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Supply Chain News: Looks Like Amazon Really Does Want to Build Its Own Parcel Network


Despite Repeated Denials, Project Consume the City is Clearly Expanding, with Huge Ramifications

Sept. 29, 2016
SCDigest Editorial Staff

For the past several years, there has been speculation that Amazon has in mind building its own parcel delivery network.

The company has largely denied those rumors with the exception of saying it might want to build some surge capacity, especially after the big troubles UPS and to a lesser extent FedEx had delivering ecommerce orders right before Christmas in 2013. Amazon has in that time also emphasized the partnerships it has with all three main parcel carriers in the US (USP, FedEx and the United States Post Office).

Supply Chain Digest Says...

With its broad and growing fulfilment and sortation center networks, Amazon just might be able to pick up high density routes using its own trucks.

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In addition, FedEx founder Fred Smith and the company's CFO, among others in the sector, have largely dismissed the idea of Amazon building out its own parcel delivery capability, either just for itself or maybe even for others, saying the investment required is simply too massive, and that even Amazon on its own lacks the delivery density to make such a move financially feasible.

Now, it appears, Amazon does indeed have those intentions, not only to get in the parcel deliver game but – as we have reported before – to develop and end-to-end global logistics capabilities. (See Amazon - The Most Audacious Logistics Plan in History?)

Amazon's goal, the Wall Street Journal says," is to one day haul and deliver packages for itself as well as other retailers and consumers - potentially upending the traditional relationship between seller and sender."

The WSJ story was based on interviews with some two dozen current and former Amazon managers and business partners.

The plan even has a code name: "Consume the City," a nod to the company's plans to build a massive delivery network that could eventually compete with UPS and FedEx.

The article says Amazon executives describe how the company "is building a full-service logistics and transportation network effectively from the ground up," in the words of one senior manager.

What's more, Amazon has also recruited dozens of UPS and FedEx executives and hundreds of other UPS workers over the past few years – hires that make the most sense in the context of building out a parcel delivery capability.

Amazon currently delivers at least some of its own packages from roughly 70 facilities in 21 states, having built most of them in the past two years. That includes a growing number of "sortation centers." The primary role of the sortation center is to aggregate shipments from one or more fulfilment centers for delivery into a defined regional grouping of zip codes, typically for a nearby set of populated urban areas.

That process could result in lower shipping rates from existing parcels carriers – since Amazon is doing much of their sortation work for them – but it would also be a prerequisite for doing its own deliveries, since its existing fulfillment center facilities are not set up to do that type of zip code sorting, which is what massive hubs for UPS and FedEx do now.

In addition, 44% of the US populace is already within 20 miles of an Amazon facility, compared with 5% in 2010, according to investment bank Piper Jaffray.

(See More Below)



There's more. In August, Amazon showed off the first in a fleet of 40 Boeing 767-300s it is leasing for its branded Prime Air logistics service, which moves parcel long distances to speed deliveries and reduce costs from traditional parcel carriers by getting the boxes closer to the final destination.

Amazon has flirted with delivery by Uber drivers, newspaper carriers and bicycle-based couriers. It has experimented with a program known as "I Have Space," in which is would deploy inventory in warehouses owned by other companies.

A program called Flex, announced at last year's CSCMP conference in San Diego, hires so-called "citizen-couriers" to work as freelance delivery people to pick up packages from warehouses using an Amazon app. It has expanded to nearly 30 metropolitan areas in the last year. Drivers can earn up to $25 an hour in two-hour shifts making deliveries.


And of course, when regulations permit it would love to do some of its own deliveries by drone.

Amazon has also hired back Uber Technologies executive Tim Collins as VP of global logistics. Collins spent 16 years at Amazon, helping to lead the retailer's European operations, before taking a spot at Uber.

The Wall Street Journal says that Amazon "is conducting trials of its own parcel deliveries in large cities such as Los Angeles, Chicago and Miami, urban location that have a high density of members who belong to Amazon's $99-per-year Prime unlimited shipping program.

It also says Amazon has begun distributing boxes and packaging materials to a small number of Los Angeles customers so they, too, can use Amazon as a delivery service. Such a program might enable Amazon's trucks to carrying some cargo on the trip back to the sortation centers after a delivery run.

Amazon's last-mile effort has become particularly visible in San Francisco. Just two years ago, workers loaded rented delivery vans with packages from a modified trailer in a parking lot beside Candlestick Park, the former football stadium. Today, hundreds of Amazon-branded white trucks, dispatched from a giant warehouse near the airport, troll the city's winding streets - even on Sundays.

Existing parcel carriers still scoff at the idea Amazon can make this work.

"The level of global investment in facilities, sorting, aircraft, vehicles, people to replicate the service we provide, or our primary competitor provides, is just daunting, and frankly, in our view, unrealistic," says FedEx CFO Alan Graf. "We've been at this for 40 years."

For its part, Amazon says "We are very happy to have the delivery capacity our carrier partners can provide. They provide a high quality service, and our own delivery efforts are needed to supplement that capacity rather than replace it."

But it certainly seems that may be quite the understatement. With its broad and growing fulfilment and sortation center networks, Amazon just might be able to pick up high density routes using its own trucks, and leave the less dense delivery scraps for its current carriers.

How that would play out across many dimensions would be very interesting to see indeed.

Do you believe Amazon is serious about building its own parcel network? Can it succeed? What will be the key factors? Let us know your thoughts at the Feedback section below.


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