Originally published on March 1, 2018, updated July 1, 2020
Learn how to apply Lean strategies to your supply chain to minimize lead time and increase profitability. eComEngine Founder & President Jay Lagarde and Director of Product Ken Furlong share actionable ideas in this informative presentation from the 2018 Amazon Virtual Summit hosted by CPC Strategy (now Tinuiti). You’ll learn:
You can watch the webinar above or check out the show notes below for the recap and a full transcript.
eComEngine’s Jay Lagarde and Ken Furlong hosted a presentation at CPC Strategy’s 2018 Amazon Virtual Summit where they shared their secrets for maintaining a Lean Amazon Supply Chain. In this recap, we’ll discuss three supply chain models (local, direct and cross dock), the importance of lead times, and how lean strategies improve business agility.
You have a supplier, take deliveries and store at least some of the items at your facility and then ship to the Amazon fulfillment center.
The Direct Model
Your supplier ships your order straight to the Amazon fulfillment center and you never touch the inventory.
This option allows Amazon sellers to meet somewhere in the middle. You’ll receive the items, process them in some way (whether it’s stickering or kitting, etc.) and then send out to Amazon.
As you can see, there are advantages and drawbacks associated with the local and direct models, but overall one of them may be most suitable for your business. While juggling multiple shipments can be tricky with limited resources, Amazon sellers who cross dock will benefit from protecting their competitive advantages, the opportunity for QA and saving money on facility and personnel costs.
As an Amazon seller, the ability to pivot and change direction in a short amount of time is essential. If your lead times are too long, though, you might feel like your hands are tied at moments when you need or want to take action.
“If you have very long lead times, you are walking a tightrope between two problems – one is lost revenue,” Lagarde explained. “You might be leaving a lot of revenue on the table by not trying to seize an opportunity.” This is especially relevant for those times when you notice a new trend or fad and want to ride the wave. Capitalizing on these moments can make or break your business.
It’s understandable that taking risks is scary but playing it safe might not always be the best choice. “You could go ahead and place a big order with your supplier, thinking the demand will still be there when the supply arrives and low and behold the demand dries up and you’ve got lost capital,” Lagarde said. “You’ve got a lot of inventory, low demand. You’re going to have to discount, liquidate in some way. The longer your lead times are, the more you’re going to have to choose between those two risks.”
Another thing to consider, according to Lagarde, is that “the further into the future your forecast goes, the less reliable it’s going to be.” That lack of predictability and flexibility can have serious consequences for your Amazon business.
As an Amazon seller, you need to have the flexibility to capitalize on opportunities as they arise while avoiding the pitfalls associated with falling demand. The idea is to take full advantage of the dynamic nature of the Amazon FBA platform where the ability to be very agile and lean amid rapidly changing conditions can reap immense benefits for business owners.
Following the practical tips shared in the Secrets to a Lean Amazon Supply Chain presentation can help you improve your business’ ability to survive and thrive in an ever-changing market.
Anson: Hello again everyone and welcome to another CPC Strategy hosted webinar. Today is day three of the 2018 Amazon Virtual Summit. For those that have joined us in the past few days or are joining us just for our third day, regardless, you will receive all three recordings to have at your disposal, but very excited today about today's presentation with eComEngine day three, talking about the secrets of lean supply chain on Amazon. I know we alluded to it last on yesterday's presentation about setting goals and how a lot of goals can be aligned and a lot of goals can be achieved through having a very lean supply chain. Really excited to follow up on that, but also have that conversation of why it's important and something that maybe not a lot of Amazon sellers necessarily think about.
Anson: Before we do get into the content of the presentation though, did want to go over some logistics today, just questions I will receive often or to resolve any issues that you may have. First off, the session recordings and slides will be sent out within 72 hours. We do try to have it out to you as soon as possible and you will have all three days worth of presentations and slides again at your disposal just to review any of the content that maybe you missed or just to refresh your memory on content that you have tuned into us with. Secondly, did want to let you know that we have handouts in the right hand corner of slide, whether it's about Amazon sponsored products or just about how to succeed on Amazon, the ultimate guide to Amazon SEO.
Anson: Just resources for you to be able to use, to have your advantage to be able to kill all your goals on Amazon for 2018. The very last thing that we did want to go in today's logistics is just submit all your questions to our panelist. We have two experts in the field. We have Ken and Jay, hanging in on eComEngine over there, really experts in all things Amazon. If you do have any questions about anything that they're talking about, the lean supply chain, any concepts that they'll be going over, feel free to shoot them over my way using the question chat box functionality. It not only helps us really see where we can help each of the audience members out, but more importantly it ensures that you get what you came here for and getting your questions answered that you might have for our presenters.
Anson: Again, any questions that you have, feel free to shoot them over my way. I will be in the back end venting through the questions and of course just making sure helping out with any technical issues or anything of that sort. My name is Anson Han, I'm the Digital Marketing Analyst over here at CPC Strategy and I will be answering and communicating with you all on the back end. Again, trying to just make this as smooth as possible. The one thing that I did want to say before moving forward is that we don't take your hour here very lightly. We know that it is very valuable. Throughout this time, we have these different resources for you and again, the question chat box functionality for you again, just to make sure that you are getting the most out of the time that you spend here.
Anson: Did want to go into the summit details. Like I said, today is day three of our event. Day one, we had CPC presenting on the growing necessity, ran on Amazon, shifted it over a little bit to talk more about sponsored products and the need to win on sponsored products. And then, day two we talked with Feedvisor about how to set your goals in 2018 on Amazon, again and a lot of goals can be encompassed from a brand under a lean Amazon supply chain and making sure that your Amazon supply chain is as efficient as possible so that your business can grow and scale up properly, which is what we'll be talking about today. It's a day three with eComEngine, the secrets on lean Amazon supply chain. Again, as I stated, very excited for our speakers to present here today.
