How to Build an Amazon Distribution Network for Third-Party Sellers

About the Amazon Distribution Network

The Amazon distribution network is complex and evolving. Its entire footprint is nearly seven miles long, and it serves 92% of third-party sellers through Fulfillment by Amazon (FBA). However, Amazon sellers looking for a more diversified fulfillment strategy that enables them to grow their brand both on Amazon and off may be looking to build their own Amazon distribution network. Ahead, we’ll examine the elements of Amazon’s fulfillment operations that small to mid-sized businesses (SMBs) can apply to their own network for faster delivery without having to rely on Amazon.

How It Works

Amazon has virtually created consumer demand for 1- to 2-day shipping, and they’ve learned the most cost effective and efficient way to deliver: inventory distribution. The closer a product is to the person ordering it, the faster it can get there at an affordable price. Next-day air is a hail-Mary kind of move when it comes to fast shipping, as it’s very expensive and carbon-intensive.

By distributing inventory strategically, they create a distribution network optimized for 1- to 2-day ground shipping, making their delivery times both fast and affordable.

Why It Works

Amazon’s greatest asset is data. With 197 million shoppers per month and over 200 million Prime members, it knows all about consumers’ purchasing habits: what they buy, how often they buy, and where they live. Knowing where consumers are located, and therefore where packages need to be delivered, allows them to stock inventory appropriately.

If you look at the states where Amazon has the greatest square footage of warehouse space, you’ll start to see a pattern in the Amazon distribution network. The top three are California, Texas, and Illinois – all highly-populated states that contain major US cities. Amazon knows that most orders will be coming from densely populated urban areas. These states are also spread out across the US, covering three major geographic regions

Why It Doesn’t Always Work for Third-Party Sellers

The Amazon distribution network functions like a well-oiled machine, but it ultimately exists to serve its own product line first and foremost, and many third-party sellers struggle with fulfilling through Amazon’s network. Third-party sellers often struggle with the following issues when working with Amazon fulfillment:

• FBA inventory storage limits
• Prohibitively high rates for oversized items
• Product damage
• No economies of scale for larger orders
• No access to customer order data
• Prime-branded packaging that dilutes brand identity

These issues have sent many merchants looking for FBA alternatives. To better understand how merchants can take the elements of Amazon’s network that are working for them while leaving the elements that aren’t, we’re going to compare Amazon’s fulfillment strategy to its largest competitor’s – Walmart.

The Amazon Distribution Network vs the Walmart Fulfillment Network

Walmart has long been fighting Amazon to regain its position as America’s number one retailer. By expanding its third-party marketplace sellers, Walmart became more competitive in their ecommerce offerings, and when stores shut down in 2020, their fulfillment strategy proved to be a major competitive differentiator. Namely, when brick-and-mortar traffic slowed down, they began to leverage their retail stores as micro-fulfillment centers.

By the end of 2023, Amazon will have 355 warehouses. By comparison, Walmart has over 5,000 retail stores. Walmart can support same-day home delivery (which it offers for free for Walmart+ subscribers) – or it can allow in-store pickup, which became a wildly popular fulfillment option in 2020.

Grocery was one of the fastest growing ecommerce segments in recent years and is projected to make up 20% of ecommerce by 2026. As the country’s biggest grocery retailer, Walmart has the potential draw in grocery shoppers who end up purchasing additional products. To be fair, Amazon does own Whole Foods where they offer in-store pickup from lockers. However, Whole Foods only has around 500 brick-and-mortar locations – nowhere close to Walmart’s footprint

Ship from Store vs. BOPIS

Brick and mortar stores like Walmart can offer two fulfillment options for online orders: ship from store and Buy Online, Pick Up in Store (BOPIS).

