Starting on July 1st, Amazon began using its new measurement system to limit storage space. Referred to as IPI, the Inventory Performance Index launched last year. Based on the results of the system, Amazon will begin restricting the amount of storage space allotted for sellers that keep inventory in their warehouses for too long.
While the ultimate goal is to encourage sellers to move their product and manage their inventories, some sellers could see negative effects. Without somewhere to store their merchandise, these sellers will be overwhelmed. However, Amazon is confident that the system will be beneficial to most of its sellers.
Reasons for Restricted Storage Space
Amazon has only continued to expand since it opened its doors to third-party sellers. To accommodate the increasing number of products, the company has spent billions of dollars expanding its warehouse space. According to researchers at Jefferies, this expansion led to a total of 100 million square feet of storage space for the online marketplace. That’s an increase of 35% each year since 2007.
Unfortunately, their efforts simply cannot keep up with the influx of shipments they are receiving. Fulfillment costs are Amazon’s most costly operational expense. The company shelled out $25.2 billion in 2017 alone. These costs are not decreasing, either. Amazon spent 43% on fulfillment in 2017 than any other previous year.
That is why Amazon is implementing this new regulation system. However, there are concerns that certain sellers will be affected more than others. For example, those who exclusively store seasonal items could have extremely low scores during off-seasons. Their scores could lead to decreased stock during their prime season of demand.
Amazon has already addressed this issue, though. One seasonal business owner says that Amazon told him the new system is “not a long-term solution and…they’ll eventually have something for seasonal businesses.”
Use of the Inventory Performance Index
If you are not familiar with IPI, it is an Inventory Performance Index, which means that it is a computer system that evaluates the efficiency of merchant inventory, allowing products that are not moving quickly to be removed from storage.
The system implantation has been met with mostly positive feedback. Sellers like Abraham Chomali believe that the IPI will help “sellers…become more professional.”
Other, pre-existing systems will work cohesively with the IPI. For example, Amazon already has a program called FBA Onsite in place. It lets users capitalize on Amazon’s logistic technologies,
even in outside warehouses. They also have Seller Fulfilled Prime that allows approved sellers to ship items from their warehouses while maintaining Prime status.
The programs, combined with IPI, should help free up a lot of warehouse space. Having additional space will lead to a more efficient fulfillment process for all parties involved. At least, that is the opinion of Amazon and most third-party sellers.
Operational Issues and Concerns
This particular system scores sellers on a scale from 0–1000. Those with scores below 350 will be put on storage restriction, which means they will not be able to ship any new items to Amazon warehouses. They will also have to pay an overage fee if the items they are storing exceed their storage limit. That fee will be charged monthly and could result in unplanned operation costs for many businesses.
The good news is that the scores renew each quarter. Therefore, sellers will have opportunities to improve their sell rates through various methods.
As expected, not everyone is excited about this new system. Before it was implemented, sellers could rent an unlimited amount of space, no matter their sell rate. Now, they will have to score above 350 to be able to continue selling with Amazon.
Potential benefits for all
While there are some who doubt the need for such a system, most of Amazon’s sellers seem to appreciate the effort. Chad Rubin is the CEO of Skubana, a sales software company. He says that “Amazon is in the business of selling, not storing…The IPI score essentially forces sellers to move inventory that’s just sitting there…”
This is the main benefit that comes from the new system. Since sellers will be forced to move products, everyone will see increased profits. From Amazon’s ability to move goods to higher demand for shippers, the IPI system will usher in a new era of product distribution.
Hopefully, this means larger and more frequent jobs for shippers across the country. Since sellers will be more motivated to move stock, restocking will have to occur more often. This turnover of inventory should lead to a greater demand for shippers in general and especially in places with local Amazon warehouses.
Although it may seem like a set back at first, sellers will also benefit in the long run. Those who do move product will see a greater availability in the warehouse house space they have been fighting for. Once all the kinks are worked out, even seasonal sellers will experience some positive outcomes from the switch.
The delays these sellers usually experience around the holidays will decrease due to the additional space in the warehouses. By encouraging Amazon sellers to be professional and on top of things, stress-inducing peak seasons can flow a little more smoothly.
Everyone will have to be patient with Amazon. As with any innovation, the IPI will take time to perfect.
If you are a seller that stores items at an Amazon warehouse, you will want to start preparing now for the upcoming changes. Make sure you review your activities over the past year to identify and examine the cause of slow-selling periods. If these periods lasted for more than a few weeks, you could end up scoring low for a quarter.