Amazon is rapidly adding new fulfillment centers, sorting packages for carriers, and even delivering some orders directly to customers. Could these initiatives hint at a revolution in ecommerce shipping?
The answer is probably “yes.” Amazon is clearly trying to improve its ability to deliver orders to customers rapidly, while shoring up, if you will, known weaknesses, including its dependency on package carriers. If successful, Amazon may soon be able to offer services like free next day (or even same day) delivery and have much more control over order fulfillment during peak sales periods, such as the Christmas shopping season.
If Amazon were able to implement these sorts of programs successfully, small and mid-sized retailers might need to find ways to improve delivery speed and reliability too, if they hope to meet potentially rising customer expectations.
“Amazon,” according to ChannelAdvisor CEO Scott Wingo, “is already substantially ahead of any other pure-play retailer and brick and mortar retailer when it comes to a consumer-oriented [fulfillment center] network. With Amazon’s growth into the sortation process in the US, they clearly are trying to further ‘own’ the fulfillment process.”
Fulfillment Center Growth
Amazon has an estimated 75 fulfillment centers already operating in the United States, with something like 15 additional fulfillment centers opening soon, according to Wingo and ChannelAdvisor, which annually estimates the number of Amazon fulfillment centers. In Europe, ChannelAdvisor believes that Amazon has about 30 fulfillment centers, including three that are currently in process, while Asia is home to about 35 fulfillment centers, including two in process.
Amazon’s many fulfillment centers, explained Wingo in an email to Practical Ecommerce, permit the company “to speed up the shipping process because of their proximity to consumers. It’s possible that they are trying to move towards offering next day shipping [versus two-day] shipping for Prime members. Their logistics can be more regional and allow for one-day and sometimes same-day shipping.”
It’s worth emphasizing that these regional centers could allow Amazon to offer next-day delivery via ground shipping, thus, the actual cost of shipping the package would not increase, and might even go down. As long as sales volume justifies the capital and operating expenses — meaning that Amazon would have needed to warehouse space and workers to fill orders anyway — Amazon would be offering next day delivery without really adding cost.
Sortation Centers Take On Carrier Tasks and Sunday Delivery
In addition to its fulfillment centers, which are typically about 1 to 1.2 million square feet facilities with something like 1,000 to 1,500 employees, Amazon has started to build sortation centers with about 300,000 square feet of space and approximately 100 to 300 workers, according to a July 2014 report from Marc Wulfraat, president of MWPVL International, a supply chain consulting firm.
Sortation centers take already packaged orders from nearby Amazon fulfillment centers and sort them into zip code ranges before presenting them to shipping carriers. Orders processed via an Amazon sortation center are improved, if you will, in at least two ways.
First, the sortation center takes on a task usually associated with shipping carriers like UPS or FedEx, specifically sorting the packages. In this way, Amazon is able to bypass the carriers’ own sorting process and deliver sorted packages to carriers’ regional distribution centers for delivery to Amazon customers.
To make this point particularly clear, imagine how a small online retailer might ship three packages going to customers in California, Iowa, and Maryland respectively. The retailer boxes all three orders and gives them to a carrier.
The carrier takes all of the orders to a nearby facility and sorts them based on the level of service — ground, next-day, etc. — and by the destination.
Each package is then routed to a hub facility and sorted again.
Each package is, next, redistributed to regional facilities.
Finally each of the packages is delivered to the retailer’s customers.
With a sortation center, Amazon may be removing the first two steps in the process, and, it is likely that Amazon is paying less to ship its already sorted and distributed orders.
Second, Amazon’s sortation centers allow the company to provide Sunday deliver via the United States Postal Service.
Amazon is believed to have at least 15 sortation centers operating in the United States. In each city of these 15 metropolitan areas, Amazon has also begun to offer Sunday delivery. It seems that Amazon uses the sortation center to facilitate the distribution of orders directly to local post offices, which in turn deliver the order immediately after receiving it from Amazon.
Wulfraat points out that somewhere close to 40 percent of the U.S. population lives in just 40 metropolitan areas, so that it is not unreasonable to imagine that Sunday delivery could be coming to those areas soon as Amazon continues to add sortation centers.
Some Orders Delivered Directly to Customers
Amazon has also shown interest in delivering orders directly to its customers on Amazon’s own vehicles. The most obvious example is AmazonFresh, the company’s grocery service.
“Amazon is always raising the bar on ecommerce and that continues to push other online retailers to improve the customer experience. For AmazonFresh, Amazon adds about 200,000 sq-ft of refrigeration and food-specific containment to their standard [fulfillment center] foot print. While Fresh is only available in Seattle, Los Angeles and San Francisco, we have just seen pictures of trucks in and around Manhattan – New York, so we suspect they are live there or in pre-announcement mode,” Wingo wrote.
While AmazonFresh is more of a test of the grocery market, it is also clearly demonstrating that Amazon can, in fact, manage direct to customer delivery. And AmazonFresh is not the only Amazon effort into direct to customer services.
In fact, probably the most audacious Amazon project of all is its drone delivery service, which is reportedly being tested this month in India.
If Amazon can deliver directly to its customers without relying on carriers, it overcomes one of its single greatest weaknesses.
Addressing a Weakness
At present, Amazon’s order fulfillment is completely dependent on carriers like UPS, FedEx, and USPS.
Amazon relies “primarily on national parcel couriers (e.g., UPS and FedEx) to move product to market,” wrote Wulfraat. “The challenge is that these carriers are not dedicated exclusively to Amazon. These carriers have to service all of their customers at peak season and therein lies the problem. When transportation assets are constrained at a national level, and shipments cannot go out on time, then the pain needs to be spread around to all shippers. Amazon is simply another shipper that has to suffer the consequences of transportation infrastructure constraints.”
What’s more, some of these carriers have had problems delivering on time at peak times, like the Christmas shopping season. Just last year, UPS, failed to deliver a significant number of last-minute Christmas gifts when the total number of shipments exceeded its capacity. According to several published reports, many retailers had to refund orders or even offer gift cards to customers who had paid relatively high shipping fees for packages that were not delivered as promised.
New Amazon order fulfillment capabilities like more regional fulfillment centers, sortation centers, or even delivering directly to customers help to minimize Amazon’s dependency.
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Implication for Other Retailers
Amazon’s innovations have a history of impacting ecommerce more generally. As an example, Wingo wrote last year that until 2006, “Amazon grew in-line with ecommerce and then after that time, Amazon grew significantly faster.”
Wingo’s point, in part, was that Amazon’s faster than average growth came essentially from two initiatives: its marketplace and free shipping. Both of these programs have also impacted ecommerce more generally, as many small and mid-sized merchants now sell on the Amazon Marketplace and nearly every online seller now offers some form of free shipping.
If Amazon’s fulfillment innovations had a similar impact, ecommerce shipping could be headed for a revolution.