Understanding Amazon’s Inventory Performance Index (IPI)

Understanding Amazon's Inventory Performance Index (IPI)

One of the ways Amazon makes sure their customers always find their preferred items on the marketplace is through their Fulfilled by Amazon (FBA) warehouses. However, overcrowding is a big issue since many sellers send stock to Amazon that they can’t quickly sell. This slows down the restocking of in-demand items.

Because of that, Amazon implements a scoring system to evaluate sellers’ inventory performances — the IPI. This is to determine which sellers can send stocks and which should be prohibited or limited from sending. We’ll discuss what IPI means on Amazon and its implications to your business.

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What Is Amazon IPA?

Amazon IPI or Inventory Performance Index is a metric that gauges a seller’s inventory performance over time. It’s a score that shows how efficient and productive sellers are in managing FBA inventory. Some of its goals are as follows:

  • Balancing inventory levels and sales
  • Fixing listing problems such as having unavailable in-demand items
  • Keeping popular products in stock

IPI is a score ranging from 0 to 1,000. It combines the sales, inventory levels, and expenses of the previous or last three months into a unique rolling metric that’s updated every week. Overall, it represents your inventory health. This is completely different from the IPI meaning for shipping in other industries.

Overall, the IPI measures:

  • Inventory management for a period of time
  • The overall balance of inventory levels and sales
  • The seller’s ability to fix listing problems and prevent having inventory that’s unavailable for purchase
  • The seller’s ability to keep popular items in stock

How to Check Your Amazon IPI

Amazon gives out two IPI checks every quarter. Sellers who fail in at least one cannot send any more items to FBA warehouses in the next quarter. If you want to know your IPI score, you can check it on the IPI dashboard.

The Inventory Performance dashboard can help identify opportunities that will help improve sales, reduce costs, and track key performance metrics. To access the dashboard, follow these steps:

  1. Log in to your Seller Central account.
  2. Click on the “Inventory” option.
  3. Choose “Inventory Planning.”
  4. Click the “Performance” option on the dashboard for more specific details.

How to Calculate an IPI Score

The IPI score ranging from 0-1,000 is represented by a bar. However, the exact calculation for IPI scores remains confidential. Still, it’s known that the IPI score is mainly calculated based on four factors:

Sell-Through Rate

1 This represents the number of units sold compared to the initial inventory. It shows how well you’re managing inventory against sales. This metric is calculated by counting the total items and units shipped in the last 90 days and dividing it by the average number of items in stock at FBA during that same period. Overall, it measures how well and quickly you’re selling and replenishing your items.

Sell-through Rate = total units shipped in the last 90 day save. units in stock in FBA over the previous 90 days

Stranded Inventory Percentage

2 Stranded inventories are unsold items or stocks in FBA. This percentage shows how much of this type of inventory you have compared to your total inventory across all ASINs. When inventory isn’t available for purchase because of listing problems, it leads to losing sales while still paying storage costs. This can happen when your listing doesn’t meet Amazon guidelines or if there are issues with a listing tool.

More reasons for increased stranded inventory include:

  • Listing errors like deleted listings
  • ASIN restrictions
  • Brand qualification reasons
  • Expired ASINs
  • Bulk upload template errors

Stranded Inventory (%) = total no. of FBA unavailable for purchase units total no. of FBA units (100)

FBA In-Stock Rate

3 This metric indicates how well you keep your popular inventory in stock and shows how much inventory you have of a current listing. In-stock rate percentage is the percentage of the time, during the previous 30 days, your replenishable FBA ASINs have been in stock and weighted by the total number of units sold for the last 60 days.

In-stock (per SKU) = (% of days in stock in the last 30 days)*(60-day sales velocity) (60-day sales velocity)

Excess Inventory Percentage

4 Excess inventory has more than 90 days of supply based on the forecasted demand and is carried over every time you’re charged for storage. This significantly affects profitability. The excess inventory percentage measures how well you’re managing your on-hand inventory in FBA. It’s a percentage showing how much of your total inventory is considered excess by Amazon.

Excess inventory (%) = no. of excess FBA inventory items total units in FBA inventory(100)

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What’s a Good IPI Score to Maintain?

