Amazon is arguably the most successful e-commerce company today. What started as an online bookstore has become an e-commerce giant with its own distribution network that poses a threat to retailers and courier services alike. In 2006, the company launched Fulfillment by Amazon (FBA). This essentially monetized its incredible logistics network so that small business owners could benefit from the network of a big corporation without the headaches of a big corporation.
But, how does its distribution network function? And how can business owners get the most out of the FBA services while entrusting their inventory to Amazon?
We’re going to break it all down for you.
BONUS: Before you read further, download our Inventory Management Software Whitepaper to see how Logiwa uses real-time tracking to help customers get up to 100% inventory accuracy and increase shipments by 2.5x.
Amazon Owns Its Warehouses and Most of Its Inventory
Many retailers, both physical and online, don’t run their own warehouses. While they may have their own backrooms, their major inventory is stored in a warehouse space that they lease or rent. To fulfill orders, third-party transportation companies ship the goods to customers or to the companies’ retail stores. As a result, warehouse inventory management is also executed by a third party.
For Amazon, this isn’t a concern. Amazon stores the majority of the stuff it sells on its platform and, increasingly, the stuff other businesses sell on its platform. In other words, the company manages a gargantuan amount of space. By the end of 2018, Amazon owned 288 million square feet of space, warehouse space included. Two-thirds of this property footprint is in North America.
Of course, at the center of Amazon’s success is a focus on scalability and customer satisfaction. It knows what satisfies customers about online shopping: instant gratification. (Or sooner-rather-than-later gratification, to be more realistic.) From the beginning, Amazon understood that one of the biggest challenges to e-commerce is a consumer’s desire to get their hands on a product instantly, the way they can from a brick-and-mortar store.
Amazon’s Solution to the Consumer’s Need for Speedy Delivery
It focused on continuously reducing its delivery times. Most Amazon users have become accustomed to two-day delivery while some areas even have access to same-day delivery, which gives physical retailers a run for their money.
So, how has Amazon managed to pull this off while other e-commerce retailers struggle with fast shipping?
From a strategic point of view, the answer is that Amazon has always invested in delivering the best customer experience possible. While other retailers were content to keep delivery times long (and weren’t being forced by the competition to speed up), Amazon pushed forward with figuring out quick delivery. As a result, they’ve become the standard that other companies are scrambling to meet.
Perhaps more interesting to you though is that from a logistics point of view, the answer is about transportation and inventory management. Transportation affects delivery time for obvious reasons. If you have a warehouse in New York, it takes time to move an order to a customer in Georgia.
A less-obvious, but equally important, challenge to quick delivery is actually finding the right items within the warehouse in order to ship them out to customers. This process—the picking process—is traditionally a labor-intensive activity.
Amazon set itself up to succeed in both of these logistics arenas.
Amazon’s Facilities Play a Vital Role in Its Inventory System
As mentioned above, Amazon manages a lot of land and much of this land consists of warehouse space. Since Amazon is Amazon, it doesn’t approach warehouse management in a monolithic manner. It’s created a thoughtful warehouse ecosystem to add structure to the Amazon inventory system.
In fact, a better way to think of this ecosystem is as a distribution network.
The Amazon inventory system divides its distribution network into 5 types of facilities:
- Crossdock centers: Packages from foreign vendors remain here until more stock is required by the fulfillment centers.
- Fulfillment centers: This is the sort of environment a warehouse professional would be most familiar with. This is where Amazon stores its goods, and it’s also where Amazon workers pick and pack Amazon inventory for customers. The company operates more than 175 fulfillment centers globally.
- Sortation centers: Introduced in 2014, sortation centers are meant to improve “last mile delivery.” No inventory is held at these locations. Instead, prepared customer packages move through conveyor belts while Amazon associates and robots sort and route the packages by zip code before they are sent to a carrier for final delivery.
- Delivery stations: Delivery stations are Amazon’s way of owning “last mile delivery” in its inventory distribution system. The last mile of many Amazon deliveries are handled by USPS, FedEx, or UPS, and delivery stations give Amazon flexibility in areas with a high volume of orders.
