Direct Fulfillment as a Strategic Lever: When Amazon Vendors Should Use It (and When They Shouldn’t)

Paul Sonneveld
Hi everyone, and welcome back to Marketplace Masters. I'm Paul Sonneveld, co-founder of MerchantSpring and host of this show. Today, we're kicking off a two-part series on Amazon Direct Fulfillment. This episode is the strategic view, and July will follow up with an operational deep dive into the workflows, SLAs, and warehouse mechanics, where I'll be joined by Chris Khoo. Now, why lead with strategy? Because for enterprise vendors, direct fulfillment isn't just an ops decision. It sits at the intersection of profitability, working capital, channel strategy, and how you negotiate with Amazon. 

And I've got the perfect guest. Jason Linscheid spent two years inside Amazon as a senior vendor manager, helping launch and scale its professional healthcare business, running joint business planning, pricing negotiations, and supply chain performance from the buyer side of the table. He was also his unit's subject matter expert on profitability, so he's seen firsthand how Amazon evaluates vendors and why so many brands struggle to grow profitably in the system. Today, he runs Vendorist, the consultancy he founded to help enterprise Wampy brands operate Vendor Central with more clarity, control, and margin discipline. Jason, absolutely fantastic to have you on the show. Welcome. 

Jason Linscheid
Thanks, Paul. Great to see you, and thanks for having me. 

Paul Sonneveld
It's an absolute pleasure. Jason actually had the opportunity to catch up for a coffee in Seattle a couple of weeks ago for the Amazon Solution Provider Summit. And it was great to go over this episode and talk a little bit more in terms of what he's been up to. But yeah, today I really look forward to picking his brain on direct fulfillment. And here at MerchantSpring, we're putting a lot of features out there specifically for vendors who operate on the direct fulfillment platform. But I think it's really important to not just look at things from an analytical operational point of view, but really start with the strategic angle here.

So it's great to have that discussion with you today, Jason. So let's jump right in it. Actually, before I do, quick reminder for our audience, many of you will be watching this live on various platforms. If you are, this is your opportunity to ask questions and get live answers from Jason as well. So you can do that in the LinkedIn comment section or on the YouTube comment section as well. So go for it. Look forward to receiving your questions. But here's one for me to get us started. So most vendors I talk to tend to think or talk about direct fulfillment as FBM filled by merchant for 1P, right? A fulfillment alternative, really, when FBA isn't like working. What does that framing miss about the strategic value? 

Jason Linscheid
Yeah, Paul, I love this topic. I love that framing, and I actually think it's one of the most common misconceptions about direct fulfillment. Because when people describe it as FBM for 1P, they're not wrong, but they're only describing how the order gets fulfilled. They're not describing why a company might choose that model in the first place. So for me, the more interesting question is, what business problem is the company trying to solve? 

Different companies use direct fulfillment for many different reasons. You might use it to expand your catalogue, support product launches, improve profitability, or maybe solve logistical challenges with heavy, bulky, or multi-box type products. It's the same fulfillment program, but many different objectives. A few weeks ago, a vendor came to me to help reduce their dropship lead times. And while we made some improvements, the more important takeaway was deciding exactly why each ASIN deserved to have dropship offers in the first place. So in many ways, this isn't only a direct fulfillment conversation. I think it's a conversation about what role Amazon should play in the business, and direct fulfillment just happens to be the lens we're using to discuss it. 

Paul Sonneveld
So, yeah, not wrong, but really quite a limited perspective. There's so many more facets to it. Absolutely. So following on from that, right, if you were sitting down with the head of Amazon and an Amazon brand today. How would you walk through, or maybe can you walk us through, like a bit of a strategic decision framework that you'd use? When does direct fulfillment make sense versus the standard warehousing fulfillment option that Amazon typically offers, or maybe let's throw some other options in here? So DF Amazon warehouse, and maybe there's some 3P options as well, right? FBA or even FBM? Like, how do you think through that? What framework do you use? 

