Success on Amazon is reliant on stock being consistently available, in the right quantities. While this may sound painfully obvious, it is possibly the largest stumbling block that sellers encounter on Amazon. For many sellers, the route of Fulfilled by Amazon (FBA) appears to be an easy choice operationally while offering many other business benefits. However, FBA inventory management can be more work than anticipated and poor execution has a direct impact on a seller’s bottom line.
What is Fulfilled by Amazon (FBA) and what are the benefits?
FBA is a service offered by Amazon as a means for sellers to automate their order fulfilment and shipping by giving access to the global Amazon fulfilment network. Amazon warehouses, picks, packs, ships and handles returns and refunds on the seller’s behalf.
Here are the key benefits:
- Increased sales: FBA products are automatically on Prime, and may qualify for free delivery. The improved fulfilment, often next day delivery, along with the Prime badge results in most sellers seeing a considerable increase in conversion
- Sell internationally: the FBA network allows sellers access to marketplaces that may otherwise be logistically too challenging to self-fulfil into
- Customer service: Being on FBA means access to Amazon’s 24/7 customer service, available in local languages
- Fixed fulfilment fees: FBA fees are charged per unit sold, fixed based on the dimensions of the product. This allows for sellers to know exactly what cost is being incurred per unit sold – regardless of order size / quantity
- Other benefits such as continuous delivery (no warehouse downtime for holidays), gift wrap services, labelling and packaging support and exclusive promotion types can also be enjoyed through this service
Amazon does make it seem as though all a seller needs to do is make sure Amazon has inventory in their fulfilment centre. Unfortunately, there is far more to it.
What is the Inventory Performance Index (IPI) and how does it impact FBA sellers?
Amazon defines the IPI as –
“The Inventory Performance Index, or IPI, is a metric to gauge your inventory performance over time. IPI score measures how efficient and productive you are in managing your FBA inventory. Multiple factors could influence your IPI score. However, the most important ones are your actions: 1) maintain a balanced inventory level between sold and on-hand inventory and avoid excess inventory (overstock), 2) avoid long term storage fees, 3) fix listing problems, and 4) keep your most popular products in stock at the right levels, when possible, to meet customer demand and maximise customer satisfaction.”
Amazon continuously monitors IPI scores, and consistent underperformance (below threshold) scoring over the two score checkpoints will result in storage limitations being applied to the seller. On the reverse side of this, higher IPI scores mean higher limits, or unlimited storage if fulfilment centre capacities allow.
IPI Score Management is the Key to Successful FBA Inventory Management
Sellers need to be actively monitoring, controlling and influencing the following metrics in order to maintain a healthy IPI score:
- Stock availability – Ensuring consistent stock availability is the most important consideration. In-stock rate is the most weighted metric within the IPI score. Shipments should be prepared and sent in regularly, based on lead times, sell-through and seasonality. The best practice is to maintain 90 days of inventory in the fulfilment centre at any given time.
- Excess inventory – Amazon considers an item as excess or overstocked if it has over 90 days of inventory on hand – based on the current sell-through. The excess inventory percentage is another metric that is heavily weighted in the IPI, as Amazon strongly discourages inventory ageing in its fulfilment centres as this creates less available storage for high sell-through products. Heavily overstocked items may include long-term storage fees if sell-through does not improve.
- Sell-through rate – As the sell-through rate has a direct impact on stock availability, excess inventory and inventory age this metric needs to be closely monitored. Amazon encourages sellers to take action, such as advertising/campaigns or promotions, to improve the sell-through rate.
- Stranded inventory – Stranded inventory is inventory that is not available for sale due to listing problems, which results in both lost sales and storage costs. As these items are taking warehousing space, Amazon continues to charge storage and track inventory age while the stock is stranded. This stock also counts towards the seller’s total inventory, which can create issues for new inventory to be received if the seller has storage limitations in place.
- Inventory age – While it is best practice to have items selling through within 90 days, at times a higher inventory age may be seen. It’s essential for sellers to monitor this as items that are in fulfilment centres for more than 365 days will be charged a monthly storage fee of £4.30 per cubic foot.
FBA Inventory Management Service at RT7Digital
As seen above, FBA inventory management is far more than preparing cartons and sending them to a fulfilment centre and at RT7Digital we understand this. While our service does include the essential replenishment recommendations and shipment creation, we place equal focus on the management and monitoring of the IPI score and related metrics to ensure a seller is able to operate at an optimal level year-round.
For more information on our FBA Inventory Management service, read about it here.