Anson: Before we do go any further though, did want to mention CPC Strategy a little bit of who we are. Just so you know that we are very knowledgeable in this space as well. We were founded in 2007, we have over 400 active retail clients and we do have solutions spanning, the Google shopping side of the world, whether it's retail-focused PBC and shopping, but mainly what we're talking about today, Amazon sales acceleration, content optimization, creative services as well as Facebook performance marketing. You can see below the diverse portfolio of clients that we have under our belt, that we have delivered lasting results for and who we are really proud to work with, and who we are really proud to represent as well.
Anson: Now, that I've mentioned CPC Strategy a little bit, did want to turn it over to today's speakers. We have Ken and Jay from eComEngine and I'll actually go ahead and let them introduce themselves and take it away with the rest of the presentation.
Jay: Thanks a lot Anson. We're really excited to be here today to share some thoughts and tips about a lean supply chain on Amazon. I'm Jay Lagarde, I'm the Founder and CEO of eComEngine. And this is Ken Furlong, our Director of Product and a long time student of lean and really an expert in software and lean supply chain. Again, we're really excited to be here today and look forward to sharing some of the things we've learned over the last really five to 10 years working with Amazon sellers. Just to introduce you a little bit about eComEngine, we started in 2006, really doing primarily custom consulting of about Amazon supply chains. We did a lot of custom integrations.
Jay: Today, in 2018, we are a software as a service company. And what you see here are the three main tools that we offer today, which is Restock Pro, which has our supply chain tool. FeedbackFive, which is a reputation management tool and eComSpy, which is a marketplace intelligence tool. We do have a lot of background working with Amazon sellers, really tens of thousands of Amazon sellers. And we're hoping to share with you some subtle, but we think very critical things today that your listeners today can take home and hopefully really help to grow their business. Today's agenda, again, some of the things we're talking about today are not necessarily things that might be top of mind when you first start thinking about your Amazon business and how to grow your Amazon business.
Jay: And that's really why we picked today's topic. We wanted to find something where it's not something that's perfectly obvious, but something that would really deliver a lot of hidden value. I'm just going to briefly overview some of the things that we're going to talk about today. Number one, the criticality of lead times for profitability. Number two, we're going to look at some tactics for driving down lead times using different FBA supply chain models. Then we'll get to talk about really hidden danger. Sometimes you think you're really optimizing something really well. You're doing one little part of the puzzle and you're doing it really well but sometimes by focusing on one thing and not looking at the whole, you can actually be causing more damage than good.
Jay: And we're going to give you some ideas about why that's the case and give you some examples. We're going to look at some pros and cons of different supply chain models for Amazon FBA. And last, and very importantly, an underlying theme of our talk today is really about agile and lean and FBA. If you think about retail marketplaces today, there's really no marketplace in the world than Amazon third party marketplaces, which are more dynamic, more changing, more exciting, growing more. And it's more critical than ever today to be very agile, to be able to flex and deal with the changing dynamic environment. And we're going to give you some tips on how to do that effectively and grow profitability in your business.
Jay: With that, I am going to turn it over to Ken Furlong who's going to talk a little bit about why lead times are so important for your Amazon FBA business.
Ken All right. Thank you very much Jay and good morning or good afternoon to everyone, as the case may be. As Jay mentioned, we're going to start with a high level just conceptual discussion of why lead times are so critical. And then we'll segue into some really specific concrete tactics you can take home with you and start implementing today. The first thing we want to talk about with lead times is, if you have very long lead times, and by a very long, I mean, let's say 60 or 90 days, that means you can really capitalize far less on near term demand that you may encounter.
Ken Perhaps you see an opportunity in the market, perhaps you see an item for whatever reason, it gets very fashionable very quickly or for whatever reason demand spikes. If you have very long lead times, you are walking a tightrope between two problems. One is lost revenue. You might say, "Well, This is a short term blip. This is a fad. It might be over by the time my supply arrive, I don't want to risk it." And so, you might be leaving a lot of revenue on the table by not trying to seize that opportunity. On the other hand, you could air the other way and go ahead and maybe place a big order with your supplier or what have you thinking that the demand will still be there when the supply arrives. And lo and behold, the demand dries up.
Ken And now you have lost capital. You've got a lot of inventory, low demand, you're going to have to discount, liquidate in some way. And as a seller, you don't want to have to choose between those two risks. And the longer your lead times are, the more you're going to have to choose between those two risks. So, that's the first thing about long lead times. The second thing we'd like to talk about with long lead times is pretty much by definition, the longer your lead times, the further into the future, you need to forecast demand. If it's going to be 60 or 90 days before you get new supply, you need to forecast 60 or 90 days out into the future actually, quite a bit more than that.
Ken And pretty much by definition, the further into the future your forecast goes, the less reliable it's going to be. It's just like the weather report. You might trust the weather man when they say something's going to happen tomorrow, you probably don't trust them too much when they say something's going to happen 14 days from now. And it's just like that with your demand forecast, the further into the future it goes, the less reliable it goes or it gets and therefore again, the more either capital or revenue you're risking. And then the third thing we like to talk about is the longer your lead times, the more inventory you're going to have in your supply chain at any given time. If your lead times are, let's just say 90 days, and you are 45 days into an order, you placed an order 45 days ago, it's on its way, that's one thing.
Ken You've got a lot of inventories somewhere. It's either in transit or at your local warehouse, maybe it's at an Amazon facility, maybe it's on its way to an Amazon facility, but somewhere in your supply chain is a lot of inventory. And that's a real problem because most of the time that inventory costs you something. You've already paid for it or you've already paid for the transit or you're paying for storage fees at Amazon, whatever it happens to be, wherever that inventory leads in your supply chain, it's tying up capital. And that's a problem. At a high level, those are the first three things we usually talk about in terms of the criticality of lead times. And then as we said, we want to pair this with some really practical concrete tips for you to take home and start implementing so I'm going to turn it back over to Jay and he's going to talk about some ways to drive down your lead times.
