Part 1: How to Use Amazon’s Inventory Performance Index (IPI) Score to Create an FBA Inventory Planning Strategy
While the elements are somewhat confusing, most sellers know about Amazon’s Inventory Performance Index (IPI) but struggle to improve inventory storage and order fulfillment. The IPI is the score Amazon uses to determine how well sellers manage inventory. Earlier this year, Amazon rolled out Storage Limit Manager for extra storage at no additional cost to help with this struggle. However, maintaining an IPI score of at least 550 keeps many sellers up at night. It’s not easy. There are a lot of moving parts. That’s why Pacvue is essential to move everything into one central place for tracking and management.
WHAT IS A GOOD IPI SCORE ON AMAZON?
Amazon’s IPI is a number between 0-1000 that measures important aspects of inventory management health and performance. The Average Amazon IPI ranges from 400 to 800. A low IPI score results in overage fees and FBA storage limitations.
While the specific IPI calculation is proprietary, there are key components to help improve this score, and it’s crucial to create a strategy that aligns with consistent score improvements. These components include:
- Excess inventory
- Sell-through rate (STR)
- In-stock inventory
- Stranded inventory
We’ll break down these components to uncover the metric importance, how to calculate the metrics, ideal measured amounts, and how to consistently make intelligent improvements.
EXCESS INVENTORY: Why Overstocking Matters
Having excess inventory, or more than can be sold within a reasonable time, can lead to higher storage costs, product devaluation, and lower sell-through rates, which can negatively impact the IPI score. Overstocked inventory can result in lower pricing power, frustrated customers, and reduced profits. It's essential to monitor inventory levels and adjust pricing strategies to avoid overstocking.
HOW TO CALCULATE EXCESS INVENTORY TO AVOID OVERSTOCKING
Calculating and reducing excess inventory improves profitability, reduces storage costs, and provides a better customer experience.
There is no set "ideal" excess inventory rate for Amazon FBA as it can vary depending on several factors, such as the product category, seasonality, and customer demand. However, as a general guideline, it is recommended to aim for a low excess inventory rate, typically around 10% or less. This means that you should have at most 10% of your inventory that is unsold and sitting in Amazon's fulfillment centers.
To manage inventory, first, calculate the average monthly sales for each product from the sales history. Then, determine the safety stock to avoid stockouts by subtracting the average monthly sales from the safety stock. The difference is excess inventory.
To manage inventory, first, calculate average monthly sales for each product from sales history. Then, determine the safety stock to avoid stockouts by subtracting the average monthly sales from the safety stock. The difference is excess inventory.
Track excess inventory over time, then adjust ordering frequency and safety stock to minimize overstocking.
Tracking average inventory is necessary because it helps businesses find the right balance between supply and demand, avoiding lost sales and excess inventory. By monitoring inventory levels, brands can make data-driven decisions about how much stock to order, how often to order, and when to reorder. This helps optimize inventory levels and improves efficiency, customer satisfaction, and profitability.
Tip: By utilizing Pacvue, you can track your ASIN-level Weeks of Cover (WOC) to gain visibility into your inventory and product profitability. This knowledge can accelerate sales of excess inventory via promotions, pricing strategies, or advertising, all while maintaining profitability.
HOW TO IMPROVE EXCESS INVENTORY MANAGEMENT
- Monitor inventory levels regularly.
Regularly checking inventory levels can help prevent overstocking and enable early identification of excess inventory. With Pacvue, you can improve visibility across your entire FBA inventory by market, including essential details such as Weeks of Cover (fulfillable goods), healthy inventory levels, and estimated storage terms and fees.
- Adjust your ordering frequency.
One way to prevent overstocking and minimize excess inventory is to adjust your ordering frequency to match the rate at which your products sell. Pacvue can help with this by providing automated predictive out-of-stock alerts and ensuring timely product replenishment to maintain optimal inventory levels for each category, reducing storage costs.
- Offer promotions or discounts.