In the ship from store model the retail store acts as a mini warehouse and fulfillment center for ecommerce orders. This model gives retailers flexibility on where they fulfill their orders from. For example, when shopping shifted heavily to ecommerce in 2020, Urban Outfitters saw that the cost of shipping orders was eating into their margins. They applied an algorithm to their ecommerce orders that identified the best store to fulfill the order from based on two pieces of criteria: which store was closest to the customer and which store had the most in stock. Using this criteria helped them to lower their time in transit (TNT) without risking potential lost sales when a brick and mortar was unable to find an item in store due to ecommerce demand. 

The other option for brick-and-mortar fulfillment is Buy Online, Pick Up in Store (BOPIS), which skyrocketed in popularity during the 2020 shutdowns. Even after stores reopened for in-person shopping, 33% of still reported that they preferred in-store or curbside pickup over home delivery. Offering BOPIS through a retail partner allows merchants to capture sales shoppers who need their item immediately. BOPIS also benefits retailers because shoppers will often buy additional items when they go into the store for pick up.

Returns Management

Another benefit of Walmart’s many retail locations is in-store returns. Nearly half of consumers prefer to make returns in-store, and the benefit of additional purchases may be even greater for in-store returns than in-store pick up. Many retailers have started to see the benefits of offering in-store returns, even for products purchased from other retailers with partnerships like Happy Returns. Driving traffic to stores, even if it’s to make a return, can increase customer engagement and ultimately, sales.

What SMBs Can Learn from the Amazon Distribution Network

The four primary principles upon which Amazon has built its distribution can be applied to distribution networks of third-party sellers. They include:

1. Inventory distribution: Merchants of all sizes can distribute inventory closer to the end customers for faster, more affordable delivery.
2. Proper allocation: A major part of inventory distribution is allocating the right SKUs in the right quantities to the right warehouse locations. This requires a deep dive into sales velocity on the SKU level and analysis of where in the country each SKU is the most popular.
3. Hub and spoke: Amazon’s hub and spoke distribution model allows them to feed their fulfillment centers from larger distribution centers, keeping their freight costs low and their inventory distribution flexible when there are changes in demand patterns.
4. Minimize long-term storage: Amazon’s FBA inventory limits have been a challenge for many third-party sellers, but Amazon’s strategy to minimize long-term storage is a smart one. Long-term storage costs can erode profits. To avoid over-indexing on storage costs, merchants should curate their SKU catalog to focus on their best sellers and optimize their inventory reorder points so they’re never carrying too much inventory.

How SMBs Should Do It Differently

While the Amazon distribution network may work well for Amazon, it clearly isn’t a one-size-fits-all solution. There are three key areas where SMBs should think differently about building their distribution network:

1. Finding an asset-light solution: Amazon’s network is huge, and it often loses the company money. Not many SMBs can afford to lose margin on their fulfillment networks in the same way. Partnering with an asset-light 3PL or 4PL allows merchants of all sizes to adopt the same distribution strategies as Amazon without over-investing working capital into their supply chain.
2. Flexible contracts: Most merchants experience some degree of seasonal demand in their business. Outsourcing fulfillment to an on-demand warehousing partner allows SMBs to pay only for the space and labor they need when they need it to support seasonal demand that results in long-term growth.
3. A multichannel solution: Amazon may be one of the largest sales channels, but it’s hardly the only one. Consumers discover products across multiple channels, including brick-and-mortar. Having a fulfillment network that can handle all transit and delivery types will enable you to grow a well-rounded business that is not fully reliant on Amazon.

Build Your Own Amazon Distribution Network

Ware2Go is a UPS-backed warehousing and fulfillment partner that helps merchants of all sizes build their business on Amazon and beyond. With a network or certified warehouses supported by cutting-edge fulfillment technology, Ware2Go can position your inventory closer to your end customers to enable 1- to 2-day ground shipping anywhere in the US to support Amazon Fulfilled by Merchant (FBM) or Seller Fulfilled Prime (SFP). To learn more, schedule a time to speak with one of our Amazon fulfillment experts.