For years, Amazon has been in a battle with states over collecting taxes on consumer purchases. As a result, the company fired marketing affiliates in various states and shut down its distribution center in Texas last year when the state comptroller presented the company with a $269 million tax bill.
But Amazon has recently reversed course, striking deals with various states to collect sales taxes, while it also plans to build many more distribution centers.
Why the change in course? According to two articles published last week that have attracted a lot of attention – “Amazon finds upside to sales tax payment” (Financial Times, registration required) and “I Want It Today” (Slate) – this is all part of Amazon’s plan to provide same-day delivery to customers.
Here is an excerpt from the FT article:
But its rivals’ fixation on price has diverted attention from how the company is turning the tables on them by getting closer to customers.
Amid the tax furore, Amazon is seizing the opportunity to expand its network of US warehouses – it had 34 at the end of last year – so it can place its merchandise nearer to big markets and offer same-day delivery to more consumers.
That will erode one of the last advantages of the physical store: instant gratification.
And from the Slate article:
It’s hard to overstate how thoroughly this move will shake up the retail industry. Same-day delivery has long been the holy grail of Internet retailers, something that dozens of startups have tried and failed to accomplish. (Remember Kozmo.com?) But Amazon is investing billions to make next-day delivery standard, and same-day delivery an option for lots of customers. If it can pull that off, the company will permanently alter how we shop. To put it more bluntly: Physical retailers will be hosed.
I recommend that you read both articles for more details. Amazon is not commenting on these reports or its strategy, so most of this is just speculation, but it’s an interesting supply chain and logistics challenge (and opportunity) to think about nonetheless.
Here are some of my initial thoughts:
This is a perfect example of how setting a constraint (in this case, providing same-day delivery to consumers) can spark innovation in business models and processes. I wrote about this idea back in May 2011, summing it up this way:
In order to spark innovation, you have to get out of your comfort zone. Deliberately choose to buck the norm in ways that will create value for your customers, employees, or both. Ask the “What if we…” questions, which often leads to some sort of constraint (such as “What if we don’t charge for shipping or accessorial fees anymore?”) and then empower your people to innovate around this constraint to still meet your high-level corporate objectives.
There are plenty of reasons why same-day delivery won’t work, but you only need one good reason to try, and Amazon has several as it tries to outmaneuver Apple and its other competitors in winning the hearts, minds, and wallets of consumers.
Same-day delivery will move retail supply chains in the direction of service parts logistics. Simply put, many of the challenges Amazon will face in providing same-day delivery to consumers will be similar to those faced by companies that manage service parts logistics operations (see here and here for examples). Network design, inventory optimization, and transportation planning and execution (among other things) are very different when your service level is “same-day to the consumer” compared to achieving a target in-stock percentage at the store level, or even providing next-day delivery. I’m not sure how Amazon will address these challenges, but it wouldn’t surprise me if its transportation and distribution network ultimately includes couriers, private fleets (its own or those of local delivery companies), the use of public transportation, and third-party retail and service locations as stock keeping locations (see the “delivery lockers” Amazon has placed in 7-Elevens and shopping centers).
This is also an example of how companies can leverage logistics to drive top-line growth, increase market share, and create a competitive advantage. I recently spoke with Tim Stratman, a well-known executive coach who works with many supply chain execs, and the author of “Are Supply Chain Leaders Ready for the Top?” (Supply Chain Management Review, November 2010). In that article, he writes that for supply chain leaders not to be “pegged in perpetuity as [just] cost-cutters and tacticians,” they need to “pursue opportunities that expose their teams to important market- and customer-focused initiatives that put them closer to the bull’s eye of profitable growth generation.” Amazon’s bet is that same-day delivery will lead to increased sales and market share, which would more than offset whatever increased logistics costs the company might incur. And like many of Amazon’s bets, this is a long-term one (see New York Times article, “Amazon Says Long Term and Means It”).
As the saying goes, “the devil is in the details” when it comes to providing same-day delivery in a profitable manner, and there are lots of details involved, too many to discuss here today. There are also many unanswered questions: Is this part of the reason why Amazon acquired Kiva Systems? What products will Amazon make available for same-day delivery and how will it price the service? How does same-day delivery change the “omni-channel” retail narrative? Is enabling same-day delivery for other retailers a promising business opportunity for 3PLs?
And what comes after same-day delivery? Teleportation, of course, which I joked about in an April Fools posting a couple of years ago. But a stepping stone to getting there is the ability to manufacture (“3D print”) your own products at home or work, a technology that continues to advance. An article published last week in the Wall Street Journal, for example, discussed how companies like Boeing, GE, and Honeywell are looking to make more complex parts using 3D printing, and “when the dishwasher in a Boeing cafeteria in St. Louis broke down recently, the company’s plumber didn’t want to wait for a plastic replacement part to be shipped to the site. He asked Mr. Hayes, the Boeing engineer, to replicate the part on a computer screen and print it out. That took about 30 minutes.”
There are many reasons why getting from same-day delivery to minutes won’t work, but you only need one good reason to keep trying.