Offering promotions or discounts is a great strategy to move your excess inventory quickly and reduce storage costs. As Bobsled Marketing’s Account Specialist, Maria Zarkova, said, “Every type of Amazon Promotion can have its moment in the sun. It’s important to understand the differences between each of them. That way, you can make an informed decision about which to use in each situation.” Depending on your goals, you can decide if a Point of Sale (POS) discount or an In-Cart discount is best.
POS discounts are applied at the point of purchase when a customer checks out and can be in the form of a coupon code or an automatic discount applied to the order total. These discounts encourage customers to complete a purchase, increase the average order value, and drive multiple-item purchases.
On the other hand, in-Cart discounts are applied when a customer adds an item to their cart and can be a percentage off the purchase price or a fixed dollar amount. These discounts can increase product visibility, drive impulse purchases, and encourage customers to add items to their carts.
Each type of discount has its advantages and disadvantages. The best option for your Amazon FBA selling strategy will depend on your specific goals and products. Pacvue can help with promotion and coupon tracking by automating manual reporting, auto-calculating performance lift calculations, and identifying top-performing promotions at the ASIN level.
- Dispose of inventory in an environmentally responsible way.
There are various ways to dispose of excess inventory, including utilizing Amazon's DBA liquidation and FBA Grade and Resell programs. With DBA liquidation, sellers can offer unsold or overstocked inventory to Amazon at a discounted price, which Amazon resells through its retail channels. The FBA Grade and Resell program allows sellers to sell FBA returns, overstocked inventory, and customer-returned items to Amazon at a discounted price, which Amazon then resells to other customers on its platform.
Before participating in these programs, consider the costs and benefits, including program fees and expected return on investment. Also, assess participation's impact on your brand, reputation, and overall business strategy.
Donating excess inventory to a charitable organization is another option. Some organizations accept gently used items, while others only accept new items. Offloading stock to other retailers, either directly or through a liquidation company, is also possible. Finally, returning excess inventory to the supplier for a refund or credit may be the best option if the merchandise is still in good condition.
- Manage your product pricing.
To avoid excess inventory, ensure that your product pricing is competitive and aligned with market demand. Overpriced products may sell poorly, which can result in excess inventory. Monitoring competitor pricing is also essential. Automated software can help to adjust your prices in real-time based on market conditions, competitor pricing, and other factors. Setting minimum and maximum prices for your products is crucial to ensure competitive pricing. However, consider the cost of goods sold (COGS), shipping, and other expenses.
Analyze your sales and pricing data regularly to identify what's working and isn't. This can help to identify trends and adjust your pricing strategy accordingly. Be flexible and open to adjusting your pricing strategy based on changing market conditions and customer demand. Remember that the pricing strategy that works best for your business today may not be the best tomorrow.
- Consider alternative fulfillment options.
Consider using alternative fulfillment options such as Amazon's Multi-Channel Fulfillment or Selling on Amazon to reduce excess inventory. Selling both 1P and 3P products can also help take advantage of the different profit margins associated with each type. For example, 1P products often have higher profit margins, while 3P products may have lower profit margins but higher sales volume.
Additionally, selling both 1P and 3P products can increase the range of products offered, creating a broader customer base and increasing customer loyalty and sales. Pacvue is the only integrated solution that supports 1P, 3P, and hybrid fulfillment options. It can be used to manage inventory and sales for both vendor and seller accounts.
SELL-THROUGH RATE (STR): Why Units Sold Matters
It’s important to monitor your sell-through rate and make inventory adjustments and create management strategies as necessary to improve IPI scoring and maximize sales.
The sell-through rate refers to the percentage of units sold compared to the total units available. A high sell-through rate indicates that products are being sold quickly and efficiently, and inventory can be replenished in time for availability. This contributes to a higher IPI score. However, a low sell-through rate can result in overstocked inventory, leading to higher storage costs, stock obsolescence, and product devaluation. This will negatively impact the IPI score, and Amazon may reduce search result visibility, continually reducing sales.
