The Amazon Supply Chain: The Most Innovative in the World?

Is the Amazon supply chain the most innovative in the world?  A very strong argument can be made that they are despite some announcements that were pie in the sky – like the patent they won in January for floating warehouses that use drones for deliveries and replenishment. Or for that matter, Jeff Bezos’ drone prediction made five years ago on 60 Minutes.  Drones for home delivery are still too dangerous, as opposed to using drones for inventory management.

But other events are both innovative and meaningful. Let’s just review some of their activities over just the past year.

Relay

Relay, quietly released in October, is Amazon’s first trucking app, and is designed to make trips to Amazon warehouses faster and more efficient. Drivers can enter cargo information into the app before they arrive. Once they have entered the information, they are given a QR code which they will use at the security gate. The idea is that by pre-checking in, they use the QR code to pass through security instead of the manual process of showing and scanning a badge at the gate. With the pre-check in process, it gives Amazon better visibility into the current location of its deliveries, and can better prepare for arrivals. Some of Amazon’s warehouses and fulfillment centers have built lanes that are dedicated solely for Relay users.  Relay aims to speed up the process of making deliveries to warehouses. Additionally, it can help to reduce manual processes.

The actual application of Relay is narrow, as it is only used for deliveries to Amazon facilities. However, the vision may be bigger. It may be a way for Amazon to make inroads for a much larger future Uber-type  freight matching service.

Whole Foods and Dash

Amazon’s acquired Whole Foods in June for $13.7 billion in cash.  The move finally puts Amazon in the position that it has been working towards for years in the grocery space. Grocery has been one area that Amazon has not been able to crack, even with the launch of Amazon Fresh. By bringing the Whole Foods brand into the Amazon family, the company immediately gets a boost for its grocery business.

Of course, Walmart is the goliath in this space. But Amazon seeks to use convenient deliveries and technology to begin to make up the difference.  Amazon’s Dash buttons, introduced before the acquisition, are a great complement to the acquisition. The Dash Button is a small wireless device about the size of a pack of gum. When a customer presses the button, the device uses Wi-Fi to order items the customer has pre-selected from Amazon.  Amazon’s vision is that people will mount their buttons in their kitchen, pantry, laundry room, and bathroom using the attached adhesive strip on the back of the device.  Then, for example, when they run out of Tide laundry detergent, the consumer pushes the button and Tide is automatically ordered.  A consumer would purchase a Dash Button for $4.99 on Amazon.com for each of their favorite brands.  With each purchase comes a $4.99 instant credit after the first purchase.

Amazon brought its supply chain expertise as well.  Whole Foods was notorious for holding too much inventory at their stores.  When a client asked for something, a helpful associate would go to the backroom and search for it, and perhaps in ten minutes would return with the item, or perhaps not.  Now they have gone to a lean, JIT grocery supply chain with virtually no inventory in the back.  But the store shelves are as full, or fuller, than they were previously.

But much work remains to be done to build out a profitable home delivery network.  In theory, the Whole Food stores could be used as forward warehouses, in addition or instead of being stores.  But even after decluttering the back rooms, most of the Whole Foods locations do not offer the right layout to switch over to a delivery warehouse, as they do not have the required docks or quite enough back room space.

Amazon, the Carrier

In February, Amazon announced plans to build its first air cargo hub at Cincinnati/Northern Kentucky Airport.  This is based on sound economics.  When the 2-million-square-foot facility opens, it will reduce the company’s dependence on UPS and FedEx. But Amazon was already moving away from reliance on the parcel giants by giving an increasing share of its parcel business to lower cost regional providers.  And many e-commerce shoppers have seen their orders delivered by the company’s fleet of private trucks.

Amazon had already moved into the ocean freight business for similar reasons. But this year, Amazon began taking greater control over shipments from China. Specifically, Amazon has started handling the shipment of goods from Chinese retailers that sell on its platform. For this line of business Amazon is acting as its own freight forwarder by reserving space on ships and clearing customs itself. This also reduced the fees it pays to outside logistics providers.

The company plans to use this new air hub to house its current and future fleet of planes. It’s expected to cost Amazon over $1.5 billion which means this will be a highly automated facility, just as UPS’s and FedEx’s are. It is reported the company will initially employ 2,000 people, which means this hub will work at scale.

It is speculated that Amazon’s end goal is to deliver packages for itself and other retailers.  Large retailer competitors are very unlikely to ever use Amazon in this way; those companies see Amazon as their toughest competitor and will do nothing to help them achieve additional logistics scale.  But small retailers could find this an interesting service.  Many smaller retailers already sell through the Amazon marketplace. There could be bundled deal for marketing and logistics.

Amazon, the Warehousing Giant

In January it was reported that Amazon had 45,000 robots across 20 distribution centers.  Today, they have roughly 100,000 robots in use across the world. Amazon has made huge investments in automation. The company spent $775 million to acquire Kiva Robots in 2012, now called Amazon Robotics. According to one report, worldwide Amazon has 493 warehouses covering about 180 square million feet. Their investment in autonomous mobile robots has certainly paid for itself in increased productivity with many more warehouses still ripe for the deployment of autonomous mobile robots.

But it looks smart for a second reason, warehouse workers are getting increasingly hard to find. We (ARC Advisory Group) had the CEO of a large North American logistics service provider in to visit us recently.  He told us that a few years ago they had ten applicants for every open warehouse job they had; today it is just one.  “If an ex-con with a burglary record shows up, we say ‘We know you will steal from us, but we can really use the help. You’re hired!’”

There is a greater need for warehouse workers because of ecommerce.  Historically, consumers went to stores and picked their goods off the shelves.  Now warehouse workers are increasingly doing the labor consumers use to do for themselves. Not surprisingly, this CEO also believes warehouse wages are poised to rise significantly.

In conclusion, while Amazon runs the most innovative supply chain, that doesn’t mean it is the best. Amazon is a much smaller and less profitable company than Walmart.  Last mile deliveries are expensive, which kills profits. Amazon remains lucky that Wall Street values high growth so much more than profitability.