Shipping With Amazon: Cutting out the Middle Man!

Shipping with Amazon

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In February, 2018 it was reported that Amazon was going to launch its own delivery service:  Shipping With Amazon!

Effectively Amazon has declared that they are officially entering the logistics business.  The “Shipping With Amazon” service, albeit currently on a much smaller scale, competes with the logistics service and delivery capabilities offered by UPS, FedEx, and UPS.

But these are incredibly large, well established logistics companies.  And they are also the major delivery service suppliers to Amazon.

So why would Amazon choose to go into this space?

The Background

Everyone knows that Amazon’s growth, size, scale and strategy is based on creating disruption.  There are many companies in many different industries that thought they were immune to the Amazon effect.  But over time as Amazon expanded it’s offering to include more and more categories of products and services a lot of these companies faltered or fell by the wayside.

Amazon’s expansion into other industries, whether it be in products or services, is also consistent with the Amazon Flywheel effect.  For instance by increasing selection they improve the customer experience which drives more traffic which increases the number of sellers on Amazon which further increases selection, and so on.  Or by lowering costs they can lower prices which improves the customer experience which drives growth which enables even lower costs, and so  on.

So going after logistics, which is an intrinsic part of their product offering, should not be surprising.  Logistics has an immediate impact on all parts of the Amazon business: costs, prices, customer experience, traffic, and growth!

But Amazon’s logistics infrastructure, aside from Distribution Centres, is much smaller than either FedEx or UPS.  FedEx has 650 aircraft for instance whereas Amazon has only 40.  FedEx has over 150,000 trucks dwarfing those of Amazon.  In fact Amazon represents only 3% of FedEx’s revenue and 10% of UPS’ revenue.

Amazon

Still Amazon can now act as its own shipping agent.  It has truck trailers, lockers, last mile contract couriers, the new Amazon Key service, and Amazon Go retail stores.  And it will continue to grow and expand all of these capabilities.  And who’s to say that Amazon may not acquire a logistics company to give it a jump-start in this space.

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It may take time but for the large logistics carriers to ignore the potential future impact of Shipping With Amazon would be naive.  Just look at all of the other industries that Amazon has gone after and overtaken… how many of them were in denial?

The Advantages of Shipping With Amazon

What exactly are the advantages for Amazon to have a “Shipping with Amazon” service capability?

Reduced Dependency

Just a few years ago Amazon faced a lot of issues with deliveries by FedEx and UPS.  Simply they ran out of capacity and time.  Amazon will always push the envelope in terms of taking in customer orders at the last possible moment and promising rapid delivery.  No one wants to get their Christmas presents delivered the day after Christmas.

So by adding another option, Shipping With Amazon, to augment their other delivery arrangements Amazon is increasing capacity and its reducing its reliance on third parties.  This multiple sourcing strategy is not new yet it adds much needed contingency in the face of continued enormous growth.

Reduced Cost

Amazon’s shipping costs have far exceeded shipping revenue for a long time.  In fact shipping costs exceed shipping revenue by billions of dollars every year for Amazon.  On top of that FedEx’s operating margin is higher than that of Amazon.  So it all only makes sense that to drive profit growth Amazon would look to reduce costs and move into higher margin businesses.

In many respects there is a duplication of overhead, infrastructure and margin between Amazon and it’s logistics service suppliers.  Plus an efficient, lean supply chain is focused on eliminating waste, unnecessary handling, and redundancies.

So it only makes sense that Amazon would pursue a Shipping With Amazon strategy.  Over time it will reduce costs which Amazon can use to pass on to customers (remember the flywheel effect) or increase margins.

Improved Customer Experience

As soon as Amazon hands a package over to UPS, FedEx, or anyone else it is losing some control over the rest of the Customer Experience.  The Last Mile  is critical!  The rest of the customer experience in the buying cycle may have been great but if there is any problem with the delivery then all is for nought.

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Amazon’s strategies for same day delivery, Amazon Go, one hour delivery, Amazon Fresh, Amazon Key, lockers, drone deliveries, and more, are all designed around optimizing the last mile and the customer experience.  Shipping With Amazon serves to extend Amazon’s control over the customer experience.

Customers trust Amazon with their orders and they hold Amazon to its delivery promises.  Shipping With Amazon helps to preserve and build that trust as they increase their positioning and value as a one stop shop.

Increased Speed

Amazon is obsessed with constantly increasing its speed of delivery.  You see it in everything that they do.  They already handle every item and every package within their Distribution Centres.  Yet when they hand these packages off to FedEx and UPS there can be additional handling, sortation, palletizing, handoffs, and movement.

Shipping With Amazon provides an opportunity for Amazon to eliminate any duplicate handling.  This certainly has the effect of reducing costs but it also has the ability to increase speed of delivery.

Shipping With Amazon

Shipping With Amazon is a strategy that should not be surprising.  The advantages that this creates for Amazon and its customers are clear.  And it is completely consistent with the Amazon Flywheel effect.  Every single advantage serves to accelerate the movement of the flywheel.

Even though it may take a lot of time, and even though Amazon may always be reliant on companies such as FedEx and UPS, no one should underestimate the disruption and dominance that Amazon can create in this space.

It makes sense to disintermediate the supply chain wherever possible.  Improving efficiencies, eliminating waste and unnecessary handling, eliminating duplicate infrastructure, lowering costs, and increasing speed are the objectives of every forward thinking supply chain operation.

Shipping With Amazon is here!  And it is looking to cut out the middle man!

Originally published on March 6, 2018.

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