Coronavirus disruption frays Amazon supply chain
Even as orders increase, disruption from the new coronavirus outbreak could have big consequences for smaller, third-party sellers on Amazon, as they will be punished for stock outages.
The Amazon supply chain is an extremely complex machine, but the new coronavirus pandemic threatens to slow it to a crawl.
The disruption is affecting all businesses that sell on Amazon, but it may irreparably harm many of the smaller businesses that rely on the Amazon supply chain as their business lifeblood. The problems faced by many Amazon sellers may have reached a new level of difficulty, as Amazon announced it is making big changes in the products that it stores and ships from its facilities in the next three weeks.
On March 16, in a response to the continuing COVID-19 spread, Amazon stated that for now, it is "making the decision to temporarily prioritize household staples, medical supplies and other high demand products coming into our fulfillment centers so we can more quickly receive, restock and ship these products to customers. We are working around the clock with our selling partners to ensure availability of these essential products, and continue to bring on additional capacity to deliver customer orders."
Getting goods out of China a challenge
The Amazon supply chain disruption is causing serious problems for vendors like 3P Marketplace Solutions, a Seattle firm that makes cowboy boots and hats and sells on Amazon as a third-party seller.
3P Marketplace, which makes its products in facilities in China, has had a container of goods on hold in China and is experiencing delays in production because factories were closed or employees could not get to work due to the coronavirus outbreak, said Jerry Kavesh, 3P Marketplace CEO.
"We had a container leave just before Chinese New Year [just before the outbreak], which is good because that's our spring and early summer product," Kavesh said. "We had product that was supposed to leave China a week or two after Chinese New Year, which was finished. And that product got caught in the shutdown. For a long time, we didn't know when the factory was going to reopen."
However, production is only one link in the supply chain, and Kavesh expects to have difficulties with shipping products out of China even after the outbreak has leveled off and production resumes. The first problem is that getting the goods out of China may be difficult as container space is limited on ships and the space may be taken by larger manufacturers at the expense of the smaller third-party sellers.
"Going back to our experience with the tariffs kicking in a year ago, as a small importer, our container kept getting bumped by larger importers, and I expect that to happen again," he said.
Amazon severely punishes stock outs
Keeping products in stock is absolutely critical for Amazon sellers, as the Amazon algorithm punishes anyone that severely runs out of stock, said James Thomson, partner with Buy Box Experts, a firm based in Lindon, Utah, that provides marketplace management services for Amazon sellers.
"Amazon is not known for being kind to companies that are impacted because of external factors," Thomson said. "Amazon is a machine and the machine keeps turning, and if you can't input your products into that machine, then get out of the way and somebody else will. That's tough for companies that have spent years building a business, but now find themselves in a situation -- arguably outside of their control -- where they can't really do much."
James ThomsonPartner, Buy Box Experts
Find ways to keep stock on Amazon
One strategy for companies to keep their stock on Amazon -- and in the machine -- is to examine demand strategy, Kavesh said. But, he cautions, this needs to be done carefully.
"You can slow down demand by reducing your customer conversion, by turning off your advertising or some of the advertising," he said. "You can raise your prices to some degree, but if you raise them too much, Amazon will suppress your listing because they think you're gouging."
Kavesh has reduced advertising, stopped promotions and is considering raising prices to slow down demand. However, raising prices is a tricky business and could turn off consumers. If one of Kavesh's customers sees a cowboy boot now but waits to buy it, raising the price by 10% or 20% could be a turnoff.
"I don't want to go there if I can avoid it," he said. "But, if I get to the point where my inventory is running out and I won't have supply, then I will do that because you cannot run out of inventory."
Smaller companies hit the hardest by disruption
This kind of disruption is going to hit smaller businesses with leaner margins the hardest, said Thomas O'Connor, senior director of global supply chain research at Gartner.
"There are likely some businesses out there that have greater safety stocks than others. But the reality for most small businesses is that they are running relatively lean, both on the inventory side as well as the cash flow side," O'Connor said. "Because of leanness, it means that a disruption like what we're seeing with COVID-19 can potentially lead to either real business continuity challenges or significant delays."
O'Connor agrees that even when production comes back fully, there will be other potential challenges in the supply chain.
"What will happen as a surge starts to kick back up, as manufacturing starts to come fully back online, as freight starts to come fully back online?" O'Connor said. "Will there be challenges both in China and into the U.S.? Will we see bottlenecks potentially starting to form coming inbound? That's another aspect that needs to be considered or at least planned for and anticipated."
Smaller manufacturers already facing challenges with financing are particularly vulnerable to the disruption, according to O'Connor.
"The financial viability of some of the smaller suppliers is a big concern -- and a big challenge. Can these businesses that are used to a consistent inbound financial flow make it if either consumers reduce their purchasing, or it's not possible to get the product on Amazon?" he said.
Small sellers may miss out on Amazon order increases
One of the ironies is that, as millions of people are now stuck inside of their homes, product orders on Amazon are skyrocketing. In the short term, this is being driven by demand for medical products and household staples rather than consumer goods. Amazon announced that it plans to hire 100,000 new workers at its fulfillment centers to handle the increase in orders.
This uptick in purchasing may not benefit smaller companies, however, said Simon Ellis, program vice president with IDC.
"There is certainly reason to think that supplies of things may go disproportionately to the large companies over the smaller companies," Ellis said. "Because suppliers are going to meet the needs of their big customers first, they prioritize customers as everybody does."
One of the biggest challenges that all companies face is the wide and deep nature of the disruption, which makes mitigation strategies difficult, according to Ellis.
Other disruptions have been regional or local, and they could be addressed with strategies like risk assessment and diversification, he said. Companies could have built lots of inventory, but this was not a practical strategy for an event that may happen every 100 years.
"It may be that there are some things you can't anticipate and you can't plan for, so you do the best you can and when things return to normal, hopefully you're still standing," Ellis said. "However, I wouldn't be surprised if there are a significant number of small businesses that are on Amazon are insolvent and go away. It's hope for the best, plan for the worst, but the mortality rate of small businesses on Amazon will likely be very high."
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