Jay: Thanks Ken. And I would just add that having excess inventory is also a risk as anybody that sells on FBA knows, prices change, demand changes and you want to reduce that risk. The first thing we want to look at is when you're moving inventory from your warehouse to Amazon, very, very common scenario for almost all FBA sellers. And what we're trying to do is just give you some tips that you can take away, some of you are going to be familiar with some of these but hopefully we'll give you something of value that you can think about to get those lead times down because they are really more critical than you may first think. The first is to automate the shipment setup. Setting up complex shipments, if it's hundreds of SKUs or even 50 or 60 SKUs, if you're doing it manually, it's tedious.
Jay: And so, we recommend automating as much as possible using flat files, using a tool to automate that shipment set up that does a number of things that speeds it up. And importantly, it helps you avoid error. Rigorously following prep rules. We all know this, Amazon has got very rigorous prep rules and it can be very easy to mess those up or sometimes ignore some of them. But we know that following those prep rules, whereas it may take a little bit longer on your side, it actually increases the speed of receiving on Amazon. And reduces the likelihood of number one, receiving slowdowns and number two, the likelihood that you'll have errors in the receiving. Won't guarantee no errors, but it will reduce the likelihood.
Jay: Thirdly, synchronize inbound and outbound operations. What do we mean by this? Well, when you set up your purchase order with your supplier, have in mind what you're going to be sending to Amazon and how you're going to be sending it to Amazon. Consider having that FBA inbound shipment already set up knowing how it needs to be parsed out. And if you can synchronize the way your PO is structured with your supplier to minimize the amount of processing you need to do, minimize the amount of errors that you may potentially have, in your warehouse, you can cut time, you can cut errors. And the same thing would be true when you think about staffing for that operation.
Jay: If you have a very large warehouse and you've got an inbound receiving staff and you've got outbound staff. Well, you ought to think about maybe blending that, either having one person to work on both or having a team together work on both that inbound and outbound because the person who processes that inbound, if they're also pushing the outbound, that's a chance for time efficiency as well as quality assurance and reducing errors in flipping inventory back out to Amazon. Next, it should go without saying that Amazon partner carriers, they not only save you money, but oftentimes they can grease the skids in getting things into Amazon more error free. It's not a guarantee, but it does help.
Jay: And then last, this is a little bit of a edge case, but there are times at Amazon where things are very busy at the Amazon warehouse, it can vary a little bit from warehouse to warehouse, but we all know that December, Prime Day or times when things can get blocked up. And it sometimes is important to think very critically about that. If it's December 1, and you're trying to get inventory slotted in for sale at Amazon something demand jolted, you're trying to move things in, get those last minute sales in 4Q. You need to think very critically, what warehouse is this going to? How long is it taking LTL or FCL carriers to get a delivery appointments in Amazon?
Jay: And if they are long as they often are, think about spending a little more money in sending those packages in by parcel because a lot of times that can greatly influence the speed with which your inventory gets into Amazon.
Anson: Yeah, definitely. Sorry, Jay, before I move on. I really like those points of information. I actually didn't know a few of them myself. And so, I know we're getting a few comments of people saying that these are really good, things that they didn't really think about. That's awesome. We did have a question from Maria though. I wanted to get your opinion on it. Obviously, we're talking in this case of strictly as FBA, she was wondering though, is there ever a point that you would think of where you would want to switch to FBM, to have some more of that control and maybe lower the cost of the fees as well or just out of the whole FBA just makes things a little bit easier? And again, does lead time more leaner supply chain that you would recommend going against or you would go against going FBM?
Jay: Yeah, that's a really, an excellent question. The whole FBA, FBM equation. And of course, now we have seller fulfilled prime, which is another layer on top of that. Where you can use Amazon carriers or Amazon itself to pick things up from your warehouse and deliver them to your customer. And really this is a puzzle that's unique for every given set of SKUs and every given seller. The size of the skew, the cost of moving them around as well as obviously some strategic things, selling FBA does have some buybacks benefits that are helpful. I don't want to get into a lot of the details on that because there's some interesting conversations around FBA versus seller fulfilled prime versus FBM, but that's something to keep in mind.
Jay: Without getting too far field, it's a great question and we're available, we deal with these questions all the time in our business and we're happy to talk to one of our success experts or contact, reach out to Ken or I we can both really deep dive in and help you think through some of the dynamics. And sometimes the answer isn't either one, sometimes the answer is both.
Anson: Yeah, another one of those great, it depends answer. That's great to hear. And before we actually do move on, we have another question from Robert who was just asking if you could elaborate a little more on the differences between parcel versus LTL versus FCL.
Jay: Yeah, parcel is your standard UPS, FedEx type parcels, small boxes. LTLs when you're sending a pallet or several pallets and FCL is when you've got a full container load. You're basically moving a full container into Amazon and you own that truck. You don't necessarily own the truck, but everything in that truck is yours. Those are the three different options and there are Amazon partnership opportunities, to use their partner carriers for all three of those inbound options.
Anson: Yeah, definitely. All right, Robert, hopefully that answered your question. Thanks, Jay.
Jay: Sure. Now, we're going to talk about another scenario where you're getting things from supplier to you, because again, this is all a part of your supply chain. We're going to talk about some things that again, subtle, maybe not always obvious, but they can really make a difference. One is to speak your supplier's order language. Your supplier uses a certain SKU that's different from yours, if they like a certain format, if they like to get a flat file, if they like to get an email, think about accommodating their needs because the more you can do to speed up things in your suppliers world, and think like your supplier does, the faster they're going to move and the less likely you're going to have misunderstandings or errors.
