Amazon is dominating the headlines by constantly challenging the logistics status quo. What started out as “the leading online retailer of books in 1994” has evolved over the last decade to become “the earth’s most customer-centric company.” To support this self-proclaimed title, Amazon has built a unique supply chain network that is transforming the way supply chains are built and managed.
Closer and Closer
Today’s logistics network is moving closer and closer to the customer. Shortening time from order, to fulfillment, to delivery is critical to a growing segment of the population. These days many consumers want their packages next day, same day or even within one hour. Amazon’s fulfillment network reflects these changing customer preferences and, in some aspects, may even be responsible for changing consumer behavior.
Amazon has developed highly automated facilities and now has almost 100 facilities within the US. Once an order is placed, the order is then located via its warehouse inventory management system. Products within an order may ship from several different locations depending on product type and availability. Once located, the order is assigned a priority depending on delivery preference. For example, a “Super Saver” order may wait a few hours before being processed while an Amazon Prime order needs to be shipped the same day.
Efficient and fast as they may be, Amazon’s fulfillment costs still remain a challenge at $10.8 billion in 2014. Fulfillment costs as a percent of net sales have risen from 10.5% in 2012 to 12.1% in 2014, an increase of over 15% for this key metric. These costs are being driven by expansion of its fulfillment network, rising transportation costs as well as the hiring of tens of thousands of employees that have been hired to run their massive facilities. Attempts to reduce fulfillment costs have included introducing more automation such as robots from its Kiva acquisition, sophisticated algorithms to streamline operations and outsourcing some fulfillment facilities to Menlo Logistics, now a part of XPO Logistics.
The 2013 holiday season was an eye opener for the logistics world as many packages did not arrive in time for Christmas. Retailers, led by Amazon, issued apologies and gift cards to customers as a remedy to broken delivery promises.
The backlash in 2013 served as a wake-up call and is considered a major factor in Amazon’s plan to take more control over its delivery network. Rising shipping costs have been a critical problem for Amazon for years. Increasing the Prime subscription fee has helped offset some of the costs, but rising shipping rates continue to be a huge obstacle. Overall, 2014 shipping costs increased to $8.7 billion, a 31% increase over the previous year — despite shipping revenues increasing 45% to $4.5 billion.
Amazon has been adding sortation centers to its US network to further reduce shipping costs. These centers are used to sort aggregated packages and pallets from fulfillment centers and ship to either post offices or local couriers. Amazon recently acquired thousands of branded trailers with the purpose of transporting merchandise between its fulfillment and sortation centers. In addition, these centers have allowed the company to expand delivery days by offering Sunday delivery in selected cities year round via the US Post Office.
Amazon is also rumored to be running an Air Cargo operation, leasing aircraft from Air Transport Services Group. Using a previously owned DHL hub in Wilmington, Ohio to facilitate the operation, flights are made daily to Allentown, PA, Ontario, CA, Tampa, FL, Oakland, CA, and Dallas, TX. It remains to be seen if Amazon is building its own air cargo network or if this was a temporary solution for peak holiday season volumes. Additional rumors exist of Amazon creating a European Air Cargo network. With the assistance of freight forwarder DB Schenker, it is believed that Amazon is utilizing chartered flights from carrier ASL between the cities of Wroclaw, Poland; Doncaster, U.K.; and Kassel, Germany with the possibility of expanding test flights into Spain and Italy.
While Amazon utilizes a variety of delivery partners such as FedEx, UPS, USPS and regional carriers, it is also tiptoeing into the last-mile delivery and is doing so in creative ways.
After first introducing Amazon Fresh in 2007 in its hometown of Seattle, the service expanded to Los Angeles in 2013 and subsequently to other metropolitan areas in New York, New Jersey, Dallas and Chicago. The Amazon-owned and operated delivery service primarily delivers groceries, but also delivers additional merchandise from its vast catalog.
Amazon’s Prime Now is pushing the envelope even further by providing one and two hour delivery service for Prime members in more than 20 metropolitan areas. This may be considered a specialized service, but it has already shaped customer expectations. Amazon recently noted that Christmas Eve 2015 was its biggest day ever for 2-hour deliveries.
Amazon Flex was introduced in late 2015 as a crowd-sourced delivery option for Prime Now’s one- and two-hour delivery options. Amazon initially launched this service in Seattle, but is adding eight other cities, including Portland and New York.
Amazon continues testing drones as an option for last-mile delivery. What was considered a joke by many just a couple of years ago may eventually come to fruition. The first step occurred in December 2015, when the Federal Aviation Administration (FAA) began requiring all drones to be registered. In addition, the agency has promised comprehensive drone legislation by June 2016.
A New Kind of Logistics Provider
To become “the earth’s most customer-centric company,” Amazon has had to develop a unique supply chain, but is it building its supply chain network for its own purposes or is it preparing to take on existing logistics and transportation providers?
Precedence may have already been established via its fulfillment services offered to businesses that sell on Amazon’s marketplace platform. Besides pick and pack services, Fulfillment by Amazon (FBA) also offers Amazon Prime free two-day shipping, customer service and returns solutions. Amazon recently announced that its fulfillment services operation handled the warehousing, packing and shipping of 1 billion items for its fulfillment customers in 2015.
It’s highly unlikely Amazon will reach a point in which it no longer needs any transportation partners, but as e-commerce continues to grow, the dynamics around delivery will evolve. The question is whether logistics and transportation companies can keep up, or if competition will demand a new kind of supply chain network in order to succeed.
John Haber is Founder & CEO, Spend Management Experts. Contact him at email@example.com.