Prolonged U.S. Logistics Crisis and Amazon FBA Inventory ProblemDue to the prolonged logistics crisis that began in the aftermath of the COVID-19 pandemic, the congestion of cargo volumes in major U.S. ports is getting worse. As the situation worsened, U.S. President Biden was trying to solve this situation, but there is no sign of any improvement in the logistics crisis due to the continuing of container ships with loaded cargo cannot enter the ports. With the year-end shopping season approaching, this port bottleneck, accompanied by the shortage of truck drivers to handle land transportation, causing the logistics costs to skyrocket.
In fact, according to the Korea Trade-Investment Promotion Agency (KOTRA), the average ocean freight rates in 2020-2021 increased more than six times, compared to 2018-2019. Considering that the biggest cost burden that incumbent Amazon sellers who run Amazon business was the logistics cost, most of the Korean Amazon sellers, who will be directly affected by the aftermath of the U.S. logistics crisis, are going through a very difficult time.
As the U.S. logistics crisis prolongs with the difficulty of estimating the schedule for additional stockpiling, there are opinions about stocking up a lot of inventories at one time among Korean Amazon Sellers that use sea shipping. In the background of this opinion, the out-of-stock issue is the most feared enemy of sellers. If inventories are out-of-stock, then the ranking of product, which has been hard-raised by spending a lot of advertising cost and effort, will fall and product sales may decrease significantly. However, if the sales cycle of a product is not accurately understood, then this should be considered carefully as it may result in excess inventory and FBA long-term storage fees.
Within Amazon’s business world, there is a joke that the day the FBA long-term storage fee is charged is the day the product is declared dead, which refers to the high penalties for long-term storage inventory imposed by Amazon. In this situation, many sellers are unable to afford Amazon’s long-term storage fees and often choose to discard their inventory. The long-term storage fee is charged from one year after the product arrives in the Amazon warehouse, because the fees incurred by non-reorderable inventory and excess inventory, commonly referred to as “dead stock,” are higher than expected. There is a second option called inventory recovery; however, a U.S. address must be set up to recover the inventory. For sellers who can’t afford to use the local 3PL warehouse, it’s a practically a useless option. So, many Korean sellers were forced to make the decision of disposing products.What is FBA Liquidation Program?In May 2021, Amazon launched a new program called FBA Liquidation. The FBA Liquidation is a program that allows recovery of a portion of inventory’s value by disposing excess inventory with low inventory turnover and non-reorderable inventory that is damaged during returns to wholesale liquidators. Sellers can recover a portion of the inventory value by liquidating the inventory at an amount of 5% to 10% based on the average selling price (ASP) of the product. A wholesale liquidator purchase rate of 5 to 10% cannot be said to be a high liquidation amount that sellers are satisfied with. This is meaningful in that it can relieve some of the burden on sellers, who have had to fully bear the enormous losses in the process of inventory discarding or recovery.
In addition, the FBA Liquidation program allows sellers to minimize the burden of long-term storage fees. Amazon has implemented a long-term storage fee of $6.90 per cubic foot (ft3) or $0.15 per item, for inventory that has not been shipped until 365 days have elapsed since it is received from the FBA warehouse. However, as soon as a seller applies for the FBA Liquidation program for inventory of a specific Amazon Standard Identification Number (ASIN), there is no monthly storage fee and long-term storage fee for that inventory.
Also, Amazon’s no longer recognizing inventory eligible for the FBA Liquidation program as excess inventory means that it will positively impact the improvement of the Inventory Performance Index (IPI) Score. The IPI score is an index that Amazon evaluates on a sale from 0 to 1,000 for each seller’s FBA inventory management efficiency and productivity. If the score falls below 450, then the storage volume will be reduced, and the account will no longer be able to store additional inventory. One of the criteria for IPI score measurement is the excess inventory ratio. Therefore, after the application for the FBA Liquidation program, the inventory is no longer recognized as excess inventory in Amazon’s system, so sellers, who urgently need to increase their inventory storage limit, should actively consider taking advantage of this program.Product Requirements Eligible for FBA LiquidationOn the other hand, there are some product lines that have limited participation in the FBA Liquidation program. This program strictly follows the laws and safety of United States and Amazon regulatory guides, so products classified as recalled items and dangerous goods (hazardous substances) are excluded from application. Dangerous goods (hazardous substances) refer to flammable, pressurized or other hazardous substances and goods that have high storage and transport risks. The recalled items include all items whose sales have been restricted by the U.S. federal government, the Consumer Product Safety Commission (CPSC), the Food and Drug Administration (FDA), and the U.S. Department of Agriculture Food Safety and Inspection Service (USDA FSIS).
In the case of inventory that cannot be reordered, this program can be applied if the cause of product damage is by the customer, shipping company, or distributor. If the cause is product defect, expiration date, or warehouse damage, then the program application is restricted. In this case, the exact reason for not being able to apply for the item being sold, can be found in detail on the Create Removal Order page in the Seller Central Manage Inventory menu of the FBA Liquidation program application process.
[Application Page of FBA Liquidation Program](Source: Amazon Seller Central - Create removal order page)
How the FBA Liquidation Program Sets the Liquidation AmountWhen a seller applies for the FBA Liquidation program, Amazon will arrange a wholesale liquidator within 30 days. The arranged wholesale liquidator will purchase the product at a liquidation amount of about 5% to 10% based on the average selling price (ASP) of the product. At this time, the average selling price (ASP) of the product is automatically calculated by comprehensively considering the product sales volume, sales volume, sales volume change rate, FBA selling price, etc. over the past 30 days, according to Amazon’s standard. The wholesale liquidator pays the item liquidation amount to Amazon. After 60 days from the date of application, the seller will finally receive the net liquidation amount after deducting all fees from the item liquidation amount from Amazon. If Amazon cannot arrange a wholesale liquidator within 30 days, then it is not possible to reapply for the program with the same item (ASIN).
