December 12, 2017

Amazon tests program to provide two-day deliveries on broad scale

Amazon tests program to provide two-day deliveries on broad scale

Pilot launched in L.A., Orange County to deliver for all shippers, regardless of affiliation with Amazon.

By Mark B. Solomon

Amazon.com Inc. is testing a program to offer two-day nationwide deliveries for all shippers, including those who aren't Amazon customers, a project that could spawn the largest U.S. transportation network buildout in decades and cap Amazon's multiyear effort to create an in-house operation to meet surging demand for its products and services.

The program is being piloted in Los Angeles and in nearby Orange County, Calif., both markets with enormous populations and, by extension, strong shipment density, according to a source who has held high-level jobs at Amazon and today works with businesses that cumulatively spend hundreds of millions of dollars with the Seattle-based e-tailer. Information on the proposed buildout was provided by a client who is involved in the pilot program, according to the source, who asked for anonymity.

Amazon "wants to pick up all of (a customer's) orders regardless of what they are and where they're going," the source said.

There is no known time frame for completing the pilot, nor is it known when an expansion might occur should Amazon founder and CEO Jeff Bezos give the go-ahead, the source said. Amazon did not provide a comment by press time.

The program has several objectives, according to the source: ensuring that Amazon's shipping and fulfillment operations consistently meet customer delivery commitments; efficiently filling what is expected to be an explosion of Amazon's capacity in coming years; and, perhaps most significantly, convincing businesses that currently don't do so to sell on Amazon's website and use its fulfillment and delivery services, known as Fulfillment by Amazon (FBA). Through the first nine months of 2017, Amazon's "net service sales," which is mostly composed of FBA revenue, hit more than $40 billion, up from $28 billion in the same period in 2016. Amazon reported more than $117 billion in net sales during that period, $77 billion of which came from sales of merchandise on the company's website as well as related products.

LEVERAGING LOGISTICS ASSETS

Besides offering shipping services to all customers, Amazon would accept shipments of all sizes, going beyond the parcel deliveries that have dominated e-commerce for nearly 25 years. The company also plans to execute all deliveries within the two-day delivery commitment under its very popular Amazon Prime program, where customers pay a $99 annual fee for unlimited two-day deliveries of most products sold on Amazon's website.

The Prime service, which as of October had an estimated 90 million members, has become core to Amazon's value proposition. One key reason is that, according to industry estimates, Prime customers order nearly twice as much per year as those who do not subscribe to the service.

The pilot is leveraging Amazon's domestic transport and logistics assets; on the facilities side, that includes fulfillment centers, inbound and outbound sortation centers, delivery stations, a 2-million-square-foot air cargo hub under construction in Cincinnati that's expected to open in late 2018, and local hubs to support its Prime Now service, which offers free two-hour deliveries to Prime members. Amazon has a combined total of 262 such facilities in the United States, according to figures published last month by the consulting firm MWPVL International.

Amazon owns thousands of 53-foot trailers that are designed for medium- to long-haul transportation; owns or leases hundreds of local-delivery vehicles; and has 40 freighter aircraft for its Prime Air service—all of which could translate into millions of next-day deliveries, depending on how and where Amazon sources its freight. The company is also recruiting owner-operator truck drivers, who would bring thousands of power units to the table and provide over-the-road and "last-mile" local deliveries.

The company has made no secret of its desire to bring much of its transport and distribution activity in-house. For years, its shipping costs have exceeded shipping revenues—the latter generated through its fulfillment service—and observers suspect that gap has widened as shipment volumes continued to grow.

CARRIER MIX MAY CHANGE

According to data from transportation analysts SJ Consulting, about 90 percent of Amazon's U.S. shipments move via UPS Inc., the U.S. Postal Service, FedEx Corp., and to a lesser degree, DHL Express, though Amazon has been using DHL's hub in Cincinnati to house its air operations while its own hub is being built. The remaining deliveries are handled by regional carriers, local delivery companies, and independent truck drivers, according to SJ's estimates.

Over the next few years, those smaller operators' share of Amazon's total volume will rise to about 40 percent, according to SJ Consulting's projections. But due to projected 20 percent annualized growth in Amazon's volumes for the foreseeable future, the major parcel and postal carriers will still see as much volume as they do today, according to Satish Jindel, the consulting firm's founder and president.

However, as envisioned under the pilot, Amazon would not use the big carriers as frequently as it does now, the source said, adding that the e-tailer would rely on outside providers only on "high-confidence" routes where it is virtually certain the two-day delivery commitment can be consistently met. Otherwise, Amazon would inject its own capacity, the source said.

The source said Amazon's worries about service reliability are well founded. "They are not ahead of the curve, and they know it. Products are getting delivered late." Last Tuesday, UPS disclosed that an undetermined number of shipments ordered during "Cyber Week," the online ordering frenzy that occurs the week after Thanksgiving, would be delayed due to an unprecedented volume of orders. There is little doubt that some of the affected shipments were ordered through or fulfilled by Amazon.

By controlling its transport network, Amazon could efficiently position assets so fully loaded trailers move between sorting centers and hubs over the shortest possible distances, thus maintaining its delivery commitments while shaving transport costs, the source said. Amazon also has a seemingly unlimited supply of capital from patient investors that could be deployed for needed investments.

However, developing a nationwide one- or two-day delivery network, especially with assets it doesn't own, will be a daunting challenge even for a company of Amazon's operational prowess. The source said Amazon would need to rapidly increase the number of U.S. sortation centers it has. According to MWPVL, there currently are 46 such facilities. Amazon may also face challenges in serving businesses with their own warehouses that are outside of its fulfillment ecosystem, and it may encounter turbulence flexing its business to accommodate seasonal changes in demand. Amazon may also struggle, as so many companies currently are, to recruit enough qualified drivers to dramatically scale up the long-haul part of its business. "Amazon is not immune from any of the challenges facing companies in the transport area," the source said.

POTENTIAL IMPACT ON THIRD PARTIES

In some ways, the transport program is following a pattern similar to another pilot, called Seller Flex, that launched on the West Coast earlier this year. Under Seller Flex, Amazon picks up goods from companies that sell on its website but don't use its fulfillment services and delivers them to the end customer. That program, which is aimed in part at taking pressure off of Amazon's fulfillment system, may be rolled out nationwide next year.

Seller Flex could deal a harsh blow to third-party warehouse operators if Amazon convinces their customers to join the FBA network. The transport program could impact Amazon's large carrier partners in a similar way, particularly if Amazon takes a share of business in areas it could not or would not handle before. According to the source, third-party carriers, while still being involved in the program, would receive less money from Amazon because the e-tailer would be performing—at lower prices—some services that the carriers had been handling. Combined with Amazon's buying power, the e-tailer would gain compelling leverage with the incumbent carriers in rate negotiations, the source said. The big carriers could walk away, but in so doing would be relinquishing large volumes of business, the source said.

As it has done in the past with other initiatives, Amazon will quietly work out the transport program's kinks in the demanding Los Angeles-Orange County markets before expanding it to other regions, the source said. Given the company's pattern of rapidly scaling up its programs once Bezos pushes the button, the source said, it would not be surprising if the country woke up one day in the not-too-distant future to find that "the service is in 20 markets."

Editor's note: An earlier version of this story erroneously identified the time span for Amazon's sales figures. DC Velocity regrets the error.

About the Author

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.

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