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Amazon said it is making improvements to help sellers who use its fulfillment network to better plan and manage inventory.
The news: Amazon unveiled a new capacity management system for sellers who use Fulfillment by Amazon (FBA), with changes effective March 1.
Key quote: “Sellers told us they need more capacity, more predictability, and more control over their inventory. Our teams have been hard at work to create a streamlined system that offers new capacity management tools and resources to better empower sellers and help them grow,” Amazon VP of Selling Partner Services Dharmesh Mehta said in a blog post.
How does it work? Amazon outlined four key features of the new program:
A single, month-long FBA capacity limit: FBA is moving to a single monthly limit that will determine how much inventory sellers can send and store. Capacity limits for the upcoming month will be announced in the third full week of each month via the Capacity Monitor in Seller Central. With this, Amazon is moving away from weekly restock limits, which can make planning for production and manufacturing difficult. It also has two different sets of limits, including storage limits and restock limits. Now, Amazon said most sellers will have access to larger capacity volumes.
Estimated capacity limits for three months in advance: Along with the monthly limit, FBA will also provide estimated limits for the following two months, including space and labor that is required. FBA said this is a forecast, and could vary based on the Inventory Performance Index (IPI) score.
Request a higher limit: Sellers can now request a higher capacity limit based on a reservation fee that they specify. Amazon said that requests will be “granted objectively,” starting with the highest reservation fee per cubic foot. Amazon has a way that sellers can recoup costs of this additional space: When the additional capacity is granted, fees are offset by earning performance credits from sales that are generated using the extra capacity. The credit is 15-cents for every dollar sold, and can recoup up to 100% of the fee. Amazon has already piloted this with some U.S. sellers, and is now expanding it. “Our goal is to provide sellers with more control over how much space they can have while limiting unproductive use,” the company wrote.
Volume-based capacity limits: Amazon is also changing how it measures inventory space. Now, inventory usage and capacity limits will be measured in cubic feet, as opposed to number of units. While units will also be shown as most sellers prefer, Amazon said the volume measure is a better representation of space that is taken up in Amazon’s fulfillment centers and vehicles. Overage fees will still apply if a seller goes over the limit.
What it says about FBA:
Inventory has been a key issue for brands and sellers over the last three years. First, the pandemic spiked demand for certain categories of goods. Then, that flooded the system, and supply chain bottlenecks gave way to a glut of inventory that was in some cases mismatched to demand when items finally arrived. Within the FBA program, Amazon’s limits on restock and capacity were another area to navigate that had the potential to cut into sales opportunities.
For sellers, the new system announced this week opens up the potential to access more space for inventory. It also helps them plan through forecasting estimates, and make adjustments through additional capacity requests that can be offset.
Capacity has been a continuous topic in Amazon’s logistics network. Last year, officials said the company overbuilt during the pandemic, and has since scaled back its warehouse footprint. But it also continues to ramp up availability of space that is still online for FBA merchants. This year, it is expected to expand a new program called Amazon Warehousing and Distribution (AWD), a “supply chain as a service” offering the provides upstream bulk inventory storage to sellers. This month, it is also allowing any U.S. merchant to use Buy With Prime, which taps the company’s logistics network by allowing Prime shipping to be made available through checkout on websites beyond Amazon.com.
For Amazon, opening up more space for sellers can help to fill a vastly expanded network that is still growing into itself. The company is also keen to continue to provide services to third-party sellers, which now account for about 60% of ecommerce sales through the site. Over the holiday season, U.S. sellers sold nearly half a billion items, according to Amazon. A better experience and more capacity will only encourage sellers to do more with Amazon.
One to watch: The ability to request a higher limit. Marketplace Pulse likened this to an auction, with the requests amounting to a bid for more space. Uber and AWS use similar strategies to balance supply and demand, Marketplace Pulse's Juozas Kaziukėnas wrote. “Here, Amazon will charge more because it itself restricts supply by imposing inventory limits. Albeit, Amazon’s spokesperson said that to date, the vast majority of sellers have had their total reservation fee reimbursed,” Marketplace Pulse writes. Essentially, sellers won't have to pay for the extra space, as long as they sell through their inventory. So Amazon is creating an incentive structure. How will this be received by sellers?
FBA overhaul: This is the latest in a series of changes made by Amazon to the FBA program, including a new workflow for replenishing inventory and new storage classifications including extra large and a wider small and light program. Amazon also raised fees for fulfillment in 2023, effectively making an inflation surcharge instituted in April permanent.
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The company is pulling back after breakneck pandemic expansion. Will it sacrifice the shopping experience along the way?
Amazon is in a period of rebalancing.
The company has long scaled at a relentless pace as it sought to not only provide a marketplace for commerce, but the infrastructure that enabled it, as well. Amazon found another level of overdrive over the last two years, as demand spiked to unseen heights during the pandemic and the company tried to build to keep up.
This wasn’t necessarily a period that saw the kind of invention that Jeff Bezos made an existential tenet of the company, but it nonetheless seems to be shaking out as a cycle that included risk and fallout.
