THE AMAZON EFFECT: AN INFLUENCE, NOT A DEATH SENTENCE

In the several decades I have been in the supply chain industry, I have seen a number of changes in almost every aspect of the industry. Up until recently, I have suggested three that have been the most important – globalization, technology, and Wal-Mart. All three have influenced supply chain managers to adopt new mindsets and develop new skills and processes. Wal-Mart, in particular, has raised the level of warehousing and trucking operations to almost an art form, and has inspired innovation in a number of supply chain techniques and processes.

And then along came Amazon, and what is now being called the “Amazon Effect”. In a retail sense, this has been defined as “the ongoing evolution and disruption of the retail market, both online and in physical outlets, resulting from increased e-commerce. The name is an acknowledgement of Amazon’s early and continuing domination in online sales which has driven much of the disruption” (Whatis.com) It has gone far beyond that, however. From a supply chain perspective, Amazon is rapidly changing the way managers must look at their own systems. Offering 398 million products from well over 100 fulfillment centers, utilizing its 40 aircraft and fleet of trucks,  Amazon’s goal is to be in a position  to deliver most of its orders the same day they are received, or the day after.

This level of customer service, if widely adopted, while no doubt extremely pleasing to the consumer, could keep consumer goods manufacturer and retailer supply chain managers up at night. While the above improvements are primarily in the business to consumer sector, many similar business to business requirements are beginning to follow. But it is not going to put the rest of us out of business. To be sure, Amazon is having a dramatic impact on buying and shipping patterns; and prophets of doom have predicted all sorts of negative results. In November, 2016, the Institute for Local Self Reliance published a 79 – page report entitled, “Amazon’s Stranglehold: How the Company’s Tightening Grip is Stifling Competition, Eroding Jobs, and Threatening Communities”. Such discussions are not too unlike what critics published about Wal-Mart when it first began to invade small-town America. But we survived that and learned from it, and we will survive and learn from the “Amazon Effect”. Now is not the time for supply chain managers to throw themselves in front of an autonomous truck.

We simply must rethink our strategy, asking ourselves some difficult questions, such as

  1. How good does our service have to be? Is our business such that we really need to offer same day or early next morning delivery to compete effectively? On which products?

 

  1. Depending on the answer to question 1, how many distribution centers will we need to achieve our service targets? What items will we need to stock?

 

  1. Where should they be located? To achieve next day delivery they probably should be located in or relatively close to the major, more expensive markets.

 

  1. And finally, how will we deliver the products? Will we need a private fleet, contract carriers, or a combination of the two? Apparently, no idea is too bizarre. In March of this year, Reuters reported that Wal-Mart was exploring the feasibility of asking store shoppers to drop orders off to on-line customers on their way home. The legal obstacles to such a program are significant, but stranger things have happened in this business.

 

So what will the answers to these questions be?  I believe the best response to all can be summarized in one word– “Outsourcing”. For years, one of the major advantages to outsourcing distribution operations has been the flexibility it afforded the outsourcing firm. As market and product characteristics change, logistics processes must change as well; and the use of a logistics service provider greatly reduces the risk of misplaced company-owned distribution centers or obsolete techniques. The warehouse building boom generated by the internet hysteria of the late 1990’s is a classic example. Several privately owned and operated 500,000 plus square foot fully automated facilities were left empty after only a few months of operation because the predicted e-commerce volumes didn’t materialize.

Even more important are the density and shared networks that logistics service providers enjoy. Sophisticated consolidation programs can greatly reduce the cost of delivering what will be smaller shipments quickly.

For reasons of its own, Amazon is relying on company owned and operated distribution centers. While this can be a smart real estate play, such a network can have its own set of disadvantages. To survive in this environment, flexibility must be the bed rock of any supply chain operation.

Written By: Clifford F. Lynch