Jason Linscheid
Yeah, that's a good question. When I was a vendor manager at Amazon, one of the things I really enjoyed learning was how to solve problems by working backwards. And I love using this approach today. So instead of asking whether in-network, direct fulfillment, 3P, or, as you mentioned, hybrid approach is right, I would really encourage brands to start with the role you want Amazon to play in your business. And then determine the fulfillment model that best supports that objective. 

So, in other words, don't start with the channel, start with what you're trying to accomplish and then work backwards from there, and i'd say ideally we're doing this at the ASIN level not even the account level. I rarely think in terms of account-level strategy for Amazon because there's just so much nuance, so ideally this is asin level thinking. So standard 1P or in network is usually best when demand is predictable and replenishment is stable, or Amazon can efficiently stock and ship your product. Their network is incredibly powerful when products fit the model. 

On the other hand, direct fulfillment is usually best if demand is, say, less predictable or maybe lead times are longer. If you want to activate long tail assortment or maybe support a new product launch, those examples, as well as products that are difficult for Amazon to efficiently and effectively ship, are all great fits as well. Just as an example, like I work with a vendor who sells products that ship in three cartons. So one unit equals three boxes. Amazon's network really struggles to do multi-box well, which leads to high damage rates, high returns, and customers receiving incomplete orders. And so direct fulfillment's a really great solution here because the vendor remains in control and helps mitigate some of those risks that Amazon's network typically struggles with. 

On that flip side, though, if you can't consistently meet customer expectations or if you're not adding value to Amazon and its customers, direct fulfillment probably isn't the right answer. Paul, you mentioned 3P, I think seller central 3P, it can make sense when the brand wants maximum control. For example, when setting the sell price is really important or if the economics just work better outside of vendor central. To me, though, any comparison of 1P and 3P is kind of like apples and oranges. They're not just different options for who ships the product to the customer. It's really more about completely different channels deserving of their own strategy. I think maybe the most important takeaway here is that it's usually not a one-and-only scenario in which the vendor will land on. Most sophisticated brands eventually land on some sort of a hybrid model using a combination of in-network and direct fulfillment. Some ASINs might end up being in-network only, others dropship only, and many will probably sell both ways. 

Paul Sonneveld
Yeah, I was going to get to, you were very clear up front to say this is an ASIN-specific decision. I'd love to go just a little bit deeper in that, in terms of how do you decide. I mean, you gave some great use cases already around, like if the demand is less predictable, if it's bulky, if it's multi-box, etc. What are some of the other considerations? Let's say you're looking at a particular race, and what are the key questions you ask yourself, and how does that then lead to one or the other or both? 

I'm particularly interested in the both because, having done a lot of webinars on the hybrid conversation on the 3P side, a lot of times, both isn't that great because you don't want to compete with Amazon and various things. But this is a slightly different context and a different scenario. So yeah, at an ASIN level, what are the questions you ask yourself when you're looking at a product and make a recommendation in terms of the fulfillment channel? 

Jason Linscheid
Yeah, I think for me, Paul, the question that I'm always asking is, what's the strategy? And what is this ASIN's job? In other words, what role does this item play in a vendor's or a seller's catalogue? And if we start with that strategic objective, I think we gain a lot more clarity as to which option or which set of tactics ultimately makes the most sense. And I think this is broader than direct fulfillment. As a conversation, this applies to advertising, it applies to promotions, and content strategy. 

Each ASIN in the catalogue ideally is defined in terms of having a job that it's attempting to accomplish for the brand. And so if that item is a tier one top-selling product, we would have a much different conversation about which fulfillment method is the right strategy, versus if we were talking about a product that was part of the vendor's long tail assortment and has never sold before. So to me, starting with that strategic objective and having clarity on exactly what role that item is playing for the vendor is where I would start that conversation and then get more nuanced as we dove into the details of each specific product. 

Paul Sonneveld
Yeah, and I think, you know, I guess I'm just want to have a look at the shift that has taken place, really in the last few years, as well on this. So we know that Amazon, depending a little bit on the geography, the answer to the story is a little bit different, but certainly in North America and in Europe, actively, Amazon has really been actively pruning Vendor Central, right, terminating accounts on the five million GMV or ten, and really sort of focusing on those enterprise brands. So, for brands that are still on 1P, how does that shift around, shift the sort of strategic calculus around direct fulfillment? You know, and how does that play into that conversation and in terms of that trend as well? 