Jay: The part of that is, if you can, if your supplier offers the ability to do EDI or some type of a flat file or XML integration, think about automating those orders, especially for a high volume supplier that you're working with where you're kicking them orders regularly. Again, you've got speed, and you've got error reduction. It can be really crucial not just on your end, but also from your supplier's point of view. If you're giving them the orders in which they like them. It makes it easier for them and they will work harder and faster for you because of that. Communicate your forecast. That's interesting. This doesn't mean that you need to hand over your forecasting software over to your supplier, but it does mean to communicate with your supplier and let them know what your expected demand is.
Jay: It doesn't have to be exact, but letting them know ahead of time, lets them prepare for your needs. And sometimes you can have a situation where a supplier can put soft tolls on items for you, so that if your rep is expecting you to order a thousand or a hundred certain SKUs, maybe they'll put a soft hold and somebody else is trying to get them, maybe you'll get a call, "Hey, if you don't get these now you're going to lose them." That type of communication can be really critical to having a really smooth supply chain. Small and more frequent orders. There are a lot of reasons for that but one simple reason is, is that small orders are faster to process and less friction, less chance of error.
Jay: And Ken's going to go into a little more about why small order sizing can often be more efficient from a lean perspective than big orders. Not saying never to do big orders, but think twice before you save a couple of dimes just to... or it's big order because they're big risks. And there are some less agility by doing big orders. Pay on time. This is a little different one. But basically this is the way of saying, be friends with your supplier. If you're always working them over and you're not thinking of them as a partner, then they're going to think of you as less a partner and you really want your supplier to be on your team, on your side, to work with you, to help you be success. It can make really all the difference in the world. Really, we think you should build a supply chain partnership.
Anson: Yeah, definitely, and funnily enough, you actually answered a question that we got towards the beginning of the webinar in terms of improving communication with your manufacturer. Again, like you said, your supplier, just making sure that it is more of a partnership. That's great to hear. John's Real, hopefully that question was answered for you.
Jay: Cool. Okay, go to the next. Last, we're going to talk about sending things from your suppliers directly in Amazon. And this is really a great idea if you can do it because think about it, you're saving a whole hop in the process and if you can do it, you're saving time and money and time and money is the name of the game when optimizing your FBA lean supply chain. First thing is you want to train, you really want to train your suppliers. You want to give them everything they need to know in order to meet Amazon's prep rules. You need to maybe even overtrain them, in the right way. Your supplier may or may not know the way things look like on Amazon side. They may not realize that if they mess up box contents and things, they will get you penalized and maybe even worse, your Amazon will be sitting in limbo for too long before it actually gets received properly or there'll be errors and so forth.
Jay: Train them, provide them with all the box labels, the shipping labels, et cetera, to make sure that they get things into Amazon just as effectively as you would. There is a new thing being tested by Amazon that some people may be aware of called supply chain connect. This may not be for everybody, but for those that are willing to be very transparent with Amazon and feel like it's okay to be very transparent with Amazon about their supply chain. There's a new tool in place where you can actually give your supplier access to something similar to your seller central portal. Where they can download all of the information to get the inbound shipment correct, and do all the sorts of interactions that a seller would normally do with respect to a shipment, including printing shipping labels and so forth.
Jay: And last, this is another little thing to think about. If you're thinking about supplier going directly from supplier to Amazon, but you say, "But I've got a few SKUs that need to be stickered and I need to sticker those SKUs. Amazon requires that in my warehouse." Well, if it's just a few SKUs, you ought to think about the paying in that case for Amazon, if it's just a few SKUs, it may be cheaper to pay for Amazon to sticker SKUs for you if your supplier can't rather than endure all the costs of bringing those items into your own warehouse. That's a summary of our tips. There's obviously a lot more, but we think these are some small, subtle things that can incrementally really drive some efficiencies in your Amazon supply chain and can really make a big difference. Okay, Ken.
Ken Again, all right. Thank you Jay. We're going to talk a little bit more about some of the things Jay touched on just a moment ago regarding knowing your real costs, and how sometimes optimizing one little part of your business or one little part of your supply chain can actually do harm to the whole. And so, in lean, this is generally what we call local optimization. You'll hear that term a lot but let's think about it this way. Think about your real costs, not just the costs that are easily quantifiable, but all the costs you incur when you purchase inventory. First off, there's generally this broad category of holding costs and there's just a lot of different flavors of this.
Ken First of all, most obviously there's the physical space that is going to be taken up with the inventory that you order. There's going to be storage solutions, whether that's racks or bins or what have you. There's all of the time you're going to put into it, because if you have a nontrivial warehouse, with a nontrivial number of SKUs in it, you're going to have to do a lot of unit tracking, you're going to have to do a lot of sorting. Inevitably, you're going to have to do a lot of resorting as you try to move things around and fit things in as new opportunities arise.
Ken Even if you're storing things at Amazon, you're going to incur some storage fees with some kinds of SKUs depending on what kind of business you're in. There's perishability obviously. And then there are all those things that we generally think of as overhead. There's the insurance, there's the utilities, so on and so forth. And these are very real costs that you incur as a business, either physical costs, time costs, or just "overhead costs" you can actually quantify easily. But the point is, they're all costing you money in one form or another, but they're hard to attribute. It's hard to attribute utility costs, for example, down to a particular SKU. And so, you probably just don't bother, you probably lump that into a category called overhead and move along.
Ken The problem with that, is that it really is a real cost and it really is increasing as you increase your inventory, but you might not be taking that into account when you decide what to pay for something and what to charge for something. To really think about all those hidden costs that are just hard to quantify, they really need to be quantified and attributed. The second general category of costs would be opportunity costs. And again, this obtains for whether we're talking about the money, the time, the physical space. Whenever you're doing something with your inventory, you are not doing something with some other piece of inventory that you could be. If you're storing a hundred widgets, you're taking up space and now you can't store a hundred cogs, or if you have money tied up in one SKU, by definition, you can't buy the other SKU.