In this case, the risk was not a new device like a smartphone or a move to bend the future to Amazon's will like drone delivery. Rather, it was an expansion that took its already-vast operations to new heights.
Nowhere was this more evident than the company’s logistics network. As CEO Andy Jassy described it to analysts Thursday on an earnings call, the company doubled the size of a fulfillment network it took a quarter-century to build in two years. It also built out a last-mile delivery network that was the size of UPS, which is one of the top two carriers in the U.S.
In 2022, all of that expansion ran into 40-year-high inflation, war in Ukraine and a pullback in demand for goods amid reopening. The company first admitted the problem: It had overbuilt.
But the solution is not to tear down. It had to keep expanding as only Amazon does, while still cutting back in a period of “belt-tightening,” as executives have put it.
That’s evident in watching developments out of the logistics network alone. Amazon pulled out of some areas, and canceled plans to expand into some new warehouses. Yet, as Business Insider reported, it still added 79 million square feet – a footprint that is equal to half of next-closest competitor Walmart’s entire distribution network. It is also expanding Buy with Prime, a new program that will allow direct-to-consumer brands to offer Prime benefits, and, by extension, access to Amazon’s logistics network. Another service, called Amazon Warehousing and Delivery, is designed for upstream storage, necessitating more space to be made available in the network.
At the same time, it will seek to keep doing more for consumers.
Jassy indicated as much when he was prompted to outline his priority areas. Beyond cost-cutting, he said speed is the second highest priority for Amazon. As if to conform this, he said later in the call that one-day shipping is getting off the ground in North America.
Selection is another priority area. At Amazon, that phrase translates to a few things, but top of mind is “expanding the third-party seller marketplace.” Third-party sellers accounted for 59% of sales in Q4. Beyond sales, Amazon’s work with the sellers who post their products on the marketplace is also lucrative for the company. Amazon allows these sellers to tap its logistics network to offer Prime through the Fulfillment by Amazon program. Its business segment called third-party seller services grew 20% year-over-year in the fourth quarter, right in line with the massively profitable cloud computing division Amazon Web Services.
Price, Jassy said, is another area of importance, especially with the consumer pullback on discretionary purchases being observed amid inflation.
“I think pricing being sharp is always important,” Jassy said. “But particularly in this type of uncertain economy, where customers are very conscious about how much they're spending, having the millions of deals that we put together with our selling partners in the fourth quarter was an important part of the demand that you saw.”
Finally, Jassy cited a priority of improving the customer experience. He said Buy with Prime would give subscribers the ability to use their benefits across the web, and noted that virtual try-on for shoes brings change to the shopping experience.
But it’s in this area that the tradeoffs that may be happening under the surface may rear their head again. GlobalData Managing Director Neil Saunders noted that online shopping generally is becoming “more difficult" on Amazon.
“While the Amazon marketplace is far from a terrible place to shop, it has become more complex and cluttered with a multitude of products, delivery options, and prices levels for shoppers to sift through,” Saunders wrote in note released at the time of the earnings call. “The result is that impulse buying has dropped and that more people are migrating away to other retailers. This is not yet a serious problem as erosion has only happened at the margins, but it is something Amazon will need to address and arrest to prevent further decline.”
Taking a rhetorical step further, the journalist John Hermann wrote this week that a “junkification” of Amazon is taking place, while arguing that “everything is going according to plan" for the company.
He placed the growth of the third-party seller marketplace at the center of this trend. But it also comes as Amazon grows its advertising business, with many taking note of a growing number of ads on the platform. The company also wants to keep growing Prime, and is now using content such as Lord of the Rings and NFL’s Thursday Night Football as key acquisition channels. Both had “record” signups of new Prime members, CFO Brian Olsavsky said.
“We see a direct link between that type of engagement and higher purchases of everyday products on our Amazon website,” he said.
It will have to do each of these things at once, while entering a period that will require it to be “more targeted with its growth ambitions,” as Saunders put it.
"Since its inception, Amazon has had a culture of throwing dollars at many different things to see where they led and what they could learn," Saunders said. "That approach worked well for a younger, fast-growth business. It works far less successfully for a more mature entity. In our view, management deserves credit for recognizing this and quickly responding. However, the shift requires a lot of care because Amazon needs to find a new balance between being ambitious and innovative and being more frugal with its spending – which will be very challenging."
Jassy said the changes of the pandemic made its logistics a "different network." That may be true of the whole company. Rather than an isolated cycle of overbuilding and pulling back, this may prove to be a period that changes Amazon altogether. The bets will still be there, but the risk will be magnified with fewer dollars that don't pay off to go around. As hinted by the logistics buildout of the pandemic and even Buy with Prime, they also may look more operational.
Less delivery robot, more delivery optimization.
As Jassy put it: “We're going to be very thoughtful about how we streamline our costs, and I think you see a lot of that, but we're also going to continue to invest for the long term.”
The recipients of those investments will say a lot about where it wants to head in this next year.