Logistics Viewpoints

A complete analysis of logistics trends, technologies, and services

Trump Blasts USPS for Charging Amazon “So Little”

Regulations | By •

In a Twitter blast last Friday morning, Trump said “Why is the United States Post Office, which is losing many billions of dollars a year, while charging Amazon and others so little to deliver their packages, making Amazon richer and the Post Office dumber and poorer? Should be charging MUCH MORE!”

There is, not surprisingly, a political angle to this.  Amazon is owned by Jeff Bezos, who also owns the Washington Post.  Trump has been highly critical of the media, and singled out the Post and for its coverage of both his campaign and presidency.  Almost immediately following the tweet, Amazon’s stock price began to drop.

But for a logistics guy, this is also a teaching moment. First of all, Amazon uses all the major parcel carriers as well as a network of regional carriers. But what Trump appears to be referencing is the increased use of the United States Postal Service (USPS) for zone skipping, also known as direct injection.

In zone skipping, a shipper consolidates many individual packages or orders into a much larger shipment – often full truckload shipments. These packages are then sent in mass from one zone to another. For example, Atlanta is in Zone 2 and Los Angeles is in Zone 8. Shipping directly from Zone 2 to a Zone 8 parcel carrier’s sorting facility can lead to substantial savings for a shipper. But the ability to consolidate for zone skipping depends on whether a shipper has both enough time and enough volume, something most companies lack. Amazon certainly has the volume.

But in an ecommerce world, the lack of time is particularly worth noting. When retailers offer many of the same items at similar prices, the speed of delivery can be the deciding factor. The need for speed is leading to shorter and shorter delivery promises.  Amazon Prime members get their packages in two days “free.”  If customers want to pay more they can get them even quicker.

Amazon can hit aggressive service expectations because it has its own air cargo network.   The company flies goods in bulk on leased Boeing 767s to an air hub in Wilmington Ohio, deconsolidates the incoming load, and then reconsolidates the outbound load with packages headed for a particular zone. It can then deliver in bulk, in truckload sized trailers – Amazon has purchased thousands of 53 foot trailers to a USPS sorting facility in that zone.

In short, you must give Amazon credit for having the kind of network and supporting logistics capabilities that allow them to take advantage of zone skipping. But that still leaves open the question of whether the USPS is charging Amazon enough for these services. The 2006 Postal Accountability and Enhancement Act made it illegal for the USPS to price parcel delivery below its cost.  USPS isn’t free to set prices as it wishes — rates are decided on by the Postal Regulatory Commission. Earlier this month the federal agency that oversees the postal service granted it the authority to speed up pricing increases over the next five years.

It’s complicated to calculate the costs for the many different types of things USPS delivers. According to a money manager with a stake in FedEx who penned a piece on the topic for the Wall Street Journal: “In 2007 the Postal Service and its regulator determined that, at a minimum, 5.5% of the agency’s fixed costs must be allocated to packages and similar products. A decade later, around 25% of its revenue comes from packages, but their share of fixed costs has not kept pace. First-class mail effectively subsidizes the national network, and the packages get a free ride.”

Citigroup estimated in April that if the costs were allocated according to USPS’ current mix of freight, the average package would cost $1.46 more.

Amazon gets 40% of its packages to our doors via USPS, compared to 20% to 25% with UPS and 15% to 20% with FedEx.

A few other data points, in their last annual report (form 10-K), Amazon reported losing $7.2 billion on shipping costs. Despite that their retail operations made about $1.1 billion in profit. Shipping costs include transportation, sortation, and delivery centers.  But their warehousing operations are very efficient, they use mobile robots to good effect in their warehousing operations.

It is also commonly estimated that Amazon ships about 600 million packages per year.

If you do the math, Amazon would have incurred hundreds of millions of more in shipping costs last year if Citigroup’s estimates for what they should be charging are correct.  They still would have had profitable retail operations, however.

This whole argument takes us into the realm of activity based costing, a critical skill for achieving excellence in supply chain management, but something very difficult to do well.

But one must say, on the surface it certainly does not look like the postal service is doing a good job allocating costs.

Amazon Launches Trucking App

Logistics Technologies | By •

trucking appAmazon is no stranger to innovation; we need to look no further than its investment in drone technology, warehouse robots, robotic picking competitions, the Prime program, dash buttons, cloud services, and a host of others. Often times, the company will quietly launch one its new services as a test run before making any major announcements or grand roll-outs. Last month, Amazon did it again with the launch of its first trucking app. Named Relay, the app was launched in typical Amazon fashion (quietly) and is available for both Apple and Android devices.

