How to Use Amazon FBM to Strengthen Your Amazon Supply Chain

Amazon FBM Helps Overcome Ongoing Supply Chain Problems

Amazon FBM is the solution for sellers struggling to overcome Amazon’s persistent. These issues have been a constant topic of discussion since the onset of the global pandemic, and for good reason. They pervade every link of the chain, from the first mile to the last mile.

At the head of the chain, the cost of materials and production have risen. In the middle of chain, transportation costs skyrocketed, with the price of a 40-foot shipping container quadrupling from July 2020 to July 2021. At the end of the chain, severe storage restrictions limit sellers’ ability to meet demand.

On September 2, 2021, Amazon appeared to acknowledge the rising use of FBM by announcing a new Returns Performance Dashboard for seller-fulfilled returns. As FBM becomes more common in the wake of FBA restrictions, Amazon is trying to protect the customer delivery experience by requiring FBM to level-set with FBA quality.

In the face of these challenges, manufacturers and sellers alike must seek ways to optimize every link in the Amazon supply chain. We’ve previously written on tactics to support each segment of the supply chain, which you can review here:

• 10 Tips for Sourcing Product Internationally
• Amazon Global Logistics: Benefits, Risks, & Best Practices
• How to Optimize Amazon Supply Chain Management
• How Much Inventory Should You Store at Amazon
• How to Minimize Amazon Seller Fees

In this post, we’re turning our attention to the end of the supply chain: Chiefly, on the immense benefits of adding Fulfillment by Merchant (FBM) as an alternative and supplementary fulfillment model to Fulfillment by Amazon (FBA) in their logistics strategy.

What is Amazon FBM?

First things first, what is FBM? Amazon FBM is the fulfillment model where the seller ships the product to the end consumer. This differs from FBA, where Amazon ships the product to the end consumer.

FBA vs FBM

The biggest difference between FBA and FBM is in who’s responsible for four areas:

• Storing inventory
• Processing and shipping orders
• Returns management
• Customer service

HOW DOES FBA WORK?

Under FBA, sellers ship product into an Amazon fulfillment center. Amazon stores the product there until a customer buys it. Then, Amazon retrieves the product and ships it to the customer. Amazon handles returns management and customer service related to delivery. Sellers pay Amazon storage fees and fulfillment fees for using FBA.

HOW DOES AMAZON FBM WORK?

Amazon FBM can work in a few ways:

• Sellers can ship directly to customers from a warehouse they operate. This practice is called dropshipping. In this model, sellers must handle inventory management, product prep, returns management, and customer service.
• Sellers can ship to consumers from a third-party logistics (3PL) warehouse that they pay to use. This model is near-identical to FBA, except a company other than Amazon provides the warehouse, inventory management, returns management, and customer service. Sellers still pay storage and fulfillment fees.
• Sellers can use a peer-to-peer (P2P) fulfillment network. In this model, online retailers offer excess warehouse space to other sellers at a lower rate than FBA or 3PL. The principle is sound, but success is dependent on each participating member’s performance.

Because inventory doesn’t flow into Amazon’s fulfillment centers, sellers also don’t have to meet FBA product prep requirements, which can be quite stringent.

So, How Does Amazon FBM Help with Supply Chain Optimization?

Amazon’s fulfillment centers are simply too constrained at the moment. Sellers are currently limited to 55 days of inventory coverage, including lead time. If shipping from overseas, your inventory can spend weeks on the water. It then has to be processed through ports and transported to the appropriate fulfillment centers. If this process takes 40 days from start to finish, you only have sellable inventory for 15 days.

Not ideal, right?

The solution is to expand beyond Amazon’s fulfillment centers.

AMAZON FBM CIRCUMVENTS FBA INVENTORY LIMITS

By leveraging any of the aforementioned FBM models, brands gain the ability to continue fulfilling orders regardless of current or future restrictions at Amazon FBA. Sellers can have inventory available via FBA and FBM at the same time. If FBA inventory sells out, your FBM offers take over, bridging the gap while you get more inventory in FBA.

If you operate FBM alongside FBA, note that you can fulfill FBM single orders and FBA bulk orders from the same warehouse.

Let’s take a look at this strategy in action.

