Amazon FBA Inventory Performance Index Explained

Amazon Logistics Cost is Increasing

As Amazon grows, its logistics costs have skyrocketed over the past decade. In 2017, the company’s fulfilment and shipping expenses amounted to $25.2 billion and $21.7 billion respectively, up from just over $2 billion ten years earlier.

In 2017, the relative weight of fulfilment and shipping costs on Amazon’s bottom line has increased over the past decade, amounted to 26.4 percent of the company’s net sales, up from 16.6 percent in 2007.

For most companies, logistics cost average between 3% to 8% of sales turnover. Imagine spending $0.26 cents on every dollar earned for logistics. For Amazon, it’s an unsustainable amount of expenses, and increasing year on year. The high fulfilment cost can be attributed to number of fulfilment centers it operates through its Fulfilment by Amazon service or FBA.

Amazon’s fulfilment and shipping costs as a percentage of net sales.

Amazon currently operates different types of fulfilment and distribution centers in the United States including small sortable, large sortable, large non-sortable, specialty apparel and footwear, specialty small parts, returns processing centers. As of 2019, there are 139 such facilities in the US, and triple the number around the world. [See infographic]

Why Introduce Inventory Performance Index?

You guess it – Space Is Finite.

Like any retailer, your shop space is limited to the confines of four walls. Your cost of sales is primarily inventory cost and shop rent. Your revenue depends on how much stock you sell against your operating cost. To increase revenue, you need to sell more, without increasing operating cost. This means your inventory needs to ‘turn’ faster to improve sales.

To increase inventory turns, retailers need to analyse their sales – what’s selling and what’s not – basically take a good hard look at inventory holdings and optimise inventory count by reducing inventory for slow moving products and removing products that does not sell.

Essentially, this is what Amazon want sellers to do – optimise inventory holding aka housekeeping.

“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.” – Amazon Seller Central

There are four factors that affect your IPI score:

A. Excess Inventory Percentage

Definition: % FBA inventory units identified as unprofitable.

Explanation: % of inventory where Holding Cost is greater than Product Demand (Sales)

This ratio measures the sum of FBA fulfilment cost versus the rate of sales and capital cost (product value) to determine the opportunity cost of not promoting sales. Low value products are particularly susceptible to this ratio.

B. Stranded Inventory Percentage

Definition: % FBA inventory units not available for Purchase (Sales)

Explanation: % of inventory under Storage but Not For Sale

This ratio is an indicator of dead stock or sleeping stock that is taking up storage space without any active listings.

C. Sell-Through Rate

Definition: % FBA inventory Sold versus Inventory Count over the past 90-days

Explanation: the rate your inventory is Moving versus total inventory On Hand

This ratio measures your inventory turns over your stock holdings to determine if you can holding too much or too little stock versus sales.

D. In-Stock Rate

Definition: % FBA inventory In-Stock the past 30-days versus units Sold the past 60-days

Explanation: % inventory available for sale over 30-days versus actual sales over 60-days

This ratio measures the speed you are replenishing your inventory over 30-days versus the rate of actual sales over greater period of time 60-days to determine the possibility your products may run out of stock.

Amazon does not reveal how IPI Score is calculated using these 4 factors nor do they provide detailed formulas to determine % rate of each factor. This means Amazon reserves the right to adjust the weightage each factor contributes to the overall score.

Immediate Solutions For Action

There are some immediate remedies you can do to address your IPI score, but for third party foreign sellers outside the US, more work needs to be done.

1. Identify Slow Moving Products

Analyse the your inventory by ASIN for low traffic and low sales conversion to identify slow moving products.

2. Identify Ageing ASINs Under Storage

Check the inventory age of slow moving products and identify which products has been under storage for more than 90-days.

3. Balance your inventory

Reduce inventory of target products through sponsored ads or reprice inventory to increase sales.

Back to the Basics of Retailing

For third party sellers residing outside the US, immediate remedies can address your IPI score but future shipments plans will determine your long term inventory performance. Chasing sales of best performing ASINs bring you revenue, but without looking at the retail metrics of your sales and inventory performance, increases your cost of sales, reducing your returns.

Traditional retailing metrics measures sales and inventory performance through a series of ratios. These ratios are similar to IPI Score factors and more. While ratios are good indicators, the real solution lies with flexible logistical support to help balance your inventory inside and outside of FBA, and optimised lead times to ship and replenish inventory.