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Understanding Amazon’s Supply Chain Strategy
As one of the world’s largest and most successful retailers, Amazon’s supply chain strategy plays a crucial role in its overall success. The company’s ability to efficiently source, produce, and deliver a wide variety of products to customers around the globe has helped it become the preeminent e-commerce leader.
A closer look at the Amazon supply chain strategy reveals the reasons for the company’s dominance. Key elements drive the effectiveness and innovation that has outperformed the competition and attracted the world’s biggest brands to the Amazon marketplace.
The fulfillment process
Inventory and Storage
The first step in getting products to the customers who placed the order is making sure the items are available to be shipped out. For some sellers, this means having a supply of the inventory in stock at a business, warehouse space, storage facility or third-party warehouse. In the case of Fulfillment by Amazon (FBA), it requires sellers to ship products to Amazon’s distribution centers in a manner that meets the company’s strict compliance requirements.
Success for an Amazon seller via FBA or other means requires careful inventory management. It’s imperative that the sellers are capable of meeting customer demand and planning for seasonal surges and events such as Cyber Monday or Prime Day.
Understanding Amazon’s FBA shipping criteria allows sellers to keep their products in stock for customers and ensures a fast and efficient shipping process. The rules include using boxes that match Amazon’s size requirements and avoiding loose packing materials such as packing peanuts or shredded paper. In addition, the shipping label should not be placed over box seams, and each unit should have a scannable barcode with no extraneous barcodes on case-packed units or shipping containers that might create confusion at Amazon’s warehouse. Finally, of course, the packaging should also be sufficient to protect the products while in transit to the Amazon distribution centers.
With the inventory ready for distribution, the next step in the process occurs when a customer orders the item. A brand’s marketing, optimization and reputation all play an integral role in driving these conversions.
Once a transaction is completed, the seller can begin processing the order and moving on to the final phase of delivering the chosen item to its intended recipient.
Pick, pack and ship
The pick, pack, and ship stage includes the steps required to ship a product to a customer. The process typically involves the following steps:
Picking – This is the selection of the specific items that are included in the customer’s order. In a warehouse setting, this might involve using a handheld device to scan the items and add them to the order.
Packing – Once the items have been picked, they need to be appropriately packaged for shipping. This usually requires placing the items in a box or other packaging, along with any necessary packing materials to protect the items during shipping.
Shipping – The final step is to ship the order to the customer. The shipper must print a shipping label, attach it to the package, and hand it off to the appropriate shipping carrier, such as USPS, UPS or FedEx.
Seller fulfillment options
Fulfillment by Merchant
Fulfillment by Merchant (FBM) is when a brand uses its own warehouse or fulfillment provider to ship a product to the end customer. For example, a customer would order a product on Amazon. That order is transmitted to the brand’s warehouse, which then picks, packs, and ships it to the end customer. On the surface, this seems like a suitable fulfillment method since inventory can be stored in one location and used to fulfill orders on Amazon, on a brand’s website, and on other marketplaces like Walmart.com. In addition, the merchant avoids having to comply with any Amazon-specific packaging, labeling or shipping requirements and may enjoy more flexibility when bundling products for sale to customers.
However, companies relying on this model will be unlikely to gain Prime eligibility for their products and will have to manage the return process in-house. In most cases, shipping costs will also be higher than the FBA alternative, and shipping times will be longer by several days.
Fulfillment by Amazon
One of the ways that Amazon sellers try to reach their full potential and land the coveted Buy Box is by opting to use Fulfillment by Amazon (FBA) rather than managing the process alone. The service outsources order fulfillment to the online retailer and puts your products inside an Amazon FBA warehouse where they can be picked, packed and shipped by an Amazon employee. Unlike a Vendor Central 1P relationship, the seller retains complete control over pricing and inventory management while relying on Amazon logistics for the rest.