The Ins and Outs of Relay

Relay is Amazon’s first trucking app, and is designed to make trips to Amazon warehouses faster and more efficient. Drivers are able to 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 that are not only time consuming, but also error prone. As of now, the app is only used for deliveries to Amazon warehouses. It remains to be seen whether the company plans to expand on the capabilities or include access to third party locations as well.

The Big Picture for the Trucking App

The actual application of Relay is narrow at the moment, as it is only used for deliveries to Amazon facilities. However, this could be just the tip of the iceberg, and a way for Amazon to make inroads for a much larger future application. Amazon has made it clear that there is a much larger trucking app that it wants to build out, and getting drivers on a network could be the way in. Hundreds of millions of dollars have poured in to the digital freight matching market over the last couple of years, and Amazon has its eyes on being the biggest player in the market.

When looking at the digital freight management market, there are a number of challenges, mainly around scalability. This means the provider needs a large number of carriers and shippers on a common network to create a marketplace. Getting to the point where there are a viable and thriving marketplace is essential for scalability. One of the biggest challenges to getting carriers and shippers to join a network is the trust factor. Too many of the start-ups that are trying to enter the market are unknown entities that simply do not have the clout to build a network. This is where companies like Amazon and Uber have the advantage.

Amazon and Uber have the capital and the brand to build a network. Amazon in particular has proven itself as an innovator when it comes to delivery services. This goes beyond home deliveries; the company has established a network to move goods between facilities much quicker. As Amazon is building out its global logistics network, it is working on controlling more modes. The company has moved into the ocean, air, and private fleet business, and now has its eyes set on the digital freight matching market. The launch of Relay looks to be the first step in realizing this goal.

The Final Word

Amazon CEO Jeff Bezos is always looking at the next big thing when it comes to making his company one of the most innovative logistics providers in the world. From investing in private fleets of trucks and branded aircraft, to drone deliveries and floating warehouses, Amazon is constantly seeking ways to become more efficient and meet the customer’s needs. With the launch of Relay, Amazon is trying to make deliveries to its own warehouses and facilities more efficient, which can speed up the final delivery of items. Even if Relay does not scale or become the norm for how Amazon handles internal deliveries, it is the first logical step in creating a digital freight matching marketplace. While Relay might be an honest attempt to streamline internal processes, it also might just be a means to an end when it comes to building a robust trucking app.

Jeff Bezos’ Drone Prediction was Far, Far Too Optimistic

Omni-channel logistics | By •

Almost four years ago, Jeff Bezos – the CEO of Amazon – went on 60 Minutes and unveiled his vision of having fulfillment drones deliver packages right to customers’ door steps.  Ideally, this could occur within 30 minutes of the order.

Mr. Bezos speculated it that might take four or five years to get things right and win the proper government approvals. He professed optimism. “It will work, and it will happen, and it’s gonna be a lot of fun,” he said.

The idea that drones could be used for deliveries was not far-fetched, but that fulfillment drones could deliver goods right to a customer’s door is still many, many years away.

Fulfillment Drones, What is Real?

Last week, the Drone technology company Flytrex, in partnership with AHA, Iceland’s largest online marketplace, announced the official launch of the world’s first operational on-demand urban drone delivery service. The CEO of Flytrex, Yariv Bash stressed that “This is a working system, not a one-off wonder.”

Following regulatory approval from the Icelandic Transport Authority (Icetra), Flytrex and AHA received approval to implement their autonomous drone system to deliver food and consumer products from shops and restaurants on one side of Reykjavik to a designated point across the city. The new drone logistics system will allow direct delivery between two parts of the city separated by a large bay. The drone can do in four minutes what it takes a car 25 minutes to do in heavy traffic.  The drone lands in an empty field near the designated neighborhood where it is met by a courier.  The courier than walks, if the customer’s home is close enough, or drives a short way, to make the final delivery to the doorstep.

The payload is 3 kilograms, about 6 and a half pounds.  Currently one delivery at a time is being done, but multiple deliveries are possible; and it is possible for the drone’s controller to be flying several drones at the same time.

In the US, drones are required to have an operator in the line of sight of the drone.  This delivery service is based on deliveries outside the line of sight.  This was accomplished through a stringent regulatory process where the drones have a designated flight path that is closed to airplanes and other drones.  The drone’s operator maintains contact with the control tower, if a plane is drifting into the drone’s flight path, the operator is notified and he will prevent any other take offs.

