The Amazon Supply Chain: What DTC Brands Need to Know to Stay Profitable

In 2006, Amazon launched Fulfillment by Amazon, allowing third-party sellers to store items in its warehouses and leverage its resources for picking, packing, and shipping these products. At the time, many people in the retail industry found Amazon's decision to offer sellers its fulfillment facilities and capabilities puzzling. It turns out it was just step one of a much larger play.

The endgame was revealed a few weeks ago at Amazon's fifth annual Accelerate conference. The biggest news coming out of the event was the launch of Supply Chain by Amazon: an end-to-end set of supply-chain solutions – including Amazon Warehousing and Distribution (AWD) centers, Fulfillment by Amazon (FBA), and Multi-Channel Distribution (MCF) – that are now also available outside Amazon's walled garden.

Through these “externalized ecommerce services,” the tech giant encourages DTC brands to utilize its supply chain not only for Amazon transactions, but also for orders placed on their own websites and other platforms. In essence, said Ryan Craver, founder of ecommerce agency Commerce Canal, “Amazon wants to ‘own’ the supply chain and become the toll booth of commerce, whether shipping to a TikTok, Temu, Costco, or Amazon consumer.” 

‍The Dependency Dilemma

For most DTC operators, leveraging Amazon’s logistics prowess to deliver Amazon transactions AND orders from other platforms is a no-brainer. For those still pondering the offer, Amazon is sweetening the pot by offering Supply Chain by Amazon users "integrated rates," including a 25% discount on AWD storage fees and a 15% reduction in AWD transportation and processing costs. 

It's an attractive proposition, to be sure. But it also breeds dependence. “It shows how reliant sellers are on Amazon,” said Jon Elder, the founder of Black Label Advisor, a Texas-based Amazon consultancy. “Amazon is nearing 50% of all ecommerce revenue in America, so it’s almost a monopoly now.” 

Being dependent on a monopoly can significantly impact ecommerce brands, potentially leaving them vulnerable to external policy shifts. This is especially true when it comes to inventory planning, cash flow management, and pricing – three areas that can create a ripple effect on DTC brands' financials. 

This year, for example, Amazon accelerated the timetable for Black Friday by setting an earlier deadline for sellers’ inventory to reach its fulfillment centers. “I’m used to getting inventory just in time to start selling it with Amazon,” said Ronak Shah, CEO and co-founder of collagen brand Obvi. “Now I’m going to be sitting on inventory that’s not really going to start selling or make revenue for another few weeks. That creates a little bit of a cash flow consideration.”

Another thing that creates cash flow considerations is new fees. In March, Amazon introduced an inbound placement fee, penalizing sellers with an additional charge for shipping their inventory to a single Amazon warehouse instead of distributing it across multiple locations. A month later, it launched a low-inventory-level fee, but quickly had to implement a grace period for brands after the original announcement sparked widespread outrage. 

To mitigate the impact of the new fees, some brands decided to change their pricing, a move that can easily result in customer dissatisfaction – especially during a cost of living crisis. “We were forced to raise prices," explained Craig Leslie, founder of The Bean Coffee Company, "which was not just because of Amazon, but it helped us absorb that additional fee increase.”   

‍The Key to Navigating Amazon's Ecosystem

The realities of Amazon's supply chain ambitions highlight the urgency of basing pricing, cash flow management, and inventory planning on real-time financial data. Take inventory planning, for instance; lacking up-to-the-minute data on stock levels, exact costs (per SKU, per warehouse, etc.), and turnover rates can hurt inventory accounting and may lead to:

• Overstocking, which could translate into increased storage costs and obsolete products
  
  
• Understocking, resulting in missed sales opportunities and unsatisfied customers
  
  
• Misallocation of resources, i.e., investing in underperforming products or overlooking successful ones.

Much like inventory accounting, creating a business cash flow forecast also requires 100% accurate and updated books. Without a relevant business cash flow forecast, brands might hesitate to invest in product expansions, miss out on securing favorable terms from suppliers, or feel forced to turn to costly short-term financing solutions.

The same issue applies to pricing. The key to building a profitable pricing strategy lies in understanding the true cost of sales and having solid bookkeeping for Amazon Sellers. This involves considering all relevant expenses, such as:

• COGS (cost of goods sold)

• Shipping & fulfillment

• Merchant fees

• Variable marketing costs (e.g., affiliate fees and paid online ads)

And since it is imperative to understand these on a per-unit (SKU) basis, real-time visibility into your financials becomes, for all intents and purposes, a precondition for pricing.

In this Amazon-centric ecosystem, the ability to swiftly adjust pricing, cash flow, and inventory strategies may determine if a brand thrives or struggles to keep pace. As the “toll booth of commerce” continues to change its policies and fees, only those armed with up-to-the-minute financial information can pass through it and maintain profitability.