The Amazonification of Logistics

The evolution of eCommerce has had a dramatic impact on both retail and logistics. Much of the changes have been spearheaded by Amazon who are largely responsible for shaping customer behavior and driving customer expectations around delivery. Many customers now want their packages next-day, same-day, or even within one hour and as a result logistics networks have evolved to reflect these changing customer preferences. Amazon has had such a major impact on eCommerce, that I thought it would make sense to look back on some of their innovations that are directly or indirectly impacting logistics:

Super Saver Shipping

Super Saver Shipping was introduced in 2002 offering free shipping for orders over $25. The program fundamentally shaped consumer expectations of the new normal for shipping. Amazon recognized early on that logistics was integral to the customer experience.

Amazon Prime

Prime was introduced in 2005 and for $79 (now $99), customers got unlimited free two-day delivery. Fast and free shipping raised the stakes. Prime forced Amazon to change the location and size of distribution centers and completely rethink logistics; Amazon was able to get products to customers fast, and free, and began to compete more with local brick and mortar stores. Today, it is estimated that there are 80 million Amazon Prime customers in the U.S. and Prime customers spend roughly double per year compared to non-Prime customers. In an industry characterized by massive fixed costs, Prime allowed Amazon to start building enormous economies of scale.

Fulfillment by Amazon (FBA)

FBA handles third-party sellers’ back-end operations, including storage, fulfillment, customer service, and allows their goods to be covered by Prime. Third-party sellers simply ship their inventory to Amazon, which then manages the entire back-end fulfillment of an item once it’s purchased. In 2016, third-party sellers accounted for approximately 50% of Amazon’s unit sales and are also Amazon’s second largest source of revenue - $23 billion in 2016 a 43% gain on 2015. By offering fulfillment as a service to other businesses, Amazon has been able to further scale their eCommerce business and allow them to gain even more control over the logistics process.

Amazon Fresh

A grocery delivery service that started in Seattle in 2007 and now operates in 16 cities. Fresh is not just about making money in the razor-thin margin grocery business. It’s likely a strategic play to build even more scale and give them further capacity to offer convenient same-day delivery. Groceries provide the perfect stable, predictable, and frequent base capacity to build out same-day delivery. Want to have your groceries, dinner, and Prime Order delivered at the same time? Fresh may make that possible.

Amazon Locker

A self-service parcel delivery service launched in 2011 where customers can select a locker location as their delivery address. The lockers currently serve a very specific use case - customers that are not home during the day and packages can not be left securely at their house or apartment. The offering provides Amazon with a click and collect type option that brick and mortar retailers provide, but the longer term strategy may be geared towards providing same-day delivery options. It’s going to be easier, cheaper, and faster to deliver multiple packages to several locker locations than many individual customer locations.

Kiva Robots

Amazon purchased the robot maker Kiva Systems in 2012 as the robots accelerate the speed at which Amazon can pick, pack, and ship customer orders, sometimes getting it down to 20 minutes from click to ship. The robots are crucial for rapid delivery and Amazon now has 45,000 robots in their fulfillment centers, an increase of 50% over the prior year. If rapid delivery becomes the new normal, getting orders out the door as quickly and cost effectively as possible will be crucial.

Prime Now, Flex, and Amazon Restaurants

As an additional benefit to Prime members, 25,000 daily essential items plus restaurant delivery can be delivered for free in two hours or for $7.99 in one hour. The service is available in about 25 cities worldwide. Flex was launched to meet the on-demand needs of Prime Now. Amazon Flex is a package delivery platform, whereby drivers are contracted by Amazon to deliver packages on their behalf. Flex offers an Uber-like experience for both customers and drivers. Flex puts pressure not just on fellow retailers but also on technology companies trying to tackle on-demand delivery.

Brick and Mortar Stores

About 90 percent of worldwide retail spending is still in brick-and-mortar stores so being online only is Amazon’s main retail weakness. Amazon has begun opening bookstores and launched Amazon Go, a check-out free convenience store concept. Amazon is taking it slow with physical stores but it's conceivable that someday there will be thousands of Amazon bookstores, convenience stores, grocery stores or a combination in one physical store. It's unclear where this is headed, but more stores eliminate their main weakness - proximity to the customer.

Prime Air

Amazon made their first drone delivery in December in the U.K. Drones offer enormous long term potential, but in reality, are probably at least several years away. There are a combination of regulatory barriers, technological barriers, safety issues, and challenges in regards to public acceptance. Many have dismissed Amazon’s drone ambitions as a publicity stunt which I think is a mistake. Amazon’s recent patent for airborne warehouses reveal that drones may be central to Amazon’s future. Amazon’s vision may be an almost fully autonomous future up in the sky where inventory is stored and deliveries are made via drones. Drones taking off from the airborne warehouses and landing at homes and businesses could be tremendously efficient. They would use little fuel, and they would bypass the inefficient road transport and decaying infrastructure entirely.

Amazon Logistics

Amazon has recently made waves in the industry with a series of moves that illustrate that it is serious about getting into the logistics business. Amazon leased 20 cargo planes to deliver goods to and from fulfillment centers, registered as an ocean freight forwarder in China, and built an ‘Uber for Trucking’ app to match truck drivers with shippers. These moves diminish the company’s reliance on third-party shippers such as FedEx and United Parcel Service. Amazon has publicly recognized that established logistics companies are competitors of theirs and I think it’s fair to assume that Amazon will offer logistics as a service to companies in many different industries. 

Looking back on these programs and innovations it's clear that Amazon has an obsessive focus on the customer and have designed their supply chain around customer convenience. The Amazon Go 'Just Walkout' store, although not a supply chain innovation, is a perfect example of making customer convenience a top priority. In comparison, incumbent grocery stores created clunky self-checkouts systems that allow them to shift work from their own employees to their customers in exchange for a minor convenience improvement. When it comes to logistics, Amazon may just be building their fortune around it - building enormous scale, efficiency, and the ability to bring any new type of goods into their delivery infrastructure.

I cover forward-looking topics that are relevant for everyone interested in the future of logistics. You can read more articles here or sign-up for a free monthly newsletter here.