This is a guest post from Matthew Boardman. Matthew is the content marketing manager at Kaspien, Inc. and lead writer and editor for Kaspien’s eCommerce blog. Kaspien optimizes and grows brands on today’s leading online marketplaces. Founded in 2008 in Spokane, WA, Kaspien has spent the last decade developing proprietary technologies for marketing optimization, brand protection, and fulfillment efficiency to generate rapid revenue growth for brands.
2020 was a wild year for eCommerce, and 2021 continues to show the same high growth, but one of the greatest takeaways is that being overly dependent on any one fulfillment strategy is dangerous. Fulfillment by Amazon (FBA), the fulfillment network that time again redefined consumer expectations for online shopping fulfillment, serves as a prime example of how a single fulfillment strategy for eCommerce leaves brands vulnerable.
Amazon FBA Buckled in 2020
In March 2020, Amazon temporarily restricted certain product categories as consumer demand exceeded FBA’s logistics capabilities. Amazon also temporarily prioritized Fulfillment by Merchant (FBM) orders over FBA orders to help lighten the load on its overtaxed infrastructure.
To further complicate matters for FBA sellers, Amazon repeatedly increased its Inventory Performance Index (IPI) requirements over the course of the year. Sellers who failed to meet the new requirements faced storage limits, which meant they had to either accept the potential for sales loss due to out-of-stocks or revise their supply chain process to be able to ship smaller orders more frequently into Amazon’s fulfillment network. That proved to be a tough ask for many brands.
Consequences of Being Unable to Fulfill Orders
When sellers cannot fulfill orders, obviously they are losing out on sales. But out-of-stocks have other implications as well.
IPI can Decrease
The seller’s IPI score can decrease, which can create storage limits. This creates a snowball effect, where inventory issues mount until the seller finds an alternative fulfillment solution or improves their inventory turn rate to increase their IPI score.
Marketing Performance Suffers
When a product is out-of-stock, the product rank worsens as competitors fill the gap. A product’s organic placement on the SERP and the likelihood of an ad winning a bid are both influenced by the product rank. In other words, running out of stock harms organic and paid marketing performance, even after inventory is replenished.
Market Share Decreases
Because your brand is out-of-stock, shoppers will turn to competitors for their needs. This compounds the impact to product rank, with competitors improving rank while your rank deteriorates. Because it takes time for marketing and sales to rebound after inventory is back in stock, competitors that aren’t facing the same issues are well-positioned to seize and retain market share.
What 2020 Taught eCommerce Sellers
Amazon FBA is the largest eCommerce fulfillment network in the US, but 2020 showed us that 1) FBA is not impervious, and 2) being dependent on one fulfillment strategy, especially one outside your control, makes you exceedingly vulnerable to unilateral decisions.
Amazon has made strides to repair its reputation, increasing fulfillment square footage by 50% in 2020. Amazon is also moving to expand its air fleet, with Amazon Air purchasing 11 jets in January 2021. A DePaul University study predicts that Amazon Air’s expansion could position the company to provide 1-day shipping to 95% of the country.
And yet … even as Amazon flexes its $490 billion muscles, the lesson of over-dependency remains. Diversification is a time-tested method of risk mitigation, and 2020 was a painful reminder of its applicability to eCommerce fulfillment.
Risk Mitigation through Diversified Fulfillment
What other solutions can sellers leverage outside of FBA? There are quite a few, but here are some of the more prominent fulfillment strategies.
Fulfillment by Merchant
FBM is a model where the seller is responsible for storing, processing, and shipping products to end consumers. This model is useful for sellers with an existing logistics infrastructure. Some of the main advantages include:
- The lack of external storage or fulfillment fees can increase margins
- As the owner of your own fulfillment network, you’re safe from unilateral policy updates like those faced in FBA
- You may also enjoy easier visibility into inventory levels
Perhaps the greatest loss for FBM is Prime eligibility. Amazon once offered an FBM program called Seller Fulfilled Prime (SFP), which allowed FBM sellers who could provide 2-day shipping to list their products as Prime-eligible, but Amazon has not accepted new registrants for some time.
In the dropship model, sellers list products on marketplaces without actually carrying any inventory. When a shopper buys the product for the retail price, the seller places an order to the manufacturer at the wholesale price. The manufacturer then ships the product directly to the consumer.
The dropship model has some very compelling strengths, including:
- Sellers don’t carry inventory risk
- Sellers can list products that they would otherwise be unable to due to slow sales, oversized, or FBA ineligible
- Dropship acts as a safety net, allowing sellers to fulfill orders if FBA runs out of inventory
- Dropship can be used for multiple sales channels
The challenge with dropship is that it requires accurate, real-time communication between the manufacturer’s warehouse and the seller’s listing, which is known as a dropship order management system. If the two parties’ systems cannot communicate in real-time or the inventory information is inaccurate, it can create all sorts of problems.
Despite its leviathan size, Amazon isn’t the only fish in the sea. One effective way to mitigate risk is to diversify your sales channels. By branching out to other marketplaces, sellers can reach more shoppers and capture more sales. But, what does fulfillment look like for some of these other marketplaces?
Walmart offers their own fulfillment network, called Walmart Fulfillment Services (WFS). WFS launched in February 2020, before stay-at-home orders swept the nation and triggered a spike in online shopping.
eBay too offered a fulfillment network, called eBay Managed Delivery. The pilot program ended in December 2019, and then eBay fell silent on the matter. There were reports in February 2020 that the program was effectively dead.
Notably, Target does not offer a fulfillment network comparable to FBA, but their online marketplace made strides in 2020, growing sales by nearly $10 billion. Brands interested in selling on Target.com will likely need to leverage a FBM model or third-party logistics (3PL) provider.
For sellers that feel unprepared to tackle a FBM strategy for other marketplaces, Amazon, conveniently enough, offers a program called Multi-Channel Fulfillment (MCF). MCF has its own pricing and support separate from FBA, but it otherwise services sellers in a very similar manner to FBA. Note that some marketplaces forbid MCF, such as Walmart, due to their direct competition with Amazon.
For large brands selling across multiple sales channels, managing operating systems for multiple fulfillment networks can become difficult. Each marketplace has separate inventory forecasting, product preparation, storage fees, fulfillment fees, inventory reconciliation, and more. To operate your omnichannel eCommerce business effectively, you may seek a means to consolidate supply chain efforts.
Third-party logistics providers such as Deliverr truly shine in these scenarios. They help sellers manage fulfillment for multiple sales channels through a centralized partner, streamlining the process.
Don’t Bet It All on FBA
Amazon FBA is a robust offering, and it’d be downright foolish to dismiss it. If selling on Amazon, you should use FBA; it just shouldn’t be your only means for fulfillment.
Create the infrastructure for other fulfillment solutions that can complement or supplement FBA. These methods will safeguard your brand against supply chain disruptions and position you to weather future storms.