What is Amazon’s Inventory Performance Index & How Is It Calculated?October 11, 2019 in Blog
Update: October 11, 2019: Amazon announced that effective January 1, 2020 the IPI threshold is 400.
One of the biggest changes Amazon recently introduced to its fee structure is something called the Inventory Performance Index (IPI). What exactly is the IPI, how is it calculated, and what are the consequences if you have a poor IPI? In this article we’ll assess all of these things.
What is Inventory Performance Index?
The Inventory Performance Index (IPI) is a score Amazon assesses to determine how well sellers are managing their inventory. You can score between 0 and 1000.
As with many of Amazon’s decisions for sellers, the IPI seems to largely revolve around Amazon’s overflowing warehouses and trying to get sellers to better optimize their inventory.
How is the IPI Calculated?
The most frustrating thing about the IPI is that Amazon refuses to comment on how it is calculated. When asked how the IPI is calculated, Amazon responded “The calculation is proprietary and will not be published, just as we do not publish the Buy Box algorithm.” Amazon gives a very non-helpful 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.”
Currently though Amazon says there are four factors that affect your IPI:
- Reducing excess inventory to increase profitability
- Increasing sell-through to balance your inventory weeks of cover
- Ensuring inventory is buyable by fixing listings that are stranded
- Increasing sales by keeping popular items in stock.
Rumors have it that the last two bullet points are the least important factors and in my experience I can confirm this as well. In other words, the key factors in improving your IPI is to avoid having over-stockages at Amazon and improving your sell through rate. To the last point, Amazon calculates your sell through rate as follows:
Units sold/shipped over the past 90 days/average number of units available at fulfillment centers of the past 90 days.
So, for example, if you sold 100 units over the last 90 days and had an average of 200 units in stock during that time your average sell through rate would be 0.5. My other sneaking suspicion is that Amazon heavily punishes products with zero sales over 90 days.
It appears as though your IPI score is calculated weekly around Monday.
What are the punishments for a bad IPI Score?
The punishments for a poor IPI score (below 400) is inventory storage restrictions and higher storage fees ($10/CBM to be exact).
Amazon does not disclose how much your inventory storage limits will be until you fall below an IPI of 400 but in the one instance our account did fall below the threshold (previously 350) we had potential storage limits of roughly 5x our current storage. In this case, the storage limits would not have been very punitive; I’ve heard of cases when storage limits were very prohibitive.
Amazon calculates your IPI each quarter (March 31, June 30, September 30, and December 31) and also 6 weeks prior to the quarter’s end. If it’s below 400 either at the quarter’s end AND 6 weeks prior then you get penalized. So, for example, if on May 19 (6 weeks prior to June 30) you have a score of 401 but on June 30 you have a score of 0, you will not be penalized. Likewise, if you on May 19 you have a score of 0 but on June 30 you have a score of 401, you will not be penalized. You basically get one free ride. It’s a bit confusing but hopefully that makes sense.
IPI Only Applies to Amazon.com (for the Time Being)
As far as I know, the Inventory Performance Index only currently applies to Amazon.com sales and not any other marketplaces. This isn’t surprising as Amazon is trying to aggressively grow into other market places and these foreign warehouses aren’t facing the same capacity problems that U.S. warehouses are.
What Should You Do?
As the algorithm used to calculate IPI is a mystery, we can only hypothesize some firm action steps you can take to avoid being penalized by a poor IPI:
- Look at your IPI score now
- Make sure you have an IPI above 400 either at the quarter’s end or 6 weeks prior
- Better utilize 3PLs for storage and increase the frequency of sending inbound shipments into Amazon
- Fix stranded inventory immediately
- Remove excess inventory
- Create shipments in advance if you think you will fall below 400 for both reporting periods.
To this last point, one current workaround to the IPI is to create shipments in advance. When you have restrictions placed on your account it will affect your ability to create inbound shipments. However, as long as those shipments are already created, you can send in that inventory.
The Inventory Performance Index is still a relative mystery for Amazon Sellers. Over the next several weeks, especially as June 30 inches closer (the first rollout of penalties), we should have a clearer picture of the most important factors in determining your IPI as well as the potential penalties for having a poor IPI.
Dave Bryant has been importing from China for over 10 years and has started numerous product brands. He sold his multi-million dollar ecommerce business in 2016 and create another 7-figure business within 18 months. He’s also a former Amazon warehouse employee of one week.