Mastering the Inner Workings of Amazon: Conversations in REM with Michael Peveto

June 7, 2023

For brands selling on Amazon, understanding the platform’s supply chain is essential to optimizing sales performance and customer satisfaction. When a customer clicks “buy,” a complex system springs into action, working to deliver the product as efficiently as possible. But how does this system really work behind the scenes?

In this recap of a Q&A session hosted by Tim Campbell, our Director of Industry Insights, Michael Peveto, Amazon Operations Expert at CommerceIQ, delves into the inner workings of Amazon. Michael provides insights into the supply chain that keeps Amazon running and shares strategies that brands can use to optimize their relationship with the ecommerce behemoth.

Tim Campbell: With your experience, especially at Amazon, what were the most common challenges in receiving brand orders that you would experience?

Michael Peveto: I worked in both the inbound and outbound sides of the warehouse. I witnessed product arrivals and the process for fulfilling end-customer orders. One of the main challenges we faced on the inbound side was receiving unlabeled cases or cartons, which required us to manually inspect each item. This process was tedious. Labels were crucial, such as indicating heavy packages for safety reasons or distinguishing identical items that were individually wrapped for efficiency. Overall, the lack of labeling that I experienced in that particular role is what made it harder to do my job effectively.

TC: It sounds like that could potentially lead to a chargeback at one location. Was that the most common way that a chargeback arose? What about shortages – what were the common ways that those arose as well?

MP: In general, shortages occur when there’s a discrepancy between the physical and digital receipt of items. This can happen when Amazon receives an item but can’t identify it or match it to the correct purchase order. Labeling can play a role here, as it helps to identify products and their associated POs.

As for chargebacks, these are essentially compliance charges. They are Amazon’s way of informing you that you didn’t follow their policies. The real problem with chargebacks is that when you fail to comply with Amazon’s policies, your products are received inefficiently and often handled by a person, which can cause shortages to occur.

TC: How does Amazon receive orders, in a nutshell?

MP: The Amazon fulfillment center (FC) may conjure up images of conveyor belts and large robots, but in reality, the process is similar to those in other retailers. Trucks arrive with pallets and after breaking them down, each case is received. Vendors may not be familiar with the parcel identifier or PID, which is a large mechanical scanner that scans all six sides of a carton and every label on it. Amazon’s system has a hierarchy of label recognition, with the SSCC label taking priority. If the label is not available or scratched, the GTIN label is recognized. The PID ensures that all information is aligned, and any failed checks lead to the product being received inefficiently and potentially causing human errors.

TC: What are the metrics that Amazon’s DCs are evaluated on internally and what does Amazon really care about when receiving items?

MP: Based on warehouse experience, the metrics we measured were mainly based on speed and the number of units processed. While quality is also measured, it’s mostly on the outbound side when the end consumer receives their order. You may have experienced receiving an Amazon package that was either too small for the box or had too many airbags causing it to bulge at the seams. These are examples of quality checks that Amazon performs, but the majority of their focus is on speed and volume.

TC: At the vendor level, were there conflicts of interest that arose due to focusing on speed or quality?

MP: When most of your performance metrics are based on speed and outputs, it influences you to work in a certain way. Amazon’s lightning-fast delivery is great for consumers, but for vendors, it doesn’t always lead to accuracy, especially in the receipt of products. It can be frustrating for vendors, who face pressure from both sides: the possibility of compliance charges or shortages, and Amazon’s push to maintain customer obsession.

TC: Do you have any insight on perhaps the corporate structure of how Amazon manages its DCs? Is there any opportunity for alignment with vendors there?

MP: Amazon does have strict guidelines across all of their warehouses, but human error may still play a part during the handling of shipments and processing of customer orders. CommerceIQ allows for the identification of trends in shortages and chargebacks at different levels. For example, one particular FC accounted for 6% of shipments but over a third of chargebacks. This information was presented to Amazon, but their findings were vague. However, chargebacks did drop after the resolution of the case. The reality is Amazon may claim to follow their strategy across all warehouses, but this may not always be the case.

TC: From a brand perspective, what supply issues do they run into that they identify? And does that differ between types of brands?

MP: The most common chargeback issues relate to purchase order (PO) accuracy, labeling, and the advanced shipment notification (ASN). These are the three things that everyone has to follow, regardless of their product. Prep chargebacks vary based on the product category. For example, larger products result in Ships-In-Own-Container (SIOC) chargebacks or oversized cartons and liquids can result in bagging and capsule chargebacks. Fragile items are more likely to result in bubble wrap chargebacks. Chargebacks aim to protect products, but vary based on category.

TC: Can you explain SIOC?

MP: SIOC means Ships-in-Own-Container and was implemented by Amazon in 2018. Sortable packages are those under 18x14x8 inches and under 20 pounds. Anything over that requires SIOC, which means using the vendor’s packaging that complies with ISTA 6 requirements for shipment, instead of putting it in an Amazon box with airbags.

TC: What were some of the common challenges to getting brands to work with Amazon to resolve chargebacks and shortages?

MP: When a company has multiple brands under one umbrella, with varying relationships with Amazon, it becomes a question of whether to combine them all into one Vendor Central account or have each brand with its own account. Additionally, when a parent company acquires another company with a 1P relationship with Amazon, merging the data proves to be a problem, leading to chargebacks due to discrepancies between digital and physical worlds. CommerceIQ solves this problem by aggregating data across all Vendor Central accounts into one platform. It’s easier to evaluate the overall health of the business while also providing the ability to drill down to individual brands and items.

TC: How are brands changing their approaches to supply chain management, given all the challenges that they have faced over the past couple of years?

MP: The discrepancy between the digital and the physical world is where the issues arise. To address this, there should be a balanced focus between a brand’s communication with Amazon and the physical supply chain. On the communication side, brands need to ensure their Vendor Central catalog is accurate and up-to-date, and that data transmissions are being monitored for accuracy. On the supply chain side, brands should utilize chargeback reports to identify problems and compare their compliance with Amazon’s shipping guidelines to what’s happening on the ground. Addressing both areas will lead to more efficient and automated reception, which can help reduce shortages and chargebacks.

TC: What role does automation play in all these?

MP: I think the disputes surrounding shortages and chargebacks make up most of our clients’ significant pain points. They’re constantly disputing these occurrences to no avail, wasting valuable time. This is where CommerceIQ shines with shortage disputes. We automate every single shortage dispute, unlike some brands that only tackle the top 10% or highest shortage claims. By disputing everything, we save valuable time, which can be used to focus on more value-add activities. I believe automation can play a vital role in not only identifying what’s happening but also why it’s happening and how to fix it. This is the role that automation can play today, and I’m sure there’s much more it can do in the future.

TC: Are there any inner secrets that you didn’t have an opportunity to talk about through any of the questions and that you want to bring up now?

MP: The first nugget of knowledge I’d like to share is that in tackling chargeback and shortages, root cause resolution should be your North Star. Here’s a quick story about a client that was receiving bagging chargebacks for a top-selling item. The client started bagging the item themselves, but still received chargebacks. They eventually discovered that there was another item within Amazon’s warehouse that was not bagged that was being attributed to this item, causing chargebacks for the same item to resurface. This demonstrates the importance of proactively checking and communicating with Amazon to ensure that chargeback issues are truly resolved.

The second nugget of knowledge is that even though you may have removed the chargeback today, it doesn’t necessarily mean it’s gone forever. Chargebacks and shortages are reactive by nature, but vendors can be more proactive about addressing them with certain tools, such as the CommerceIQ platform.

Want to learn more? Watch the full video at https://growth.commerceiq.ai/conversations-on-rem-with-michael-peveto.