Ken Or if your personnel are spending time resorting your warehouse because it's getting cluttered again, they're not spending time doing something else. So, really think through those opportunity costs. And then as Jay mentioned a little while ago, there's always demand risk. There's the risk that you have a lot of inventory. It might even be moving very well right now, but that demand can dry up for a whole variety of reasons. And then, of course, there are lots of other categories of costs, but these are the ones that we recommend you focus on first. First of all, know your real cost. And then, when we start talking about optimization and local optimization, as Jay mentioned, it's very tempting to buy large orders. And almost always the reason for that is volume discounts.
Ken This siren song of volume discounts. Your supplier is saying, "Hey, I'll give you a 5% discount if you order a thousand, I'll give you a 10% discount if you order 10,000," so on and so forth. And that can make your per unit cost look really attractive in a spreadsheet, but that's because again, your spreadsheet probably doesn't take into account all of these hidden costs, the utilities, the insurance, the personnel time involved, so on and so forth. Really, think twice about those very large orders, even if you're getting a volume discount. And here's a couple of things that we want to just sort of leave you with a little sound bites, if you will. Again, think about will you still have room to maneuver? And we mean that literally or figuratively.
Ken If you've been in a warehouse where you just received a very large order because you've got a great volume discount, you know what I mean by whether you have room to maneuver or not? Similarly, you've got a lot of capital tied up now, can you maneuver it, if a new skew suddenly pops onto your radar or one of your existing SKUs demand pops? Do you have room to maneuver? Do you have room to respond to that demand? And then the last thing, and Jay alluded to this, really think through and talk to your suppliers about whether this is actually what they want. A lot of your suppliers will be communicating to you via their pricing structure. "Hey, we like it when you place really big orders." It might turn out that they really don't like that even though their pricing structure tells you that.
Ken They might far prefer you to order in much smaller batches, so long as you guarantee a certain volume over the long haul. Or they might prefer that you order in smaller batches and extend you that discount anyway, just because you're a very reliable customer who for example, pays on time. Really talk to your suppliers, partner with them, really find out what is it that's important to them in their business. Find out if their pricing is really communicating something to you that it shouldn't be and then work with them to find a win-win.
Ken All right. And then next we want to dive into some of the pros and cons of different supply chain models. And one of the questions alluded to this earlier. And just to level set real quick, at a high level we talk about three different supply chain models and these are not all the flavors and whatnot, but these are kind of the big ones that we want to get on people's radar. The first is local and local is where you've got a supplier, you order from your supplier, you take delivery at your facility, you store at least some portion of that inventory at your facility on any given day. At any given point, you ship it to Amazon and then there's some sitting at Amazon.
Ken The key thing about this model is that you have at least one facility of your own and you intend to hold inventory there. The direct model is very simple. It's where, as Jay said, your supplier ships it straight to Amazon for you and you never touch the inventory. And then cross dock is, you can almost think of it as a blend of the two. Cross dock is where you take physical delivery of it, but you don't intend to hold that inventory for any meaningful amount of time. You're really just sort of taking it off of one truck, processing it in some way, whether that's for stickering or kitting or what have you, and then sending it right back out the door to Amazon.
Ken And the key here is that even though you're taking delivery of the items, you're not planning on storing them for any meaningful amount of time. That's what we mean by the three models. We're going to dive in to each one now. Let's start with local. As with all the models, there are some pros to having a local model for your supply chain. First off, it gives you a lot of multichannel flexibility. If you're selling not only on Amazon but perhaps in a brick and mortar environment perhaps, on a Shopify store, whatever other channel you may be selling on having that local inventory where you can distribute those units to your channels as you need, on demand can be very powerful.
Ken It also gives you at least a potentially lower cost structure than direct, because at least in theory, you're not storing 100% of your inventory at Amazon and incurring those storage fees. You're holding some back incurring, presumably a lower holding cost on your side and then sort of releasing inventory to Amazon as needed. Another advantage which might not be very obvious to folks is that having your local facility and having sort of that stop if you will, in between your supplier and your channels, whatever your channels might be, can help sort of protect competitive advantages and information. It provides a little bit of opaqueness to your supply chain and doesn't show all of your cards to everyone else in the market.
Ken And then lastly, having your own facility, having physical control over the inventory, it gives you an opportunity to do some value-add, whether that's in the form of customized packaging or bundling, or even just better stickering so on and so forth. That being said, there are some cons to the local model. First off, as we talked about earlier, there's the holding costs. You're going to have to have a physical facility, whether that's a million square foot warehouse or your garage or something in between, and that facility is going to have costs associated with it. You're also presumably going to have to have personnel or at least your own personal time, there's going to be a lot of in processing, there's going to be organization and reorganization as we said, and then there's going to be out processing.
Ken And then the other thing, which again might not be terribly obvious at first glance, is that in the local model, by definition you have multiple shipping events and whenever you're moving inventory around, that's an opportunity for something to go wrong. Whether it's that inventory got damaged or it got lost or it got delayed or what have you. And so, just by the very nature of accepting multiple shipping events, you're sort of incurring extra risk. In general, this isn't always in everywhere true, but in general, we recommend using the local model for multichannel kits, for multichannel SKUs that can't be direct shipped for whatever reason and for any SKU where the holding cost is reasonably low. And especially if that holding costs, low holding cost SKU has, let's say higher than average demand variability. Some days you sell 10, some days you sell zero, so on and so forth. Having that inventory buffer at your local facility can help smooth that out.
Ken The next model is the direct model. Again, where your supplier shipping directly to Amazon. And so, some of the pros with this model are, first off you have a single shipping event, not two, not three, not however many. There's a single shipping event, less opportunity for things to go wrong. You don't incur any facility costs on your side obviously. You don't incur any time costs, you don't in process, you don't out process so on and so forth. And you don't have any personnel costs because again, you're not doing any of those operations.
