‘The factory [or warehouse] of the future will have only two employees: a man and a dog. The man will be there to feed the dog. The dog will be there to keep the man from touching the equipment.’
Warren Bennis19
Let’s not forget, as referenced in our exploration of automation development, Amazon bought Kiva Systems, the company that manufactures the robots, for $775 million in 2012. Following the acquisition, to cover itself for the 2014 holiday season, it added about 15,000 Kiva robots to 10 US fulfilment centres. Current estimates suggest they now make up one-fifth of the Amazon workforce and also reduce warehouse operating costs by 20 per cent. The robots are responsible for moving proprietary shelving ‘pods’ along a predefined grid to workstations where Amazon picking staff pick, pack and prepare the items for shipment, loading them onto a network of conveyor belts that can handle some 400-odd orders per second. Its warehouse management software matches the right sized box with each order and handles the application of shipping labels.
The parts of the process managed by the Amazon Robotics system are claimed to be five to six times more productive than manual picking and eliminate the need for human-scale aisles, taking up half as much space as a traditional, non-automated warehouse. Their flexibility also means they can be used to constantly reconfigure the warehouse space based on sales data, so high-velocity items can be retrieved more quickly. The robots, however, can only handle relatively small items that fit in the pods they transport, in comparison to traditional retail and wholesale warehouses which rely on carrying and stacking most of the inventory on pallets with fork-lift trucks. For larger items, large robotic arms known as ‘robo-stows’ (manufactured by Thiele Technologies) handle these, moving and packing boxes at Amazon’s larger FCs. Another warehouse technology feature is the vision system that can unload and receipt an entire trailer of stock in as little as 30 minutes, while in 2017, the company created a team to guide its use of driverless-vehicle technology, for the deployment of self-driving forklifts, trucks and other such vehicles that can build on its existing automation efforts.
With such a huge supply chain and fulfilment logistics network, and a constant drive to improve performance and cut delivery cost and time, it was perhaps inevitable that Amazon would also enter the transportation market. Indeed, transportation and logistics could be the next billion-dollar opportunity for e-commerce companies, according to industry research.20 The global shipping market, including ocean, air, and truck freight, is worth $2.1 trillion, according to figures from the World Bank, Boeing and Golden Valley Company. With so much at stake, legacy shipping companies, which have been able to capitalize on the boom in parcel delivery as e-commerce spending has risen, are under increasing pressure from Amazon and the likes of Alibaba, JD.com and Walmart. Amazon and its rivals have to date focused on building out last-mile logistics fulfilment capabilities but are increasingly going after the middle and first mile of the fulfilment supply chain.
Amazon started by offering outsourced consolidation for international sellers in 2014, leveraging bulk discounts for cheaper US import rates. Towards the end of 2015, it emerged in rapid succession that it had been negotiating to lease 20 Boeing 767 jets for its own air-delivery service, had registered to provide ocean freight services in China, and had purchased thousands of truck trailers to ship merchandise between distribution facilities.21 Amazon China then registered to provide ocean freight services, essentially pushing Chinese sellers to use its services for shipping to Amazon US customers and giving it control over the significant trading routes between China and the US. Amazon Maritime, Inc. holds a US Federal Maritime Commission operating licence, as a non-vessel-owning common carrier (NVOCC).
In 2016, Amazon received options to purchase up to 19.9 per cent of Air Transport International’s stock and began scheduled operations with 20 Boeing 767 aircraft. A year later, it unveiled its first branded cargo plane and announced that Amazon Air would make Cincinnati/Northern Kentucky International Airport its principal hub. It also received tax breaks to the tune of $40 million for the construction of a 920-acre facility with a 3-million-square-foot sorting facility and parking space for over 100 cargo aircraft at an estimated total cost of $1.5 billion. According to plans filed for an onsite sorting facility, 440 acres is scheduled for completion in 2020, while the remaining 479 acres will be developed by 2025–2027 during a second phase, by which time it is planned to handle freight from 100 aircraft based at the hub and operate over 200 flights daily. This move also complements the set of cargo-handling facilities built out at smaller airports to enable connectivity between its Air Sortation Centre in Hebron, Kentucky and major cities with FCs. MWPVL International Inc. refers to these as ‘air sortation hubs’. They are positioned close to airport runways for the purpose of handling and receiving freight packages being shipped to the Hebron Air Hub.
