I wanted to write a post about 3D printers this week, but we’ll have to leave that to another time. There’s something much more important and urgent to cover this week: Amazon’s brand-new Inventory Performance Index, the new storage limits, and some additional inventory-related news.
Judging by the latest inventory rule changes (like the introduction of long-term storage fees) and the other changes we’ll cover today, it seems that Amazon doesn’t want to be fully involved in the fulfilment game—apart from their own—or Amazon seller needs.
Why else would they introduce all these new rules and limitations, right? If they wanted to, they could just continue to build warehouse after warehouse (or continue to let their fulfilment partners do it), and then cash in on the storage fees. Then they wouldn’t have to worry about how much stock we send in or how long we keep it there, right?
Amazon’s storage fees are already several times higher than what you would pay to a standard fulfilment company, so the business should be very profitable, right? I mean, they currently charge more than £50 a month to store a pallet of goods! With standard fulfilment companies, that costs just £10 to £20! You could build a profitable business solely based on storing those pallets, regardless of whether or not the actual stored goods sell.
Anyways, based on these new inventory storage limits and the inventory performance index, it’s clear that Amazon doesn’t want to be purely in the fulfilment business. They want us sellers to be as efficient as possible with our inventory! The new stock management principle is, basically, Quickly In and Quickly Out! Which means that:
We should only send stock to the Amazon warehouse that we know we can sell quickly.
Using Amazon as a long-term storage facility is no longer a viable option.
And quickly doesn’t mean months anymore. Yes, as you will soon find out, in order to maintain a perfect score, Amazon actually wants us to turn over inventory in under 4 WEEKS! We’ll get to that detail in just a moment, but for now, just realise that the inventory game is changing. You will have to make drastic decisions in the very near future to stay compliant with these new rules and be able to use FBA services.
Ok, let’s take a closer look at what these new changes are and what they mean to us as regular Amazon FBA sellers. These new rules have currently only been introduced on Amazon.com (the US platform), but I’m sure that they will roll them out in the UK and other countries very quickly. That’s how Amazon usually does these things—they start with the US and the UK/Europe rollout follows shortly afterwards.
Inventory Performance Index
So, what is this brand-new Inventory Performance Index (IPI), and how exactly will it affect us? The IPI is essentially a measurement of how well Amazon sellers are managing their stock on an on-going basis. The index has a scale from 0 to 1000, where 0 is the worst possible situation and 1000 is the highest score.
Another important number to remember here is 350—this is basically the lowest score allowed by Amazon. If your account goes below 350 for a significant period of time, Amazon can actually prevent you from using FBA services. Yes, they can basically suspend you from using FBA services purely because you’re not managing your stock efficiently enough. Even if you pay all the fees for storage and any long-term storage fees or fines, you’re still at risk of being suspended from the service.
That is the most drastic punishment you can get, though. The more realistic result of going into the red for a prolonged time is that Amazon will lower your stock storage limits. We’ll get to that in a moment.
Let’s get back to the Inventory Performance Index. The IPI is made up of four metrics that are constantly monitored by Amazon’s algorithm:
1) Excess Inventory
Basically, this is the stock that is already currently tagged as EXCESS, as it will incur long-term storage fees (LTSF) if you continue selling at the current rate. As you can see, I have 225 excess units, which is 17.74% compared to my overall stock. This puts me in the FAIR range of the scale for this metric (10-30%). You can also see that to achieve EXCELLENT status on this metric, your excess inventory should be ZERO! Clearly, Amazon doesn’t want us to use their warehouses for long-term storage—fair enough!
2) Sell-Through Rate
The second metric is even more drastic and more important. It is the actual sell-through rate of your stock. In short, this means how quickly you sell out of your entire stock before replenishing it, and it is calculated across the last 90 days.
As you can see from my stats for the sell-through metric, I have a POOR rating of just 0.5, which negatively affects my overall IPI score. A score of 0.5 means that I have sold just HALF of my stock over the last 90 days, which is considered very poor by Amazon’s standards.
