This Online Giant is Building its own Full-Service Logistics Network

Tackling the delivery business, Amazon executives publicly say, is a logical way to add delivery capacity—particularly during the peak Christmas season. But interviews with nearly two dozen current and former Amazon managers and business partners indicate the retailer has grander ambitions than it has publicly acknowledged.

Amazon’s goal, these people say, is to one day haul and deliver packages for itself as well as other retailers and consumers—potentially upending the traditional relationship between seller and sender.

Some executives refer to the initiative as “Consume the City,” a nod to the company’s plans to build a massive delivery network that could eventually compete with such partners as UPS, according to people familiar the matter.

Inside the company, executives describe, in the words of one senior official, how Amazon “is building a full-service logistics and transportation network effectively from the ground up.”

Amazon’s push into the shipping sector reflects a willingness among today’s powerful tech companies to defy the traditional constraints of business and leap into new ones.

Now the stage is set for Amazon to move against the partners that have helped power much of its success so far. Shipping costs as a percentage of sales have risen every year since 2009. Last year, Amazon spent $11.5 billion on shipping, or 10.8% of sales, compared with 7.5% in 2010. Total revenue for the year was $107 billion.

The company could save $1.1 billion annually if it stopped using UPS and FedEx, according to Citigroup Inc. analysts. Keeping packages under its own control just over longer distances could save Amazon around $3 or more on a typical delivery, the analysts say. The average cost to ship a package via UPS or FedEx is $7.81, they estimate.

Amazon currently delivers its own packages from roughly 70 facilities in 21 states, having built most of them in the past two years, according to data from supply-chain consultancy MWPVL International Inc. Today, 44% of the U.S. populace is within 20 miles of an Amazon facility, compared with 5% in 2010, according to investment bank Piper Jaffray.

All of this helps to explain why Amazon wants more control over its delivery chain—from factories in China through U.S. ports to sprawling suburban warehouses and neighborhood package-sorting centers. It hopes to offer more delivery times, including hours not available from traditional carriers, say people familiar with the plan. The cost of such a system isn’t known.

Currently, Amazon is focused on solving the riddle of the so-called last mile—the final and most expensive leg of a package’s journey to the doorstep.

Amazon has flirted with delivery by Uber drivers and newspaper carriers. It has experimented with a program known as “I Have Space,” stashing inventory in warehouses owned by other companies.

A more established program called Flex hires so-called citizen-couriers, who work as freelance delivery people to pick up packages from warehouses using an Amazon app. It has expanded to nearly 30 metropolitan areas in the last year. Drivers can earn up to $25 an hour in two-hour shifts making deliveries, according to Amazon’s website.

Full Article publsihed on WSJ

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