Amazon Plans Revamp of its Delivery Network

Company-controlled capacity to serve 40 largest population centers, consultant says.

March 6 -- Amazon.com. Inc. is moving quickly to revamp its delivery network to gain more control over its fulfillment infrastructure while reining in spiraling transportation costs, according to a supply chain consultant with close ties to the e-tailing giant.

James Tompkins, who runs Tompkins International, a Raleigh, N.C.-based consultancy, said Amazon has divided the nation into three segments based on population size: The top 40 markets, which comprise about half of the U.S. population; the next 60 largest population areas that account for about 17 percent, and the remaining population, which account for about one-third.

The top 40 markets will be served by a private fleet being built by Amazon to support an expansion of its online grocery business, called "Amazon Fresh," according to Tompkins. The next 60 will be served by an array of regional parcel delivery carriers, he said. The remainder will be served mostly by the U.S. Postal Service, he said.

UPS Inc., which today handles much of Seattle-based Amazon's current deliveries, will not play a prominent role in the network realignment, Tompkins said. Nor will FedEx Corp., which manages a lesser portion of Amazon's delivery business. An Amazon spokeswoman was unavailable to comment.

Orders will be routed through Amazon's 55 fulfillment centers, with deliveries made the same day, the next day or, at most, in two days, Tompkins said. Inventory will be positioned to exclusively support local deliveries. A national delivery network as operated by providers like FedEx and UPS will be rendered irrelevant because they will be considered too slow to suit the typical Amazon customer, he said.

Tompkins said that Amazon has a timeline for its rollout, but that he is unaware of the details. "They are moving on this very aggressively," he said.

Amazon two years ago seriously considered a bid for FedEx as a means of buying into an existing delivery operation, according to Tompkins. However, Jeffrey P. Bezos, Amazon's founder and CEO, backed away after determining FedEx's network structure was too national in scope to fit Amazon's strategy of local fulfillment and delivery, Tompkins said. A FedEx spokesman declined comment.

Tompkins has worked in the supply chain management field for decades and is considered one of the nation's leading authorities on its role in e-commerce. His relationship with Amazon is not clearly defined, a status seemingly more by design than coincidence. When asked to describe the nature of his involvement with Amazon, Tompkins replied that he was contractually obligated not to comment.

A "FRESH" EXPANSION

Though Amazon Fresh has been operating for five years, it is today only available in Seattle, San Francisco, and Los Angeles. However, Amazon plans to expand the grocery business to between 30 and 40 U.S. markets in 2014, according to Tompkins.

Tompkins said the private fleet network would commingle groceries with general merchandise, thus building the scale needed to make ground shipping cost-effective and to offer a compelling value to customers, Tompkins said. It would also set in motion a chain of events that would result in Amazon competing with FedEx and UPS.

The online grocery business, which is plagued with high fulfillment costs, is not considered a particularly attractive enterprise on its own. However, Bezos has used Amazon Fresh as a proving ground to test a more ambitious delivery model rather than as a way to build a national grocery footprint, according to Tompkins. By using his own vehicles to deliver groceries, Bezos has been able to fine-tune his own delivery network and understand the pros and cons of leveraging his own infrastructure than those of the incumbents, Tompkins said. Now Bezos is poised to apply that knowledge on a broader scale, Tompkins said.

Transportation costs remain a thorny issue for Amazon. Its shipping expenses in 2012, the most recent period that full-year figures were publicly available as of this writing, rose to more than $5.1 billion, up from nearly $4 billion in 2011, according to the company's 10-K filing with the Securities and Exchange Commission.

Shipping costs in 2012 exceeded shipping revenue by nearly $3 billion, according to the filing. Amazon generates much of its shipping revenue from third-party merchants who sell products through the company's site and use its fulfillment services for storing inventory, picking and packing, and shipping.

In the filing, Amazon said it expected its "net cost of shipping"—the ratio of shipping costs to revenue—to continue rising as parcel rates increase and more customers take advantage of the company's delivery offerings such as "Prime," which charges a $79 annual fee for unlimited two-day deliveries. Amazon has said it is considering a $40 annual price hike for Prime subscriptions.