Inventory turnover is another crucial metric to track, and it refers to the number of times inventory is sold and replaced within a specific period. A high inventory turnover rate is a positive sign of efficient inventory management, maximizing sales, and timely restocking. This can lead to higher sell-through rates. On the other hand, low inventory turnover rates may indicate issues with the inventory management system, including slow-moving products, overstocking, or high pricing, which can result in stranded inventory, increased storage costs, and lower sales. This can lower the IPI score and negatively impact overall performance.
For most sellers, a good inventory turnover ratio is between 5 and 10, indicating that businesses restock their inventory every 1-2 months. It’s crucial to monitor the sell-through rate, make inventory adjustments, and create management strategies necessary to improve IPI scoring and maximize sales.
HOW TO CALCULATE SELL-THROUGH RATE (STR) TO IMPROVE UNITS SOLD
Total units sold refers to the number of units of a particular product sold on Amazon FBA in a specific period. Total units available are the units of the product currently in stock and available for sale on Amazon FBA. For instance, if you have sold 100 units of a product and have 200 units in inventory, your sell-through rate would be 50%. A high sell-through rate is a positive sign as it indicates that your product is selling well and in high demand.
HOW TO IMPROVE AMAZON FBA SELL-THROUGH RATE (STR)
- Optimize your product listing.
Make sure your product listing is well-written, includes high-quality images, and is optimized for search engine optimization (SEO). You can use keyword analysis from Pacvue to identify the most important keywords related to performance, identify trending keywords, and uncover new opportunities. This helps increase visibility and attract more potential buyers for your product.
To make a plan that is easily digestible for your team, try starting with your top 80/20 products. The 80/20 rule as it relates to eCommerce, suggests that 80 percent of your business comes from 20 percent of your products. Once you’ve identified your 80/20, split these products into rounds based on priority, and follow a content optimization schedule, like the one below, from top to bottom:
- Monitor and adjust your pricing strategy.
Ensure your pricing is competitive and matches market trends by performing a pricing analysis. This involves building a map of current price trends and deciding to price higher, lower, or match existing competitors. Competitive pricing is essential for a successful online business, as 80% of consumers consider it important. Regularly monitoring and adjusting pricing can help improve your sell-through rate (STR).
- Offer promotions and discounts.
Promotions and discounts can improve your inventory health and your sell-through rate (STR). To integrate them into your Amazon FBA selling strategy:
- Consider offering discounts on popular products to increase sales and reduce excess inventory.
- Use Amazon's promotion tools, such as Lightning Deals and Coupons, and plan promotions and coupon codes in advance.
- Target specific audiences using Amazon's targeting features and monitor performance to adjust the strategy.
- Offer promotions for a limited time and utilize email campaigns to reach your existing customer base.
- Improve product reviews.
Encourage customers to leave positive reviews for your product, as it can increase customer trust. There are various ways sellers can increase visibility and credibility with better reviews.
- Respond to customer inquiries promptly and professionally to build trust and improve customer satisfaction.
- Use Pacvue to monitor negative reviews and get alerts based on trigger words.
- Consider sending follow-up emails to customers asking for reviews or adding a call-to-action on your product's packaging.
- Monitor your product's reviews regularly and respond to negative feedback constructively.
- Ensure that your product images and descriptions accurately represent your product to prevent negative reviews due to misrepresentation.
- Monitor your inventory levels.
To avoid negatively impacting your STR, ensure you have enough stock to meet demand and prevent stockouts.
- Monitor your inventory levels by setting minimums and managing supply chain lead time.
- Maintain good supplier relationships and use an all-in-one-place inventory management system like Pacvue.
- Have a contingency plan for product sell-outs, such as stashing excess inventory or offering discounts to customers for other products to improve satisfaction.
- Avoid overage fees by keeping your on-hand inventory below your FBA capacity limit
- Monitor and respond to customer feedback.
Keep an eye on customer feedback to enhance their experience and boost loyalty, leading to more sales and better STR. Pacvue streamlines review management by analyzing comments and flagging themes for you to address. You can even set alerts based on keyword tags.
