How would one monetize some two dozen, 3M sq.ft., first-mile warehouses built all over the country, apart from prostrating with prayers that the pandemic-induced shopping behaviors would keep them filled to capacity? Luring FBA sellers to bid for limited capacity and incentivizing higher inventory turnovers through that narrow nozzle isn’t a bad place to start. Here’s a rundown of Amazon’s new streamlined FBA Capacity Management System that kicks in next month and our take on what sellers should watch out for.

Preamble

Participation in Fulfilled By Amazon (FBA) program comes with many benefits, such as Prime eligibility for fast shipping. But restrictions and lack of clarity on shipping out inventory to the fulfilment centers have been sources of frustration for Amazon’s FBA sellers. Cash flow planning becomes easier for merchants when sales is steady, predictable and consistent. A critical consideration in this regard is right-sizing the inventory.  

Amazon’s new streamlined FBA Capacity Management System aims to give merchants greater capacity limits, more control, and visibility over their inventory & supply chain. The new system strikes the right balance between avoiding stock outs and paying unnecessary storage fees to stash excess stock. As a result, Amazon’s consumers can expect more of their products of choice to be available in-stock, ready to be purchased.  

What’s happening now

Currently, a major challenge for Amazon sellers is inventory management. Ensuring that the right amount of goods is available at the Amazon fulfilment centers to be available for shipping to customers is critical to sellers’ success.  

Amazon sets capacity limits on a weekly basis. There are two limit scores – a storage limit based on space and restock limit based on units for sending in inventory. This sets up a challenge for sellers in terms of creating production schedules or ordering inventory from manufacturers.  Restock limits were particularly difficult for many sellers during the last holiday season. Keeping in-demand items on the shelves while balancing restock limits and shipping delays was challenging.  

Too much inventory takes up space for Amazon and creates unwanted costs for sellers. Amazon’s aged inventory surcharge adds a cost of USD 1.50 per cubic foot for each unit of inventory stored by Amazon for between 271 and 365 days. After 365 days of storage, the surcharge increases to the greater of USD 6.90 per cubic foot or 15 cents per unit. Stocking up with too little inventory can cause stock-outs, missed sales and Amazon customers not getting the products they want.

The two-score approach was complicated and was not appropriate for many different types of products. Hurt by these pain points, sellers complained. Amazon lent its ears and updated the FBA capacity management system.

What will change in March 2023

Single Month-Long FBA Capacity Limit

Beginning March 2023, Amazon will assign to sellers a single, month-long FBA capacity limit. This eliminates the need to navigate two different sets of boundaries (storage limits and restock limits) that are measured differently. In the new regime, sellers can plan their inventory with a single limit based on the Inventory Performance Index (IPI). The seller’s track record in moving goods in and out of the fulfilment center is a chief determinant of IPI, besides sales forecasts for their ASINs, shipment lead time and fulfilment center capacity.

Three-Month Estimated Capacity Limit

Sellers get more predictability and control over their inventory when the capacity limits for the upcoming month are announced in the third week of each month. Estimated capacity limits for the two subsequent months are also provided, to help sellers plan over a longer time horizon. Depending on how efficiently sellers use their capacity, the new system will forecast space and labor availability over the near future.  

Volume Limits for Capacity

To be truly representative of a seller’s space usage in Amazon's fulfillment centers and transportation vehicles, the new system will measure sellers' inventory usage in cubic feet and not the number of units. Sellers will still be able to see their inventory usage in units. Overage fees will apply if a seller's on-hand inventory exceeds their capacity limit, to help prevent excessive inventory levels.

Opportunity to Request a Higher Limit

Sellers will be provided an option to request additional capacity based on a reservation fee they specify. This feature provides more control over warehouse space while limiting unused space. If a high-spend marketing or advertising campaign is in the works and additional storage space is required, this request tool will be the perfect solution.  

Bidding for Storage Space with Capacity Manager

Sellers may request additional capacity based on a reservation fee that they specify. The additional capacity could be the greater of 20% of the already-allotted space or 2000 cubic feet. Requests are granted objectively, starting with the highest reservation fee per cubic foot until all capacity available under this program has been allocated.  

