Amazon_fba_inventory_management

Two New Amazon FBA Inventory Management Opportunities Just in Time for Q4

Last month, we covered Last-Minute Strategies to Beat Amazon Long-Term Storage Fees, which kick in every February 15 and August 15. Hopefully, you were able to put some of those tips to work for you and not only avoid LTSFs but also produce an incremental sales spike and get a handle on your inventory levels and the tools available to help you manage your stock levels year round. Unfortunately, storage fees need to be back on your radar. That’s why we’re presenting you with two Amazon FBA inventory management opportunities just in time for Q4.

October 1–December 31, 2017: Q4 Increased Storage Fees

If you’re an FBA seller, you likely just received an email from Amazon about a different set of storage fees, namely the rate increases for storage during the Q4 period. First and foremost, I want to reiterate the rate changes as they are substantial (understandably so given that space is at a premium and speed and accuracy of fulfillment is of the essence during the holiday period).

As of October 1 (and through December 31), Amazon FBA monthly storage fees increase as follows:

  • Fees for standard-size items increase from $0.64 per cubic foot to $2.35 per cubic foot.
  • Fees for oversize items increase from $0.43 per cubic foot to $1.15 per cubic foot.

These fee hikes, coupled with the cruciality of Q4 sales (in terms not only of direct sales but related product reviews and seller ratings and how all of these things affect your product rankings), mean that inventory management is about to be more important than ever. This is true for FBA sellers and for Amazon itself, which is ultimately responsible for making sure that holiday shoppers have what they need (and more in the form of add-ons and companion products) in a timely fashion and in the form of a great experience.

“Amazon wants to be a fulfillment center and not a warehouse.”

Seller Labs Chief Marketing Officer Jeff Cohen said exactly that when discussing Q4 storage fees in a recent Facebook Live Q&A (minute 46). And it’s so very true. As an FBA seller, once you really wrap your head around this, you’ll understand storage and storage fees in a whole new light. That said, it’s in your best interest and Amazon’s to get your excess inventory out of Amazon’s warehouses fulfillment centers.

Opportunity #1: Take Advantage of Free Inventory Removals (While You Can)

For a limited (and unspecified) amount of time, Amazon is offering free inventory removals. In theory, if you did your best to minimize inventory in time for the August 15 Long-Term Storage Fee clear-out, you should be in pretty good shape already. Regardless of whether you need to remove a small amount of items or several pallets worth, free is free and now is the time to do it.

So if what you have sitting in Amazon’s warehouses is too much for Q4 sales and it will cost you more to keep it there with the October 1 fee increases, take advantage of free removals now. In terms of options, you can have the product returned to you so you can sell it elsewhere or just hold it and ship it back to Amazon later, you can have it destroyed by Amazon, or you can have it liquidated by Amazon.

Notes and caveats about the current free removals promotion:

  • Free inventory removals mean that Amazon is waiving some fees; it does not mean that Amazon covers the cost of shipping items back to you.
  • If you remove inventory under this promotion, you will not be able to send in more units of the removed ASINs until your inventory levels fall below Amazon’s projection of your sales for the next two months or until January 1, 2018.
  • Removals during peak and promotional periods may take longer to process than the standard 10 to 14 days.
  • The duration of the promotion is limited and may be discontinued by Amazon at any time. Read the promo terms in full.

Inventory Management Is Everything, Especially Around Q4

Removing inventory, free or otherwise, is a legitimate strategy but not a particularly desirable one. The best that one can do is to balance the known data of past and current performance along with educated predictions about the future. The ideal result would be always having enough product to cover all orders but not so much as to incur fees while also replenishing on the cusp of selling through but no sooner and no later. Trying to get as close to this ideal amount as possible matters all year but especially during Q4 when products are moving fast, shipping times can be delayed, and real estate for storing product is at a premium.

Opportunity #2: Get to Know the New Inventory Performance Index (IPI)

Amazon seems to understand the pursuit of the inventory ideal better than any other retailer and to extend that understanding to sellers. And because Amazon is in the business of moving your product rather than storing it, they’ve added the new Inventory Performance Index to the Inventory Planning Dashboard in order to help you manage your inventory and understand how to achieve balance. The IPI is currently in beta and it’s a real step forward in how Amazon normally displays stats and reporting information. You’ll notice that the IPI is highly graphical and that it comes with suggestions and integrated action items (For those of you into smart software that learns over time, this is much like Ignite, our Sponsored Products campaign-management solution).

First off, yes, the Inventory Performance Index can help you manage that excess inventory. For our purposes here (avoiding/minimizing Q4 storage fees), the IPI shows your excess stock and the estimated costs of holding this inventory. It also shows you last month’s FBA storage fees and it recommends ways in which to lower those fees going forward, so hop to it proper fast for Q4 clear-out and balancing . . . but the Amazon Inventory Performance Index is bigger than this in terms of capabilities and implications.