Ken The downsides though are of course, depending on the SKU and whatnot, you have a potentially higher cost structure with the FBA storage fees. Also you can't pool inventory between multiple channels. If you're selling, again, a SKU on three or four different channels, one of which is Amazon and you're shipping direct to Amazon. If your demand dries up at Amazon and it spikes somewhere else, it's just that much more difficult to move your supply around and satisfy that demand and it can just end up in the wrong channel at the wrong time, then you lose revenue and incur higher costs as a result.
Ken And then again, one of the cons of this model is that your supply is very transparent both to your supplier then to your channels. And in some cases that can be a competitive disadvantage for you. In general, we recommend this model for high holding cost SKUs, anything where for whatever reason is going to be very expensive for you to hold it, this might be a good option for you. For any SKU where you're just selling on a single channel because you don't have that inventory pooling aspects of that can be a good model.
Ken And then, for SKUs that are commoditized, this can also be a very good model, if you have some other advantage in your business, whether it's the ability to obtain the inventory at a lower cost or what have you. And of course, all of these assume that your SKU can be direct ship. Oftentimes, they can't be. And then the last model again is cross dock and some of the pros here are that, you do have lower or possibly no facility costs on your side depending on exactly how much inventory you're moving through your cross dock and that sort of thing. Again, presumably you have lower personnel and time costs involved because sure, you're taking delivery, you might be doing a little bit of processing, you're doing some out processing but you're probably not storing things, moving them from one rack to another, reorganizing them every time you get a new shipment, so on and so forth.
Ken Cross dock, like local has the advantage of protecting some competitive information in your supply chain. It also, while it does introduce multiple shipping events, it gives you an opportunity to do some QA. For example, if you have a SKU where you've had quality problems in the past, maybe you were shipping it direct to the channel and you got a lot of returns saying it was broken, it was the wrong item, what have you. Doing something cross dock at least allows you to put eyes on the item before it goes to your channel and make sure that everything is up to spec and if there is a quality problem you catch it earlier and can remediate it much earlier.
Ken And then lastly, like local, cross dock also gives you the opportunity to provide some value-add. Again, whether that's custom packaging, kitting, special instructions, special stickers, what have you. The cons of cross dock, again, can be a little counterintuitive, but the first thing that we point out is if you're in a cross dock model, it can get very tricky to juggle multiple incoming shipments, if they all arrive too close to one another. You might have enough space or enough personnel or what have you, to handle an inbound shipment from one supplier and flip it and get it back out the door to Amazon. You might not have the wherewithal, whether physical space or personnel or what have you to handle three or four. And sooner or later something's going to go wrong. You're going to have your incoming orders scheduled perfectly and one of them is going to be delayed. And so, both of them are going to arrive on the same day or what have you.
Ken Any number of things that can go wrong. So, that is a risk you're incurring with cross dock. Also like the direct model, it's more difficult to pull the inventory that you might have between multiple channels. Again, in general, these aren't hard and fast rules, but we generally recommend that you use cross dock for any SKUs that are high holding costs where you have a single channel. They might be commoditized SKUs or like we said SKUs that have a higher than average defect rate because again, it gives you that opportunity to do some QA, or SKUs for which custom packaging or stickering would be good. Also cross dock can be really good for some kinds of kits, but to Jay's point earlier that's probably more of a deep dive than we have time for today. So, just have that as a bug in your ear that certain kinds of kits can be very well handled in the cross dock model.
Ken All right. And with that, we're going to recap just very briefly and then see if we have any more questions. A couple of things we've gone over today are for instance, lead times and knowing your costs and these are pretty, pretty basic lean strategies, that any good lean practitioner would advise you to look into. But the key thing for this audience is that these lean strategies really help you capitalize on what you care about. For example, rising demand or they help you avoid discounting or liquidation for the falling demand. And that can dramatically increase the agility of your business both because it frees up capital, it frees up space and frees up time. They can also reduce quality issues, whether it's with in processing, or out processing or so on and so forth.
Ken And as we've discussed, that really helps you in your business. And then lastly, like we talked about, it can just dramatically reduce the need for capital or the need for physical space to be tied up and give you that room to maneuver both literally and figuratively, that we talked about. And just to recap something we said earlier, when you think about the dynamics of the Amazon FBA platform, these benefits really become magnified even more given how dynamic it is. There are very few other retail environments where you can't think of some of the immense benefits that can happened from being very agile and lean and being able to respond to very rapidly changing conditions and ultimately taking advantage of opportunities that regularly arise.
Anson: Yeah, definitely. And we agree on our end as well to what you just said Jay, it is really all about doing those small things really well and doing the things that maybe not necessarily every other seller is thinking about like adopting a lean strategy that really do set aside those just regular sellers, those seller that are actually ready to succeed on Amazon. And one thing that we have been saying for the past few months that I realize you need to start thinking of Amazon as its own business to your business. You have to have an actual strategy behind it and have a game plan, like you said, to really succeed. So, really like that point. And then just terms of recapping really like all the points that we've hit so far.
Ken Great. Thank you. And so lastly, as we've discussed, all of these models, a lot of this learning and insight that we have is just based on years and years of working with sellers and understanding their pain points, understanding what matters to them in their business. And as Jay mentioned, we don't have time to go into sort of all the nitty gritty details today, but if you have questions, if you have concerns, if you just want to learn more, definitely reach out to us and we're always happy to chat and see if we can help you with your business.
Anson: Awesome. Yeah, definitely. And I know we have a decent amount of time for questions left. I did have a few questions that had come in to start the webinar, not necessarily having a great place to just interject here. Wanted to just spend time and answer a few questions but if you do have any other questions that you want to ask right now is the time, use the question box functionality and let us know how we can really address those points for you. Any points of pain, anything that, again, you want to answer to make sure that you're getting the most of your time. Did want to start us off on, someday we have mentioned a few times which is on smaller, more frequent orders and I guess, this is free to you Jay or Ken.