Amazon informs that sellers' reservation fees – up to 100% – can be recouped using Performance Credits from the sales they generate using the extra space within their fulfillment centers.  

Estimating Performance Credits

Suppose that a seller receives an initial FBA capacity limit of 3000 cubic feet and is approved for an additional 600 cubic feet, for a total limit of 3600 cubic feet. This means that one-sixth of their total capacity comes from their request (600/3600). Therefore, one-sixth of their sales of ASINs will qualify for performance credits.

Now suppose that their total sales of ASINs for the period is USD 420,000. This works out to qualified sales of USD 70,000 [USD 420,000 x (1/6)]. The performance credit rate is USD 0.15 for every dollar of qualified sales or 0.15 x USD 70,000 = USD 10,500. So the seller would get a performance credit of USD 10,500. If the reservation fee is less than USD 10,500, it would be fully offset by this credit.  

Takeaway

Amazon's new FBA capacity management system addresses sellers’ pain points, providing them with more control and visibility over their inventory and supply chain. This will allow them to plan their inventory better and keep their products in stock. The new system's features such as a single, month-long FBA capacity limit, estimated capacity limits for the next two months, the opportunity to request a higher limit, and measuring inventory usage in cubic feet will make it easier for sellers to plan, manage and grow their business.  

Fineprint

Sellers with large unit dimensions will however face an increase in storage costs compared to those who sell small-dimensioned items. Efficient use of this new system is going to boil down to an interplay between  

A) The magnitude of the reservation fee (for additional space)

B) Costs to ship and re-stock inventory frequently, at Amazon's fulfilment centers
C) Fulfilment fee (whether it increases if the “number of times” items are shipped increases)
D) Sales velocity of the ASINs stored in the new additional space rented

E) Impact of the wider rollout of ‘Buy with Prime’ on fulfilment space. Will the 25% additional sales conversion seen during the pilot run push up the demand for warehouse capacity among the 3700 new brands that enroll in Amazon every day, vying for a share of the 2.7B monthly visits to the marketplace?  
F) Do sellers have control over which ASINs ($ value, margin, velocity) get stored in the parent vs child fulfilment spaces?

Our take

While Amazon’s 1P is good for GMV, 3P is well suited for brand control. Typically, 3P sellers handle the product from start to finish of the sales funnel with greater oversight over fulfillment, marketing, supply logistics, and delivery options such as Fulfilment by Amazon (FBA) and Fulfilment by Merchant (FBM). For enterprise vendors, challenges such as listing optimization, customer service, logistics and distribution are better served via the 1P model where Amazon handles all such operations at scale. For Amazon, even though their 1P gross product margins are slightly higher (45-50%) vs the 45% they typically get from 3P sellers, the extra work and risks involved in 1P operations do not justify the marginal gains. Amazon takes ownership and responsibility of the goods at the shipping ports of the manufacturer in China or South East Asia and from thereon is responsible for distribution to warehouses in the US, Europe and elsewhere and eventually to the consumer. The risks of carrying the inventory and its liquidation in case of softening of demand due to recessionary climate is on Amazon. Reason enough for them to be creative in supporting 3P sellers vs the 1P vendors.  

Many brands are keen to become 3P sellers but are being advised to be otherwise – “not allowed”, rather – by their Vendor Managers. The recent layoffs will leave many 1P brands without a Vendor Manager and they will find it even more difficult to navigate in these changing times.

However, if the rising COGS and FBA costs do not help accelerate 3P sellers’ sales trajectory and offer enough margins to the sellers, expect price increases to be passed on to the consumer. Bidding for – rather than buying – additional capacity only makes things expensive for sellers. IPI scores will become crucial to 3P players looking to contain storage costs.  

Any surprise then, that 61% Amazon sellers are already selling on at least one other eCommerce platform? Or that  52% of the sellers intend to expand to other platforms (eBay, Walmart, Shopify etc) in 2023? Last year, only 25% of respondents were in that category.

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