FBM Case Study: My Medic Grows Revenue 272% via FBA + FBM

In 2020, quantity restrictions at Amazon FBA put My Medic at risk. They had high consumer demand, but not enough inventory space to meet that demand. We partnered with them to fulfill orders through dropship, enabling My Medic to continue capturing sales even if FBA ran out of stock.

THE RESULTS

• Over 4x revenue growth in two years
• 2,100 additional units sold through dropship in 3 months
• Custom promotions and ongoing optimizations resulted in increased market share
• Reinvestment in direct response marketing scaled brand’s reach and sales

The Ideal Way to FBM: Seller Fulfilled Prime

Clearly, Amazon FBM offers great potential, but you’re still sacrificing some of your value proposition by not using FBA — specifically, fast shipping. That is, unless, you are using Seller Fulfilled Prime.

WHAT IS SELLER FULFILLED PRIME?

Amazon Seller Fulfilled Prime, or SFP, is a type of FBM where the seller can verifiably guarantee a Prime-equivalent shipping experience. First and foremost, this means providing 2-day shipping, including over the weekends.

HOW TO QUALIFY FOR SELLER FULFILLED PRIME

Amazon ended enrollment for Seller Fulfilled Prime in early 2019. To gain access to SFP now, brands must work with a third-party seller or 3PL who is already SFP-approved.

Amazon has been forced to dramatically expand its workforce due to the surge in FBA demand. Marketplace Pulse notes that this has led to Amazon’s quarterly revenue per employee dropping from $229,000 ten years ago to $84,000 in 2021. To counter this, Amazon either needs to automate more processes within FBA or open SFP back up so sellers and 3PLs can provide the personnel required for ecommerce logistics.

What are the Downsides of Amazon FBM?

By this point, Amazon FBM seems pretty compelling, and it should. But, if FBM is so useful, why wasn’t it more popular before the pandemic?

Amazon FBM has been widely used for years, but there are some downsides:

AMAZON TENDS TO FAVOR FBA ORDERS

If a product is offered via both FBA and FBM, Amazon will show the FBA offering first. This favoritism is the source of some recent regulatory scrutiny, which the Connected Commerce Council (a big tech lobbyist) argues would harm not only Amazon, but millions of small and medium businesses.

AMAZON DOESN’T PROVIDE THE INFRASTRUCTURE — YOU DO

Amazon FBA is so popular because it’s so convenient. Amazon provided everything — the buildings, personnel, tech, materials, customer service. Once inventory was in FBA, it was set.

In FBM, you or a 3PL must provide this infrastructure. It’s an entire business in and of itself.

INVENTORY MANAGEMENT CAN BE HARDER

Another major perk of FBA is that Amazon makes it easy to view current inventory levels. Not all 3PLs are able to match that convenience. If dropshipping, the manufacture absolutely must maintain accurate inventory counts in their system, otherwise the seller could be selling units that don’t actually exist.

FULFILLING FBM OVER FBA CAN HARM YOUR IPI SCORE

If you do use a hybrid FBA + FBM model, be careful of how you deploy them. Every sale not fulfilled through FBA while you have FBA inventory in stock will reduce your IPI score. Always try to sell through FBA inventory before using FBM for a given product.

How to Start Using Amazon FBM

There are cons, but the benefits of using Amazon FBM far outweigh any risks, especially with the current state of the Amazon supply chain. So, how do you get started?

Two ways:

PARTNER WITH A SELLER OR 3PL THAT HAS SELLER FULFILLED PRIME

Brands can partner with a third-party seller or a 3PL that is SFP-enabled. Through either of these partnerships, brands can fulfill Amazon orders while maintaining Prime eligibility. Kaspien is SFP-enabled and has delivered many FBA + FBM success stories. If interested, you can learn about our retail partnerships here.

DROPSHIP ALONGSIDE FBA

If you already have a warehouse system in place, equip it with dropship capabilities. If you sell your product yourself, you can pay for a dropship order management system and hook it up with your seller account and warehouse.

Alternatively, you can partner with a third-party seller like Kaspien to dropship your products. Our proprietary dropship order management system boasts custom transaction mapping, automated repricing, automated SKU creation, dynamic shipping cost analysis, reporting, and more.

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