To get an EXCELLENT score, this number should be 7 or more, which means that you have to turnover seven times the stock level you send in—that is a crazy quick sell-through rate for any seller! It pretty much means that you have to sell out of any stock you send to Amazon’s warehouse in less than 13 days.
Obviously, that is what is necessary to achieve the maximum/best score possible, and it’s not like Amazon asks everyone to reach that level. But, even if we just want to stay in the GREEN/GOOD range for this metric, we have to achieve an FBA sell-through rate of at least 2.0, which means selling out of stock TWICE in our last 90 days of trading. To put it simply, Amazon wants us to only send in stock that we know we can sell within 45 days of arrival at the warehouse. That’s the reality of using FBA services from now on.
3) Stranded Inventory Percentage
This is something we can easily achieve top scores in, and it’s something that we actually have direct control over. Stranded inventory basically means listings that are not active/selling but have inventory sitting in Amazon’s warehouse. I don’t think this situation is very common, but it can happen for a number of reasons. All in all, this is something we, as sellers, can usually fix quickly and easily, allowing us to stay in the EXCELLENT, 0% range.
4) FBA In-Stock Rate
The fourth and final metric that makes up the new Inventory Performance Index is one that measures our out-of-stock listings. It is calculated as a percentage of estimated lost FBA sales in the last 30 days. I have the score of 100% as I have not yet run out of stock on any listing for this account but, generally speaking, this metric will be one that we’ll have to monitor very closely to avoid out-of-stock situations.
These are the four metrics that make up the new IPI. From the images provided, you can see that my index score is currently 594, which is actually very good! But I can already project that it won’t stay that high for very long because I will run out of one product variation very soon and that excess inventory and low FBA sell-through rate will only get worse.
I have decided to take drastic measures to save the account and stay on top of the game by:
- Reducing the prices of my three remaining variations by 50%. This will allow me to sell off the existing inventory and make space for the new product I’m working on.
- As soon as stock runs out, I will probably have to make these listings inactive or even delete them entirely so that they don’t count towards my FBA in-stock metric. This means they will be out of stock forever. I don’t want that to affect my IPI, so I will contact Amazon and ask them about the correct procedure when you no longer want to sell an item. I will update you on the outcome of this on my Facebook page.
I really hope that I will manage to stay in the GREEN, but if my IP falls below the magic 350 mark and goes into the RED zone, will Amazon ban me instantly? No, that would be too drastic a measure. If your account goes into the RED and stays there, you will face the brand-new…
FBA Inventory Storage Limits
Well, technically, this is not totally brand new as we have had storage limits before. The difference is that these limits will now be tied directly to the Inventory Performance Index and will be simplified to these rules:
- Individual selling accounts have the same storage limit, which does not increase or decrease.
- Professional seller accounts may or may not have storage limits, depending on the following criteria:
- Sellers who maintain an Inventory Performance Index of 350 or greater will have unlimited storage for standard-size, oversize, apparel, and footwear items.
- Sellers with an Inventory Performance Index less than 350 six weeks before the end of a quarter will be notified of their potential storage limits. If their score is still less than 350 on the final day of the quarter, the limits will apply for the next quarter.
- Sellers without an Inventory Performance Index will receive default storage limits until enough data is collected to generate a score.
So, Amazon is basically saying that as long as your IPI stays above 350, you don’t have to worry about the limits anymore. If it goes below 350 and you don’t fix it before the quarter ends, Amazon will put storage limits on your account. We don’t know the exact limits they will use, but it will most likely depend on your overall stock levels, the number of SKUs, and your selling history.
When these limits are implemented, and when your stock levels exceed them, you will not be able to send in new inventory until you sell some of your current stock and come back to below the limit. Essentially, you will have to wait it out, run some sales promotions, or simply remove excess inventory from the Amazon warehouse (have it destroyed or get it shipped back to you).
