Amazon’s Freight (Train) Is Coming

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Editor’s Note: This article is from Steve Bettwy, Vice President – Quality and Business Continuity, Operational Excellence, and Continuous Improvement at Direct Supply.

I hope we can agree that Amazon will disrupt an industry if it wants to. Bibliophiles everywhere can still hardly say “Amazon” without snarling, and Amazon’s effect on retail, grocery delivery, and even cloud computing is nothing short of transformative.

Walmart and Kroger are the biggest retailers in the US, but when it comes to e-commerce, nobody comes close to Amazon. Amazon currently enjoys about 50% of all US e-commerce business. Of course, along with that comes a lot of products that need delivering. Amazon announced that it shipped 5 billion items through Prime alone in 2017, and some analysts estimate it will ship over 4 billion packages in 2018.

Shipping Costs Are A Thorn In Amazon’s Side

At its core, Amazon is a logistics company. Significant energy goes into optimizing its distribution and delivery model. With distribution centers now within 2-days ground transport of most Americans, Amazon can carefully select the best combination of company-owned, public, and private delivery services to put the average package on your porch for under $4. Yet, despite all its advantages, shipping remains one of Amazon’s largest expenses, probably exceeding $30B in 2018.

At nearly 15% of revenue, shipping offers a huge opportunity to take costs out of the company.

Most businesses would look at that cost and say, “There’s our target.” They’d deploy their Black Belts, Lean Masters, and AI algorithms to see how to reduce it. Even 5% would be worth billions, and somebody would earn a fat bonus check for doing it.

Amazon is not “most businesses….”

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Four Billion Shipments Is The Tip Of The Iceberg

US shipping behemoths FedEx, UPS, and the US Post Office deliver about 17 billion packages a year. Billions more are delivered by couriers, specialty carriers, in-house drivers, and gig contractors that cater to last-mile, last minute deliveries. In that grand universe, Amazon is but another participant. But many believe it’s that grand universe that Amazon has its eyes on.

Amazon Has Been Investing In This For Years

For years, Amazon has been building its fleet of semi-trucks and aircraft – large vehicles that feed the distribution centers at the heart of its logistics network. More recently they’ve started adding smaller trucks, purchasing 20,000 vans as well as virtually guaranteeing profit for anyone willing to run a fleet of their own. Business is so good I’ve even seen packages being delivered in rental trucks instead of branded Amazon vehicles.

Keeping Trucks Full Is The Key

The problem with this model is that once packages are delivered, the trucks are empty. Half the route is a dead head back to a distribution center to be refilled. No business is successful at 50% utilization, so how do you fill the rest of the route with paying customers? It’s simple: you mix your own outbound shipments with inbound and outbound 3rd party deliveries so the truck is never empty.

So how does this work? Starting at a distribution center the route algorithm builds a load for each truck, ensuring first that the products’ delivery commitments are met. At the same time it also looks at all the pickups customers have scheduled. From there it creates a route that packs as many deliveries and pickups into the smallest possible area. If you pick up one package for every one you deliver, shipping revenue generated by that truck would double!

Once all packages are delivered and picked up most trucks would return to the distribution center. But instead of being empty, they’d be filled with the fruit cake you’re sending Aunt Betsy, other companies’ e-commerce shipments, Amazon returns, and anything else needing delivery. Back at the distribution center, those packages would simply move into Amazon’s infrastructure to get to their final destinations. The truck would be refilled and sent back out on a new route.

This Model Blows Up Every Other Overnight Delivery Model

With this type of dynamic routing in place, some trucks may also deliver packages “direct to the customer.” Imagine a package being picked up someplace, then delivered straight to a destination nearby. Eliminating interim stops (like overnight hubs) makes these local deliveries extremely fast and extremely inexpensive, and grants Amazon entry into the courier/ gig delivery market. Technology on-board Amazon vehicles already allows drivers to fulfill requests on the fly. Today, for example, Amazon pre-loads un-purchased products onto a truck knowing they will be ordered by the time the truck reaches an area. The driver receives the order in real-time and fulfills it right from the back of the truck. This technology would not need to be changed much to shift a route in real-time for “direct to customer” shipments.

Two thirds of American households buy from Amazon.

This Works Only For Amazon Because Everybody Buys From Them

Why does this model work for Amazon and not for, say, UPS or Walmart? The answer is the utter ubiquity of Amazon deliveries in American homes and businesses. Many receive multiple deliveries each week or even each day. With that kind of presence an Amazon package is being delivered somewhere near your home or business several times a day. Leveraging all those deliveries to include 3rd party shipments is simply a matter of technology to guide it and an infrastructure to make it cost effective. Amazon is already very close.

Just Entering This Market Could Transform Amazon Itself

Does this make financial sense for Amazon? Let’s say it will take $10B to build the technology and infrastructure to ship 6 billion packages per year. Amazon could have its hands on $70B worth of the package delivery market. They take over most of their own shipments, become a 4th player on par with UPS, FedEx, and USPS, and win some share of the courier/gig/milk-run business. That’s not a terribly long putt. It would bring one of the largest expenses back in-house, grow the company by 25%-50%, and create an engine that (quite diabolically) would strengthen as Amazon competitors increased their e-commerce businesses.

Customers Stand To Gain From This, Too

Does this make sense for customers? Let’s set aside for a moment the fact that FedEx and UPS have fumbled Amazon’s Christmas deliveries for years running. In this model, customers could get same day deliveries from most of their local stores. They’d never need to drive to a FedEx store to ship a package. And everything being shipped to or from someone would be visible and controlled in their Amazon dashboard. Few people I know would complain about extending the excellent Amazon customer experience into other parts of their lives.

None of this is new news, of course. In addition to building its infrastructure, Amazon began experimenting with local deliveries in 2016 and has made high-profile hires focused on delivery. Countless articles pitch why Amazon will or won’t go after 3rd party deliveries. Amazon itself says it won’t. I bet it will. The model is disruptive and the opportunity is huge. That sounds like just the kind of swing Jeff Bezos would take.

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