Anson: How do you manage overseas suppliers who push for those full container shipments? Is that more of a communication issue? Is that something they usually do pick the right manufacturers, right supplier? Is there any tip or insight that you can provide there?
Jay: Yeah, there's no one right answer. I mean, a lot of it depends on the sizing of what you're doing. I mean, we do have some clients, some customers that are very focused on small items because they love the ability to move things rapidly via air into the supply chain. If you've got large items and the cost of moving things is different, obviously you've got to move things in and container loads, and it's a different ball game or if you're doing it at scale, you need to move things in container loads. I don't know that there's any right answer. A lot of it depends on the weight and size of your skew, the relationship with your supplier. I mean, these principles apply, regardless, they apply, no matter whether you're sourcing from Asia or whether you're sourcing from somebody in a town next door or even right next door.
Jay: They apply, you just have to apply them in context. If it's a month lead time, obviously if you had a choice, a one week lead time is better than one month and one month is better than three months but whatever you can do to squeeze time out of that lead time really adds to your business agility. And that includes even long lead times. I mean, if you can go from three months to 1.5 months by working with your supplier more diligently that's a big difference.
Jay: And that really affects the holding cost of your inventory that you have to hold on to an Amazon. It reduces your risks, it reduces your holding costs, it reduces the amount of money you have to have tied up in inventory.
Ken And one thing I'd add to that, I think Jay is spot on with everything he just said. One thing I'd add, is that to Jay's point at the very beginning, it might be the right decision for your business to take the whole container load and take the volume discounter or even if there isn't one. It all depends on the variables involved, what's the cost, the real cost of taking the full container load versus taking, let's say one third the amount of inventory and having to pay much higher shipping costs or maybe moderately higher shipping costs? It really depends. To start answering that question for your own business, really sit down and think through the scenarios. Scenario one, I take the whole container, it costs me this much, here's how much capital I'm putting at risk so on and so forth.
Ken Scenario two, I pay whatever X minus some percent but my unit cost doesn't look as attractive. What does your insurance costs look like? What does the holding costs look like? How sure are you in that demand forecast three months out that you're predicating this on? And then, everybody's risk tolerance is different, you might be comfortable with that risk, somebody else might not be comfortable with that risk, but just to even make the decision really sit down and be brutally honest with yourself about what is the true cost you're incurring getting that large of a shipment.
Anson: Yeah, definitely. Thanks for the answer guys. Jay, this next one's for you. I know you mentioned this in your presentation about an option that Amazon or the option that you have for Amazon to come pick up the product from your own warehouse. Can you just elaborate a little bit more on that?
Jay: I think that what they're alluding to, they're seller fulfilled prime, if I'm not mistaken. Obviously, this is a mechanism and you have to be approved for it where you can have that prime badge on your product, but it's really stored in your warehouse, not in Amazon's warehouse. And obviously, typically, when you're doing seller fulfilled prime right now, you're using either Amazon partner carrier or we're now seeing in certain environments where Amazon themselves are developing some logistics capabilities. And you may find that some of us in certain areas like us here in Richmond, Virginia we're right South of Washington D.C and we do have Amazon delivery people all the time delivering in our area. Sometimes you may have an Amazon logistics capability and engage in that as well. Not necessarily, but it could be.
Anson: Got you. Thanks for answering that. Hopefully, that elaborate a little bit more for you Karosh. This next one is a little bit more open, I guess, it is talking about the supply chain connect option. Is it available for other marketplaces on Amazon aside from the US right now? Do you know if it's available in Japan, Mexico? Is that not necessarily something that we're familiar with?
Jay: That's a good question. There's very limited information out on it right now. And so, I think we're early stage in looking at this. To the best of my knowledge, I've only heard of instances where it's been used in the US but I think it probably could be available for Chinese suppliers as well. But to be honest, I'm not an absolute expert on that because it is a very new program. And I think as we learn more about this, I think one of the things that sellers will have to think about is, if using this program is a good idea? You want to connect your supplier to Amazon. I mean, the question is, is that part of your business strategy? Are you comfortable with that level of transparency or do you feel like you'd rather manage your supply chain kind of independent of that level of transparency? And that's really a business and strategy decision that any company will need to make.
Anson: Great. Awesome. Hopefully that answered your question there, Mallory. Ken, this is a question for you. We have a question from Ji Hun asking if you could expand a little bit more on the cross dock methodology that you had mentioned or the method. I know that we have that great infographic on slide 34, I'm not sure if we can go back to that really quickly. But I know that obviously the pros and cons are laid out there, but is there anything I guess about this cross dock method that maybe we haven't mentioned that might be able to provide a little bit more clarity to him?
Ken Sure, sure. The cross dock, the analogy there with the label is that you've kind of got a loading dock with one door on one side and one door on the other and a truck is backing up on one side, you're taking it off that truck, you're walking it over to the other side of the loading dock and putting it on a different truck. And that is not quite accurate. That's not quite what is usually going on. Usually there is some stuff in the middle where you're doing some form of processing, whether that's value-add like bundling or custom packaging, better instructions, then the manufacturer or the supplier might send that sort of thing. Or it might just be required Amazon prep, labels, stickers, that sort of thing.
Ken But the point is, you're taking physical delivery but you're not intending to store the inventory locally. You're only taking delivery because maybe you have to and you really are just going to walk it from one truck to another or because you want to, to do some sort of processing. But once that processing is done, if you took a hundred widgets in one side, you're going to process 100, you're going to send them back out the other side. That's distinct from local where you might take a 100 widgets in one side and you might store all 100 and then only process them when you're about to send them to Amazon. Or you might process them on the way in, then put them on the shelf and release them to Amazon as you need, whether in batches of 10 or 20 or what have you.
