Forecasts are always wrong — that is a foundational truth of projecting demand. It’s a game of how close you can get to reality — and how fast you can respond when you miss the mark.
To better distribute products across its network, Amazon has started charging sellers that carry consistently low levels of inventory relative to unit sales a low-inventory-level fee for standard-sized products. Sellers can avoid this fee if they maintain four weeks of inventory but will be penalized if they go above or below this level.
Unless sellers can achieve the Goldilocks of inventory forecasts — in other words, balance understock versus overstock — more incremental fees are headed their way.
Here’s why Amazon is making this FBA change, how sellers are pushing back and what the change means for the future of ecommerce logistics.
Advertisement
Why is Amazon Adding an FBA Fee?
Rising transportation costs and the pressure to keep reliable amounts of inventory as close as possible to end customers pushed Amazon to make this FBA change. Amazon wants to ensure that any given item is in a fulfillment center as close as possible to a shopper viewing it on Amazon’s platform so that it can support same-day shipping and increased ad effectiveness. The reason for this is simple: same-day shipping, as Amazon CEO Andy Jassy has made clear before, increases sales.
But while Amazon’s change improves the experience for end customers and brings down its own overhead, the change only makes it more challenging for sellers to achieve logistical success.
For many sellers, this change means having to carry more stock than they may be used to. Going up to four weeks of cover may require revamping fulfillment strategies by creating smaller local shipments, shipping to more fulfillment centers and cross-docks, and just generally shipping more inventory — and taking on more costs for those shipments. And while the difference between having up to three weeks versus up to four weeks of cover may seem slight, it can mean millions more in costs for a seller.
Why are Brands Challenging the Change?
Brands and sellers are pushing back against Amazon’s change because of the opacity surrounding how optimal stock is being calculated — and because of how punitive the change is.
How exactly Amazon came up with four weeks as the threshold, how it calculates penalties and how frequently it calculates them can all seem arbitrary. And the frustration only gets compounded when you factor in that Amazon charges sellers a fee if they have too much inventory (so that it can make up for long-term storage costs). What’s more, it’s not immediately clear that Amazon has accounted for the impact of sales and advertising fluctuations — or at least has done so in a way that’s transparent to brands.
To illustrate, let’s say a brand usually sells 100 units on an average week and therefore needs 400 units for every 30 days. But when Prime Day is around the corner, the brand opts to increase inventory to 600 units for the coming week, and it ends up quadrupling sales. This adjustment could lead Amazon to say that the brand’s optimal inventory level now has to be higher than 100 units a week if the brand wants to avoid the fine.
So does the new fee mean that Amazon will charge the brand for not having enough inventory? Would Amazon penalize the brand for selling and storing too high a volume of inventory during Prime Day? Either way, it’s impossible for brands to forecast exactly how much inventory they’ll need, and Amazon is essentially threatening to punish them for something they can’t accurately predict.
This is not the first time Amazon has used the stick versus the carrot. Amazon attempted to incentivize sellers who pushed more inventory volume with discounts on FBA fees, but that initiative ended up receiving little to no uptake among sellers. So Amazon has taken it upon itself to punish brands that can’t maintain inventory — all while saving itself from transportation costs and making sellers shoulder them instead.
Unlike Amazon’s placement change, which incentivizes sellers to evolve their logistics strategies and ends up actually being a good thing for brands, this FBA change has no upside for sellers — unless they aren’t able to see a sales lift on increased inventory position and their placement is already optimal. While Amazon’s placement change gave brands the choice of paying more or revamping their logistics, this FBA change effectively forces them into the choice of accepting nontransparent fees — or getting off Amazon’s platform entirely (which would be in the interest of very few brands).
What Does This Mean for the Future of Logistics?
To navigate this shift in the logistics landscape, brands will need to enhance their forecasting as much as they can. But perfect forecasting, of course, is never possible, so it’s going to be a matter of getting as close to reality as they can and responding rapidly when they’re off the mark.
But beyond illustrating the need for better forecasting, Amazon’s change cements the fact that the supply chain is only going to get more and more complicated for sellers. While Amazon used to take on all the logistical complexities and costs for brands, it’s no longer interested in becoming an all-in-one solution for brands if it means sacrificing profitability.
This FBA fee won’t be the last change coming brands’ way. Going forward, ecommerce sellers will have to handle more complexity than ever before. To find the happy medium — whether it be with inventory levels, transportation efficiency, or any of the other myriad complex factors that go into logistics — brands will likely need help from third parties that have mastered leveraging scale and technology.
Rob Hahn is the COO at Pattern and a former Whitebox executive and senior leader at Amazon. At Amazon, he was a pioneering innovator of the company’s automated fulfillment centers, driving successful integration of robotics and global expansion of the company’s logistics services. He has more than a decade of experience in building and scaling global operations, robotics, and automated warehousing.
