hand, a high sale-through rate shows that a seller might not have foreseen demand and is at risk of running out of stock.
- Excess Inventory
Amazon considers excess unproductive inventory as the main driving factor in computing the IPI. This metric assesses how well a seller manages on-hand inventory that is already with the Amazon FBA warehouse. To calculate excess inventory, Amazon considers items that have been in the warehouse for 90 days and products that have a 90-day supply in storage.
- In-Stock Rate
The In-Stock Rate refers to the capability of the seller to replenish inventory at a given period. It considers the percent of the time a seller restocked FBA items within 30 days and the number of unit sales in the last 60 days. This metric is updated daily, although the number might not be 100% accurate.
- Stranded Inventory
Stranded inventory is the number of FBA units that are not available for customers to purchase. There are various reasons why a unit would be tagged as stranded. It could be the following:
- Pricing issues
- ASIN restrictions
- Listing Errors
- Expired/Deleted ASINS
- Bulk Upload Template Issues
Stranded Inventory is computed by dividing the number of stranded units against the total number of units.
What are the Consequences of Failing to Meet the Amazon IPI thresholds?
Amazon imposes storage limits on sellers that fail to meet the marketplace’s IPI requirements. Additional Amazon FBA seller fees might also apply when they do not reach the three-month threshold. More than the Amazon IPI, mismanaging inventory can impede growth, reduce sales, and stunt profitability.
How to Improve Amazon IPI Score
While secretive about their computation methods, Amazon provides recommendations on how sellers can improve their IPI scores:
- Improve Demand Forecasting
Most inventory management issues stem from insufficient data and research about item demand. Stocking the same item in the same amount every time is a recipe for disaster.
When it comes to selling on Amazon, retailers should leverage on big data eCommerce and work on improving their demand forecasting processes. Doing this will enable them to make better and more informed decisions and prevent overstocking or understocking.
- Be Proactive with Product Issues
Stranded inventory can cut sales, impact profit margins and affect customer loyalty. Addressing stranded inventory is all about diligence. Sellers should regularly check the status of their listings to nip issues in the bud.
- Keep an eye on the IPI Score
The Amazon IPI threshold can change without much notice from the company. Retailers must regularly check their status to prevent going below the minimum limit. Ignoring this metric can cause significant issues with storage limits and can even incur additional fees.
Managing inventory is neither easy nor straightforward, especially for a growing operation. It is crucial to have a seamless inventory management and order fulfillment process to succeed on marketplaces, especially on Amazon.
Having an experienced third-party Logistics partner can ease inventory management. We at ZhenHub offer inventory management software that address multiple supply chain issues. From warehousing and storage concerns to delivery and shipping, we can significantly improve your logistics process. Sign up now or request a free quote to start gaining a competitive edge.