Let’s face it.
Most everyone knows about Amazon. They’re the leading e-retailer in the United States with over $386 billion in sales in 2020 alone. Not to mention roughly 150 million Amazon Prime Members, 300 million active customer accounts worldwide, and an average 21% revenue growth year-over-year.
With these numbers, it’s easy to see they are a force to be reckoned with.
If you sell products online, you know Amazon runs a program called FBA (Fulfillment by Amazon). This third-party logistics provider (3PL) service allows other businesses to utilize Amazon’s massive infrastructure to provide ecommerce fulfillment for their own customers. Amazon is the largest third-party logistics providers (3PL) company in the world.
Basically, with FBA you ship your inventory to Amazon, advertise your products for sale on their platform, and the online powerhouse takes care of the rest: pick, pack, ship, and even customer service.
Seems like a great way for small to medium sized organizations to do business, right?
Well, not so fast. Once you stop and take a closer look, FBA may not be the all-in-one logistics answer you thought it was and here’s why.
High Costs That Continue to Rise
When an e-tailer does as much business as Amazon, there has to be an enormous amount of people and infrastructure involved to make it happen. FBA is no exception.
At last count, there were over 110 active US fulfillment centers and 185 centers globally. These facilities account for more than 124 million square feet of commercial space in the US alone. If you think a network this size might be expensive to build and maintain, you’re right. Amazon offsets their maintenance costs by regularly increasing pricing for their fulfillment and inventory storage fees. They have done this a few times over in the last decade.
Because of this tremendous overhead, and the massive number of packages shipped each year, Amazon is actively looking for new ways to reduce operating and shipping costs. And with good reason—Amazon’s shipping costs in 2020 were $61 billion, a 200% increase from the previous year. It’s public knowledge that they will take massive loses on shipping to keep customers happy.
To remedy this problem, the web giant has the long term view that investing into their own private freight, air transport, local delivery options, and even drone programs will be the most cost effective strategy to counterbalance rising transportation expenses. However effective this strategy is long term, these are obviously high-priced and capital-intensive expansions that need to be funded somehow.
You are likely paying for these shipping losses and future investments through Amazon’s FBA rate increases for sellers.
Year after year the cost of Fulfillment by Amazon has continued to rise. For example, FBA storage in 2021 went up an average of 4%, forcing businesses to either overstock (risking added storage expense for idle inventory) or understock (saving money but possibly losing sales during the holiday rush). Fulfillment fees in 2021 have increased as much as 20% in the last 18 months.
That’s a tough spot to be in.
Counter this with independent logistics companies who don’t charge extra fees for busy periods and maintain more consistent overall storage pricing. Many logistics companies have in-house fulfillment infrastructures in place that are ready to grow with your business or are willing to make the necessary operational investments to support your shipping activities. As compared to Amazon where you are just part of the machine, your 3PL will likely have a vested interest in the success of your business. They view you as a partner, not just another contract.
Lack of Personalization Options
With today’s savvy consumers, there are three key elements involved in the successful sale of physical goods. Think of these as the trifecta of building a strong brand.
A great product
The ability to ship quickly and reliably
A means to differentiate yourself and stand out from the crowd
While finding and developing the right product is all your business, distribution and marketing are areas that can be outsourced to others.
There’s no denying that Amazon has their act together when it comes to order fulfillment. Their billion-dollar operation is a model of efficiency that cranks out thousands of orders every day. But on the same token, this is also one of their biggest weaknesses.
In order to handle this type of volume, Amazon’s processes have to be as streamlined as possible. That means zero deviation from center. Each item is packed, wrapped, and sent the exact same way … EVERY … SINGLE … TIME. And by default, no less, in “Amazon” branded boxes (unless you opt to pay more for a generic one).
That’s fine when you are shipping everyday items or low-cost consumables. But not okay if you want to stand out from the crowd. For the customer experience it should be about your brand—not the vendor’s. One of the best ways to accomplish this goal is to implement branded packaging, gifting or some other means of differentiation in your fulfillment process.
Partnering with the right 3PL eliminates this roadblock. As most have white-labeled logistics solutions, which allow you to customize your order as you see fit. Whether it is branding your shipping boxes with your logo or tagline, having a specific plan for packing filler, custom inserts, or having a special arrangement for how the contents should be packed in the shipping box, your 3PL should have experience and flexibility to accommodate these types of requests.
