*This article is co-authored by Gregory Healy and Nick Gaganiaras
The entire e-commerce supply chain revolves around one major player: Amazon. Every move Amazon makes, whether large or small, reverberates through the supply chain, with massive implications for e-commerce sellers, third-party logistics companies (3PLs), consumers and commercial real estate holdings.
That’s why it makes sense to pay close attention to Amazon’s movements. At this moment at least, Amazon determines the general direction of e-commerce distribution and can indicate general trends that all e-commerce businesses should be keyed into. Here, we’ll look at changes Amazon is making to its platform on both the micro and macro levels and expand on what those changes mean for the future of e-commerce.
The Micro Level: 3 Key Amazon Indicators
One major e-commerce indicator to examine are the fees for Amazon’s Fulfillment by Amazon (FBA) program, which allows companies to sell items stored at and shipped from Amazon’s warehouses. Amazon pushed through its largest FBA fee increase ever in 2018, bumping up seller fees across almost all categories. The company also increased storage fees a whopping 8% to 12%.
And 2019 brought only moderate changes, with marginal fee increases across the board and slight storage cost increases. Amazon also eliminated long-term storage fees for items stored for less than a year. Sellers can expect FBA and storage fees to continue rising in 2020.
But there’s one other metric that impacts sellers significantly: the Inventory Performance Index (IPI). This is a score between 0 and 1,000 that assesses how well sellers are managing their inventory, determined by a proprietary algorithm. Although Amazon has not revealed how the algorithm calculates each seller’s score, it’s governed by two main factors: the amount of excess inventory and the sell-through rate.
Starting in 2020, Amazon is bumping up the IPI threshold sellers have to meet. If they score below the threshold, they’re subject to storage limits and fee increases.
This move signifies Amazon’s shift toward artificial-intelligence-powered inventory management. Sellers are rewarded with lower overall fees for smart inventory optimization, and conversely, penalized for overstocking items and storing excess inventory for long periods of time.
The Macro Level: Big-Picture Amazon Trends
Now let’s zoom out and look at percolating big-picture trends.
Amazon has fashioned itself as a data-centric seller platform that, in theory, provides brands greater leverage and exposure than if they were to sell through their own platforms. It is, after all, the world’s largest retailer, with access to bigger and more comprehensive consumer datasets than any other retail company.
Selling on Amazon is sometimes equated to a devil’s bargain — selling through Amazon effectively mean businesses cede control of how products are sold and shipped. And with its proprietary brand, Amazon becomes both a platform and product with which users of the platform must compete.
But without Amazon’s sales capabilities, it’s extremely difficult for most companies to gain the reach they need. Plus, setting up an e-commerce operation requires reconfiguring entire supply chains to fulfill orders directly to customers. Add in Amazon’s one- and two-day shipping initiatives, and it’s difficult for businesses without extensive fulfillment networks, like WalMart and Target, to compete.
Although Amazon overtook WalMart this year in terms of sheer size, WalMart does have one advantage — its network of physical locations. Amazon has been working to build a network of fulfillment centers that gets their products close to consumers, buying up millions of square feet in storage space, but WalMart still has the physical advantage here — which means WalMart may be able to leverage their store network to be more cost-efficient for last-mile delivery.
E-Commerce Retailers Should Pay Attention to Inventory Optimization
So, what does this all mean?
Amazon operates based on input from three major drivers: How can we do this better, cheaper and faster?
Amazon’s steady increase of seller fees points to its confidence as the front-runner — it is confident it won’t drive sellers to another platform. At the same time, the focus on IPI and bullish network expansion point to an overall thrust toward smarter supply chain management.
Thus far, Amazon has used an inventory-forward fulfillment model. Inventory is pushed through the supply chain, with inventory levels used to generate demand. But the model of the future is demand-driven, with inventory strategically prescribed and pulled through the supply chain as consumers ask for it. This means Amazon will continue to expand its network, snapping up small, localized warehouses that cut down final-mile delivery costs and working with 3PL companies to get inventory as close to consumers as possible.
Amazon’s next-day network forces companies to focus on inventory optimization. The onus is on suppliers to tighten projections and cut overstock and long-term inventory, who must rely increasingly on artificial intelligence algorithms to predict demand and plan storage. Along with that, this localized, next-day network relies on 3PLs, who will be asked to do more value-add work to get the most out of inventory stores, by labeling, packaging, doing light assembly and customization, and even providing 3D manufacturing to print orders on demand and reduce storage space needed.
In the pursuit of better, cheaper and faster, Amazon is operating meaner and leaner. Suppliers, 3PLs and independent e-commerce sellers would do well to follow their lead. There is latitude for CRE-adjacent parties to work with Amazon and not against it. By staying attuned to what Amazon has in store for its future on the micro and macro levels, CRE occupiers can be prepared to create opportunities for themselves and their properties.
About the Authors:
Gregory Healy, senior vice president, leads the Supply Chain and Logistics Consulting team in the U.S. for Occupier Services. With over 20 years of global manufacturing and supply chain experience as both a senior executive in the corporate world, as well as owning a supply chain consulting practice and a third-party logistics business, Gregory has real world experience that brings a unique perspective to the Colliers team.
Nick Gaganiaras, executive managing director for Occupier Services in the Supply Chain and Logistics Consulting practice, supports the Canadian market with his expertise. With over 15 years of experience in supply chain and logistics operations, Nick brings a balanced approach to supply chain problems, offering strategically positioned business solutions. As an operator, he has worked through the same challenges that clients face every day. As a solutions designer, he has developed both financial and operational models to handle the intricacies of many industries and client-specific requirements.