The average Amazon IPI ranges from 400 to 800, with an ideal score of at least 550. A 400 to 549 score is still good but requires attention since it may fall below the threshold. Generally, incurring a score below 350 will limit your IPI storage and cause overage fees. This means that Amazon will restrict your ability to send more inventory and can charge you for any excess inventory in Amazon warehouses.

This isn’t good for your business because you have to pay more and have fewer selling opportunities. This is especially bad for sellers that use running cash flow or those that highly depend on what they earned from previous sales to buy stocks to resell.

If you’re a seller who needs support with capital, you can always seek help from PIRS Capital for additional funds for your business.

Amazon sets the IPI target score after considering different factors like seasonality, marketing events, and available space in Amazon FBA warehouses. Because of this, thresholds can change from time to time. The 350 score was way back in 2018, and the most recent threshold requirement is 450.

When Are IPI Scores Updated?

The four factors or sub-categories mentioned before are updated daily, while the final or whole IPI score is updated weekly, typically every Monday. Amazon sends a notification to sellers with scores below 350 after their first calculation. This gives you a grace period of six weeks that you can use to improve and bring your score back up before the end of the quarter.

How to Improve Your Amazon IPI Score

Managing your IPI score and keeping it healthy is one way to balance your performance. If you’re worried about how to raise your score, here’s a list of tips on how you can do so:

Tip 1: Avoid Overstocks

This directly means avoiding having excess inventory. Often, overstocking can be due to poor inventory management, leading to too much or the wrong type of stock that sits in warehouses. You can estimate the cost of your overstock with this equation:

Overstock waste expense = Excess Inventory x Cost of On-hand Inventory

Avoiding overstocks means meeting only the demand for stocks and not exceeding. Additionally, you can prevent overstocking by:

  • Strategic pricing – Develop a well-researched pricing strategy. Since overstocks result in higher prices, you can price them fairly instead and still charge enough to earn profit.
  • Estimating demand – Create a system that will help you forecast demand for items. This will help you plan for your business’ future more accurately, especially about how many items you’ll need to stock up at a given time.
  • Automate reorders – Utilize a good inventory management system that will automatically determine and quickly notify you when to place reorders of your stocks.

Tip 2: Improve Sell-Through Rate

Obviously, Amazon wants sellers to have high sell-through rates because it means more stocks are leaving their warehouses faster. The ideal rate depends on several factors, like the industry you’re in and the types of products you sell. However, once you notice that your rate is lower than your usual rate, it’s best to consider how you can move more goods off the warehouse and stock only what’s needed.

Specifically, you can try the following:

  • Reduce reorders for less popular products.
  • Discount your items to attract more customers.
  • Bundle your products to increase the number of sold products for every transaction.
  • Be on top of your check-in inventory status and remove some stocks from FBA warehouses if they’re not needed.

Tip 3: Improve In-Stock Rate

Even if overstocking is a disadvantage, it’s recommended to stock up popular items to avoid constantly missing sale opportunities. If you run out of stocks on your popular products, you’ll lose sales and a chance to increase your IPI score. You can optimize your in-stock rate for your popular items by:

  • Ranking or categorizing your products based on their popularity.
  • Utilizing key sales reports from management systems to determine which products sell best at different times.
  • Performing a regular inventory analysis and keeping the highest and most popular products in stock.

Tip 4: Fix Stranded Inventory

Amazon gives penalties for stranded inventory, and it will cost you money to store these items. The best solution is to fix your stranded inventory ASAP. You can do this by accessing the “Fix Stranded Inventory” page in your seller’s account’s “Manage Inventory” option and removing or editing your list of items. You can also utilize an inventory management system to have a complete overview of all of your stocks which can help you monitor and avoid stranded inventory.

Get Funding for Your Amazon Business

Amazon IPI is an essential metric system that you should monitor and manage healthily to avoid incurring losses in your business. Moreover, a healthy and good IPI score means that your business is doing good and you’re earning well.

In any case that you need additional capital to increase your business capacity or help you overcome some financial issues, don’t hesitate to contact PIRS Capital for quick offers of additional funding.

Written by: Mitchell L.

I work with companies that sell products on platforms such as Amazon, Shopify, Walmart, Ebay, Etsy, etc. I understand that every business is unique and thats why I form genuine relationships with owners so I can help them reach their goals and find success through our working capital solutions.

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