How to Adapt to Amazon’s Latest Push for 1-Day Delivery, Part 3

Recent changes to Amazon.com's Seller Fulfilled Prime (SFP) program has sent sellers and the entire e-commerce industry scrambling. Merchants must quickly adapt to the new norm of nationwide one-day delivery or risk losing sales on Amazon. Offers from third-party sellers which include free Prime shipping can no longer be offered just regionally; they must now be offered nationwide or not at all. And to maintain their SFP eligibility, sellers must adhere to the strict one calendar-day or two calendar-day delivery promise on such orders — even on weekends.

For more details on my thesis on how the new SFP requirements will impact the e-commerce industry as a whole, see part two in this series.

Placing inventory in multiple warehouses closer to your customers is the most cost-effective way to offer nationwide one- or two-day delivery. By distributing your inventory geographically, you can use economical ground shipping to reach most of your customers in one calendar day. You'll need about four fulfillment locations to meet the February requirement and several more to meet the June 1 requirement.

Source: Cahoot Peer-to-Peer Order Fulfillment Network

When it comes to e-commerce order fulfillment, one size doesn't fit all. In this article, I will explore the pros and cons of four popular nationwide fulfillment options.

Outsource All Fulfillment to FBA

One option is to stop doing SFP. You can instead outsource all of your fulfillment to Fulfilled By Amazon (FBA). FBA works best for fast-moving standard SKUs. For long-tail SKUs, FBA may be feasible if your margins support the high storage fees and if your inventory turnover complies with Amazon’s IPI limits.

Source: Cahoot Peer-to-Peer Order Fulfillment Network

Before switching from Amazon SFP to FBA, you should carefully study the Amazon FBA restrictions, hidden fees, inventory prep prerequisites, and FBA’s continually changing requirements. FBA fees can be challenging to understand and difficult to reconcile, particularly in the absence of personal support. Many sellers have also found inventory tracking to be an issue.

FBA applies surcharges during the peak-season (October-December) and charges higher fees for fulfilling non-Amazon and oversize orders. Many marketplaces like Walmart and eBay have outright banned their orders coming in Amazon Prime-labeled packaging. You may also experience higher returns through FBA because the customer can initiate the return without consulting with you. Amazon customer service isn't equipped to help your customers with product-related questions.

FBA also has strict storage limits. New ASINs are limited to 200 units per inbound. FBA also requires that ASINs move quickly enough to maintain a high inventory performance index (IPI). Products with a lower IPI may not qualify for replenishment, and you may start incurring additional fees.

FBA can be an excellent option for sellers that don't wish to deal with the hassles of self-fulfillment and don't sell on other channels. Plus, Amazon provides 24/7 customer service in addition to taking responsibility for the fulfillment performance and metrics. Besides offering virtually unlimited scalability for sellers, FBA fees are particularly attractive if your items are small and light.

Build or Lease Warehouses of Your Own

One way to expand your fulfillment capabilities is to build or lease more warehouses of your own. With this option, you'll have full control over the operations. There are no peak-season upcharges or inventory restrictions. Building or leasing additional warehouses should only be considered by large-volume and established merchants with somewhat predictable sales. Also, it is an effective approach for merchants that have long-tail SKUs, custom products, heavy kitting/bundling needs, or products with special storage or handling requirements.

Source: Cahoot Peer-to-Peer Order Fulfillment Network

Due to rapid e-commerce growth driven by COVID-19, vacant warehouses are now scarce. Industrial rents are at an all-time high, so leasing new warehouse space is going to be pricey. You must account for the time needed for researching and finding warehouses, negotiating terms, hiring and managing staff to run the fulfillment operation, besides cash flow and capital implications of leasing or buying.

While the new warehouse cost is fixed in rent, utilities and wages, it would be hard to achieve full capacity utilization in the early days. Until you reach high efficiency, your cost per unit would be significantly higher.

When considering this option, be sure to thoroughly evaluate the software and other technical solutions you would need to run a successful multiwarehouse operation. Look for fulfillment and shipping software that supports automatic order routing and robust integration with Amazon Buy Shipping.

Outsource Fulfillment to Multiple 3PLs

The third strategy is to outsource your fulfillment to third-party logistics companies (3PLs). There are about 20,000 3PL companies in the U.S. to choose from. The vast majority of 3PLs in the U.S. are mom-and-pop operations. These companies typically have from one to three locations.