Obviously, the decision to use Amazon’s FBA service comes with added costs. In addition to paying standard seller fees on orders, Amazon will also charge a fulfillment fee based on the type and size of the product. Storage fees for the space that inventory takes up in Amazon’s fulfillment centers are yet another cost that results from using an FBA model for sales.
However, some of these costs would simply originate elsewhere, such as from in-house employees or a different logistics provider. By partnering with Amazon on fulfillment, sellers enjoy an easier path to Amazon Prime status for their products, reduced customer interactions and more streamlined processes for returns.
Many Amazon businesses already take advantage of the platform’s Fulfillment by Amazon (FBA) program to support their efforts to get products ordered on Amazon to the buyer. However, fewer companies may realize that Amazon also offers similar fulfillment services for products that are ordered from other websites. With this option, Amazon Multi-Channel Fulfillment (MCF) can simplify the logistics of order fulfillment by providing the same features and services of Amazon FBA to fulfill orders that originate from most online merchants, including a brand’s direct-to-consumer (DTC) website.
Much like any other third-party logistics (3PL) company, Amazon allows sellers to store their inventory in their vast fulfillment network. Once products are in one or more of the company’s warehouses, order fulfillment can be automated by integrating Amazon’s services with other e-commerce platforms. Amazon will then handle the picking, packing and shipping of products even when they are ordered via a sales channel other than Amazon. These orders remain fully trackable, and Amazon Multi-Channel Fulfillment can also manage customer returns according to the seller’s preferences.
While brands can use Amazon’s MCF and FBA programs simultaneously, it’s worth noting that the company will always prioritize Amazon orders over those from other sources. However, the Multi-Channel Fulfillment program is not restricted to sellers who use Amazon as one of their sales channels. Even brands that use only their own DTC site or alternative e-commerce solutions can still choose to have Amazon handle their order fulfillment.
Amazon’s fulfillment advantages
Amazon’s growth over the past two decades is largely due to its approach to order fulfillment. The marketplace’s emphasis on quickly delivering items, including its popular two-day Prime shipping, has set the standard for the industry. But, clearly, their fulfillment strength begins with their warehousing strategy.
The company’s largest warehouses are located in near population hubs, with the Amazon inventory split among them to minimize delays. Each distribution center is optimized to make picking, packing and shipping as efficient as possible. In addition, inventory storage is divided into separate areas according to demand and shipping requirements, such as one for magazines and books, another for Prime items and others for oversized or irregularly-shaped products.
In addition, Amazon utilizes various types of warehouses and fulfillment centers dedicated to particular tasks. According to the company, these include:
Sortable fulfillment center – Around 800,000 square feet, sortable fulfillment centers can employ more than 1,500 full-time associates. In these buildings, Amazon employees pick, pack, and ship customer orders such as books, toys, and housewares. Thanks to the innovations of Amazon Robotics, associates often work alongside robots, allowing them to learn new skills and help create a more efficient process to meet customer demand.
Non-sortable fulfillment centers – Between 600,000 to 1 million square feet, non-sortable fulfillment centers employ more than 1,000 full-time associates. In these centers, associates pick, pack, and ship bulky or larger-sized customer items such as patio furniture, outdoor equipment, or rugs.
Sortation centers – At sortation centers, Amazon associates sort customer orders by final destination and consolidate them onto trucks for faster delivery. Amazon’s sort center network powers the ability to provide customers with everyday delivery, including Sunday delivery.
Receive centers – Amazon’s receive centers support customer fulfillment by taking in large orders of the types of inventory that are expected to sell quickly and then allocating those items to fulfillment centers within the network.
Specialty – Amazon’s fulfillment network is also supported by additional types of buildings that handle specific categories of items or are pressed into service at peak times of the year, such as the holiday season.
Similar to its approach to warehousing, Amazon is revolutionizing the delivery options that customers can utilize when shopping on the platform. In recent years, Amazon has accelerated the time needed to get orders from storage to the purchaser and launched new methods that increase efficiency.
