Global supply chains have been turbulent since the onset of the global pandemic, and Amazon was no exception. Fulfillment by Amazon (FBA), the long-time gold standard for e-commerce fulfillment, buckled under the strain.
From March 2020 to the time of writing, Amazon FBA has restricted inbound shipments based on product category, repeatedly increased inventory performance index (IPI) thresholds, reduced inventory quantity limits, and implemented storage utilization quotas that further restricted inventory space at FBA centers. In Amazon’s 2021 Q2 earnings call, Brian Olsavsky, Amazon’s Chief Financial Officer, said “We've been playing catch-up pretty much since the pandemic started.”
This turbulence left many FBA sellers up a creek without a paddle. Sellers needed a supplement to FBA, and fast. This led to a boom in Fulfillment by Merchant (FBM) offerings.
At the surface level, the difference between FBA and FBM is simple: In FBA, Amazon ships the product from its warehouse to the end consumer. In FBM, the seller ships the product from their warehouse to the end consumer. Amazon also sometimes calls FBM “Merchant Fulfilled Network,” or MFN.
FBM is something of an umbrella term, as the exact fulfillment model can differ. For example, sellers can pay a third-party logistics provider (3PL) to act as a stand-in for FBA. Sellers still ship inventory to someone else’s warehouse, where it is stored, processed, and delivered to customers. 3PLs also handle product returns and customer service. Deliverr is a chief example of this model. They’re akin to FBA, but marketplace agnostic.
Alternatively, sellers can adopt a dropship model, where they keep inventory at the manufacturer’s warehouse. The seller lists the product for sale, despite having no inventory on hand. When a shopper purchases the product, the seller passes the order back to the manufacturer, and the manufacturer ships the product to the end consumer.
In the dropship model, sellers are meant to process returns and provide customer service, but in practice, some sellers route returns to manufacturers. Recently, Amazon has published reminders that sellers are meant to handle dropship returns, and in August 2021, Amazon will enable auto-authorized returns that automatically route dropship returns to sellers.
From a seller's perspective, the biggest difference between a 3PL and dropship model is who handles the product storage, order processing, returns management, and customer service.
But enough about FBM; we’re here to discuss the differences between FBA and FBM. Where things get interesting is the implications of each fulfillment model.
There’s a reason FBA is still considered a preferred option for most sellers.
Unfortunately, FBA is not without its downsides, some of which include:
Now, let’s take a look at the other option, starting with the benefits for FBM:
If FBM was perfect, FBA wouldn’t be so popular. So, what are some downsides to FBM?
So, which fulfillment model is better? To that, we ask, “Why pick just one?”
In all seriousness, 2020 and 2021 have proven that the best solution is a hybrid model. Using FBA and FBM together allows Amazon sellers to enjoy the benefits of both while mitigating the shortcomings of each.
When FBA stopped accepting inbound shipments from certain product categories in early 2020, brands with FBM capabilities were able to continue selling. They benefitted their business by capitalizing on demand, and they served their customers well by being available for them, regardless of what FBA was doing.
This experience proved true time and again as Amazon increased IPI thresholds, imposed inventory restrictions, and implemented storage utilization quotes. Each time FBA became volatile, FBM provided an invaluable safety net. Asset diversification is a time-tested risk mitigation strategy, and e-commerce fulfillment is no exception.
My company, Kaspien, has helped many brands implement an FBA + FBM model since the pandemic hit. One such example was PlexiDor Performance Pet Doors.
PlexiDor started selling through a dropship model, then transitioned into a hybrid FBA + FBM model after validating they had the necessary sales velocity. In the image below, you can see how FBM continued to support additional sales even after their products became FBA-enabled. In November, January, and April, FBA sold out, yet PlexiDor was able to continue capturing sales through dropship.
Amazon FBA is on the road to recovery. Amazon expanded its warehouse space by 50% in 2020, and they are aggressively growing Amazon Air.
In January 2021, Amazon Air purchased 11 jets. In March, Amazon spent $131 million to gain a 19.5% stake in Air Transport Services Group’s (ATSG) stock. According to ATSG’s annual report, Amazon could own nearly 40% of the cargo airline if it leases more aircraft and exercises all its warrants.
However, Amazon’s Q2 earnings call made it clear that FBA is still playing catch-up. 2020 also gave a booster shot to other e-commerce platforms, such as Target, Walmart, and Shopify. Diversifying your fulfillment solutions with FBM capabilities prepares your brand to scale on and beyond Amazon. The FBA + FBM model is the best path to continued growth.
Matthew Boardman is the Content Marketing Manager at Kaspien, a leading Amazon seller, eCommerce agency, and eCommerce software provider with over $1 billion in retail sales. Matthew collaborates closely with leading industry experts throughout Kaspien to write informative content on eCommerce strategies and news.