Not everyone believes Amazon will migrate from FedEx and UPS so quickly. Scott Devitt, Internet analyst for investment firm Morgan Stanley & Co., said during a late February webcast that Amazon will continue to leverage the established delivery infrastructure and will not become a disruptive force in the delivery market. Amazon will continue to use its enormous buying power to extract favorable rates from its delivery partners and will see that as a more attractive alternative to building out its own network, Devitt said.

Frederick W. Smith, FedEx's founder, chairman, and CEO, told analysts recently that only FedEx and UPS have the delivery networks capable of efficiently handling the demands of Amazon and other e-commerce providers. Smith said his company, UPS, and the U.S. Postal Service would remain at the forefront of e-commerce shipping for the foreseeable future.

Tompkins said that Amazon has been planning its strategy long before the well-publicized delivery problems that occurred during the 2013 holiday season, when about five million of its shipments were not delivered in time for Christmas. Much of the fallout was laid at the feet of UPS, though some have argued that Amazon erred by understating how many packages were coming UPS' way toward Christmas day, thus overwhelming the Atlanta-based carrier's air network and triggering the backlog.

Amazon is still smarting from the fiasco, however. The company's fulfillment executives believe UPS and FedEx are not investing enough in equipment, infrastructure, and other resources to keep up with Amazon's growth, according to a person familiar with the matter.

These days, every move in the e-commerce space is significant because of its enormous potential. E-commerce has penetrated just 10 percent of the U.S. market, and between 6 and 7 percent of the global market, according to Morgan Stanley estimates. Based on projected annualized growth rates of 15 percent, e-commerce could be a $1 trillion worldwide business by 2016, according to the firm.

Mark B. Solomon        http://www.dcvelocity.com/    

Another Perspective: Faltering Carriers and Web Shopping Expectations

December 26, 2013 -- After years of preaching the convenience and reliability of online shopping — shop in your pajamas, with fast, free delivery — retailers may have been too successful at spreading the message this year, contributing to the volume of holiday orders that overwhelmed delivery services like U.P.S. and FedEx.

As the companies scrambled to deliver gifts the day after Christmas, they also struggled to explain how it all happened. Some analysts wondered aloud whether it was not just logistics, but industry and customer expectations that needed to be re-examined, while one suggested the companies might have to reconsider their pricing system.

“We have this perception that anything can be delivered at any time, and that it will be super cheap and really fast — but this is not Santa Claus,” said Sucharita Mulpuru, an analyst at Forrester, the research firm. “It is an operation in which there are constraints, and there are costs associated with getting more packages than were expected to be somewhere on time.”

The volume even surprised the United States Postal Service. Officials said on Thursday that they had expected a 12 percent increase in packages during the holiday season, but package shipments jumped 19 percent, and it added Sunday deliveries to accommodate them. A spokeswoman for FedEx said this season was the busiest the company had ever seen.

But it was United Parcel Service, the world’s largest package delivery company, that was perhaps the most unprepared for the crush. The company hired 55,000 seasonal workers this year, but that number was roughly the same as last year and the year before that — not enough to keep up with rising demand.

“It hasn’t fluctuated that much over the past couple of years,” Natalie Black, a spokeswoman for the company, said of its holiday staffing. “Whether that was part of the problem, I can’t say. Right now, we don’t know what the linchpin was for the network breakdown.

“You can only fit so much in planes,” she added.

It was unclear how many customers were affected, but complaints poured in from across the country and retailers large and small were caught up in the maelstrom.

While bad weather and a short holiday shopping season were cited as possible causes by U.P.S. officials, they also said the volume generated by growth in online shopping was a likely factor. Online sales have been growing for years, and this season, the rise during the weekend before Christmas was extremely steep, up 37 percent, according to IBM Digital Analytics Benchmark. FedEx said that it had predicted it would deliver 22 million packages on its busiest day this year — double the volume in 2007. The actual number is not yet known. One way to address future demand, Ms. Mulpuru, the analyst, suggested, would be to approach the surge the same way that the airlines do: by charging more for the service.

