Imagine not having to worry about day-to-day warehouse operations and limiting your costs when it comes to physical space in your business.
Fulfilment by Amazon (FBA) promises to take the hassle out of many factors affecting inventory management such as storing inventory stock and processing and shipping orders to customers. In addition, they offer customer service and returns management.
As with any other outsourcing, it’s necessary to weigh-up the costs and benefits before deciding if FBA is a viable option for business. So, let’s look at the three key services FBA offers.
One of the factors affecting inventory management for a growing business is the warehousing and storage of inventory stock, The cost of real estate in the warehouse can be prohibitive and carrying costs can quickly add up.
FBA makes it easy – you simply pay monthly storage fees per cubic foot of the inventory stock held on your behalf. For top sellers, smaller and fast-moving items, FBA can offer a cost-effective alternative to maintaining your own storage facilities and warehouse operations.
One of the challenges with FBA however, is that Amazon have strict ASIN and UPC systems which can create some difficulty in getting inventory stock into their warehouses. Businesses must label each product individually, pack them into multiple shipments and send them off to Amazon’s many warehouses.
With large quantities of stock, there is the likelihood that not all the items will sell. Twice a year, Amazon reassesses the inventory stock held in its fulfilment centres and any items sitting in their warehouses for longer than six months incur long-term storage fees.
You could find yourself paying storage for outdated stock or goods that simply aren’t selling. Keeping track of FBA inventory once it reaches high quantities can become problematic, making it difficult to keep track of what inventory stock you have, what you need, and what you should cut back on.
When deciding if FBA is a good fit for your business, it is important to note that it s likely to make better financial sense for those retailers selling smaller, fast-moving items. Selling large items or big-ticket purchases may incur greater shipping costs, have higher monthly storage fees or storage costs.
Picking, packing and shipping
Every time your business receives an order from your customers, it needs to be picked, packed and shipped. This takes time and resources – someone must locate the products, wrap, box and print packing slips and shipping labels.
A key benefit of using FBA is Amazon’s ability to deliver anywhere your customers are located and at a reasonable rate. They offer fast delivery and support bulk purchases. Cheap shipping and packaging costs tend to be beneficial for growing businesses but picking, packing and storage fees can hurt a business that’s already running on thin margins.
When selling through FBA, there are two fees you will be charged. Firstly, a packing cost is charged per unit and then a handling cost per pound of weight; shipping is free and for Amazon Prime members, FBA offers free two-day shipping.
Amazon also charges a referral fee for hosting your products. This is a percentage of the items price, with the percentage amount dependant on the item category. You can pay a per-item fee on a personal account or pay a monthly charge on a business account.
The FBA system is a viable option if you are smart about your product selection, procurement and merchandising. However, when outsourcing your fulfilment process you are handing over control and your eCommerce business has little remedy over late deliveries, damaged goods or even the wrong items being dispatched.
With direct fulfilment you are in control of products and costs associated with each step in the order fulfilment process.
Good customer service is what keeps customers coming back. With Amazon FBA, you are covered by their legendary customer service. Amazon provides round-the-clock customer support so you can be confident your customers are getting the best possible service. Amazon will even handle customer returns, releasing you of the burden of the reverse logistics.
For those eCommerce enterprises wanting to establish their brand and reputation, FBA offers little ability to build relationships with customers or to influence your customer experience through personalised product branding.
A downside to their fuss-free returns policy if you only ship a small number of high-value items is that the cost of their returns policy can potentially cause a significant blow to your profits.
FBA has many advantages and can deliver significant increases in revenue, ROI and sales. However, larger items, slow sales and higher initial transport costs can potentially negate these advantages.
The right option will always depend on what your business is and what your business needs are. For drop-shippers and start-ups, FBA will usually be a better choice, unless you are selling goods in a highly competitive area or other retailers are selling very similar items. The many advantages of FBA will then cease to be as effective.
Established businesses should weigh the total cost of fulfilment, including the initial transportation to fulfilment centres against the cost and benefits of more direct fulfilment solutions.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.