As a next stage, Flytrex will deliver to a customer’s back yard.  The delivery will be part of the same flight path to the neighborhood that has been approved by the Icetra, but with new map coordinates added that specify the location of the back yard.  The drone will hover 50 to 60 feet in air, and then lower the product to the end consumer.  Logistics are coordinated based on a smartphone.  The consumer will have visuals showing the estimated time of arrival and the drones current location.  When the drone arrives at the destination, the customer is notified and the drone hovers above the destination until the customer acknowledges that they are ready to accept the delivery.  When the customer presses the “accept delivery” button, the goods are lowered to the ground.

Fulfillment Drones

Flytrex Drone Delivery System

It should be noted that Flytrex is not a drone manufacturer.  In fact, they are drone agnostic.  What they have produced is a cloud-based drone management system. The entire system includes functionality that allows the operator to communicate with the drone, smart phone enablement for estimated times of arrival and delivery activation, integration into the shipper’s logistics systems, and communication with the aviation regulatory agency.

When I asked about Jeff Bezos’ vision of delivering right to a customer’s doorstep, Mr. Bash responded “these devices are too dangerous to be near untrained humans.”

In conclusion, while the Amazon vision of delivery right to the doorstep remains untenable, Mr. Bezo’s stake in the ground did lead startups to invest in drones. What we see with last week’s announcement is the first ongoing drone delivery service in an urban area.

Prices that Walmart Can’t Touch

Retail | By •

On a recent visit to Munich, Germany my wife and I shopped in a Lidl. Lidl is a global discount supermarket chain, headquartered in Germany, that operates over 10,000 stores across Europe. They offer prices that Walmart can’t touch.

We bought a bottle of wine, a decent brand, a large box of mint chocolates, and a Liter of Coca Cola Zero.  The charge was 5.22 Euros, $6.10 in the US. The same price at our local warehouse discount grocery store here in the US would probably be at least $14 – ten dollars for the wine, three for the chocolate, and one for the cola.

The Lidl Supply Chain

There is a supply chain story here.  Here is what the web site and a little independent research reveals:

  • These are small stores that have a limited number of stock keeping units.  “Instead of offering a myriad of brands in every category, our stores offer carefully curated selections…” Unlike traditional supermarkets with an average product range of 10,000 food and non-food items, or big box stores with as many as 50,000 items, Lidl offers between 1,000 and 3,000 products.In red wines, we had perhaps ten choices.  In contrast, at our local discount big box store, there are several aisles devoted to just red wine. But limited choices don’t have to mean bad choices. This year Lidl won several medals at the Indy Independent Wine Competition and LA International Wine Competitions.
  • “You’ll notice while shopping at Lidl that most of our assortment is our own private label – around 90% of our products, in fact. This means we’ve especially developed these products to match our high standards and allows us direct oversight of product integrity. Each product undergoes a rigorous testing regimen, which includes taste, quality and sensory testing.” Global and national branded products cost more. Lidl’s products don’t have that mark-up. And small, hungry manufacturers will settle for smaller profit margins.
  • “We keep overhead to a minimum and eliminate any unnecessary costs. Take our ‘bring your own bag’ policy. Not only does it mean we don’t build the cost of bags into our prices, this policy also saves you time at the register and is a greener solution. Additionally, we display our products in custom boxes instead of replenishing and stocking item by item. Our associates simply replace the boxes as needed, saving hours every week on stocking shelves. These simple steps allow us to pass our savings on to you.”They aren’t kidding about the low overhead. The look and feel of the store was stark, there was nothing fancy about the neighborhood (lower real estate costs), and the staffing was clearly lean.
  • They compete with an Every Day Low Price strategy where promotions are minimized and demand is far more stable. Promotional surges can be hard for a supply chain to efficiently handle. Stable demand promotes higher inventory turns. Further, in general, discount retailers are not as concerned about product stock-outs as other retailers. Traditional retailers consider it a lost sale. Discounters would rather error low on the forecast and trust that customers will pick a competing brand. This also drives high inventory turns.
  • Merchandising and supply chain management are well aligned.  In the US, the Head Office Supply Chain Department is “split into two distinct areas: Supply Chain and Layout Management. In the Supply Chain area, the department has a strategic role, focusing on optimizing both the availability and freshness of product. The Layout Management team supports store operations in determining the optimum placement of product groups and individual items.”By having merchandising and supply chain operations report up through the same organization, product revenue contribution, a core focus of most retailer’s merchandising department, and cost savings from efficiencies, a focus for supply chain management, are better aligned; growing product category revenues does not come at the expense of an efficient supply chain. Lidl stores in a region have the same layout, which leads to both warehouse and store replenishment efficiencies.
  • Lidl has grown fast. This helps to support a denser and more efficient transport network.  In the UK, for example, three Distribution Centers support 640 stores.

