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Amazon has poured billions of dollars into warehouse expansion during the past decade to make room for the massive influx of inventory the company is storing for third-party sellers. Now, it's putting in place a program to force those sellers to use the space more efficiently, penalizing those who don't.
It's part of Amazon's effort to ease its growing warehouse congestion problem. The company can't open fulfillment centers quickly enough to meet the demand that comes with having millions of outside sellers on Amazon. Third-party merchants now account for more than half of products sold on the site.
In an attempt to reduce the clutter, Amazon is instituting a system called the Inventory Performance Index, which it describes as a “first step in setting a bar” on inventory performance. The IPI measures how well each merchant manages its inventory, removes products that aren't selling and fixes its listings as needed.
Starting Sunday, inventory that stays in Amazon's warehouses for too long without being shipped to customers or taken back will hurt a seller's IPI score. Those with a score below 350 won't be able to send more products into Amazon’s warehouses and will incur a monthly “overage fee” on the inventory that exceeds their storage limits. Sellers above 350 won't have any restrictions on storage space. Scores range from 0 to 1,000.
Until now, sellers could rent unlimited storage regardless of how effectively they managed their inventory. In the initial stages of the new program, only a small number of sellers will be affected by the storage limit.
“Amazon is in the business of selling — not storing — your stuff,” said Chad Rubin, CEO of Skubana, a developer of sales software. “The IPI score essentially forces sellers to move inventory that’s just sitting there, and Amazon gets to make more money off of them.”
Amazon introduced the index late last year and said it would be implemented after June 30. Each seller's score will get reassessed every quarter.
The new system is part of Amazon's overarching effort to add more software and automation into the rapidly growing marketplace. More importantly, it's about reining in costs while continuing to add sellers and build out facilities. In 2017, fulfillment costs, which make up Amazon's biggest operating expense, surged 43 percent to $25.2 billion, while total sales rose 31 percent.
"As we continue to grow and support more sellers that desire to make their products Prime-eligible, we introduced changes that will help sellers manage their inventory and help us more efficiently receive inventory and deliver products to customers," Amazon said in an emailed statement.
Researchers at Jefferies estimated last year that Amazon’s warehouse footprint, which now reaches well over 100 million square feet, increased an average of 35 percent a year since 2007, and said that e-commerce companies need three times as much warehouse space as brick-and-mortar retailers. Amazon Chief Financial Officer Brian Olsavsky recently said the company added about 30 percent to its warehouse square footage in each of the past two years.
That still may not be enough. CBRE Group wrote in a report this year that demand for industrial real estate — mostly e-commerce warehouse and distribution centers — has outstripped supply for 32 consecutive quarters.
Amazon has launched several programs in recent years to deal with the overcrowding. In January, it started FBA Onsite, which allows Amazon to use its logistics technology for inventory in warehouses owned by outside sellers. Seller Fulfilled Prime lets certain sellers ship their products from their own warehouses and still be eligible for Prime benefits, which had only been available for sellers using Amazon's fulfillment centers.
Amazon also has tools that help sellers know when to restock inventory, manage excess inventory, and tells them how long products have been in fulfillment centers and which ones are subject to long-term storage fees. The company has made some adjustments to storage fees, charging more for items that are slow to move and clog up warehouses.
The IPI is still a work in progress and has some issues to work through. Seasonal sellers, for example, could see their score drop significantly during the slow parts of the year, making it difficult for them to stock up and prepare for peak season.
Ephraim Ausch, owner of Benevelo Gifts, sells most of his gift baskets during the holiday season. He said he “freaked out” when he first learned about the IPI score because he knew it would put immediate restrictions on his storage needs, even though he had strong metrics over the holidays.
In advance of the new program going into effect, Ausch said he was able to negotiate a custom setting that takes into account the nature of his business.
“Amazon said it’s not a long-term solution and that eventually they’ll have something for seasonal businesses,” Ausch said.
Abraham Chomali, who's been selling on Amazon for nine years, said the IPI is part of a process to improve the quality of marketplace sellers. Amazon initially charged artificially low storage fees as a way to draw more sellers to its marketplace, he said, and that allowed a lot of merchants to be sloppy in managing their inventory.
Amazon’s warehouses have gotten so full that Chomali and other sellers have seen shipment delays, particularly during the holiday season.
“It’s come to a point where sellers will face active consequences for slowing down their system,” Chomali said. “Amazon is moving sellers to become more professional.”