Source: Cahoot Peer-to-Peer Order Fulfillment Network

To meet the Amazon SFP delivery speed metrics, you'll need to negotiate individually with multiple 3PLs. Pricing and fee structures vary wildly. Many of them may require a minimum volume commitment. Expect fulfillment fees to be different in Ohio vs. Southern California and the New York metro area. Consider using a 3PL Request for Proposal (RFP) template to get an apples-to-apples comparison.

You'll also need the technology to manage inventory and intelligently route your orders to the right fulfillment location based on shipping cost, transit time, inventory availability, cut-off time, etc. There are limited affordable software options on the market for SMBs. Some 3PLs may want you to integrate with their systems, which would require technical expertise and additional investment. Most 3PLs also require you to use their shipping carriers and rates, which can erode your purchasing power and volume discounts.

Each 3PL has its standards, processes, limitations and service level commitments. Amazon's SFP program has little room for late shipping and delivery. Therefore, it’s paramount that your 3PLs have cut-off times that maximize the same-day fulfillment opportunities and that they support weekend fulfillment. See part one of this series for details on how Amazon’s new SFP requirements impact fulfillment operations. When working with any outsourced fulfillment provider, you must demand visibility into all your orders in real time. Meeting Amazon’s 99.5 percent on-time shipping metric is critical. Any mishap here can risk your SFP eligibility.

Another thing to investigate when working with 3PLs is how they can coexist with your existing warehouse(s) if you have them. If you can ship an order faster and cheaper from your warehouse than your 3PL, you should be the one fulfilling that order. Don't get locked into rigid rules due to inferior technology like assigning a fixed 3PL based on sales channel, as that will end up costing you more.

Outsourcing to 3PLs that offer SFP-compliant fulfillment can be the right choice if you need additional specialized services. Some 3PLs offer returns processing, wholesale/B-to-B order fulfillment, custom packaging design and marketing inserts, inventory prep and forwarding for FBA in addition to B-to-C e-commerce fulfillment, and even customer service.

Join a Peer-to-Peer Fulfillment Network

A newer option growing in popularity due to its affordability and flexibility is to join a peer-to-peer (P2P) e-commerce order fulfillment network. In a P2P network, e-commerce merchants store inventory and fulfill orders for each other. Think of this option as an Airbnb for e-commerce order fulfillment. In this model, highly vetted and experienced merchants act as 3PLs and fulfill orders on behalf of the network. Since these merchants are already fulfilling orders for themselves, most of them are well versed in the SFP program and its high-performance standards. The network operator coordinates all activity via a single agreement, modern software, predictable pricing structure, and SLA.

Source: Cahoot Peer-to-Peer Order Fulfillment Network

The network operator provides the software to fetch orders from all the popular sales channels in real time, rate shop, and route them to the optimum fulfillment location, all without any manual effort. The software also tracks inventory across all sites and provides full visibility into the fulfillment performance and package delivery status. It also handles label generation, direct from carriers, and Amazon Buy Shipping. Due to this high degree of automation, set-up is typically quick and easy. The intelligent order routing and automatic rate shopping features of the software maximize savings. Merchants can also use their carrier accounts and rates to preserve their existing carrier relationships and discounts, which is especially appealing to larger merchants. Merchants are not further required to own a warehouse or provide fulfillment services to the network.

This option is, however, not suitable for every business. A P2P network isn't designed for long-term storage. It works best for fast-moving SKUs and merchants looking to augment their geographical footprint by placing their inventory in more fulfillment locations managed by the network. You must prep products with barcodes and ship them in bulk to the network warehouses. A P2P network is excellent for standard and oversize products that don't require custom handling or special storage. Unlike FBA, there are fewer inventory restrictions. Fulfillment costs do not vary based on sales channels, and there are no peak season surcharges.

Conclusion

Whether it’s Amazon leading the way via its new SFP requirements or changing consumer preferences and expectations, it’s clear that one-day nationwide delivery will be the new norm in the not-so-distant future. Some may even argue that we're already there and now is the time to act and win market share. In the words of Warren Buffet, “Be greedy when others are fearful. Be fearful when others are greedy.”

Manish Chowdhary is the founder and CEO of Cahoot, a peer-to-peer order fulfillment network where merchants collaborate to increase their sales and margins by offering profitable one-day and two-day free shipping to customers nationwide without spending a penny more than the economical ground shipping.