On one hand, the fees charged by Amazon in this program include liquidations referral fee and liquidations processing fee. Liquidations referral fee is calculated as 15% of item liquidations amount, and liquidations processing fee is set for each item based on item size and weight.
[Liquidations Referral Fee]* Special Handling Items may include clothing, shoes, watches, jewelry, and dangerous goods.(Source: Amazon Seller Central - FBA Liquidations Help Page)
The following example will make it easier to understand how much money can be recovered using the FBA Liquidation program. Also, if choosing the discard and return option, then incurred fees can be compared, and relative advantages of the FBA liquidation program can be identified.
[Example Comparing Recovery Value for Removal Order Options](Source: Amazon Seller Central - FBA Liquidations Help Page)
If a mascara set weighing 0.4lbs was sold at an average selling price of $30, then the seller would have to pay a fee of $0.32 for each item to Amazon to dispose of or recover the item.
On the other hand, if the FBA Liquidation program is used, then $2.3 per item excluding fees can be recovered. Considering the wholesale liquidator’s typical purchase rate (5~10%) described above. Assuming a 10% purchase rate for the liquidation item, the liquidation amount for that item would be $3.00. The liquidations referral fee applies 15% of the item liquidation amount, so $0.45 will be charged. The liquidations processing fee of $0.25 based on the weight of the item will be incurred for this item weighing 0.4lb. In conclusion, after deducting the two fees from the item liquidation amount, the net liquidation amount deposited in your seller account is $2.3.How to Apply for the FBA Liquidation ProgramSellers can apply for this program by entering the amount they wish to liquidate based on each item classified by ASIN. The detailed process is as follows.
[FBA Liquidation Program Application Process]
If a seller wants to apply for liquidation of items classified as sellable inventory, then the seller can enter the desired quantity in the “Fulfillable quantity for removal” field. If a seller wishes to liquidate unfulfillable inventory, then the seller can simply enter the desired quantity in the “unfulfillable quantity for removal” field. “Removal Order ID” is an optional field as it is automatically generated when left blank. Finally, click review to complete the liquidation order. If the application for a liquidation order is completed, then the case cannot be withdrawn. So, this must be proceeded with special care.
[How to Apply for Liquidation of Sellable Item](Source: Amazon Seller Central - Create removal order page)
[Application Procedure for FBA Liquidation](Source: Amazon Seller Central - Create removal order page)
Reduce Inventory Costs with the FBA Liquidation Program and Optimize Logistics Costs with Cello Square!In the Amazon business, even if an item was launched with strong conviction through thorough market research, it is often overlooked by U.S. consumers. In addition, difficulties may arise due to unforeseen variables such as trend changes, competitors’ entry into the market, and return issues. If the situation does not improve through any efforts, it may be the best strategy to reduce the time and opportunity cost to minimize the expected damage and promise the success of the next item.
FBA Liquidation introduced today is a program that can be usefully utilized as one method to minimize such damage. However, before considering the use of FBA Liquidation program, the inventory needs to be depleted gradually through various promotional activities to ensure that the items are not classified as inventory subject to long-term storage fees. For example, there is a strategy to deplete inventory in advance by actively participating in large discount events such as Black Friday and Cyber Monday by applying a promotional price below the target margin to products (ASINs) that are expected to have excess inventory. In addition, there is a way to smoothly exhaust inventory by increasing the sales conversion rate by participating in outlet deals and setting a high coupon discount rate on a regular basis. If inventory depletion rates are low despite these promotional activities, then FBA Liquidation program is recommended as a last resort to reduce long-term storage fees and improve the inventory performance index (IPI).
Occasionally, due to the high cost of goods, it is a better option to minimize damage to the goods themselves, at the expense of logistics, than to recover some of the value of the inventory liquidated through the FBA Liquidations program. In this case, returning the excess inventory to an address in the United States to resell the product through other domestic and foreign channels can be considered.
Specially, the management of returns or inventory recovery in logistics also plays an important rule. Therefore, it is possible to operate more easily and efficiently by using services that are capable of not only forwarding but also logistics management at once. Samsung SDS digital forwarding service, Cello Square, provides a return service using local warehouses in the western and eastern United States, so it will be possible to minimize financial costs and time inefficiencies in the inventory recovery process through more reasonable freight rates and systematic logistics processes. In addition, based on the information such as they type, weight, origin, and destination, and transportation schedule of the cargo that the shipper wants to deliver, it provides an instant estimate for sea/air sections and allows the shipping cost and time to be compared. By solving all procedures of import/export logistics and transparently performing difficult tasks such as settlement and verification of international freight, it can be expected to reduce overall logistics costs by reducing simple repetitive tasks.
When using the Cello Square service, a dedicated logistics manager (NAVY) is assigned to each customer, so users can inquire overall logistics and receive support for implementation. Based on global top-tier air/marine logistics, users are collaborating with various logistics providers based on strategic partnerships, so even sellers with low volumes can safely deliver to FBA warehouses at competitive rates. This is the best way to increase efficiency by minimizing various opportunity costs in the overall Amazon business inventory management in that it can reduce the probability of inventory management failure by optimizing logistics through consulting with a dedicated operator from the FBA warehouse stage.
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