The Inventory Performance Index (IPI), which Amazon recently added to its charge system, is one of the most significant modifications. What is the Impact Perception Index (IPI), how is it determined, and what are the repercussions of having a low IPI? We will evaluate each of these items in this article.
In this article you will learn:
- The Inventory Performance Index: What Is It?
- How IPI is Determined?
- What consequences result from a low IPI score?
- How Do “Capacity Manager” Storage Limits Affect Your IPI Score?
- Frequently misconceptions about IPI Scores
- IPI is currently limited to Amazon.com.
- How Should You Proceed?
- CONCLUSIONS
The Inventory Performance Index: What Is It?
Amazon uses a score called the Inventory Performance Index (IPI) to evaluate vendors’ inventory management practices. Scores range from 0 to 1000.
The IPI appears to be mostly focused on Amazon’s overflowing warehouses and encouraging sellers to better utilize their inventory, as is the case with many of the decisions that Amazon makes for sellers.
If you’re a new seller, you won’t have an IPI score; typically, an IPI score is awarded to you approximately 15 weeks following the shipment of your first item into Amazon FBA.
Your Seller Central Inventory Dashboard displays your current score.
How IPI is Determined?
The fact that Amazon won’t discuss the methodology behind the IPI is the most annoying aspect about it. Amazon provides a very unhelpful explanation of how to improve your IPI as follows: “The best way to increase your IPI score and minimize your FBA storage fees is to reduce unproductive inventory and keep your productive inventory at lean levels while ensuring you have enough on hand to minimize lost sales.” When asked how the IPI is calculated, Amazon responded, “The calculation is proprietary and will not be published, just as we do not publish the Buy Box algorithm.”
However, according to Amazon, your IPI score is now influenced by three factors:
- Cutting back on excess inventory to boost earnings
- In order to balance your inventory weeks of cover, increase sell-through.
- Repairing stranded listings to guarantee that inventory is buyable
“IPI points are not deducted for running out of stock,” as stated clearly by Amazon. It is important to reiterate this because it is a widely held misconception: your IPI score won’t suffer if you run out of stock.
Your IPI score will be impacted by stranded inventory, but it is easily fixed. Put another way, the two most important things to do to raise your IPI are to decrease Amazon overstocks and increase your sell-through rate. Finally, the way that Amazon determines your sell-through rate is as follows:
Units sold/shipped within the previous 90 days divided by the average number of units available at fulfillment centers during that same period = sell through rate.
Thus, your average sell-through rate would be 0.5 if, for instance, you sold 100 units during the previous 90 days and kept 200 units in stock on average over that period. Another dark notion I have is that products that have no sales for more than 90 days are severely penalized by Amazon.
Go to sellercentral.amazon.com/inventory-performance/dashboard/ to get a dashboard with all of our important metrics (login required).
Usually, your IPI score is determined every Monday.
What consequences result from a low IPI score?
A low IPI score (between 400 and 500; check Amazon for the most recent thresholds) entails penalties such as increased storage costs ($10/CFT, to be specific) and limitations on product storage.
When our account did drop below the 350 barrier, which was the prior threshold, we had potential storage limits that were almost five times larger than our present storage. However, Amazon does not reveal the exact amount of our inventory storage limitations until we drop below an IPI of 400. Although I’ve heard of situations when storage restrictions were really prohibitive, in this instance the limits would not have been highly severe.
At the bottom of each shipment planning window, you may view your possible and actual storage limits.
Every quarter on March 31, June 30, September 30, and December 31, as well as six weeks before the end of the quarter, Amazon computes your IPI. You will be fined if it is less than 400 both at the conclusion of the quarter and six weeks earlier. For instance, you won’t be penalized if, on May 19 (six weeks before June 30), you had a score of 401 but on June 30 you had a score of 0. Similarly, you won’t be penalized if, on May 19, you receive a score of 0 but, on June 30, you receive a score of 401. In essence, you receive one free ride. Although a little unclear, hoping that makes sense.
How Do “Capacity Manager” Storage Limits Affect Your IPI Score?
Amazon implemented major modifications to their storage limit implementation process in late 2022, chief among them being the introduction of the “Capacity Manager.” Amazon now estimates your capacity restrictions three months ahead of time and sets a monthly storage capacity.
What effect does your IPI score have on the storage limits that Capacity Manager allows? Amazon says that your storage capacity is affected by your IPI score, but it doesn’t say by how much. Based on my observations, your IPI score is not a reliable indicator of the amount of storage you will have; that is, having a high IPI score does not guarantee having large storage limits. It seems that the most crucial element is just how much merchandise you have typically sold during that time.
Frequently misconceptions about IPI Scores
Let’s also talk about some common misconceptions regarding IPI scores:
- It is untrue that ASIN Limits are impacted by IPI Scores. Your IPI scores have no effect on ASIN limits, either positively or negatively, during times when Amazon has ASIN replenishment limits.
- It’s untrue that new products lower your IPI score. Adding new products does not lower your IPI score because Amazon only considers a product’s sales history up to 90 days after it is launched.
- It is untrue that new seller accounts have an IPI score. An IPI score won’t be assigned to new seller accounts until about 15 weeks after their first item is shipped to an Amazon FBA fulfillment center.
- This is untrue: You can raise your IPI score significantly and quickly. Both recent sales and storage activity as well as past sales and storage activity are reflected in your IPI.
- It is untrue that marking items as non-replenishable raises your IPI score. Your IPI score is unaffected by marking an item as non-replenishable.
IPI is currently limited to Amazon.com.
Sales on Amazon.com are the only marketplaces for which the Inventory Performance Index is currently applicable. This is not surprising, given that Amazon is making a concerted effort to expand into other markets and that foreign warehouses are not experiencing the same capacity issues that American warehouses are.
How Should You Proceed?
We are only able to speculate on certain concrete actions you can take to prevent being penalized by a low IPI because the algorithm used to calculate it is unknown:
- Check your IPI score right now.
- Ensure that, either at the end of the quarter or six weeks earlier, your IPI is higher than the minimum threshold (between 400 and 500).
- Use 3PLs for storage more effectively, and send shipments into Amazon more frequently.
- Keep enough inventory for 30 to 60 days, but no more.
- Resolve stranded inventory right away.
- Eliminate surplus inventory.
- If you believe you will fall short of 400 for both reporting periods, make shipments ahead of time.
Making shipments ahead of time is currently one way to get around the IPI with regard to this last issue. Your account’s limitations will impact your capacity to initiate shipments from abroad. But you can submit that inventory as long as those shipments have already been made.
CONCLUSIONS
For Amazon Sellers, the Inventory Performance Index remains somewhat mysterious. We should have a better understanding of the key elements influencing your IPI and the possible consequences of having a low IPI over the coming weeks, particularly as June 30 draws near (the first penalty rollout).