In addition to its disruptive moves with same-day and one-hour delivery, managing its own fleet of couriers, trucks cargo ships and planes, and reducing its reliance on third-party providers, in 2017 Amazon also introduced its first app for truck drivers, designed to make it easier to pick up and drop off packages at Amazon warehouses.22 Giving Amazon direct access to millions of truck drivers across the country, it is also thought to be working on a similar app that would match truck drivers with cargo. Another, slightly more leftfield innovation is the patent Amazon filed in 2015 for delivery trucks equipped with 3D printers that would enable them to manufacture products on the way to the customer destination.23 It filed a further 3D patent in 2018, covering the eventuality of cutting the manufacturer out of the equation altogether by taking custom orders for 3D-printed items to get them made and have them delivered to or collected by the customer.24
If Amazon really is looking to cut the middleman out of the fulfilment process and take end-to-end control of its supply chain, it is impossible to view any moves to expand its global logistics footprint as anything other than an extension of its ‘Fulfilment by Amazon’ service, which stores, picks, packs and ships products and handles returns sold by third-party merchants on the Amazon.com marketplace, and also includes Amazon Pay. The service is sold as the best way to optimize the end customer’s buying experience, but it can also serve to meet their strict shipping and delivery timelines, and consideration for listing among Prime-eligible products. Notable FBA expansion included roll-outs to Germany in 2010, Canada in 2012, Spain in 2013, India in 2015 and, most recently, Australia in 2018.
Boosted in part by ever-increasing speed and scale that Amazon has dedicated to its last mile with Prime Now, the number of merchants actively selling via the Marketplace and using FBA rose by 70 per cent between 2015 and 2016, although it does not disclose the revenue it generates from its Fulfilment by Amazon service. Meanwhile, the number of items Amazon sold on behalf of third-party sellers doubled during the same period. From a B2B perspective, we should also consider the impact of Amazon Business (known as AmazonSupply from its launch in 2012 until it was renamed in 2015). This competitive marketplace for B2B products on Amazon.com serves procurement business needs across a variety of product categories, such as laptops, computers, printers, office supplies, office furniture, hand tools, power tools, safety equipment, office kitchen essentials and cleaning supplies. A year later, the company revealed that Amazon Business had generated $1 billion in revenue, serving 400,000 business customers. From this perspective, given the sheer volume of products handled by both FBA and Amazon Business and, taken with its most recent moves into air cargo, ground transportation and ocean freight, Amazon is already a major global logistics player.
Even here, though, Amazon has experimented with services to make products available for rapid delivery directly from merchants to avoid overwhelming its own warehouses with additional inventory. The service, called Stellar Flex at its 2017 launch, was tested in India and on the US West coast and takes Amazon’s logistical reach beyond its FCs to those of its merchants. The latest iteration, FBA Onsite, which emerged in 2018, gives Amazon greater flexibility and control over the last mile, while saving money through volume discounts and avoiding FC congestion. This comes after some industry insiders hinted that Amazon was a victim of its own and FBA’s success, reducing orders through the end of 2017 due to capacity issues. At the same time, some estimates have suggested the cost savings of having sellers hold merchandise in their own facilities could be as high as 70 per cent. So, extending FBA into sellers’ facilities could be another way of adding both capacity and scale to its growing logistics demands.
