‘I have 1,800 mini warehouses across the country. 460 feature backrooms converted into online order fulfilment centres. Employees who are cross-trained to work the sales floor and the backrooms pick online orders from stores’ shelves or inventory and pack them at the store. UPS picks up the orders and delivers them to hub-and-spoke distribution centres.’
Brian Cornell, Target CEO, 201813
We’ve seen how Prime and Prime Now power the flywheel, and how new additions like Amazon Prime Pantry, AmazonFresh and Amazon Wardrobe add scale and breadth to the wider Amazon ecosystem. But we’ve also begun to explore how these new additions also put increased pressure on its supply chain and fulfilment logistics. All of this expansion must be fed by an ever-growing distribution and fulfilment network.
Amazon laid the foundations for Prime with a traditional FC and logistics network model, using third-party carriers as already discussed. But it has continued to innovate, using its substantial AWS computing power to boost the ability to orchestrate its huge logistics network so it can yield greater levels of automation, efficiency and productivity. It started its business with two FCs in Seattle and Delaware and over the next two decades grew this estate to over 250 million square feet of data centre and FC space around the globe.
Looking at its data centre estate, this vast computing resource is rarely discussed, as it is the Amazon business, developer toolset and internet traffic running on top that people care about. With some of the world’s biggest media and social networks, streaming services, publishers and retailers all running on the AWS cloud, it’s very difficult to estimate how much of the world’s internet traffic flows across it. An estimate by DeepField Networks put the proportion at a third of the world’s internet traffic – and that was back in 2012.14 Amazon is also particularly tight-lipped about its AWS data centre infrastructure, never offering tours of any of its facilities. Its website only displays rough approximations of the locations of their data centres, divided into ‘regions’, each region containing at minimum two ‘availability zones’ which are home to a handful of data centres. It locates these data centres as near as possible to internet exchange points, which transfer content traffic, and builds its own accompanying electric substations, each of which can generate as much as 100 megawatts or more – enough to power tens of thousands of the densest servers per site, or millions globally. Having set up its first AWS data centre in northern Virginia, US in 2006, as the centre of this infrastructure, by 2018 it had 50 availability zones across the world. It operates much of this estate through a subsidiary company, Vadata Inc.
In much the same way as it has built its AWS services by rapidly scaling its global data centre infrastructure, Amazon has used similar blitz tactics to build out and support its physical last-mile fulfilment network through its Amazon Logistics operations. While its first two FCs were established in 1997, it has been ramping up its supply chain and logistics footprint aggressively since 2005 and the launch of Prime, and now over 80 per cent of its total global real estate is dedicated to data centres and some 750 warehouse facilities. Its North American FC roll-out strategy between 2008 and 2010 can be tracked against those states that offer the most tax-friendly breaks for retail sales.
But, by 2013, as each state started to implement tax fairness policies, Amazon had moved its focus to serving more urban areas to minimize transportation costs over its last mile and nurture its Prime Now ambitions. Marc Wulfraat, President and Founder of supply chain, logistics, and distribution consulting firm MWPVL International Inc., commented in an e-mail to the authors, ‘If you sort the US metro population in descending sequence, you can see that Amazon clearly started to build out FCs close to major metro markets.’ It operates a variety of different types of fulfilment and distribution centres, including those that handle small sortable, large sortable, large nonsortable, speciality apparel, footwear and small parts, and return items, as well as its third-party logistics outsourced facilities. It also has a network of ambient and cold-storage grocery DCs to serve its Amazon Pantry and AmazonFresh operations.15
Also in 2013, Amazon and many other retailers in the US competing for last-minute Christmas spending were unable to deliver packages on time due to the fact that many pushed order deadlines back to as late as 11pm on 23 December, and were overwhelmed by a surge in demand that amounted to a 37 per cent year-on-year increase in orders placed during the last weekend before the holiday.16 Many blamed UPS, which was responsible for the last-mile delivery of a fair proportion of the approximately 7.75 million packages it shipped through its air network on the Monday before that Christmas.
Amazon’s leasing patterns have also emphasized last-mile warehouses driving proximity to the consumer in the latest phase of its warehouse network expansion in response to the learnings from 2013 and subsequent demand for Prime Now. Amazon now splits its logistics warehouse investment between four types of facility:
The introduction of regional SCs in 2014 across the US increased control over the outbound transportation of packages within its own distribution network. Experts recognize these buildings are key enablers to moving away from its reliance on UPS and FedEx, so packages can be delivered by the US Postal Service, local couriers and Amazon.
The rise of e-commerce, bolstered by Amazon’s inexorable expansion in the US and Europe in particular (and which is now spreading to Asia and the Indian subcontinent), is heating up the industrial real estate market. The Urban Land Institute’s Emerging Trends Report for 2018 listed fulfilment centres and warehouses as the top two sectors with investment potential, and their average size has increased from 24 to 34 feet in height to cater for e-commerce fulfilment. Amazon has said its warehouses can ship more than 1 million items a day during busy holiday seasons and that a typical Amazon delivery requires just one minute of human labour.17 That said, Amazon has also come under fire for working conditions in its warehouses such as onerous screening and tracking procedures, long hours and distances travelled per shift with highly regulated bathroom and work breaks, and relatively low levels of remuneration. So much so that in 2013, German unions called for strikes over Amazon warehouse workers’ pay rates.18