Inventory has always played a significant role in the way you sell on Amazon.
Whether or not you have inventory can determine when or if to run ads. It plays a role in organic ranking and now, it can even impact the total amount of units you can have available on the platform.
In this column, you’ll learn how about two new challenges facing Amazon sellers this upcoming holiday season. You’ll see how to prepare now for peak season sales with inventory management tactics and tools that support your business goals.
Keep reading to learn more about:
- New restock limits for Fulfillment by Amazon warehouses.
- How your Inventory Performance Index (IPI) score impacts your available storage volume.
- What the IPI is and how it’s calculated.
- Recommended actions for improving your IPI score.
- Tips for Amazon sellers who are new to Seller Central.
- Tips for increasing your restock limit.
Amazon Limiting Sellers Storage Based on Storage Utilization
Amazon has announced two newer aspects that complicate selling on the platform:
This limits the amount of inventory you can restock to Amazon’s FBA (Fulfillment by Amazon) warehouses in one shipment and the total maximum units you can have at Amazon.
This limits the maximum cubic feet of storage space you have at Amazon. The Storage Volume is governed by your IPI (Inventory Performance Index).
Not paying attention to how inventory is selling through your account can have dire consequences for brands and sellers on the Amazon platform.
Sellers who fall below the minimum criteria can have their storage limited to as little as 25 cubic feet. Trying to compete and be profitable with that small amount of storage can completely demolish your sales projections.
We will be outlining the steps you can take to ensure that you have the storage space available for your peak season, thus, maximizing your sales on Seller Central.
We’ll also go through what you can do if you’re already falling below Amazon’s set criteria.
Success in Q4 Means You Have to Act Now
It can seem a little early thinking about inventory control specifically for the Q4 season. However, because of the IPI, Amazon’s primary measure to determine your available FBA warehousing space is a rolling average.
It can take 2-8 weeks to increase the score you currently have on Amazon, so it’s essential to plan ahead of time.
This means if your IPI is below the 450 required by Amazon you need to start taking aggressive action today.
This article will outline how to avoid having detrimental storage limits, how it happens, and what to do when you’re already below the threshold.
If you are looking for information about Restock Limits, we will discuss them further down in the article.
What is the IPI (Inventory Performance Index), and Does It Affect Me?
The IPI will only affect those using Seller Central and utilizing FBA warehouses.
It does not affect those using Vendor Central, Kindle Direct Platform, or those selling on Seller Central by Merchant Fulfilling or utilizing Seller Fulfilled Prime for their items.
Inventory Performance Index (IPI)
The Inventory Performance Index (IPI) manages how well you control and manage your inventory at Amazon.
This metric is a 12-week rolling average. It looks at several components over three months.
Four components make up the Inventory Performance Index (IPI):
This most important metric as it 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 restock more or remove inventory from FBA.
Sell Through Rate
This refers to units sold/shipped over the past 90 days and the average number of units available at fulfillment centers over the past 90 days. This parameter is the most heavily weighted.
This provides information on products that aren’t selling due to listing issues. This occurs when your listing doesn’t meet Amazon guidelines. In these instances, your products become stranded and unable to move while still incurring FBA storage fees.
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.
It is important to highlight that these components are not weighted equally.
Excess Inventory and Sell-Through Rate are the parameters that have the most significant impact on IPI, while Stranded Inventory and Restock Rates can play a minor role in the overall score.
This means you will get more movement focusing solely on the first two components rather than spreading your efforts equally across all four elements.
During the height of the pandemic, Amazon changed the minimum IPI to 500. Recently, they reduced the minimum IPI back to 450. However, Amazon can increase or decrease that minimum at any point in time.
For this reason, we advise our clients to aim for a total Inventory Performance Index of 600.
Your minimum goal should be working towards at least 50 points over the current IPI requirement.
Some product mixes make maintaining a high IPI easier than others. If you are a small brand with a small number of products that move consistently, for example, your IPI will generally tend to be higher.
If you are a seller with a large product mix that changes often, it is the most challenging to manage.
Inventory Performance Index (IPI) and Inventory Limits
Amazon will send out reminders with the two checkpoint dates for IPI measurement before each quarter. If you are below the IPI for both checkpoints, your storage will be limited for the entire next quarter.
If you’re currently experiencing an inventory limit, Amazon does not provide a way to appeal the decision.
There’s no direct department that you can reach to escalate your concern. You will simply have to manage through the next quarter with the lower storage limit.
You can continue to sell Merchant Fulfilling items using other 3p sellers to move your inventory, or simply send in small shipments of your fastest, most profitable inventory into Amazon.