IN-STOCK AND STRANDED INVENTORY MANAGEMENT: How to Fix Stranded Inventory on Amazon FBA
Having enough inventory in stock is essential for quickly fulfilling customer orders, leading to increased satisfaction and positive reviews, which can boost the IPI score. Stranded inventory, which refers to slow-moving, obsolete, or damaged products that are unlikely to sell, can increase storage costs and lower profitability. It's important to regularly review inventory levels to avoid stockouts and identify any stranded inventory, which can then be disposed of or repurposed. This can lead to lower lead times for customer orders and a higher inventory turnover rate, improving the IPI score. Recently, Amazon introduced a new FBA inventory capacity management system to make it easier to manage inventory levels.
HOW TO CREATE SAFETY STOCK BY CALCULATING IN-STOCK INVENTORY
To calculate your In-stock inventory, you need to know the total number of units of that product that are currently in Amazon's fulfillment centers and available for sale. This information can be obtained from your Amazon seller account.
- "Total units received" means the number of product units stored in Amazon's fulfillment centers.
- "Total units sold" means the number of units of a product sold on Amazon within a specific timeframe.
To find your in-stock inventory, subtract the total units sold from the total units received.
Regularly monitoring your in-stock inventory can help you avoid running out of stock and ensure that you have enough products to meet customer demand.
HOW TO CALCULATE STRANDED INVENTORY
To calculate stranded inventory, you need to know the number of units of a particular product that are stored in Amazon's fulfillment centers but are not selling.
- Total units received is the number of units of a product that Amazon has stored in their fulfillment centers.
- Total units sold refers to the number of units of the same product sold on Amazon within a certain period.
- In-stock inventory represents the number of units of that product available for purchase and currently stored in Amazon's fulfillment centers.
To calculate stranded inventory, subtract the total units sold, and in-stock inventory from the total units received. If the result is a positive number, it indicates the number of units that are stranded and unable to be sold.
Regular monitoring and management of stranded inventory can reduce waste and improve the efficiency of your Amazon FBA business.
HOW TO FIX AMAZON FBA IN-STOCK AND STRANDED INVENTORY
Improving in-stock and stranded inventory is crucial for a successful Amazon FBA business. In-stock inventory ensures that customers can purchase products confidently, reducing the risk of stockouts and increasing sales. Stranded inventory represents missed sales opportunities, increased storage costs, and reduced profitability, making it essential to regularly monitor and manage. You can increase efficiency, reduce costs, and improve the customer experience by improving inventory management, leading to increased loyalty and repeat business.
- Monitor your sales data regularly to predict demand and adjust inventory levels. Pacvue can help you monitor your sales with a complete view of detailed metrics and visuals.
- Use Amazon's Inventory Management tools, like the Restock Inventory report and Automatic Replenishment, to monitor inventory levels and reduce stranded stock.
- Plan for peak seasons and adjust inventory levels accordingly. Consider running promotions and discounts during off-seasons and plan for potential returns.
- Consider using multi-channel fulfillment to reduce the risk of stockouts. Pacvue makes it easy to track both 1P and 3P inventory in one place.
- Monitor and manage inventory appropriately, including lead time and supplier performance.
- Optimize your product listings with accurate information and clear, high-quality images to attract customers and increase sales. Pacvue's content scorecard reporting can help you identify opportunities to improve your listings.
- Evaluate your pricing strategy regularly to ensure competitiveness and reduce stranded inventory.
PLANNING A GOOD AMAZON INVENTORY MANAGEMENT STRATEGY WITH YOUR TEAM
Accurately tracking FBA inventory can help reduce lost sales, ensure proper stock, identify slow-moving products, and drive better decision-making. Optimizing FBA strategies can result in increased sales, better customer experience, reduced waste and fees, and increased efficiency. Managing FBA inventory as a team requires clear communication, division of responsibilities, utilizing an all-in-one tool like Pacvue, defining processes, and monitoring performance regularly. By following these steps, you can ensure that you always have the right stock level to meet customer demand.