Free, two-day Prime deliveries are likely one of the most familiar. While the company and its sellers still use third-party carriers like UPS, FedEx and the U.S. Postal Service for some deliveries, Amazon has also added its own proprietary shipping options. Drones that land in your backyard or on your roof can deliver products in a matter of hours. Amazon-branded trucks and delivery vans are now offered via a franchise-like structure to entrepreneurs and small businesses interested in expanding the company’s delivery footprint.
The company also focuses on making the delivery process more convenient via its Hub & Locker and Hub Counter locations. At the same time, Amazon Key gives delivery drivers the ability to place packages inside a home or garage. As a result of these innovations, delivery times are reduced and convenience for shoppers and Amazon is increased.
Customer service and returns
Amazon has built a reputation for having a strong customer service team and for making it easy for customers to return products. This is likely because Amazon has invested heavily in developing a comprehensive and user-friendly returns policy and process and training its customer service staff to be knowledgeable, helpful, and efficient.
Amazon also offers a wide range of options for returning products, including the ability to return items by mail, at a local drop-off location, or select retail stores, and provides clear instructions for how to do so. Additionally, Amazon provides convenient tracking and updates throughout the returns process and often offers refunds or replacements quickly and without hassle. All of these factors contribute to making the customer service and returns experience with Amazon generally positive and stress-free.
When third-party sellers opt for an FBA agreement, Amazon handles the customer service and return processing for those brands. While this sometimes leads to concerns about the condition of returns and fraud, it does minimize the costs and time-consuming burden of handling those responsibilities in-house.
Amazon’s supply chain management relies heavily on technology and is often among the first to integrate new technologies. The company uses robots, automated conveyor belts, and other technology in its fulfillment centers to streamline the process of sorting, storing, and shipping orders. Advanced software optimizes routes and schedules for its delivery trucks, planes, and other transportation assets, to reduce costs and increase efficiency. Sophisticated algorithms and data analytics help track and manage inventory levels and predict product demand. Technology such as barcodes and RFID tags can track products throughout the supply chain and ensure that goods are shipped and delivered accurately and on time. And as mentioned, drones are now being used to make some Amazon Prime Air deliveries in larger markets.
Overall, Amazon’s use of technology in its supply chain helps the company to operate more efficiently, reduce costs, and improve the speed and accuracy of its fulfillment and delivery operations. But the advantages also extend to the companies it works with. For example, the Seller Central and Vendor Central dashboards provide sellers with a central hub to manage their relationship with Amazon, and each offers a wealth of data to help with forecasting and optimization.
As Amazon has grown, so has its focus on private-label brands. Inspired by the success of house brands in brick-and-mortar stores, Amazon hoped to capitalize on its ability to market low-priced products backed by the company itself. Since committing to the tactic, they have offered private label products, some bearing the Amazon name, in categories ranging from food to clothing to electronics.
However, new reporting indicates a shift may be on the horizon. While sellers and brands utilizing Amazon have previously focused on competing with Amazon’s private label brands, the new priority may be on learning how to adjust to a marketplace with fewer Amazon-branded products available, but new challenges that would accompany such a transition.
Both Vox and the Wall Street Journal addressed the potential change in Amazon’s strategy in recent weeks. Their reports centered on the possibility that Amazon’s efforts to drive market share in-house may lead to more harm than profit.
Among the motivations for a decision to minimize these offerings is the scrutiny Amazon has faced from government regulators due to their private label products. There are well-documented questions about how Amazon’s role as a marketplace and data-collection company may conflict with its aspirations to sell more of its in-house brands. Regardless of what happens in the future, current sellers should be aware of the industry climate and have a plan to respond in ways that will grow their businesses.
Amify can deliver for your brand
Find the right Amazon warehousing strategy for your business with help from the experts at Amify. They understand the impact that a delivery option can have on your bottom line and how growing sellers can make Amazon’s supply chain strategy and operations an important advantage. Contact us today to learn more.
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