Further down in this article, we will highlight what you can do when your inventory performance is low, you are facing potential inventory limits, or if you’re new to Amazon.
Why Would Amazon Do This?
It seems like it would be counterintuitive for a company that is so focused on having as many products on its platform as possible to limit the amount of inventory you could sell.
However, as more sellers joined the platform and with rising FBA and Prime offers, overcrowding at the warehouses started to become and larger and larger problem for Amazon.
Amazon sellers were attracted to FBA because of the low cost of storage rates. Sellers were using the FBA program as a cheap way to warehouse large amounts of inventory.
At first, Amazon tried to increase storage fees. Adding long-term storage fees dramatically increased the storage cost for merchandise aged over six months.
However, even with those changes, Amazon couldn’t curve the overcrowding and demand on their FBA warehouses.
As a result, they started to introduce storage limits in 2019. From Amazon’s perspective, they want to ensure that customers have favorable shopping experiences and quickly get the products they want.
This means making sure that the products that are most likely to sell are available.
Amazon looks at how you have managed inventory in the past and whether customers are purchasing your products to determine how much space is allocated to you.
The better Amazon feels you are doing at managing your space at Amazon’s FBA warehouses, the more storage space you will be allowed.
What if My IPI is Below the Current Threshold?
If your IPI is currently below the threshold or within 50 points of the lowest threshold, these are the actions we recommend.
The first step is to check the current threshold. As of the writing of this article, the current threshold for IPI is 450.
However, here’s the direct link to the policy so you can find the current threshold as Amazon has the ability to change this any time. You can find the current required IPI in Seller Support under the heading FBA Inventory Storage Limits (login required)
You can review your current IPI score in Seller Central by going to Inventory, Inventory Planning, and then clicking on your IPI score.
Even with the aggressive tactics, it can take 2-8 weeks to make significant progress in changing the Inventory Performance Index.
The closer the cut-off date and the more you need to raise your IPI, the more aggressive you need to be in the following tactics to obtain the inventory space required for your peak season.
Recommended Actions to Improve Inventory Performance Index (IPI)
Excess Inventory – Dump Slow Moving Items
Excess inventory is generally one of the top two reasons your Inventory Performance Index score could be low since it is the most heavily weighted metric.
The first step to addressing Excess Inventory is to pull back inventory that you don’t expect to sell. Focus on SKUs (Stock Keeping Units) that have gone out of fashion or merchandise experiencing a significant demand drop like seasonal products.
If you don’t expect it to sell within three months, you should pull back the inventory to sell on a different channel by creating a removal order.
Sometimes it makes more sense to discount and/or advertise products to help them sell through faster to remove them from your inventory rather than call back inventory from Amazon.
Sometimes optimizing a listing that is not moving can also help increase the sell-through rate.
A quick note on having Amazon destroy products — sometimes they will liquidate that product instead of destroying it.
If inventory control is an essential factor for your brand, we will recommend pulling back the inventory even though it costs more.
While Amazon is great at logistics and moving items through their process, they’re not great at returning items to sellers. Many times, items will arrive damaged or mixed SKUs in multiple boxes, so that can clog up receiving departments.
If possible, we want to make sure that we’re proactively taking action to avoid having to pull back inventory and risk inventory being damaged or being unavailable to be sold for a long time.
Sell Through Rate – Send Fast Moving Items
Amazon looks at this to identify whether the items you’re selling are things customers want to purchase. The way that we improve the sell-through rate is to send in small shipments of items that will sell out very quickly.
If you’re currently using LTL or FTL, we recommend that you move to small parcel shipments during this process so that you can send more and frequent shipments without going out of stock for long periods.
As you’re restocking items, we want to prioritize those items that will move quickly, sending small quantities of items that will sell out as soon as they arrive or shortly after they arrive.
This allows your overall sell-through rate to increase dramatically and make a more significant impact on your overall IPI.
If you don’t currently have any fast-moving items that you can send into Amazon, consider listing products outside of your regular product mix. Consider purchasing items via wholesale that will move quickly enough to increase your overall Sell Through Rate.
It is vital that no matter how fast you think a product will move through, as you send these products in, you’re testing small batches to make sure that things will sell at the pace you anticipate.
Inventory that’s being held in FBA warehouses and not available for sale affects your overall IPI. Fixing Stranded Inventory can make a slight difference; however, if you need to move your IPI significantly, this component of the overall metric will only make a slight difference.
It would be best to address Stranded Inventory weekly or bi-weekly, depending on your general Sell Through Rate.