Lidl Store Opening in Richmond, VA

Lidl recently opened its first store in the US.  Should Walmart, BJ’s, and Amazon be worried? Absolutely!

Walmart versus Amazon: Walmart Fights Back

Omni-channel logistics | By •

Wall Street believes Amazon is winning the retail war with Walmart. Amazon’s market cap is twice that of Walmart, despite being a much smaller and less profitable company than Walmart. Wall Street values the growth of the ecommerce giant over the size and clout of the world’s largest retailer.

In the last few years, Walmart has invested billions to up their multi-channel capabilities. Multi-channel involves the combination of stores and a web/ecommerce presence, the ability to support sales through multiple product flow paths to the customer. Or as Doug McMillan, the CEO of Walmart, put it in the letter to shareholders in this year’s annual report, “Our strategy to serve customers through e-commerce and our stores in a seamless way … Customers are time-crunched, so we want their shopping experience with us to be fast and easy—truly seamless—in all the ways they want to shop: in stores, on their mobile device, or through pickup and delivery.”

Walmart versus Amazon
Walmart’s Annual Report Emphasizes Multi-channel Convenience

Walmart’s investments multichannel investments include opening state of the art automated ecommerce warehouses, buying ecommerce companies like Jet.com, and big investments in IT. Some of these investments have been controversial.

In executing multi-channel, their stores can be an asset. 90 percent of Americans live within ten miles of one of its stores. Nearly four out of five of them shopped at Walmart last year.

But to satisfy investors, the world’s largest retailer not only has to grow revenues, they need to do it profitably. Many multichannel flow paths are not very profitable. Marc Lore, President and CEO or Walmart eCommerce, spoke to this in the same annual report:

“The key to success in e-commerce is winning in logistics and supply chain. Most marketplace platforms are inefficient in that the lowest priced retailer typically wins the order, regardless of their proximity to the customer. Conversely, at Jet we use smart-cart technology to let customers see how they can save money on shipping and other costs as they build bigger baskets.”

Shipping is by far the biggest cost to fulfill an e-commerce order. Ecommerce shipments that make money despite offering free shipping can only do so by marking up the cost of the item to cover the shipping costs. The marginal cost to put more stuff in a box that ships from the same warehouse is much lower than shipping an individual item, although parcel optimization can be complex.

Jet.com seeks to shape customer behavior by displaying “Smart Items” that save the customer money. These are items that drop in price as they are added to the customer’s cart because they’re coming either from the same warehouse as something else already the cart, or even better, located in the same aisle of the warehouse as items that are already in the cart. Customers can also save money by agreeing to waive their right to free returns. Returns are massively costly for retailers, so this is another place where Jet.com can split savings with customers.

Many pundits argue that for traditional retailers to achieve success in multichannel, goods must be the same price online and in the store, even though it is far cheaper for the retailer to fulfill an in-store order. But Mr. Lore’s viewpoint is that “As we make these costs transparent, we’re changing consumer behavior to save them money and make the transaction more economical for Walmart.” In this way Walmart’s “Everyday Low Price” store philosophy can apply to their multichannel efforts.

Jet.com and Walmart.com offer “free” two-day shipping on for orders of more than $35. Too make this strategy of sharing savings with the customer work, the company will need to optimize the way inventory is stored across the network. The company says that their @WalmartLabs team out in Silicon Valley crunches billions of variables and developed algorithms that determine from where inventory should be stored and where an order should ship based on a customer’s location. Shipping items other than perishables to a home will usually be much less expensive if done from an ecommerce warehouse, than from a store close to a customer.

But Walmart isn’t only concerned about making money from ecommerce. Walmart.com is also integrated with their physical stores through services like “Walmart Pickup,” “Pickup Today” and “Online Grocery.” Getting customers to order online but then pick up at the store can be profitable. While, Walmart must pay store associates to pick the order, there is also the possibility that the ecommerce personalization will suggest goods already in the store to add to the market basket, or that customers will decide they need additional items in the store.

