As you probably already know, Amazon has become one of the largest sales channels for most US sellers. In 2018,…
The Amazon 3PL Trap
Let’s face it.
Most everyone knows about Amazon. They’re the leading e-retailer in the United States with over 232 Billion Dollars in sales in 2018 alone. Not to mention roughly 100 Million Prime Members, 300 Million active customer accounts worldwide, and an average 27% revenue growth year-over-year.
With these kinds of 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 (3PL) service allows other businesses to utilize Amazon’s massive infrastructure to provide order fulfillment for their own customers. Amazon is the largest third-party logistics (3PL) company in the world.
Basically, you ship your inventory to Amazon, advertise your products for sale on the web, and the online powerhouse takes care of the rest. Pick, pack, ship, and even customer service — all done on your behalf.
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 100 fulfillment centers and 15 sort centers worldwide (with more on the way soon). All total, 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 has proved this out in the past, having announced regular periodic price increases on fulfillment and inventory storage fees.
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 losses on shipping alone totaled over 7.2 billion dollars last year!
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 offset 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, the cost for storage TRIPLED during the 2018 holiday season, 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 2018 have also increased significantly compared to the rates in 2017.
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/developing the right product is up to you, 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 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 label 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, 3PLs will have experience and flexibility in accommodating 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, 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.
With the growing number of sales channels, including Big Box, 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 buyers.
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.
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 their customers. That means calling an 800 number and speaking to a lower level associate about your problem. Someone who has no clue what your business is about, your history, or how you like to be treated.
Or being subjected to a barrage of back and forth emails where your case is mistakenly “closed” before the problem is actually fixed. You 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 an 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. Agents who know about you and your business and understand what makes them tick. 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 all who use the program now and even those who are considering it. Because of Amazon’s omni-presence and virtual reach, many feel they need Amazon FBA for obvious reasons. 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, while doing it cost effectively. As previously mentioned, the Amazon’s Seller Fulfilled Prime (SFP) program gives you the same access to 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 end all be all 3PL solution.
You can also check out How a 3PL supports your Amazon business (infographic below!)
At DCL we have years of experience supporting both Vendor Central and Seller Central for selling 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.