The Inventory Performance Index, or IPI for short, is a ratio that determines the storage space donated by Amazon for a seller’s products. The higher the IPI score the more space you have to store your goods, the lower the less space you have. When selling in the FBA model, sooner or later every seller will have to face the challenge of stock management, IPI suggests how to do it in order to get unlimited storage space.
The Inventory Performance Index is a relatively new metric and therefore subject to change, and like almost everything at Amazon it often escapes the laws of logic. The IPI was introduced in 2017, but its real impact on sellers has been visible since July 2018 (in Europe it was a little later, in Q3 2019), when Amazon started allocating warehouse space based on IPI results.
According to Amazon’s official documents, the IPI includes four dimensions:
- Excess inventory percentage
- Stranded inventory percentage
- FBA sell-through rate
- FBA in-stock rate
Excess Inventory Percentage
In simple terms, this indicator shows how many of the products a seller has in Amazon’s warehouse are being stored for an excessive amount of time. The exact definition of an item that is classified as “excess” is:
- At least one item from a given ASIN has been in Amazon’s warehouse for more than 90 days
- The stock of a given ASINU in Amazon’s warehouse will last for more than 90 days of sales
- The cost of keeping a stockpile without taking any action is higher than the cost of taking action (such as lowering prices to increase sales or removing surplus).
To keep this ratio as high as possible, a retailer must either increase marketing spend on a product to increase turnover or remove units of merchandise classified as excess from Amazon’s warehouses.
Stranded Inventory Percentage
An indicator that measures the percentage of goods that are unsellable due to a listing problem. Amazon tells you the reason why a listing is not available for sale so getting this indicator to the right level is a fairly straightforward task. Any listing problems indicated by Amazon should be resolved.
FBA sell-through rate
This subscale tells you how quickly you sell out of stock, or in other words, the de facto turnover of the seller’s stock. Specifically, Amazon describes this rate as follows, pieces of merchandise sold and shipped in the last 90 days divided by the average number of available pieces of the seller’s merchandise on Amazon.
For example, if a seller has shipped 120 pieces of merchandise in the last 90 days and had an average of 80 pieces of merchandise available on Amazon’s inventory during that time then the sell-through rate would be 120/80 = 1.5.
The FBA sell-through rate is one of the more difficult metrics to control. In our experience, the larger the seller’s account, the harder it is to improve this rate. The best method is to ship by parcel, which is accepted by Amazon’s warehouses faster and gives the seller more flexibility in controlling the sell-through rate. Of course the downside is cost, but looking at Amazon’s recent moves it seems that shipping by parcel or a mixed model of parcel and pallet is inevitable.
FBA in-stock rate
Keeping popular products in-stock is important for both the retailer and Amazon. The FBA in-stock rate reports how much time a seller’s ASINs have been in-stock over the past 30 days. Additionally, Amazon uses weights for this indicator based on the number of units sold of a given SKU in the last 60 days.
In simplistic terms, every seller needs to ensure that their bestsellers are always in stock.
In our opinion, IPI is and will be in the future a key sales factor in the FBA model that every seller will have to pay attention to. Amazon is constantly raising the bar when it comes to stock management which is understandable as it seeks to maximise the use of warehouse space. For sellers, this means aiming for just-in-time deliveries.