sc digest
March 14, 2013 - Supply Chain Newsletter

This Week in SCDigest

bullet Understanding - by the Numbers
bullet SC Digest On-Target e-Magazine
bullet Supply Chain Graphic of the Week and Supply Chain by the Numbers bullet Holste's Blog/Distribution Digest
bullet Cartoon Caption Contest Continues This Week! bullet Trivia
bullet Supply Chain By Design and New Expert Insight bullet Feedback


  first thought


Supply Chain Graphic of the Week:

Manufacturers Plan for More Aggressive Cost Reductions for 2013

Supply Chain by the Numbers for Week of March 14, 2013:

  • Still Looking for More US Truck Drivers
  • Diageo Says Supply Chains Should be Local
  • Container Ship Cancellations Soar
  • Yuan Value Complaints Slowing


March 5, 2013 Contest

See The Full-Sized Cartoon and Send In Your Entry Today!


Holste's Blog: Can Automated Solutions Reduce or Eliminate DC Congestion?




Weekly On-Target Newsletter:
March 13, 2013 Edition

Voice Success, Euro DC Automation, Ship Cancellations, KNex Comes Home and more


Supply- and Demand-Centered Modeling: A Follow Up to 2013 Priorities

By Dr. Michael Watson


I Love Quality Research, but Hate Faulty Research Conclusions

By Scott Deutsch
Director, Global Marketing
Vocollect, a Business Unit of Intermec



What game-changing supply chain-related book came in 1991 after a 5-year, $5 million study (funded by MIT) on the future of the automobile?

Answer Found at the Bottom of the Page

Understanding - by the Numbers

Is there any more disruptive business and supply chain force in 2013 than

It is regularly said, I think with good justification, that Amazon is the only competitor Walmart really fears.

Given its massive revenue and market share growth in the rapidly growing ecommerce arena, that Walmart fear seems very justified, and certainly is not only felt by Walmart.


"Perhaps surprisingly, Amazon's fulfillment costs, which it says includes procurement costs (overhead), are actually rising. They were 8.2% of revenue in 2010, 9.2% in 2011, and 10.2% in 2012."


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In fact, the term "being Amazoned" has started to gain some currency, referring to retailers or others that have or could see their sales, margins and even their fundamental businesses threatened by the Seattle and now global juggernaut (starting with traditional book sellers, but now many other retailers as well).

It's not only traditional retailers and dot com competitors that need to keep a close eye on what Amazon is doing. In April of 2012, AmazonSupply was introduced, taking aim at companies like Grainger, Graybar and other sellers of building supplies and MRO type items. Companies in many sectors (electronics obviously, toys and games, sports equipment, etc.) obviously have to now really think about how to deal with Amazon as a major and rapidly growing channel partner.

I think Amazon's supply chain is very good - but very different than Walmart's.

Over the past few years, Amazon has acquired and I have no real idea why someone would buy these products on line, but perhaps I am behind the times. This means some consumer goods manufacturers need to keep tabs on Amazon developments as a potentially important channel. Who knows what might be next.

Additionally, Amazon has an even more direct supply chain impact, as its massive build out of fulfillment center space, aggressive policies with regard to shipping charges, apparent push for same day delivery in some markets, innovations like the Amazon Locker, and more are pushing the forefronts of efulfillment and clearly pressuring other retailers and service providers to keep pace.

So what do you know about Below will be links to a series of charts, but we have put them all together here as one pdf document for your convenience: by the Numbers.

There is no doubt that Amazon's revenue growth has been staggering. As shown in the chart below, over the last four years, its top line has grown 28%, 40%, 41%, and 27% respectively, taking it to $61 billion in annual sales - though about $26 billion of that is outside of North America (see chart.) The $35 billion in US sales (lumping Canada in with that, because it is not broken out) would make Amazon about the 10th largest US retailer, but if it grows even 25% again this year it will move up three or four notches in 2013. (Click on this or any image to see full size version.)

In terms of total worldwide sales, Amazon is likely to pass both Target and Walgreen's this year. Both of those retail giants had a bit over $70 billion in 2012 sales, but Amazon will inevitably pass them by soon, and I would say inexorably pass all but Walmart in a few years.

When you look at merchandise only, excluding media (books, music, etc.) and some other smaller categories, the numbers are even more impressive, with Amazon sales rising about 35% last year after even higher growth before that. Chart is here.

Yes, the growth rate appears to be slowing, but that's the law of big numbers. Merchandise sales growth of 35% at Amazon compares to overall US ecommerce sales growth of a little over 15% in 2012. Total US ecommerce sales in 2012 were about $225 billion, meaning Amazon has about a 15.5% share of US ecommerce sales (actually a little lower since that again includes Canada in Amazon's US numbers, but still staggering).

That growth is obviously coming out the hide (and bottom lines) of both brick and mortar and dot com retailers. Amazon is rapidly gaining share. Many companies are being Amazoned.

Profits? Well that is a different story. The chart here shows Amazon's income from operations and then net income for the last few years. The observations are obvious. With all that growth, income from operations has been declining, as well as net income, which amazingly came in at a slight loss for 2012, on $61 billion in revenue and 27% revenue growth. Both operating profits and net income dropped sharply in 2011 and 2012. Even operating profit was only 1% of revenue last year.

And Wall Street gives Amazon a pass. Despite very mediocre and falling profitability, to the point of a loss in 2013, rapid revenue growth and the vision of founder and CEO Jeff Bezos for world domination keep the stock price high. It is up from about $180/share to close to $280/share over the past 12 months. That is a luxury given Amazon's lack of earnings growth virtually no one else enjoys.