- Prime Now hubs: The Amazon inventory system for time-sensitive items, like groceries, relies on Prime Now hubs. These hubs manage items that are typically delivered within 2 hours of purchase.
The two facility types that are most critical to the Amazon inventory system are the fulfillment centers and the sortation centers.
How The Amazon Fulfillment Centers Manage The Company’s Inventory
Warehouses operate on an extreme version of that kindergarten lesson: Everything in its place and a place for everything. The standard inventory management wisdom is to divide your warehouse and its shelves into sections and put away items accordingly.
For 99% of businesses, this is the way to go. If you simply placed SKUs onto the first shelf you came across, you’d be hard pressed to find that item again when a customer orders it.
Amazon falls into the other 1% of businesses. It would be safe to assume that Amazon is not running its trillion-dollar business using spreadsheets or off-the-shelf inventory management solutions. Rather, it uses a highly sophisticated warehouse management system to keep its inventory processes running smoothly. This sophisticated system allows the company to embrace the chaos inherent in running a small country’s worth of warehouse space.
You might be surprised to learn that Amazon fulfillment centers are not sectioned off in any discernible way. There isn’t a consumer electronics section or a kitchen appliances section. When a shipment of batteries comes in, an associate doesn’t find the batteries section on a warehouse map and then walk the inventory over to that section. Instead, when goods come into a fulfillment center, associates place them wherever there’s space.
And it’s one of the main reasons Amazon delivers goods to its customers so quickly.
How Amazon’s Fulfillment Centers Embrace Chaos
Here’s a breakdown of how the Amazon inventory system manages an incoming order of goods:
- A box of toothpaste arrives to the Amazon fulfillment center
- An associate removes each individual tube from the box
- The associate proceeds to place each individual tube wherever there’s available space, with no rhyme or reason (aside from the reason that there’s a free spot)
- Before placing each item in its random location, the associate scans the barcode on the shelf and on the product
- The system can now instantly identify where in the warehouse those 50 tubes of toothpaste are scattered
This inventory system benefits Amazon’s model in several ways.
Quick Putaway Process
It’s easy for associates to put items away. Rather than crossing the entire warehouse to put away a box of toothpaste, associates can quickly put items in the first available spot they come across.
Efficient Picking Process
If you have a dedicated area for toothpaste, you’ll have to walk across the entire warehouse when an order for toothpaste comes in. With the Amazon inventory system, there’s a greater chance that one of those fifty tubes of toothpaste are closer to your current location, making it efficient for you to grab one and continue with your pick path.
Randomness is Sensible for The “Everything” Store
Because people can buy almost anything on Amazon, it would be virtually impossible to store specific quantities of every possible item. At any given moment, Amazon may only have one box of Oreos in its warehouse. If Amazon carried a large quantity of every item (e.g., it created a dedicated section for Oreos), it would have to keep a whole section e empty while it waited for a shipment of cookies, which would severely limit the amount of storage space and would require an investment in more warehouse space.
Unpacking Makes Sense in a B2C Environment
If Amazon were supplying Wal-Mart stores or CVS locations, it would make sense to keep the 50 tubes of toothpaste in their boxes. But, since Amazon mostly serves consumers, it makes sense to unpackage these items in advance rather than wait for an order to come in.
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Robots In Amazon Fulfillment Centers
In some fulfillment centers, robots work alongside human workers. Conceptually, the “chaotic” process is the same, but the robots add some speed. For example, in robot-equipped fulfillment centers, robots bring shelves to workers instead of workers looking for shelves. It’s essentially a faster version of Amazon’s randomized inventory system.
How Amazon’s Sortation Centers Keep The Inventory System Moving
In sortation centers, prepared and sealed customer packages move through conveyor belts, are routed based on their destination zip code, and are eventually shipped to post offices. The purpose is to get packages to customers faster and address the challenges of same-day delivery.
While the goal of these sortation facilities is admirable, the inner workings of these centers are beyond impressive.