Jason Linscheid
Yeah, that's been a tough one for many brands. And I actually think this trend makes direct fulfillment more important than ever, Paul. We know Amazon is becoming increasingly disciplined about where it invests inventory and working capital. We know it's shrinking the number of brands that are managed by each vendor manager. We're just kind of across the board, seeing Amazon be a lot more selective than they were several years ago. They still want to sell every SKU on the planet, which has always been their motto, but increasingly, They want to sell SKUs that are economically attractive and provide the best possible customer experience. And so that's where I think direct fulfillment can help bridge the gap. Products that might not justify in-network inventory, whether it's economically, operationally, or even strategically, they can still remain available. I usually like to say just because Amazon doesn't want to stock a product doesn't mean they don't want to sell it. 

And I think one thing that successful vendors learn to do, and again, probably much broader than direct fulfillment, is you really see the business through Amazon's eyes. If you can learn to see the system from both sides of the table, Amazon's decisions will become a lot easier to understand. And then brands can adopt a strategy that's aligned with their own incentives as well as Amazon's incentives. And I think in this way, that's where direct fulfillment can be a strategic tool for those vendors. They can increase assortment and inventory coverage. It can help grow sales or even help improve Amazon's margins. And those are all things that will make your vendor account more attractive to Amazon and hopefully less likely to be deprioritised or transitioned over to 3P. 

Paul Sonneveld
So you mentioned there's some rationale for Amazon to migrate you from the warehouse to the direct fulfillment channel. You know, big working capital savings on the Amazon side. If I was playing devil's advocate, right? Like, why wouldn't Amazon put everything on direct fulfillment, right? You know, do the good old drop shipping operation. Now, clearly, that's not gonna happen, because there are some benefits. So to put it another way, what is Amazon giving up by asking a vendor to go to use direct fulfillment for a particular ASIN? Obviously, they're getting benefits, and we'll talk about some of the commercial implications of this more broadly, but what are they giving up? 

Jason Linscheid
Yeah, that's a great question. I think the first thing that comes to mind is control over the customer experience. So one of the things that's made Amazon so successful over the years has been their obsession with that customer experience and pushing the limits as far as possible in terms of getting last-mile delivery to happen as quickly as possible. When e-commerce originally came into the world, the expectation was that products would ship in maybe one week or two weeks. And Amazon obviously has pushed that towards single-day delivery and even multi-hour delivery in some cases. 

So it's really the control over that operational capabilities that they've built for themselves and really made a name for themselves in this industry, and frankly have changed the world with. It's that ability to control the customer experience and to provide a last-mile delivery to the customer through the vendor, through a dropship program that would be on par with what they are able to do when shipping that product through their own network. 

Paul Sonneveld
Yeah, which then gets me into what is the criteria that you need to meet before you're eligible for this? Or, you know, sorry, let me go back a step. Can any vendors switch on direct fulfillment or other specific hoops or competencies from a supply chain point of view that you need to demonstrate to Amazon? Because to your point, you know, obviously it's still going to be said sold by Amazon. I haven't actually checked where it says shipped by Amazon in these cases. But Amazon's reputation is on the line, and they've sort of outsourced the delivery, although I'm sure they're involved in lots of points in the supply chain still. But what is Amazon expecting in terms of operational performance or history? 

Jason Linscheid
Yeah. So to answer your first question, the direct fulfillment program is invite-only. It's not a program that vendors can just sign up for and implement through Vendor Central. There is not a huge hurdle or bar to achieve in terms of performance before Amazon will provide that invite. But there is some back-end work that Amazon needs to do in the sense of creating a new vendor code, making sure that all the contracts are in place before they will actually allow a vendor to participate in that program. 