Of course, a major reason for that lousy profitability is Amazon's tremendous build-out of fulfillment centers. It now operates an amazing 65 million square feet of fulfillment space, give or take. It grew that space 57% and 36% in 2011 and 2012, respectively, in North America, and 68% and 74% internationally. It now operates about 35.6 million square feet in NA, and 30.7million internationally. It opened 18 new fulfillment centers worldwide in 2012. Those numbers are staggering and unprecedented. See chart.

Ok, last few things. Perhaps surprisingly, Amazon's fulfillment costs, which it says includes procurement costs (overhead), are actually rising. They were 8.2% of revenue in 2010, 9.2% in 2011, and 10.2% in 2012. That's a 20% increase in two years (see chart).

Amazon is using low/free shipping costs to drive its revenue growth. It's just released 2012 annual report says that "We believe that offering low prices to our customers is fundamental to our future success, and one way we offer lower prices is through shipping offers."

But, Amazon's DC build out is serving to reduce shipping costs, naturally enough, as the shipping points get closer to the customer (to the point of potentially enabling same-day shipping in select metro markets). As seen in this chart, Amazon says it lost 4.7% on shipping revenues (what customers pay) versus its actual shipping costs. We will also note that when (and it will come) Amazon does have to near universally charge state and local sales taxes, it will raise its prices by another 5-8% depending on the state).

Amazon Shipping Costs

But interestingly, shipping costs grew 29% on 27% revenue growth in 2009. However, that pace is down sharply from previous years, leading many Wall Street analysts to say the DC strategy to lower shipping costs is working.

Inventory turns at Amazon also dropped in 2012, down to 9 from 10 in 2011 and 11 in 2010. Not quite sure how to make sense of that either.

I am out of space, even though I have a lot more. Fortunately, you will find it all in the pdf document reference above. It tells quite a story.

After Amazon's Q4 and full year 2012 earnings call, I had a brief exchange with one of Wall Street's leading analysts that follows Amazon for a living. He asked to remain anonymous, but told me that "It's highly strategic and positive for Amazon to trade off fixed cost to get proximity to customers and benefit from lowering shipping costs. No one else can compete with Amazon on price eventually unless they spend the billions needed to replicate the fulfillment center footprint."

Not much to add to that. I have daughter in college who tells me she buys virtually everything she needs from Amazon. How about you? If you think about how Walmart permanently changed the retail game with its focus on supply chain, the story may be repeating itself here with Amazon and efulfillment.

What are your thoughts on this analysis of Can Amazon be stopped? What is Amazon's impact on the supply chain? Let us know your thoughts at the Feedback button (email) or section (web form) below.

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Tuesday, March 26, 2013

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More feedback this week on our two First Thoughts columns by SCDigest editor Dan Gilmore on 2013 Priorities: Mapping and Modeling Your Supply Chain Part 1 and Part 2.

That includes our Feedback of the Week from Greg Schlegel of Lehigh University, who says 95% of all manufacturers do NOT map their supply chains.

That letter, plus other very good Feedbacks, is published below. More next week.

Feedback of the Week - On Mapping and Modeling the Supply Chain:


Excellent article.

We at Lehigh University and our Supply Chain Risk Consortium are violently in agreement with you on both threads.

We teach Supply Chain Risk Management at the graduate level and are supporting this emerging discipline of supply chain excellence with global workshops, education through APICS' new SCRM Certificate of Achievement and an upcoming book for the classroom and more.

Through four years of teaching and global workshops, it seems 95% of all manufacturers do NOT map their supply chains!

We are advocating SC mapping be one of the First exercises one champions, if one plans to develop a solid SCRM journey to Identify, Assess, Mitigate and Manage risk.

We are also advocating new SCRM metrics such as TTR (Time-to-Recovery), VaR (Value at Risk) and Resiliency Indexes.

In our new 21st Century Supply Chain Maturity Model, Predictability is the next stage in this risk journey, after Visibility. This means "Stress Testing" one's supply chain with What-if scenarios using Probabilistic Models, NOT deterministic methods.

Looking forward to the next installment on Modeling.

Very exciting times in the world of global supply chains and risk management.

Greg Schlegel
Executive in Residence, Center for Value Chain and Research Adjunct Professor, Supply Chain Risk Management
Lehigh University

  More On Mapping and Modeling the Supply Chain:  

While I think a holistic SC model is possible, I believe that companies are unable to take a full modeling approach as they are consistently caught in OPERATIONS decisions and, if able to, move into TACTICAL decision making (illustrated at

Thus, STRATEGIC decisions are unable to be fully attended to.


Once employees have suitable knowledge regarding the types of data they must concern themselves with (i.e. the variables) and, just as every bit important, are empowered to have access to the applicable data, will SC models effectively be implemented.

One thought I would have is what happens when models go wrong? I would theorize that incomplete and inaccurate models would lead to disastrous business decisions. This may explain hesitancy by some governing boards to embrace any type of model.

I very much look forward to future articles.

Justin Jagger
Academic Specialist
Department of Supply Chain Management
Michigan State University


Thanks for underscoring the importance of mapping supply chains. On my supply chain courses it is the first learning activity for the delegates after the introduction. The charts produced then go on the wall and stay there for the rest of the course.

David MacLeod
Learn Logistics Limited



Q: What game-changing supply chain-related book came in 1991 after a 5-year, $5 million study (funded by MIT) on the future of the automobile?

A: "The Machine that Changed the World," which in part chronicled the Toyota Production System and coined the term Lean for its principles, starting a Lean revolution in manufacturing and beyond that remains powerful today.

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