Ken But the point is there that you're intending to hold onto the inventory locally for some period of time for some reason, whether it's because you have a lower holding cost structure than the FBA storage fees or because you're pooling between channels, so on and so forth. Cross dock, again, you are not intending to hold any inventory you're intending to take it all in and send it all right back out. And as I mentioned, there are some flavors to that, that might not be exactly how everyone listening in on this understands cross dock, but that's what we mean when we say cross dock.
Anson: Awesome. Great. And I think this is actually a great question to end on from Wyatt. And this is just really more so, he's asking, "Is there any really common mistakes or most common mistakes that you see that either lead to longer lead times?" I know you mentioned it in the presentation or that might hinder someone to be able to use a more lean supply chain. Again, obviously it depends business to business are there any common themes or trends that you see most frequently from businesses that might be selling on Amazon that are doing one or two things that really, if they just exit out, can really help them in terms of adopting the leader methodology?
Ken Yeah, the top one.
Jay: The top one.
Ken That's a great question.
Jay: There are a lot of top ones, I think, sometimes it's just ordering too much. Sometimes the eyes are bigger than the stomach and sometimes you need to test and not hold on to too much. I mean, every dollar that you spend on inventory that's important. Those dollars mean agility for you because those dollars mean investments that you're making on things that you can trade, if you will, on the Amazon platform. And if you tie up all your investment dollars in the wrong things and then another great opportunity arises, you're stuck. And so, I think that's a really big one. Obviously, all of these ideas about watching your lead time are really fundamentally designed to reduce the amount of inventory you have to have, the amount of costs you have to have and to be able to flex with the changing dynamics of the Amazon environment. I would say that, but Ken, what are your thoughts? Is there something else that you want to recommend for that answer?
Ken Yeah, I'm going to take a crack. I might not be able to limit myself to one, but I'll take a crack at some of the top several. And these are in no particular order because as Jay said, it really does depend, but somewhere, up in contention for a medal would be focusing too much on per unit cost and thereby ordering too much like Jay said. I only really need a 100 but if I order 500, I get a 10% discount, so I'm going to order 500. Well, unbeknownst to you, that slows your supplier down and in a variety of ways. And so, first of all, you're getting more than you wanted and you're getting them later than you wanted. Focusing on per unit costs without factoring in all those other things is a big one.
Jay: And you made me more bloated than you want to be with that particular SKU.
Ken That's right. In terms of lead that primarily obviously is an issue in terms of lead time from your supplier, whether to you or to Amazon directly.
Jay: There always are exceptions to that. I mean, if you're making, I mean, everybody that's worked on Amazon, sometimes you've got an end of life product. Let's say, you know that you're buying the last remaining units of this in captivity anywhere, it's a crazy example but it happens and you're happy to sell this thing over the next year because you're the only one that's going to happen. Well, there's an exception, there's always exceptions to the rule. We're trying to show you common scenarios. There are always sometimes exceptions that you do want those holding costs, but there's where your buyer is making strategic judgements to bend the rules because of some external factors that don't always apply.
Anson: After what you most said and throughout the webinar too, there was a lot of little tidbits of knowledge. I think people can definitely walk away with, I think two of the main points, again, not necessarily just looking to buy in bulk, but really seeing how that fits into your lean Amazon strategy and also taking more into consideration the actual costs and knowing the real cost as you said Ken, about your actual product in operating an Amazon business. I think that that's two great points that, again, not necessarily a lot of people think about when they're thinking about their Amazon strategies. I guess before we do end here, are there any other last minute thoughts, any closing thoughts for me to review?
Ken That's a great question.
Jay: It is.
Ken I would just underline everything we already talked about. You really know your costs and really make informed decisions. There's not one rule that's going to serve you in every scenario. But if you do your homework, if you are really brutally honest with yourself and look at your costs, and follow some basic principles, you'll do very well.
Jay: And I would just say that at eComEngine, this is certainly a big part of the puzzle, but it's not the only part of the puzzle. We are very, very passionate about helping people be very, very strategic about optimizing their Amazon supply chains. This is part of it, operationalizing things well is another part of it, being very strategic about financial metrics around your SKUs, around your profitability, about your holding costs, about all those hidden costs that are in your supply chain. These are all things we're very passionate about and we're just excited that the market on Amazon is doing well and we just really enjoy working with our customers and clients and helping them be more strategic and grow their Amazon businesses.
Ken This is how we geek out.
Jay: That's about right.
Anson: Yeah, no, that's awesome. And again, like I said just with the summit in general, I really love how the direction of each webinar day has kind of fit all together. So, starting with obviously just in terms of how to set your goals on Amazon. And then talking about really the strategy that you should take in terms of your whole Amazon business and then on the back end as well in terms of advertising after the fact when you have those products, when you have established that business strategy, but to succeed on sponsored products, really covering a wide variety. And I guess the whole scope of the Amazon business and the Amazon ecosystem I think is something that was awesome. So, again, I wanted to just take this time and thank both you Jay and you Ken for speaking. It was a great presentation, but I also wanted to thank the audience members as well for sticking around with us.
Anson: We know, especially for those that have attended all three days more power to you and thank you so much. Again, the time that you spend with us, we do not take for granted and we are so glad that you have been able to join with us and we hope that each day has been of value to you. But as for us, that's all for the Amazon Summit. Looking to close out the Amazon Summit strong, the 2018 Amazon Virtual Summit want to again thank eComEngine, thank Feedvisor, and again our in-house speakers over at CPC Strategy. As for us, that is it. I'm signing off from sunny San Diego. This is CPC strategy and eComEngine. Have a good rest of your day.
Jay: Have a great day everyone.
Originally published on March 1, 2018, updated July 1, 2020
This post is accurate as of the date of publication. Some features and information may have changed due to product updates or Amazon policy changes.