Leading to your second part of the question, which was that on the customer experience side, so Amazon's designed this program to be as seamless as possible from the customer's view. They actually don't want it to be known that the shipment is coming directly from the vendor. So the messaging on the website will say that it ships from Amazon. Additionally, shipping labels and things of that nature, any labelling on the box that the customer might see, will point to an Amazon return centre. It's not designed to point to the vendor's warehouse location. So it's designed to be a seamless program. And the way that Amazon governs it is through performance over time. They're, of course, wanting vendors to perform at a level that is on par with the way that they, too, perform from an operational standpoint. 

So think of your time to ship. But of course, they understand that that's not always going to be possible. So what ultimately happens is that the vendor's performance is taken into account and when the customer sees a lead time presented on amazon.com for a given product, that lead time will take into account any of the time that it takes for the vendor to do their pick, pack, prep, and ship, as well as the expectation for how long it might take the carrier to do last mile delivery. So that's a dynamic calculation that's being taken into account. Of course, vendors have the ability to review their own performance and ultimately should be working to shrink the time that it takes to perform so that they are able to offer customers a level of an experience that's on par with what they might expect from an in-network order. 

Paul Sonneveld
Yeah. Amazon is certainly very good at helping people to account to deliver to a certain standard. One of the things i picked up on what you were saying there is, hey, it's a new vendor code, new contract, right which to me sounds like hey opportunity to renegotiate terms and maybe extract an improved working capital position or a profitability outcome. Take us through some of these changes you know how does the working capital picture, for example change or how does the profitability model change between, say, an ASIN that was previously sourced by Amazon directly into their own warehouse versus now moving into a direct fulfillment model. Can you draw some, you know, compare and contrast and highlight some of those key differences, both from, I guess, a cash flow and a profitability point of view? 

Jason Linscheid
Yeah, I would say it depends. By the way, Paul, that's probably my favourite answer to all Amazon questions. It depends. The first thing I'd want to know is, talking to those contracts we just mentioned, are there any differences between the contracts on your in-network vendor code and your direct fulfillment vendor code? Usually, that answer is no, but some vendors do have different quick pay discounts for each vendor code or maybe a different accrual structure depending on what they've negotiated with Amazon. One of the things I'd look at next then is the difference in payment timing between in-network and direct fulfillment orders. This will have an impact, of course, on the working capital as well as just overall cash flow. 

One of the things that's interesting is depending on your freight arrangement, direct fulfillment can either accelerate cash collection or have no impact for others. So this gets a little bit nuanced, but traditionally vendors that are WePay or Collect Freight, which is where Amazon arranges for and pays the inbound freight, they'll see virtually no difference in payment timing. Because Amazon's invoice due date calculations essentially start at the same time, regardless of in-network or direct fulfillment models. 

The vendors that they pay or prepaid freight will actually get paid a little bit sooner on direct fulfillment orders than they would for in-network orders. And the reason being is that the invoice due date calculation simply starts at a different time. It frankly it starts earlier on the direct fulfillment orders. So, on a direct fulfillment order the invoice due date calculation starts when that invoice is created instead of or I should say conversely, on the in-network side, it starts when the order is physically delivered to Amazon's FC. So if you're a TheyPay freight vendor and you traditionally, say, have a one-week lead time on your in-network orders, you'll probably see cash collections sped up by about a week on those direct fulfillment orders. 

Another thing in terms of working capital, another consideration for finance teams would just be the change in inventory ownership and location. So, w ith direct fulfillment, you're obviously going to be sitting on inventory a lot longer. Your inventory risks change a little bit too, so forecasting assumptions will matter a lot there. Ultimately, I think every company's numbers are going to be a little bit different. As we talked about earlier, the economics have to be modelled and at the ASIN level for sure. I think most vendors would want to be able to do a side-by-side comparison between the two just to make sure that they have clarity as to what the numbers look like on both sides. And, you know, maybe, Paul, just a quick side note here. If you're a vendor and you don't know your ASIN level profitability, I'd highly recommend making that a priority. 

