The massive logistics expansion at Amazon, credited with disrupting traditional supply chains around the globe over the past few years, may just be getting started.
Amazon’s thirst for additional delivery capacity has not been slaked; it has just been whetted. An ongoing “obsession” with customer experience is driving continual logistics growth.
Although Amazon’s interest in drones, robotics, and other technologies and strategies on the edge of the logistics envelope draws public attention, the shift Amazon has set in motion in the more mundane world of trucks, trains, ships, and planes actually is a bigger deal.
The e-commerce company is adding everything from cargo planes to truck trailers, giant sortation centers to university campus kiosks, to a distribution network focused on fulfilling growing demand for increasingly fast delivery of tens of millions of distinct products ordered online.
“Today we stand at 27 767 airplanes that fly millions of parcels a week, every week,” David Bozeman, vice president of Amazon Transportation Services, said on Thursday. “We’ll continue to grow that out, and we’ll have several more airplanes to fly many more millions of packages.”
Bozeman “peeled back the onion” that is Amazon’s logistics strategy a bit for attendees at a symposium on the ‘Future of Freight’ sponsored by the company and the Eno Center for Transportation.
“It starts with the customer,” he said. “To meet that customer obsession, we’ve had to systematically build out our sort centers, linehaul middle-mile and air network.”
Amazon now ships more than 1 billion parcels a year in the US alone, and is increasingly involved in moving heavier freight as it builds the front-, middle- and back-end logistics network needed to ensure those parcels, especially Amazon Prime orders, arrive on time.
US e-commerce sales in 2016 totaled $394.9 billion, a 15 percent increase from 2015. E-commerce last year accounted for 8.1 percent of US retail sales.
“No matter what you hear, there is no one person or entity that can handle the amount of capacity [demand] that is out there in the industry,” Bozeman said at the event, held at Amazon’s offices in Washington, D.C. While Amazon continues to work with myriad transportation and logistics service providers, “there has to be a balance, and we have to continue to build.”
As net product sales expand — rising 16.3 percent to $48.5 billion in the first half of 2017 — Amazon has focused on improving several interlocking elements of its distribution system, from its linehaul capability, predominantly trucking, to its sortation centers and its air network.
“We’ve had double-digit launches of sort centers this year,” Bozeman said. Sortation centers receive product from fulfillment centers and forward shipments to the US Postal Service and other transportation partners for final-mile delivery to consumers. For Amazon Prime customers, those products could be any of more than 50 million individual items delivered in two days.
According to supply chain consulting firm MWPVL International, which closely tracks Amazon’s supply chain growth, the company now has 258 facilities in the United States, including 30 outbound sortation centers, 44 delivery stations, and 103 fulfillment and redistribution centers, with 102.6 million square feet of active distribution space and plans for 56 new facilities.
So far this year, Amazon has announced 24 new fulfillment centers, including a 1 million square foot fulfillment center in Shelby, Michigan, that will open next year announced Thursday.
Plans for new sortation centers have been reported this year in Theodore, Alabama, near Mobile; Aurora, Colorado; Chicago suburb Crest Hill, Illinois; Hazelwood, Missouri; Lancaster, New York; and Oklahoma City. Those centers make Amazon Sunday delivery and seven-day-a-week service possible.
“Industry is changing, speed is happening, people want their product,” Bozeman said. “We’ve had to move to seven-day delivery. Sunday delivery increases the likelihood a customer will place an order. Every way we look at it, every way we analyze it, this is what people want.”
His assertion is backed by the findings of a Citigroup study released earlier this year.
“Aspirations of consumers for quicker delivery and greater flexibility over deliveries and returns continue to rise. We also see low level M&A to add footprint and capabilities and synergy opportunities to emerge as B2C delivery density and service requirements approach traditional B2B,” Citigroup said.
The addition of sort centers increases Amazon’s need to control linehaul operations— the flow of freight from fulfillment to sort centers to delivery stations. The middle-mile, as many logistics and trucking operators have discovered, is as important to e-commerce as the final-mile delivery.
“We have vendors bringing product inbound to our cross docks and fulfillment centers,” Bozeman said. “The FCs send product to sort centers and air gateways and eventually delivery stations. We’re building out the trucking network from a trailer perspective.”
Amazon has purchased thousands of tractors, but leases tractor power from its transportation and logistics service providers. “In 2015, we launched a dedicated trailer fleet just so we can enhance the integrated sort center approach going forward,” Bozeman said.
“We have partnerships with our various LSPs, linehaul service providers, that have the power,” he said. “At the end of the day, it’s about having a balanced network” and capacity.
In January, Amazon announced plans for its first air cargo hub, at the Cincinnati/Northern Kentucky Airport in Boone County, Kentucky, up I-71 from the global air hub of UPS in Louisville, Kentucky. “As we build out the linehaul network to support sort centers, and we’ll continue to do that, we need to build out our air network,” Bozeman said.
The pace of development is not likely to slow. Amazon’s business model revolves around a “flywheel” set in motion by customer expectations, he said. “There’s a difference between customer focused and customer obsessed, and Amazon is customer obsessed,” said Bozeman, who worked for Caterpillar and Harley-Davidson before joining Amazon.
The flywheel starts when customer expectations draw traffic and sellers to Amazon. “The more sellers you have, the more selection you have, and the more selection, the better the customer experience,” he said. “As you grow, you get a lower cost structure, lower prices, and the whole loop starts again.” Amazon’s history shows that loop doesn’t just restart, it accelerates.
That acceleration is becoming cyclonic, as the growth of Amazon Prime and Prime Now show all Amazon suppliers, including manufacturers and vendors of products sold online as well as logistics and transportation providers, are caught up in it, along with traditional retailers.
As the cyclone gains strength, it will reshape logistics in ways not always evident on the ground. That will create challenges and opportunities for shippers and carriers trying to ride the storm.