This is probably the most frustrating metric of the IPI because, basically, Amazon is telling you that you can’t restock items because they’re not selling fast enough.
At the same time, they’re trying to encourage you to make sure that you’re staying in stock.
We have found that this metric is very light weighted, and you’re better focusing on the two key metrics of Excess Inventory and Sell Through Rate.
There has been some debate whether deleting previous SKUs can increase this; however, we have not seen that this significantly impacts the total IPI.
General IPI Notes
As you’re working to increase your overall IPI, it is important to remember that it can take several weeks to increase.
The IPI is an average calculated over 12 weeks. It is important that you give the IPI enough time to move before you determine whether the actions you have taken are making a difference.
It can be tempting to check your IPI often, however, your IPI score is only recalculated once a week.
If you need to raise your IPI quickly or a large amount you may need to take overly aggressive actions in pruning your inventory and pumping fast-moving items through your account to increase your score to the required amount.
If You Are Not Able to Raise Your IPI Before the Next Quarter
If your score was already too low and you don’t have enough lead time to increase your IPI before the next quarter, then it’s time to start looking for alternative ways to move your products.
Sometimes this means utilizing third-party sellers to make sure that inventory can be available to customers with a Prime offer. We have several reliable third-party resellers we refer our clients to if it’s ever an issue.
If you don’t want to utilize third-party sellers, the alternative is to increase the total amount of Merchant Fulfilled offerings that you have. Remember that Merchant Fulfilled offerings generally don’t compete well against FBA offers, so watch your competition to determine feasibility.
While many brands avoid third-party sellers because it may reduce control over their brand, in this instance, it can be a good tool to use to make sure that you don’t lose potential market share to other competing product lines.
Another step that you can take is to allocate your FBA warehouse space to items that have the highest margin and smallest dimensional size as they are highly profitable and sell through quickly. Leaving items that have lower profitability or that move slower through Merchant Fulfilled (MF).
Tips for New Amazon Sellers
If you’re a new seller coming to Amazon or moving from Vendor Central to Seller Central, start by sending small quantities at first. You do have a grace window when you first open your account.
However, you want to make sure that you are sending in small amounts of inventory. As little as one case per product can help you identify the overall Sell Through Rate.
There is no minimum for sending inventory into Amazon FBA. So it is possible to test as little as one unit at a time to test products on Amazon.
Sending in small shipments does increase your overall shipping cost and can reduce profitability in the short term. However, when you’re first investigating the platform, sending in smaller quantities can help you better understand the demand your product will have and help avoid additional fees that can be required to call inventory back or to pay for storage fees.
Once you have a better idea of your sell-through rate, you can start to increase to total sizes of your inventory.
It is a delicate balance to have enough inventory that you don’t run out of stock but also that you don’t have excess inventory. While in general, you want to aggressively avoid stockouts, the impact of a low IPI score should take priority.
How Seller Velocity Impacts Restock Limits on Amazon
Just this past year, a new complication of Restock Limits came into play on Amazon. While many sellers had been dealing with SKU-level inventory limits, Amazon instituted an account-wide limit based on a seller’s velocity.
Amazon defines the limit by saying:
“Restock limits are set per storage type, based on your past and forecasted sales, allowing you to allocate these limits across your ASINs.”
It is important to note that this is not calculated by only looking at available inventory.
“How do you calculate utilization?
Utilization counts against your maximum inventory level and helps determine your maximum shipment quantity. Utilization includes your current inventory at Amazon and all incoming shipments, including your shipments in Working, In transit, and Receiving status. Inventory pending removals and any reserved inventory are not included in the utilization calculation. To view the utilization number by sort type, go to your restock limits monitor and review your utilization by storage type.”
The reason I moved this to the bottom of the article, even though it is having the biggest impact on sellers right now, is because we need to take the same approach as we detail for handling Excess Inventory and Sell Through Rate in the IPI score.
This metric is primarily governed by past sales velocity.
That means that as you increase your overall sales, your limit will increase. Here are the steps we recommend:
- Pull back or discount stale inventory to make additional room in your allotted amount of units.
- Only restock your fastest-moving items. This may mean not restocking some profitable, slower-moving items until your sales velocity allows for your restock limit to be hit.
This also means that as your velocity picks up over Q4, your restock limits should also rise.
Monitoring Inventory Matters
To be successful on the platform, you need to take an active role in your Amazon inventory management.
In prior years, simply avoiding restocks was enough.
However, these new requirements require a greater focus on monitoring sell-through rate and storage utilization at Amazon.
Prepare now to support your Amazon marketing and sales goals for the coming holiday season.
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All screenshots taken by author, August 2021