Amazon’s continued prioritization of essential items in response to COVID-19 is presenting new challenges to those who sell on the platform. Fulfillment by Amazon (FBA) sellers are navigating unique operational hurdles for the first time, including inventory replenishment restrictions and customer delivery delays. These sellers maintain inventory in Amazon’s fulfillment centers (FCs), meaning Amazon handles fulfillment and shipping on their behalf. Meanwhile, because of those challenges, many sellers are considering pivoting to a Fulfillment by Merchant (FBM) strategy. FBM sellers bear the responsibility of fulfilling and shipping all customer orders. In my work at Stella Rising, I advise and work with clients daily, ensuring that their seller strategy is the correct one. In this post, I examine the benefits and drawbacks of FBM for sellers considering making the switch as a result of COVID-19.
FBM PRO: AVOIDING STOCK SHORTAGES
On April 18th, Amazon announced that they would be setting maximum inventory thresholds for all replenishable products stored in their FCs. For FBA sellers, this meant less control over inventory and increased uncertainty as to when things will be back to “normal.” This recent implementation of replenishment and stock-level restrictions led FBA sellers to consider a concerning proposition: “What if I run out of stock?” This is the fear that sparked interest in FBM, because pivoting to FBM allows sellers to avoid stock shortages resulting from Amazon’s temporary inventory restrictions. Because FBM sellers do not maintain inventory in Amazon’s FCs, they will remain in stock on Amazon if their warehouse or 3PL has inventory available. Switching to FBM may seem like a no-brainer for those faced the with prospect of losing sales on Amazon due to stock issues. However, the below points highlight the obstacles and risks that must be considered prior to pursuing a seller-fulfilled strategy.
FBM CON: PRIME INELIGIBILITY
The most obvious downside to FBM is that products are not Prime-eligible; they do not qualify for the 1-2-day shipping that Amazon’s 150 million global Prime members pay for annually as a part of their subscription. Amazon consumers value fast, free shipping, and expect both as part of their online shopping experience. Sellers who do not provide Prime-eligible offers risk losing consumers to competitors who can satisfy their expectations.
FBM CON: PROFITABILITY CONCERNS
Beyond losing the highly coveted “Prime” badge, a seller-fulfillment strategy poses behind-the-scenes challenges that cannot be overlooked. With FBA, Amazon builds the cost of shipping into per unit fulfillment fees. FBM sellers are solely responsible for both arranging and paying for shipping on all customer orders. FBM orders are not eligible for Amazon Partnered Shipping (which offers the most competitive rates), so the per unit cost to ship is higher. This results in margin inconsistencies and/or negative margins due to the variable cost of shipping to customers located all over the country. In short, FBM sellers are responsible for the end-to-end process of fulfilling and shipping customer orders and all associated costs, which are highly unpredictable.
FBM CON: INCREASED LABOR
Pivoting from FBA to FBM means transitioning your warehouse or 3PL team from prepping and shipping in bulk, to shipping a higher volume of customer orders. The result is an increase in the need for logistics, as well as an increase in order prep fees due to more “touches” during the fulfillment process. It is crucial that before pursuing FBM, sellers ensure that their logistics team has the capacity to prep and ship one-off orders in an efficient manner, meeting Amazon’s strict performance metrics (outlined below).
FBM CON: TECHNICAL DEMANDS
In addition to increased logistical demands, FBM-sellers must also determine their strategy for maintaining accurate stock levels and fulfilling customer orders efficiently, both of which pose a unique set of challenges. When managing inventory levels and processing customer orders, FBM sellers have two options:
- Manually, via uploading stock levels, exporting customer orders, confirming shipments, and inputting tracking information.
- Automatically, by establishing a connection between the seller’s inventory and order management database and Amazon’s Marketplace Web Services (MWS) Application Programming Interface (API).
Both options require careful consideration and introspection, ensuring that the seller either has the capacity to take on additional manual work or has the technical capabilities to automate the inventory and order management process.
FBM CON: HIGH STANDARDS OF OPERATIONAL EXCELLENCE
With Amazon no longer handling fulfillment, shipping, returns, and refunds, these tasks now fall to the FBM seller, as do the customer service inquiries that go along with them. Amazon is customer-obsessed and has implemented strict expectations to ensure that FBM sellers provide a strong customer experience. The following is a list of performance metrics that FBM sellers must meet, otherwise they run the risk of having both their FBM and FBA selling privileges terminated:
- Order Defect Rate (ODR) of < 1% during a given 60-day time period
- Cancellation Rate (CR) of < 2.5% during a given 7-day time period
- Late Shipment Rate (LSR) of < 4% over both a 10-day and 30-day time period
- Valid Tracking Rate (VTR) of > 95%
- On-Time Delivery Rate (OTDR) of > 97%
- Return Dissatisfaction Rate (RDR) of < 10%
As sellers consider rolling out FBM in an attempt to regain control over their Amazon inventory and sales, the points outlined above must be factored into the decision-making process. If you already have the proper operational, logistical, and technical capabilities in place and can guarantee that you will be able to adhere to Amazon’s performance expectations, FBM may be a viable option. If, however, you have any doubts regarding your ability to operate efficiently and effectively as an FBM seller, we caution against making the switch, as the numerous risks and obstacles often outweigh the rewards.
Stella Rising has led the marketplace era, with a special focus on Amazon. Does your brand have a sound Amazon strategy in place? Connect with us.