There are pluses and minuses to each approach. Vendors who turn over all responsibilities to Amazon sacrifice certain controls. Amazon doesn't always meet minimum advertised pricing guidelines from manufacturers when it sets prices using its own algorithms. That can result in lower margins for the manufactures. And during Amazon's annual vendor negotiations process, it aggressively seeks to recoup its operating costs. This can eat away at vendors' margins if they don't make a strong case for themselves. In addition, purchase orders from the company can fluctuate, causing planning inefficiencies.
Amazon sellers face disadvantages, too. Although they maintain ownership of their goods until they sell them, they must assume the substantial cost of handling daily operations and are more dependent on their brand's reputation to turn page visits into sales. Another downside: sellers are less likely to feature on Amazon's Buy Box, a call to action for consumers. Based on our experience, Buy Box winners capture purchases more than 82% of the time.
Here's what happened to one Genpact client, a food and beverage company that was using the vendor option, deciding for itself the number of cases it would ship to Amazon. SKU mismatches infested the firm's data. As a result, it had to cancel half its orders during a single period, and chargebacks were eating into profits. There were ongoing issues over advance shipment notifications, electronic invoices, purchase orders, bills of lading, and more. These problems cut into revenue by 23%.
To help, an implemented master data management cleanup paired Amazon barcode, weight, and dimension rules with our client's. Automated catalog management alerts that refreshed in real time were installed.
Next, cost and freight analytics and devised process enhancements were conducted for getting the goods out the door, embedding drawings of Amazon labels into the system.
Finally, detailed data helped steer traffic toward high-performing carriers. And the new system helped our client renegotiate carrier contracts. As a result, chargebacks fell by 68% within six months.
Clearly, there are benefits and drawbacks to both systems – so how do you know which is right for your company? Start by answering these questions:
- What is your overall business objective?
- How are you bringing together your online and offline strategy?
- How strong are your customer service capabilities?
- How much control over pricing, inventory, and branding do you want to maintain?
- What is your current operational volume? Can you nimbly adjust when demand fluctuates?
- How mature, flexible, and at the ready is your supply chain?
Your answers will determine the merchant model you should choose. For instance, if you need full control of supply chain management and don't mind taking on the responsibility of customer service, you should consider the merchant fulfilled network model.