Paul Sonneveld
Yeah, that's one thing you didn't mention there is chargebacks. And I just want to deliberately bring this up because as I was doing research for the show, there was quite a bit of chatter on some of the forums around, you know, DF is great because I'm exaggerating here, but, you know, you remove chargebacks, right? And all this sort of supply chain fees that Amazon levies on you because you're not doing everything exactly to Amazon's spec as you're delivering into the warehouse, right? And that resulting in a couple of hundred basis points in terms of margin improvement. What do you make of that? Have you found that to be true? Or, actually, is the situation on the ground a little different? 

Jason Linscheid
Yeah, so I would agree with you that this can be a popular opinion. But honestly, this is something I always push back on. Chargebacks often get headlines because they're easy to measure and they directly impact vendor margins. But to me, the answer is no. I don't think chargeback elimination is a reason to implement direct fulfillment at all. It's not a get out of chargeback jail free card. It's true that direct fulfillment orders don't carry the same chargeback risk that in-network orders do. And the primary reason for that being is just the fact that Amazon never sees the physical shipment, which eliminates most of the potential chargeback risk. But to me, those chargebacks are a signal. You know, they're a symptom of operational issues.

And personally, I'd rather fix the root cause than change the fulfillment model. So, no, I don't think direct fulfillment should be used as a shortcut around operational discipline. You know, I would just maybe add here, like, operational excellence for direct fulfillment, it still matters here. You know, as we talked about earlier, Amazon's optimising for that customer experience. And so as a vendor, your ability to do the pick, pack and ship on time, it directly impacts that customer experience, which is something we all know is important to Amazon. 

Paul Sonneveld
Yeah, there are better ways to get rid of chargebacks, right? Which is go and fix the underlying root cause issues and build a better operations. 

Jason Linscheid
And maybe another related topic, Paul, that comes up here a lot with chargeback avoidance is also the fact that Amazon pays the shipping cost on those direct fulfillment orders, which can save the vendor money. So that sometimes is often viewed as another benefit to the direct fulfillment program. But really, I'd be careful here, too, in using direct fulfillment to avoid costs. I once did a two-week audit for a brand who came looking to me for ways to jumpstart their growth. The year before they had intentionally shifted a large chunk of revenue from in-network over to direct fulfillment and they were hoping to save the, I think it was six percent or so that they paid on their freight allowance. 

And you know, it was a decision that was well intentioned, but what they really failed to do is to to predict how that would impact the customer experience and eventually their sales. So their direct fulfillment lead time was like, I want to say three to five days, plus the additional time it takes for the carrier to deliver. So customers went from seeing one-day delivery to seeing one-week delivery. And you can imagine what happened to sales in that case. 

Paul Sonneveld
Yeah, customers don't like seeing that when they hit the add to cart button. Absolutely. Which is actually just a little side note on that. Sometimes I'm hearing some concerns around Amazon deprioritising direct fulfillment listings when it comes to search discoverability and maybe winning the featured offer or the buy box. Typically, we know that Amazon, you know, Amazon vendor offers tend to win the buy box, but have you seen any differences if the listing is fulfilled directly on the 1P model, any implications for the buy box or search that you are aware of? 

Jason Linscheid
Yeah. Yeah. Yeah. I definitely think there's some merit to this ball. I think, yes, but it's going to be, it's nuanced and maybe not as explicit as it sounds. So, you know, I wouldn't necessarily think about this as whether Amazon likes or dislikes direct fulfillment. It's really whether your direct fulfillment offer creates an experience that Amazon wants to promote. So I mentioned earlier the idea that vendors should learn to see Amazon through Amazon's eyes, and this is really a perfect example of that. They're not explicitly rewarding or penalising your fulfillment model, but they're rewarding outcomes. So if your direct fulfillment offer has slower delivery speeds or maybe it's less reliable, like a higher cancellation rate, maybe it's more expensive to ship, then yes, for sure, direct fulfillment can be less attractive to Amazon. So, I do think that there is some merit to it, but maybe not as explicit as it might sound. 

Paul Sonneveld
Yeah, I think that makes absolute sense. You know, I think we have to assume that if you're doing a great job shipping things quickly with low return rates, good customer feedback, then Amazon will continue to prioritise you or put you higher up the pecking order in terms of that. And obviously, the reverse is also true. Sorry. Yeah. Yeah, I think in general… 

Jason Linscheid
Sorry, go ahead, Paul. 