Walmart has advantages in battling Amazon that other retailers don’t. More than half their sales in the U.S. are food. Delivering perishable items to a home is difficult and expensive. While Amazon is experimenting with these food delivery, they lack the size and scale of Walmart in this category.

In conclusion, I believe Walmart’s success in multichannel will depend upon getting consumers to buy into a share the savings approach. This will depend upon making the ecommerce sites easy to use and navigate despite the added complexity created by Smart Items. It will also depend a fairer sharing of the savings. For example, in the case of returns, the “sharing” does not seem to be significant. In most cases customers are only offered a few cents off the purchase price.

Wall Street Believes Amazon is Winning the War with Walmart

Logistics Service Providers | By •

Investors believe Amazon is winning the retail war with Walmart. Amazon’s market cap is twice that of Walmart’s. When it comes to retail, Walmart’s most important retail operations (Walmart U.S. and Sam’s Club) are more than four and a half times larger than Amazon’s main retail operations (Amazon North America) and the operating income is almost nine and a half times that of Amazon. Investors clearly value growth over profitability.

Amazon is winning
Amazon’s CEO Jeff Bezos

Amazon’s U.S. retail sales increased by over 25 percent. In contrast, Walmart U.S. grew by a paltry two percent and Sam’s Club by just 0.5 percent. Nevertheless, if things were to continue as they are it would take Amazon over a decade to achieve the same level of profitability (measured by operating income) as Walmart currently has.

It is hard not to look at those numbers and wonder if Amazon is overvalued or if Walmart is undervalued. In terms of Walmart’s valuation, Warren Buffett’s Berkshire Hathaway last summer had holdings in Walmart that were worth $3 billion, as of February of this year they were down to less than $100 million. One of the greatest investors of all times believes that traditional retailers will have an increasingly hard time competing with Amazon.

Amazon has upped its game. Two years ago, Amazon’s ecommerce operations lost money and retail was subsidized by profits from their web services business. Today their ecommerce operations are profitable. One modest explanation is that Amazon Prime, the free two-day shipping program, raised its fees to a $100 per year from $79 per year a couple years ago.

Further, Amazon’s expensive warehouse building binge, which is continuing, allows them to ship goods significantly more cheaply than Walmart. Amazon’s annual security exchange commision report shows that they lease and own about 100 million square feet of warehousing and data centers (but mostly warehousing) scattered all over the U.S. Walmart ships from five dedicated eCommerce distribution centers.

This means Amazon parcel shipments don’t travel as far and thus cost less. It is also true that Amazon has moved from working with the high priced national overnight carriers to also using a variety of lower cost regional carriers. The result? Analysts report, Walmart’s online shipping costs from five to seven dollars, while Amazon’s averages three to four dollars per parcel. Walmart can also ship from many stores, but the world’s largest retailer reports that shipping from their warehouses is more profitable.

That does not mean Amazon excels at shipping. Amazon Prime’s two-day shipping guaranty results in heavily subsidizing shipping. They lose 8.7 billion dollars on shipping per year. But their losses, as a percentage of shipments revenues, are narrowing year by year.

It is also clear that the Amazon marketplace, where third parties can sell their goods, is much more profitable than Walmart’s and helps explain how Amazon can make money at ecommerce while so many of their competitor’s struggle. In the first quarter of this year, 50 percent of paid units on the Amazon marketplace were sold by third-party sellers. Analysts report that on average, the ecommerce giant makes a fifteen percent commission on these sales. And about 50 percent of third party goods use the Fulfillment by Amazon service which makes these products eligible for the Amazon Prime shipping program. It is doubtful that Amazon loses money shipping third party goods. In fact, based on the margins, it looks like third party sales are a leading explanation for how Amazon makes money at ecommerce despite the two-day shipping guaranty for Prime members.

Strategically, Walmart’s focus on everyday low prices in their stores is outdated. The number of items sold by Amazon dwarfs that of the products offered by Walmart. This means that all too often an Amazon product, often from a third party, is cheaper than what is being sold by Walmart.

The convenience is also a differentiator, even though Walmart customers who are economically less well off than the average Amazon shopper. Almost three out of four Walmart shoppers bought something on Amazon during the yearend holidays, up from two-thirds who said the same back in 2014.

Does that mean Walmart is doomed to lose? I don’t think so. But they must change the way they play the game. I’ll share some thoughts on this in a future post.

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