Imagine you're a headphone company.
You’ve got a great landing page, manage to get clients yourself and don't rely on
anyone else for exposure.
You've also invested quite a bit in creating a decent distribution network, decent meaning
a modest 2-4 day delivery.
But unless your headphones have the perfect bass and treble combination, you’ll still
have to deal with other brands in the market.
Except that your competition uses Amazon fulfillment.
Yes, they do pay a-not-so-modest average of 13% per item plus an additional fee, but with
one-day shipping, they can lure enough customers to more than make up the difference.
While you struggle and sweat to ensure deliveries are on time, Amazon can do everything overnight.
Having a superior product is great and all but research shows that 25% of customers won't
consider buying if it isn’t shipped in 2 days or less.
What's worse is that two-thirds are willing to pay a premium to get it early.
Guess who’s capitalizing on that?
Through the years, Amazon has built one of the most intricate but efficient supply chains.
It’s partnered with several regional and global logistics companies, made deliveries
with drones, paid less tax than sausage stalls in Austria and bossed the online retail space,
making more revenue than the next 9 biggest retailers combined.
Since the inception of prime in 2005, Amazon has consistently stayed ahead of the game.
Unlimited two-day shipping was a luxury unheard of at the time and just when it seems others
have caught up, they've raised the stakes again.
Amazon’s fulfillment network consists of several types of facilities with different
roles in the supply chain.
There are Inbound Cross Dock centers which receive goods from vendors, inbound and outbound
sortation centers, return centers, delivery-stations, airport-hubs, prime now hubs, whole food distribution
centers, and a few others.
Building more facilities means a rise in inventory costs but in the long run, this reduces transportation
costs.
Every so often, a new distribution center is built when the volume of deliveries in
an area is large and profitable enough to invest in.
For Bezos, it's always about playing the long game.
Except for the FirePhone - that was pretty short-lived
At the heart of the storage and distribution network are Fulfilment Centres.
Amazon has more than 250 of these globally.
Fulfillment centers are massive facilities, the largest one is around 93,000 meter square
in size.
It is here that most of the products are brought in from vendors, inspected to make sure they
meet standards, organized into shelves and later shipped in the appropriate packaging
when an order is placed.
When that happens your package along with others near you is collected by external logistics
drivers who deliver them to their respective airport-hubs.
Now Amazon does have its own fleet of planes and trailer-trucks but they're only responsible
for a fraction of the packages.
It's air-fleet of 50 is still relatively small compared to 251 of UPS or the 650 strong of
FedEx.
More on this later.
At last, comes the time to deliver the package from the nearest warehouse to the customer’s
doorstep.
How hard can that be?
Ironically, the last mile, as it’s called, is the costliest part of the entire journey,
with estimates suggesting up to 53% of the total cost per package.
Shipping in bulk is always cheaper and as the number of items reduce, the cost-per-item
increases.
Then there’s geography.
In rural areas, two consecutive delivery stops could be miles apart.
Cities, on the other hand, have less deviation but more traffic.
The last mile issue affects all e-commerce companies.
Just look at Walmart, which, despite having stores less than 10 miles away from 90% of
the US, is still spending billions trying to figure efficient ways to ship products.
It’s latest attempt: make employees deliver packages on their way home.
For the last mile, Amazon mostly relies on 3rd-party logistics providers like UPS and
FedEx Outsourcing not only means higher rates but
also not being able to control customer-experience for the last part of the journey.
But that’s going to change.
Amazon has been increasingly reducing dependency on other carriers.
It's leasing more planes, buying more trucks and baiting more students into its self-delivery
program.
A quarter of all shipments are now handled by itself.
So to recap: the vendor ships the inventory to a warehouse or warehouses.
From there the inventory is distributed among other branches as needed.
A combination of their own freight system and others is used to get the packages to
the closest shipping hub and from there to the customer's house.
But amazon isn’t slowing down.
It’s 6 year old plan to start flying shipments in drones is almost ready.
Drone delivery if perfected could drastically change the last mile economics, especially
in those areas discussed previously.
And let's not forget the environmental benefits compared to traditional modes of transport.
As of 2019, fulfillment centers have over 100,000 robots working 24/7, with more being
added every year.
With advancing development in automation, the next 10 years could be very different
for supply chains.
Soon, one-day shipping will no longer be a privilege, but a standard, which all businesses
will strive to maintain.