Paul Sonneveld
No, go ahead. 

Jason Linscheid
I'm just going to add in, in general, it's usually safe to assume that if it makes sense for the customer, that's probably what Amazon will lean towards. 

Paul Sonneveld
Yeah, I know. Gotcha. Hey, one of the things that has not come up at all, and I don't want to wrap up the show without talking about it is, the annual vendor negotiation process and specifically the negotiation angle or the role of direct fulfillment in this process. Where do vendors leave leverage on the table when they don't think about DF as part of the broader terms conversation? 

Jason Linscheid
Yeah, this is a great question. And I think it's one of the most overlooked areas of AVN. I think too many vendors negotiate percentages instead of looking for solutions. So let me give an example. I work as an advisor to a brand that runs on really tight margins, like many brands. And AVN outcomes are incredibly important to their bottom line. 

In our first year working together, Amazon asked for a huge increase in their freight allowance and their damage allowance. I think it was something like ten points total. And one of the first things we did was to work to understand why. What was driving Amazon to ask for such a big increase in the first place? 

When we dove into it, we saw that a few products had a really outsized impact on Amazon's cost of freight and damages. And so instead of accepting that higher accrual rate that Amazon asked for, which would have applied to all ASINs in the catalogue, we negotiated a direct fulfilment-only approach for those difficult ASINs, which allowed us to preserve the selection without disrupting margins for the rest of the catalogue. 

I think the same can be done for items that are unprofitable. It can be done for catalogue expansion, can be done to help support the availability on long-tail items in which Amazon's not willing to invest in that in-network inventory position. So vendors should definitely come to the table with a clear understanding of what's Amazon's asking for, have the backup data to support your position, have clarity on whatever trade-offs you're willing to make within the negotiation, and then definitely think about direct fulfillment as one of the outside-the-box levers that are available for negotiating. 

Paul Sonneveld
Yeah, no, that's a great angle, actually. I love that example of just taking a couple of SKUs. It doesn't have to be all or nothing. And I think this is where direct fulfillment is such a great lever because it really, going back to the first point you made at the start of the show, which is this really applies at an individual ASIN level. So you can fine-tune your negotiations, your commercial strategy around that, which is fantastic. 

Excellent. Great. hey we're at the thirty-minute mark, so that means, unfortunately, we're gonna have to say uh goodbye because we are running out of time. Jason, I just want to really thank you for jumping on the show today. I love the strategic perspective that you've brought to this whole conversation, and I'm glad we're doing it. Initially, we actually had the operational one scheduled first, and we had to reschedule that, but I'm glad we did. 

Because I think it's really good to start with the operation with the strategic side before we get into the nitty-gritty of fulfillment and how all that works. So appreciate your generosity and sharing all your examples and Before I let you go, I just wanted to ask if there are people watching this after or watching it live now, and they want to maybe talk to you more about what you do or maybe how direct fulfillment can play a role in their business. What is the best way for them to get hold of you? 

Jason Linscheid
Yeah, thanks for having me, Paul. I really appreciate this opportunity to do this today. So I'm active on LinkedIn. People can find me, just look for Jason Linscheid, as well as thevendorist.com, which is our website. We have a really cool scorecard there for helping vendors kind of analyse their Amazon business across a couple of different parameters, and really look forward to hearing your conversation on the tactics side of direct fulfillment with Chris Khoo. 

Paul Sonneveld
Awesome. Well, it was great having you on the show today. Thanks so much. 

Jason Linscheid
Thanks, Paul. 

Paul Sonneveld
All right, everyone that I can't believe it's already gone. We're at the thirty-two-minute mark. So thank you so much for tuning in today. I hope you found that useful. Yeah. Just a reminder that I think, depending on where you live, very soon, there it is. The first of July, we have a follow-up part two session with Chris Khoo, where we're going to go deep into the operational side of things. So head to our website at merchantspring.io. Go to the resources section and make sure to sign up for that as well. But yeah, thank you so much for tuning in, and I look forward to seeing you next time. Take care.