Losing Control of Your Inventory
Buying trends change constantly and savvy online sellers stay ahead of the competition by adjusting their tactics and strategies to meet these changes. One major downside of the FBA program is some sellers are required to send a large portion, if not all of their inventory to an Amazon fulfillment center. By relinquishing physical control of their inventory, they can’t adapt as quickly which can put them at a huge disadvantage.
Imagine a scenario where a seller sends half their inventory to Amazon for fulfillment and keeps the other half for their own ecommerce store. Everything is going great until they get a call from a big box retailer (Target, Walmart, etc) for a large order which is a huge win, but then they are forced to pull from their on-hand inventory and are left with very little inventory to fulfill orders from their own ecommerce store.
In the middle of the COVID-19 epidemic in March 2020, Amazon prioritized essential products in their marketplace. As a result, sellers who were deemed as selling non-essential goods saw huge delays in delivery times and Amazon was not accepting inbound goods from them to replenish their stocks. This was devastating to some sellers as sales dried up and they had no way to sell their product elsewhere since their inventory was stuck at an Amazon fulfillment center. In addition, Amazon restricted FBA inventory for the 2020 holidays which had a negative impact for a lot of sellers. While the COVD-19 crisis was an unprecedented event and it’s understandable why Amazon took these measures, it highlights some of the dangers of consolidating your inventory with Amazon or being too reliant on a single sales channel.
With the growing number of sales channels, including Big Box stores, online retailers, and marketplaces (Walmart, eBay, etc), it’s advantageous to have control their physical inventory so they can more easily meet the demands of their end-consumers.
Also, like most growing brands, your business is constantly changing and adjusting to your customers’ needs. Having access to your inventory (say you need to re-flash a batch of devices, re-label a set of products, or add a special set-up insert to help eliminate customer service questions) is common practice and could make or break your business, especially during your peak shopping seasons. Being able to access your own fulfillment center or that of your 3PL logistics providers to make these changes is something that has to be considered.
One way to keep control of your inventory while still maintaining the Prime treatment (i.e. selling to Prime members) you get with the FBA program is to participate in the Seller Fulfilled Prime program. Through this Amazon program, the seller still gets the Prime badge next to their product, but the order is fulfilled by the seller or through their 3PL partner. This scenario allows the seller to retain control of their supply chain and better manage costs while ensuring efficient deliveries and excellent service.
Impersonal Customer Service
While we’d like to think that everything will run smoothly once set up, most know that’s simply not the case. No matter how much you plan, build, or execute, problems are still bound to creep up.
So what happens when your customer runs into an issue? How will it be handled? Better yet, what happens when you have a problem and need a prompt resolution?
With FBA and Seller Central, you’re pretty much in the same boat as one of Amazon’s end-customers. Yep, you have a 1-800 number to try, probably an automated system, and an-entry level call-center worker to help mediate your issue. Good luck getting your issue resolved quickly by someone who has no clue what your business is about, your history, or how you like to be treated.
Another route is being subjected to a barrage of back and forth emails where your case is mistakenly “closed” before the problem is actually fixed. You might get passed around like a hot potato from one customer service center to the next as you wait for a resolution that never comes.
Working with a customer-focused independent 3PL partner is the exact opposite. A typical 3PL is staffed with dedicated customer service representatives located mere steps from the actual distribution floor, where your products sit. You will likely develop a close working relationship with your customer service rep and they will become your advocate within your 3PL’s distribution center.
Alternative 3PL Solutions
Fulfillment By Amazon is an incredibly efficient operating model, but may not be the best choice for your business needs as covered in this article. The challenges with FBA are obvious to most sellers who use the program and even those who are considering it. Because of Amazon’s omni-presence and virtual reach, many feel they need Amazon FBA. In reality, the decision is not black and white. You will need to determine the right solution for your growing brand—one that gives you reach and flexibility, but does so cost effectively. As previously mentioned, the Amazon’s Seller Fulfilled Prime (SFP) program gives you the same access to Amazon Prime Members, but more flexibility to scale and reduce operational costs. Also, you can read our overview of the advantages and disadvantages of all Amazon fulfillment options: FBA, SFP, and MFN. Don’t feel trapped thinking that Amazon is the be-all end-all 3PL solution.
You can also check out How a 3PL supports your Amazon business
At DCL we have years of experience supporting both Vendor Central and Seller Central programs for sellers with a presence on Amazon. If you are seeking logistics support we’d love to hear from you. You can learn more on our Amazon services page, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.
Tags: Amazon Fulfillment