Amazon describes the IPI score as “a new metric that aggregates data from your sales, inventory, and costs to measure the overall efficiency of your inventory management. The higher your score, the better your performance.” The score ranges from 0-1,000 and Amazon says “your IPI score is based on how well you drive sales by stocking popular products and efficiently managing on-hand inventory. An IPI above 400 indicates that your business is excelling. An IPI below 300 indicates that immediate action should be taken to improve the score.” Does this remind you of anything? Well, in addition to the scoring discussed above, the interface looks and works a lot like many credit-rating reports currently available, so if you’re familiar with those (and you should be given the recent Equifax breach), you’ll have no trouble navigating the IPI and utilizing it for both information and to make changes and fixes that will help you sell more, store less, and up your standing with Amazon.

How It Works

Currently, there are three categories affecting one’s Inventory Performance Index score. Each has sub-factors and each provides recommendations for changes you can make in an effort to perform better. Not only can you see your score, you can see how you compare to other sellers. The categories affecting your IPI include:

  1. Excess Inventory Percentage: Here you can see “the number of units for which the cost of holding your inventory would likely be more than the cost of taking action (such as reducing prices to increase sell-through or removing excess units). This value is based on product demand and your costs (including fees, unit costs, and cost of capital inputs).” Not only can you see excess quantities and the fees you will incur should you not reduce that excess, you can manage your excess with recommendations about which SKUs need adjustments or removal.
  2. In-Stock Rate: This is “the percent of time your ASINs have been in stock during the last 30 days, weighted by the number of units sold for each SKU in the last 60 days.” Here you get information about out-of-stock SKUs, estimated lost sales, and the count of SKUs for which the days of supply is less than lead time (indicating a need to expedite).
  3. Stranded Inventory Percentage: Amazon considers stranded inventory to be products that are “not available for purchase due to a listing problem.” Basically, it can’t be listed or sold but it still incurs storage costs. In addition to showing you what’s in this category, there’s a link to help you fix those listings so that you can get them live and selling or get them out of Amazon’s space.

What the IPI Implies and Why You Should Care (and Adjust Based on Its Recommendations)

As I alluded to earlier, IPI is bigger than just a tool for managing excess inventory and calculating FBA fees (those tools already exist in the Seller Central maze). What’s more interesting and useful about the Inventory Performance Index is that it scores sellers based on how well they keep products in stock, maintain healthy inventory levels, and fix listing problems. It’s a single metric to gauge performance, just one of the many weighted metrics that Amazon uses in order to assess FBA sellers’ businesses and to rate and reward seller performance.

This brings me back around to the credit-rating analogy. Think of it this way: a credit score affects one’s ability to make purchases, obtain loans, receive preferred rates, etc., and there are things that one ought to increase that score (make payments on time, pay at least the minimum amount due, open enough lines of credit but not too many, etc). When a consumer does these things well, he or she is rewarded in the form of higher credit limits, lower interest rates, bonus programs, and the like. The more data that accrues, the more accurate the credit score becomes and the more it counts because a longer history indicates a proven track record and a predictable performance going forward. Doors are opened and closed based upon these numbers.

Final Thoughts on IPI

It seems to me that the Amazon IPI score is a similar way of measuring seller performance, offering sellers opportunities and assistance to perform better (for their own sakes and for Amazon’s), and determining preference in the form of rankings and rewards. We know that Amazon takes sales and inventory into consideration when ranking in A9 search results. We know that Amazon rewards sellers who use FBA, who sell well, who are vigilant about managing their stock levels, and who get quality products to shoppers while delivering excellent customer service. When a seller plays the Amazon game right, that seller sells more, and Amazon ranks that seller’s products higher, which in turn drives more sales . . . and so on. That is the Amazon virtuous cycle and it’s a lot like credit ratings and how people with high credit scores are selected for better offers such as lower rates and loyalty bonuses, which in turn helps them maintain good credit and enjoy the benefits of such.

That said, consider the Inventory Performance Index to be the equivalent of your Amazon Seller credit score (or one facet of such). Check it frequently and manage it according to the rules and recommendations provided. Tend and build your score and you’ll enjoy platinum-level perks; let your score plummet and you’ll find yourself with limited options and be passed over in favor of competitors who are building up their own seller credit ratings with Amazon.

Lena R. Liberman

Lena is a Content Editor at Seller Labs. She has nearly 20 years of editorial experience, heavily concentrated in the fields of technology, publishing, and education. When not gathering information and writing about it, Lena can be found restoring vintage furniture or hiking with her dogs.