“An airline doesn’t just buy additional aircraft so they can accommodate everyone who wants to fly the day before Thanksgiving for $300,” she said. “They just raise the price of your ticket and force people to go earlier.”

Shipping is often subsidized for shoppers, Ms. Mulpuru said, and it is retailers that have contracts with companies like U.P.S. If rates stay relatively static for retailers they have no incentive not to encourage people to buy as much as possible until the last possible moment, she added.

This year, for example, if customers ordered from Nordstrom by 3 p.m. Eastern on Dec. 23, they were eligible for arrival on Dec. 24. Amazon’s one-day shipping deadline was also Dec. 23, and it even offered same-day delivery on Dec. 24 in some locations.

Shipping has been a crucial battleground for online retailing since the earliest days of e-commerce, but it has become more important over time.

Krista Clark, an analyst with the research firm eMarketer, said services like Amazon Prime, the online retailer’s program that offers unlimited two-day shipping for $79 a year, had conditioned consumers to expect faster delivery of everything.

At the same time, customers aren’t willing to pay for it. “The thing people care about more than fast shipping is free shipping,” Ms. Clark said.

She cited a study by comScore that found that half of shoppers said free shipping was the most valuable benefit an online retailer could offer.

Some retailers have invested more in central warehouses and distribution systems to better handle online orders. Others, such as Gap, Best Buy and Walmart, have relied on their physical stores to fulfill online orders.

That allows retailers to get the goods in the hands of customers more quickly. “People have gotten crazy trying to compete with Amazon with faster delivery,” Ms. Clark said.

In the process, retailers often bypass the traditional shippers like U.P.S. or FedEx in favor of more localized delivery options — or one day, Amazon has suggested, maybe even drones.

EBay has been promoting a fast delivery service called eBay Now, which works with retailers like Macy’s, Target and Toys ‘R’ Us, to deliver orders in one hour from a store to a customer using a network of human couriers.

Although eBay typically charges a $5 fee for the service, during the holidays, it offered it free, including deliveries on Christmas Eve. (An eBay spokeswoman declined to say how many people actually used the service.)

Although eBay Now is available in only a few metropolitan areas, including New York, San Francisco, Chicago and Dallas, the company plans to expand the service more widely. Amazon and Google are also rolling out local delivery services that could divert some of the shipping volume, and revenue, away from U.P.S. and FedEx.

Though explanations were in short supply on Thursday, U.P.S. took to social media to offer abundant apologies, responding individually with direct messages to its unhappy customers on Twitter. As it apologized, it had plenty of company from retailers that were offering their own regrets, while placing most of the blame on the package carriers.

“While we are dependent on our shipping partners to hold up their end of the bargain on getting your orders to you, we also realize that we are accountable for meeting your expectations and take responsibility for what happened here,” Jamie Nordstrom, president of Nordstrom Direct, said in an email to customers. “We feel awful whenever we let a customer down, especially at this time of year.”

A spokeswoman for Kohl’s said the company was “deeply sorry.” Amazon issued gift cards to affected customers. In San Diego, even a distributor of Glock guns and parts took to Twitter to “apologize if any of your orders didn’t arrive in time for Christmas due to the holiday overload.”

On Thursday, those tardy packages began to trickle in.

Todd Sawicki, an entrepreneur in Seattle, ordered several items from Amazon on Dec. 23 and paid extra to get guaranteed delivery on Christmas Eve. On the 24th, a package arrived via U.P.S. from Amazon, and he figured it was the gifts — Legos for his son, and a bracelet and headphones for his wife.

Far from it. Inside was a toilet repair valve he had ordered earlier.

“It was the Amazon equivalent of a lump of coal,” he said.

On Christmas morning, without anything else to give his wife, he presented her with the wrapped valve.

At 11 a.m. on Thursday, he said, the valve was finally swapped out for the intended Christmas gifts.

Elizabeth A. Harris And Vindu Goel          www.nytimes.com