February 1, 2017

Amazon's Cincinnati air hub speaks to company's broad supply chain ambitions

$1.5 billion facility designed to reduce delivery and fulfillment costs, ultimately expand market share.

By Mark B. Solomon and Ben Ames

E-tailing giant Amazon.com, Inc. has made little secret of its desire to more effectively manage its own supply chain and to take over the supply chains of its customers, and its announcement late Tuesday that it will break ground later this year on a $1.5 billion air hub at Cincinnati/Northern Kentucky Airport is a major step on that quest.

The facility, to be located in the Cincinnati suburb of Hebron, Ky., will contain 11 buildings, according to a research note by Colin Sebastian, an analyst for Robert W. Baird, an investment firm. It will be the focal point of Seattle-based Amazon's growing fleet of dedicated freighter aircraft—of which 16 of a planned fleet of 40 are operational—to support its "Prime Air" network for two-day deliveries. More importantly, especially for traditional transport and logistics firms that don't think Amazon competes with them, this new facility places another piece in the company's ambitious jigsaw puzzle of controlling a greater portion of its supply chain, and those of its third party merchants that use the "Fulfillment by Amazon" (FBA) service, over time.

Though it is not clear, the assumption is that the Cincinnati hub will replace Amazon's existing operations at the nearby Wilmington, Ohio, air park, which were not dedicated Amazon facilities. A local report said Amazon employees there would be offered jobs in other parts of its network. The new operation is expected to employ 2,000 full-time workers, Amazon said.

Amazon chose the site for its central location, skilled workforce, and proximity to its other nearby fulfillment centers, Dave Clark, Amazon senior vice president of worldwide operations, said in a statement. Besides the air cargo fleet, Amazon has a network of 4,000 trailers, a crowd-sourced courier service, called "AmazonFlex," for last-mile deliveries, and an ocean freight forwarder license for its Chinese operation which enables it to serve the U.S. According to published reports, Amazon has handled the movement of 150 containers in the past few months. All of this, and what may be still to come, are enabling Amazon to move beyond its roots as an online retailer, and to define itself as a "transportation service provider" carrying freight for both its direct retail customers and third-party wholesalers participating in the FBA program.

SUPPORTING BOTH GOALS
The Cincinnati airport is ideally located to support both of those goals, sitting in a fast growing cargo hub that is part way between an "Amazon Prime Air" facility in Wilmington and the Amazon subsidiary Zappos.com's fulfillment center in Shepherdsville, Ky., said Jim Tompkins, CEO of supply chain consultancy Tompkins International.

By combining that central location with a growing aircraft fleet, Amazon could be positioning itself to move from standard two-day delivery for its Prime customers to one-day delivery, Tompkins said. Such fast service could help Amazon counter a competitive move from rivals like Wal-Mart Stores Inc., which said yesterday it would provide two-day shipping for free.

"The only hole in (Amazon's) bucket is when they have slow-moving items that can't be stored in all their fulfillment centers, so they're stored in just one or two distribution centers (DCs) instead of 40 to 50 sites," he said in an interview today. "The only way to do [next-day shipping] then is to have more air capacity and more airplanes. And that is exactly what they're doing."

Even for a company of Amazon's size, the only way to provide such fast fulfillment at a reasonable cost is to achieve enough volume to drive down the cost of order picking by automating its DCs and to cut the costs of home delivery by increasing delivery density, he said.

"That is part of the brilliance of Amazon: That they realize what drives efficiency in fast delivery and great customer service is to have high volumes. Scale is king," Tompkins said.

Amazon has 11 fulfillment centers in Kentucky alone, with at least 13 fulfillment centers within a 150-mile radius of the planned Cincinnati facility, providing plenty of package volume to generate significant per-unit savings, Sebastian of Baird said.

Transport savings have become one of Amazon's many Holy Grails. Its shipping costs have exceeded shipping revenue for several years, due to the explosive growth of its business and, the company believes, its lack of custodial control of its shipments. Tomorrow, Amazon releases its fourth quarter and year-end results, which will include shipping trends during the key holiday peak season.

The move to Cincinnati is a blow to Wilmington, which has spent the past eight years rebuilding its presence after package giant DHL Express ceased domestic U.S. service in 2009 and closed its national hub there. DHL today uses the same Cincinnati airport where Amazon will build its hub.

The air park has 1,300 acres, two runways, and 3 million square feet of office, industrial, and hangar space. In an email, Wilmington officials said they are optimistic about the air park's future. The work with Amazon "proved its ability to handle a major cargo project reliably and cost effectively," they said. City officials said they are in on-going discussions with other airlines. About 1,300 people are employed at 12 companies in the air park.

Satish Jindel, president of consultancy SJ Consulting, believes Amazon is taking a big gamble relocating from Wilmington to Cincinnati. In a letter to be sent tomorrow to Amazon Chairman and CEO Jeffrey P. Bezos, Jindel said Amazon would save about $1 billion by developing a hub in Wilmington, and that it would be up and running sooner. Jindel added that it would be easier and less expensive to hire and train workers in Wilmington than in Cincinnati. In a phone interview today, Jindel said Amazon would have an all-cargo facility at Wilmington at its disposal, whereas at Cincinnati it would share space with passenger airlines.

Though Jindel has doubts about the move, he doesn't have any doubts about Amazon's strategy. The fast-growing FBA service has been taking business from Memphis-based FedEx Corp. and UPS Inc., both of whom had these merchants as former customers, Jindel said. What's more, consumers and businesses that order on Amazon's website were once the customers of retailers that are FedEx and UPS shippers, he said.

"FedEx and UPS need to get their heads out of the sand and bring in outside people with a different vision" of dealing with a company like Amazon, Jindel said.

About the Authors

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

More articles by Mark B. Solomon
Ben Ames
Senior Editor
Ben Ames has spent 20 years as a journalist since starting out as a daily newspaper reporter in Pennsylvania in 1995. From 1999 forward, he has focused on business and technology reporting for a number of trade journals, beginning when he joined Design News and Modern Materials Handling magazines. Ames is author of the trail guide "Hiking Massachusetts" and is a graduate of the Columbia School of Journalism.

More articles by Ben Ames

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