News & Insights
Preparing for Amazon’s New FBA Capacity System
Recently, Amazon announced a new Fulfillment by Amazon (FBA) capacity management system that will go into effect on March 1, 2023. According to the online marketplace, this revamped approach to inventory is designed to give sellers greater capacity limits and provide more predictability. It also gives selling partners new opportunities to control their capacity limits while offering more visibility into Amazon’s capacity management process. Let’s take a look at what’s staying the same, what’s changing, and what it means for FBA brands on the platform.
There will be consistency
Before we dive into the updates to the process, it’s helpful to note that many parts of the FBA system are not changing and should remain familiar to sellers. Fortunately, this means there will be some consistency for current FBA sellers once the new system rolls out.
Seller account types
Individual selling accounts will continue to be limited to 15 cubic feet of inventory space. The upcoming changes will not impact this limit, and these users will not be eligible for increases based on their sales.
Professional selling accounts will still be considered new if they have been active in FBA for less than 39 weeks. These accounts are not subject to FBA capacity limits while the sellers develop their FBA sales history. This allows Amazon to determine the appropriate capacity for the business as it becomes more established.
Professional selling accounts active beyond the initial 39-week window will continue to receive a capacity limit based on their Inventory Performance Index (IPI) score. As is the current practice, sellers with consistently higher IPI scores will receive higher capacity limits that are adjusted for sales volume and available capacity.
Inventory Performance Index (IPI) score
Since 2018 Amazon has relied on the IPI to set capacity limits for inventory and help Amazon sellers gauge their inventory health. The index uses a proprietary calculation to provide FBA sellers with a composite score between 1 and 1000.
The factors influencing this score include a seller’s ability to remedy product listing problems such as out-of-stock and unavailable items. It also considers current inventory in an Amazon facility, with a negative impact coming from too little or too much stock.
Under the newly-announced system, IPI will continue to be the driving force behind inventory capacity limits and maintain its place as the primary metric used by Amazon and FBA sellers to measure how efficiently inventory is managed.
Storage and Aged Inventory Fees
While there are some fee changes to be aware of, the storage portion of the Amazon FBA fulfillment fee will still be determined by the cubic feet the inventory takes up inside Amazon’s facility. In addition, the monthly storage fee will continue to consider an item’s relative size, the time of year, packing requirements, how many products are stored, and product classification. Each plays a role in the final price, and Amazon fee changes in the future would not be surprising.
Apart from the primary storage fees that FBA sellers face, Amazon will also still penalize sellers for products that remain in their fulfillment centers for too long. In May of 2022, Amazon adjusted its policy regarding older inventory inside its warehouses. Previously known as a long-term storage fee, the new aged inventory surcharge adds a cost of $1.50 per cubic foot for each unit of inventory stored by Amazon for between 271 and 365 days. Once the inventory age of an item passes 365 days of storage, the surcharge increases to the greater of $6.90 per cubic foot or 15 cents per unit.
But changes are coming
Moving on to what is changing, the details about Amazon’s new FBA capacity management system address four specific areas where current FBA sellers will notice a difference. The adjustments are intended to streamline the system with users in mind. They focus primarily on simplifying the reporting models, extending the timeline that brands can use for inventory planning and giving sellers new opportunities to grow their capacity limits.
A single, month-long FBA capacity limit
To simplify inventory planning for FBA sellers, Amazon will replace its weekly update with a monthly FBA capacity limit. For each seller, this limit will be announced the third full week of each month via an email and Seller Central’s Capacity Monitor. For most sellers, this also means they will have access to higher capacity volumes than before.
In addition to the more forward-looking capacity limits, Amazon is opting to eliminate the previously-used metrics that were conveyed to sellers as storage limits and restock limits. Because many businesses complained of the confusion that resulted from navigating two different types of limits, they will be replaced by an FBA Capacity Limit, which will be similar to the currently-used restock limit in accounting for on-hand and in-transit inventory.
Estimated capacity limits to help sellers plan three months in advance
Amazon also announced that it would begin providing estimated capacity limits for an additional two months beyond the upcoming monthly allowance. The company plans to forecast its space and labor to provide these estimates but notes that these estimates will also vary up or down based on how efficiently sellers use their capacity, measured by their IPI score. Similar to the current system, an IPI that is trending higher will likely result in a similar trajectory for a brand’s capacity limits.
An opportunity to request a higher limit
With its new Capacity Manager, the global marketplace is also touting the broader implementation of a feature it has piloted with select sellers recently. Beginning in March, sellers can request additional capacity through a bid-like process. FBA brands interested in growing their inventory can apply for more space at a seller-proposed price. The requests are granted objectively, starting with the highest reservation fee per cubic foot until all capacity available under this program has been allocated.
While this can cut into profit margins, sellers who have their bid accepted can offset the reservation fees by earning performance credits from the sales from the extra capacity. These performance credits of $0.15 for each dollar of inventory sold can offset up to 100 percent of the reservation fee. This way, sellers won’t have to pay for the additional capacity as long as the products sell.
FBA capacity limits in volume to better reflect capacity usage
The final announced change also attempts to align the metrics used when communicating with FBA sellers with their expectations. For example, capacity limits shown on a seller’s inventory usage will now be set in cubic feet rather than the number of units. However, since many sellers prefer to plan in units, Amazon will continue to provide the estimated units that a particular cubic volume will accommodate. Of course, overage fees will continue to apply if a seller’s on-hand inventory in Amazon’s fulfillment centers (not including open shipments) exceeds their capacity limit.
The impact on sellers
There are certainly some advantages for sellers in Amazon’s decision to update its FBA systems. It appears sellers will enjoy greater capacity for their inventory and better insight into their long-term storage availability within Amazon’s fulfillment centers. Rather than calculating their restocking needs weekly, brands can focus on shipping a month-long supply. Sellers may also enjoy a clearer understanding of how much space their inventory is taking up thanks to the dual reporting of capacity in cubic feet and number of units.
However, there are reasons to be wary of what is coming. Taking advantage of the new bidding option for expanding warehouse space will require a strategic approach and well-informed sellers to avoid unnecessary reservation and overage fees. Sellers of more expensive products with higher margins may have an advantage when competing for this additional space. Unit size, price and performance credits will all be critical when navigating the new bidding option.
Sellers should also remember that the new longer-range capacity forecasts fluctuate dramatically depending on seasonal trends as well as space or labor swings at Amazon. Using these new projections effectively will require sellers to thoroughly understand their products’ demand beyond the data that Amazon provides.
Amify can lead your FBA strategy
It’s clear that most brands need FBA to reach their full potential on Amazon. Not only can it level the playing field against a brand’s biggest competitors, but it can also improve customer service, minimize costs and give your brand more time to focus on its true strengths.
The team at Amify can help your brand adjust to the shifting demands of success on Amazon. More than 60 experts in warehousing, logistics, optimization, content and more are waiting to help you focus your efforts where they matter most. Contact us today for a free consultation.