Amazon has also experimented with the returns process, which we referenced earlier as having a significant impact on all e-commerce players’ bottom lines. Industry estimates suggest as much as 30 per cent of all products purchased online are returned. In a pilot programme announced late in 2017, Amazon partnered with Kohl’s, for the US department store to sell Amazon hardware devices, but also to accept Amazon returns from customers. The retailer’s store staff pack and ship eligible items back to an Amazon fulfilment centre for free.25 Kohl’s Chairman, President and CEO Kevin Mansell, commented a few months into the partnership: ‘One thing is for sure: the experience is amazing, and people are using the service. If the customer responds, they think it’s a great experience, they use the service, but very importantly, it drives incremental traffic, then we’re going to look to expand it.’26
By comparison, Walmart’s expanding transportation and logistics operations are driven largely by cost savings, required to balance the rising cost of fulfilling its e-commerce business with its vast, global store network. The grocer has begun leasing shipping containers to transport manufactured goods from China and is making greater use of lockers and instore pickup options mentioned earlier to cut down on delivery costs. In 2017, Cristy Brooks, Walmart US Innovations Development Director, outlined how the company is also tackling on-shelf availability in its larger stores. Out-of-stocks have been an issue the retailer has been urgently addressing in recent years. Its so-called Top Stock system stores inventory on the top shelves of the sales floor. This, Walmart claims, enables it to maintain ‘fuller shelves while keeping a better in-the-moment read on inventory’. Benefits include a reduction in Walmart’s use of rented temporary inventory trailers and the freeing up of back-room space, which has allowed the retailer to also integrate services like online grocery pickup, according to Brooks. This free space is also being used to provide staff training. Brooks cites its Morrisville, NC store as reducing its back-room inventory by 75 per cent in two months after implementing Top Stock and using the new space to open an associate training academy.27 It also stole a march on Amazon and its Kohl’s returns programme by updating its own online returns process in its stores via an update to the Walmart app late in 2017. The update meant some of its items for sale online, such as health and beauty products, were available for instant refunds without the need to visit a store.28
Amazon already offers instant refunds on some first-party and third-party purchases, and items below a certain value do not need to be physically returned. But Walmart has sought to keep pace in the fulfilment stakes with this returns initiative, which builds on its online grocery pickup, pickup towers, and free two-day shipping services – the latter of which it notably stresses is available without a membership fee.
Alibaba has begun leasing containers on ships, similar to Amazon’s ocean freight initiative. This means that Alibaba Logistics can now facilitate first-mile shipping for third-party merchants on its marketplace. It is worth comparing the Alibaba logistics model with Amazon’s. In 2003, Alibaba jointly launched the China Smart Logistic Network, also known as Cainiao, with eight other financial services and logistics companies. Today the Cainiao logistics network is made up of more than 15 major 3PL or logistics companies, while Alibaba took a controlling stake, increasing its share in the company from 47 to 51 per cent in 2017 with an $807 million investment. The Chinese giant said at the time that it was going to invest 100 billion yuan ($15 billion) in its global logistical capabilities over the next five years. It aims to build this capability using drones and robotics technology to deliver anywhere in China within 24 hours and anywhere in the world within 72 hours.
Considering Cainiao fulfils 57 million deliveries a day, the sheer dominance of Alibaba in its home market means it can wield significant power over the region’s logistics network. Much like Amazon, it bases this power on technology investments that provide the supply chain visibility and data integration required to efficiently orchestrate fulfilment processes across this network. Despite the US, as the world’s largest consumer economy, providing a base to its global operations, Amazon’s market share is a fraction of the already mature US e-commerce market. By comparison, Alibaba’s market share in China is over 60 per cent, where traditional trade still accounts for over 78 per cent of the world’s second-largest and most rapidly growing consumer economy.
Alibaba rival JD.com has also been busy building out its own logistics network. Following a model similar to that used by Amazon, by the end of 2017 it had created a network of seven fulfilment centres and 486 warehouses across China and thousands of local delivery and pickup locations. JD.com has also reportedly been considering opening an FC in Los Angeles as an outpost for a US logistics expansion. Most notably for JD.com, in the spring of 2018, it launched a Europe–China freight train to carry goods that it can market to its domestic customers as soon as they are logged and on board. The first China Railway Express train, which travels 10,000 kilometres from Hamburg, Germany to Xi’an, the capital of central China’s Shaanxi province, where JD operates one of its most important distribution hubs for cross-border imports, took 35 fewer days than ocean freight alternatives at a cost 80 per cent cheaper than air transport.
Liu Han, General Manager of International Supply chain at JD Logistics, said in a statement at the time, ‘Through our use of a train from Germany to China fully dedicated to carrying goods destined for JD.com, we are dramatically reducing the time to market for European retailers and suppliers and providing our consumers with even more product choices at cheaper prices. With demand for imported European products soaring on JD, we expect to launch a regular service later this year, and we look forward to seeing this train make many more trips in the months and years ahead.’
Having examined the effect of express delivery and its impact on fulfilment demand and capacities on different continents, we come to the final major area of Amazon’s fulfilment strategy, and it takes us back to where we started this chapter – where Amazon did not have a significant physical retail presence outside of its bookstore network, and so could not offer extensive online-to-offline services, such as click & collect, like its US rivals Walmart and Target or others across Europe and Asia. That was until the 2017 acquisition of Whole Foods Market and, by extension, not just its 450+ stores but also Whole Foods’ retail grocery distribution network that serves them.