I really wanted to get this post out as soon as possible. Even though most of you are not selling on the Amazon.com site, it is a good indicator of what is to come. I strongly suggest that all sellers prepare for these rules to be introduced in the UK too.
This whole Inventory Performance Index and the new storage limits just mean that we, as sellers, will have to change, adapt and become more flexible with how we manage our inventory. More planning is now needed. We can’t simply send everything to Amazon and then think about how and when we will sell it later. No, going forward, you need to know exactly how much stock you will sell in next 30, 45 or 60 days and only send that amount to Amazon.
Planning your orders from China will be much more difficult now, so you really need to stay ahead of your sell-through rate and make sure you do not run out of stock. Unfortunately, that’s a very typical situation when you’re trying to manage sea freight shipments from China—it can sometimes take up to three months from the product being ordered for it to be shipped and delivered to Amazon.
If you ask me, the only real solution to this is to have your own storage space or rent one out. That way, you can keep a reserve of your stock and send portions of it out to Amazon as needed. You will have control over only sending out units that you know you will be able to sell quickly instead of the full order you placed with your Chinese suppliers going directly to the Amazon warehouse.
As an experienced seller, I had an idea that, sooner or later, this day would come. I knew that, eventually, sellers would no longer be able to send Amazon pallets of goods with no idea about how long it would take to sell out, so I already have a warehouse and I’m actively managing my stock. I keep—or at least I try to keep—all SKUs in my warehouse and only send Amazon a portion of my stock as needed. I actually started doing this when Amazon introduced the long-term storage fees, but I can now see that it will help me with the new IPI too.
I understand that not everyone has a warehouse, but there are still cheap alternatives you can use in the same way:
- Rent a self-storage unit
- Use Amazon prep companies (I bet these will become very popular now)
- Rent a shelf/pallet space in a warehouse nearby (this will most likely be the cheapest option)
- Use your house as a temporary storage location
- Clean out your garage or shed and use that as your warehouse
- Buy or rent a storage unit that you can put in your garden
Apart from using your house (which is actually the simplest way of fixing this problem), all these solutions will incur extra costs. You will have to do the math on how each solution will affect your margins. If you have lots of stock, paying a local warehouse or Amazon prep company to store your goods will probably be the best approach and you can expect to pay around £10 to £20 per pallet space per month. Which, by the way, is much cheaper than the storage fees Amazon charges us.
Yes, I hear you! The Amazon FBA game is even more complicated now. You’re right, it is! But if you’ve known me for a while, you will know that I’m not the type of person who will go on the Amazon forums and cry about how bad Amazon is and how this is ruining everything, etc. I have never done that. I take a pragmatic approach to every new rule or change and simply look for a way to fix the issue. It is as simple as that.
In fact, I look at all these changes and rules as a huge PLUS! I mean, these new rules and changes probably mean that even fewer people will be able to manage perfect scores and, in general, maintain their businesses. Many will give up. And that means one thing: MORE FOR ME!!! 🙂 Business is not EASY and only the fittest will survive. I have been doing this for 15 years now. I guess I have seen it all, so there’s not much that surprises me anymore….
And there’s one good thing that has come out of all these new changes. Now, you really don’t need to use or pay for a dedicated inventory monitoring solution anymore because Amazon is giving us so many great tools to manage this process ourselves, including:
- All the reports
- Inventory age tool
- Restock inventory tool
We can now accurately manage our own inventory levels and plan re-stockings. Amazon even now sends emails ahead of time to make sure we don’t forget to send in new stock in time.
So, my take on this is: don’t cry that Amazon is introducing new rules! Just work on how you will adapt and manage your business so these new conditions will benefit you!
OK, that’s it for today. I really hope this helps and I will continue to update you on when and how these new changes will be implemented in the UK. If you haven’t done it already, follow me on my Facebook page to receive short updates from me (ones that I don’t publish as blog posts) about Amazon and my Amazon FBA business.
If you have any questions or comments about Amazon’s new Inventory Performance Index, please leave them in the comments block below and I will personally answer them within 24 hours, Mon-Fri.