Are 3rd Party Sellers the Future of Fulfillment? Amazon Thinks So!
Amazon has historically used the strategy of building and expanding its own logistics network and now has the largest self-owned fulfillment network in the USA. Starting from 2 fulfillment centers in 1997, Amazon now boasts 355 warehouses, expanding over 3019 million square feet.
That’s a lot of real estate! And all of these fulfillment centers are owned and operated by Amazon, without any third-party support.
However, after years of building its own network, Amazon has finally taken a significant step toward embracing “third-party networks.”
The company recently announced its Hub Delivery Program, which aims to tap into thousands of U.S. small businesses – from bodegas to florists – to deliver its packages by the end of the year. The program requires businesses to deliver an average of 30 packages a day for seven days a week, outside of major holidays. Amazon plans to recruit 2,500 local stores by the end of 2023 for this program.
Why is Amazon Expanding into External Networks Now?
Amazon has realized that the self-owned network strategy is outdated. Last-mile delivery is key to successful fulfillment because it plays a vital role in making consumers happy. Amazon wants to leverage external networks to win in the last mile.
But, last-mile delivery especially with an extremely fragmented external network can be incredibly difficult to get right.
Hub Delivery: Pros and Cons
Let’s evaluate some pros and cons of this new program-:
For Store Owners:
- Extra income up to $27,000 per year.
- Weekly direct deposits
- Increased in-store foot traffic
For Amazon Sellers:
- Reduced last-mile delivery cost
- Faster deliveries
For store owners:
- Storage constraints as small stores have limited space.
- No manpower and infrastructure support to deliver 30 packages/day which may lead to higher costs.
- Extra coordination and operational complexity.
- No information released on per package commission.
- Consistent need for manpower for even seasonal businesses.
For Amazon Sellers:
- The program allows Amazon to access more seller data in the last-mile delivery leg. Amidst anti-competitive concerns and EU accusations of unfairly using non-public seller data, merchants might be at risk by sharing more data with Amazon.
- Dependence on unknown vendors to deliver products – especially risky during the holiday season when timely deliveries are crucial
- The program says that hub representatives will deliver packages when they have time. This increases your reliance on their schedules and might impact delivery timelines.
While it seems that the cons outweigh the pros of this new program, one might speculate on Amazon’s end game – to empower sellers and small businesses, or to just cut costs?
Cost-Cutting Vs Seller Benefit
Amazon has gained considerable media attention for aggressively cutting costs, to reverse the side effects of high operating expenses fueled by pandemic growth. Amidst a 3% YoY drop in online sales and a 23% jump in fulfillment expenses, Amazon closed 99 warehouses, went on a firing spree, and moved to a hub-centric air network. This program could just be yet another cost-cutting exercise at the expense of store owners, sellers, and consumers.
In its quest to cut costs, Amazon moved from a national fulfillment network to a regionalized model. The tech giant also said it is deploying new AI-driven algorithms to predict what customers in the regional hubs will need to guide inventory placement systems.
Amazon’s Regional Model Vs National Model
The goal is to ensure shorter travel distances that enable cheaper and faster deliveries with the regionalized model. In the national model, if a local store ran out of a product, Amazon would have to ship products from other parts of the countries, leading to cost inefficiencies and time delays.
Let’s further dive into what Amazon’s strategic moves mean for the future of fulfillment:
- Ground network efficiencies are pivotal to successful fulfillment.
Both of Amazon’s moves aim to generate cost and delivery efficiencies through a denser ground network strategy. Sellers must evaluate how great their fulfillment partners are at nailing ground networks. If your order fulfillment service is still moving goods across the country when your end customer is closer, you’re not playing the game right!
- Last-mile delivery will make or break your business.
With last-mile delivery being a key determinant of consumer satisfaction, you cannot afford to go wrong with it. Sellers need a fulfillment partner that allows them to distribute inventory closer to the end consumer if they want to conquer last-mile delivery.
- External networks are better than owned networks.
Gone are the days when incurring huge capital expenditures to own warehouses was a good strategy. Consumers want nothing less than ultrafast deliveries. You need a fulfillment partner with a built-in network of multiple warehouses to deliver goods faster, cheaper, and smarter.
Why do sellers need an FBA alternative?
Sellers need a smarter and personalized 3rd party seller (3PL) FBA fulfillment alternative that can offer the same benefits as FBA, at much lower costs. With Amazon, reopening its Seller Fulfilled Prime (SFP) program, sellers can get the benefits of Prime and yet have autonomy over their logistics. Sellers should look for partners that can provide them with:
- A dense network of warehouses for nationwide delivery
- Ground network efficiencies to avoid expensive air shipping
- Consolidated fulfillment and shipping services for leaner processes
- Cheaper order fulfillment than FBA
- Personalized one-on-one seller support
With logistics getting more complex and expensive, sellers need to reevaluate their fulfillment networks and partners to ensure a successful ground network strategy.