Building a Lean Supply Chain on Amazon
by Liz Fickenscher, on March 1, 2018
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. You’ll learn:
- The criticality of lead time for profitability
- Tactics for driving down lead times
- Know your real costs: how local optimization hides large costs
- Pros and sons of different Amazon supply chain models
- How Lean strategies increase business agility
Here is the recap, written by Jeanne Croteau:
This post is accurate as the date of publication. Some features and information may have changed due to product updates or Amazon policy changes.
Maintaining a Lean Amazon Supply Chain
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 the three supply chain models (local, direct and cross dock), the importance of lead times and how lean strategies improve business agility.
The Local Model
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.
- Best for: Vendors working with multi-channel kits, multi-channel SKUs that cannot be direct shipped and low-holding-cost SKUs with higher than average demand variability. Drawbacks: Can include holding costs and the complications that arise from having multiple shipping events.
The Direct Model
Your supplier ships your order straight to the Amazon fulfillment center and you never touch the inventory.
- Best for: Businesses with high-holding-cost SKUs, single channel SKUs and commoditized SKUs (assuming they can be direct shipped). There are no facility, handling, or personnel costs and there’s just a single shipping event.
- Drawbacks: Potentially higher-cost structure due to FBA storage fees. You won’t be able to pool inventory between multiple channels, and this transparency will allow your suppliers and channels to see your process.
The Cross Dock Model
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.
- Best for: Businesses with high-holding-cost SKUs, single-channel SKUs, commoditized SKUs, SKUs that have a higher than usual defect rate and SKUs for which custom packaging or stickering is advantageous or required.
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.
The Impact of Long Lead Times
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.
Using Lean Strategies Increases Business Agility
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.