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July 6, 2018

What Is the Amazon Inventory Performance Index (IPI) And How Can You Improve It?

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The Amazon Inventory Performance Index (IPI) allows you to automatically track your inventory performance with Amazon. Similar to a credit score, it measures your FBA inventory efficiency based on inventory management and replenishment.

Your IPI is a number between 0-1000 that’s used to measure inventory health – capturing low inventory and excess inventory levels for your SKUs. Inventory health relates to having either too few or too many units. Having too few units of inventory results in out-of-stock products and lost sales, while having too many units of inventory results in excess holding and storage costs.

Amazon’s IPI benefits both your business and Amazon. Optimizing inventory will reduce lost sales and inventory holding costs for you while simultaneouslty ensuring Amazon's warehouses are stocked with the right products in the right quantities, which increases the utilization of its vast warehouse network.

Factors Influencing Amazon Inventory Performance Index

Amazon does not disclose the methodical logic behind how it calculates the Inventory Performance Index. However, it does suggest that there are three factors that contribute to IPI:

  1. Excess inventory, to reduce inventory carrying and storage costs
  2. In-stock inventory, to prevent stockouts 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 your business 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

If your IPI falls below 400, then Amazon limits your ability to send more inventory and imposes a fee on any excess inventory sitting in Amazon warehouses. These penalties add up fast and can result in hefty storage fees and lost sales.

According to Amazon, on average, merchants with a higher IPI score generally pay less than 1% in storage fees as a percentage of revenue. Keeping your IPI score high will lower your storage costs and deliver more profit for your business. For example, merchants will an IPI score greater than 400 get access to additional storage capacity in Amazon fulfillment centers.

These limits are computed for every merchant each quarter. If your Inventory Performance Index is less than 400 six 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.

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 businesses 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 your business. A good inventory turn ratio for a business should be at least six. Ideally, you should operate your business at inventory turns ration of 12. That is, your inventory should turn over 12 times a year, or you should be bringing in inventory for 30 days (one month) 12 times annually.

Last year alone, Amazon turned its own inventory an average of 8 times.

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 stockouts. Any lost sales due to low inventory aren't captured in inventory turns.

If your products go out of stock and you're not able to capture sales in the meantime, it can be 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 stockouts and excess inventory.

Overall, the inventory performance index (IPI) is a powerful tool that can be utilized by Amazon merchants 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 can be significant costs to merchants
  3. The IPI is Amazon-centric

Amazon Does Not Disclose How It Computes IPI

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

Costs to Merchants

Amazon’s IPI has historically imposed increased costs for merchants, forcing them to either liquidate their inventory or remove them from the Amazon network to prevent incurring additional storage fees. The costs and losses of this can be sizable for many.

The Inventory Performance Index is Amazon-centric

IPI does not account for lost sales in the multi-channel business. For example, if your business uses FBA for eBay, Shopify, or Walmart channels, then IPI will not provide a true depiction of your complete 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 size 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 seasonal demand. Fix stranded inventory, review listings, and remove excess units from Amazon. Pro tip: use Flexport's Integrated Amazon FBA Replenishment service to keep prime-ready fulfillment centers in stock while honoring storage limits.
  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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