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OM in the News: Amazon’s Jammed Warehouses

November 10, 2016
An Amazon fulfillment facility in New York.

An Amazon fulfillment facility in New York.

Amazon has a holiday message for the millions of merchants who rely on it to fill their online orders: Don’t clutter its warehouses with stuffed Easter bunnies or other out-of-season goods. Though Amazon has built more than 24 new warehouses this year, increasing its square footage by 30%, it says it needs all the space it can get to cope with the annual boom in holiday orders. That is why it is trying to discourage its 3rd-party sellers from stocking up on items that aren’t likely to sell by the end of the year.

“For the first time,” writes The Wall Street Journal (Nov. 4, 2016), “Amazon is charging its sellers a premium for storing merchandise in its warehouses during November and December.” Generally, warehouses overflow with 3rd-party sellers’ goods, especially as Christmas nears, straining its capacity and increasing costs. The company has temporarily stopped accepting shipments from new sellers, and established sellers are required to time their shipments to arrive by Nov. 9. Amazon also offered to remove sellers’ goods from its warehouses free of charge for return.

The idea is to speed the flow of goods and optimize use of space. Amazon says 1/4 of the merchandise sold on its site are part of its fulfillment program, which charges storage fees based on volume. Starting this month, storage fees are due to more than triple to $2.25 per cubic foot a month, up from 54 cents the rest of the year. A seller with 500 small Easter baskets in stock, for example, would pay storage fees of about $124 in November, up from $30 a month the rest of the year.

Amazon makes considerably more when its fulfillment customers make a sale than when their goods languish, racking up storage charges. The temporary increase in storage fees is called “surge pricing”—charging more for goods or resources when demand is highest. Other companies, including UPS have introduced peak surcharges to encourage shippers to make more accurate predictions of their package volume.

Classroom discussion questions:

  1. Why is Amazon resorting to this pricing measure against independent merchants?
  2. How else can its operations managers control the space issues at the warehouses?
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