In one such center in the Denver area, robots known as “drives” carry packages. Once a worker places a package on a robot, the robot reads the barcode and then takes off to one of the 300-plus rectangular holes in the floor, which represent zip codes. The package slides off the robot’s back and down a chute where it’s loaded onto a truck and is out for delivery.
There are also human workers who carry out this process. They grab packages, quickly look at the address, and walk them over to the appropriate chute. It’s easy to see how the robots speed up the process of sorting packages, and they even politely pause to make room for other robots, avoiding collisions and potential damage to products. The entire system is calibrated by experts who run a series of simulations to determine the exact speed at which the robots move and which robots get the right of way.
Whereas fulfillment centers consist of workers who can use their human dexterity to pick up different-sized items and sort them (a skill robots struggle with), sorting centers consist of “mules” that quickly move these packaged items to their appropriate shipping truck.
The fulfillment centers and the sortation centers address two key inventory system challenges: Finding goods and getting them on the road quickly.
What Is The Amazon Inventory System for FBA Customers?
There’s another dimension to Amazon’s inventory system: managing goods for its Fulfillment by Amazon (FBA) customers.
Since Amazon has one of the most sophisticated fulfillment systems in the world, it makes sense that other businesses would pay to leverage it. As a result, Amazon offers the FBA service where it picks, packs, and ships a business’s products on their behalf.
- Packages (properly sealed and with the appropriate labels) are received by the warehouse
- An Amazon associate scans the shipping label on the package to match it to a shipment ID in the system and to verify that it’s at the right fulfillment center
- An Amazon associate opens the shipping box to remove the goods
- An Amazon associate verifies that each individual item in the box has a scannable barcode
- An Amazon associate inspects each item to assess whether it needs additional packaging to prevent damage either during storage or during outbound shipment
- Products are sent to the receiving station
- An associate at the receiving station performs a “six-sided check” to ensure the item isn’t damaged
- An associate at the receiving station performs a title verification
- Once these steps are completed, the item is officially received
- The unit gets routed to be stowed
This is the process if everything goes smoothly. However, there are cases where a shipment must be put aside and dealt with by an Amazon problem solver. When an Amazon problem solver has to address an issue, it delays the receipt of items and their submission into the inventory system by anywhere from a couple of hours to a couple of days.
How To Properly Prepare and Manage Your Inventory As An FBA Customer
If you use FBA and want your items to move smoothly through the process, be mindful of the company’s prep, labeling, and packing requirements.
- Make sure your goods are packaged properly and are e-commerce ready.
- Don’t tape or band together multiple boxes.
- Shipping boxes shouldn’t have any other scannable barcodes aside from the shipping label.
- Place shipping labels over flat surfaces. (If you place the shipping label over the box’s seam, it can be damaged during shipping or when the associate has to open the box.)
- Use foam, air pillows, or full sheets of paper as packing material or dunnage. (Using dunnage like packing peanuts or shredding paper slows down the receiving process.)
- Ensure case-packed units only have barcodes on the individual units and not on the outer carton so that multiple items aren’t received as one unit.
Understanding how Amazon’s FBA inventory system service works (and prepping your goods accordingly) ensures that your inventory is entered into the system in a timely fashion.
Amazon’s Inventory System Presents Opportunities and Lessons For Any Business Owner
Whether you want to learn from Amazon or use its logistics system to distribute your goods, there are plenty of lessons to soak up. The retailer has bucked standard warehouse management wisdom and re-invented how warehouse workers pick, pack, and ship products. Moreover, it’s invited other business owners to piggyback on its proven methods and grow their businesses as well.
No matter your relationship with Amazon, the Logiwa warehouse management system can support your inventory management needs. Schedule your demo today.
Download our Inventory Management Software Whitepaper
Logiwa ensures accurate and real-time inventory management across all your warehouses. Our software provides detailed reporting so that you can:
- Predict reoccurring spikes in customer demand
- Avoid out-of-stock situations
- Avoid overstock situations
- ... and more
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Written by Ruthie Bowles
Ruthie is a content marketing consultant for Logiwa. Her specialties include small business development and inventory management.