That Amazon.com Inc. is transforming the way commerce is conducted has become obvious even to the casual observer. But if Satish Jindel, who is hardly a casual observer, is correct about where the Seattle-based e-commerce giant is headed, it hasn't gotten started yet.
Given Amazon's relentless pace of innovation, there will likely be no finish line. But at the company's present rate of development, it will become the world's ultimate retail monster, with its only rival being the Chinese firm Alibaba.com, which dominates its own market using similar strategies and execution, Jindel reckoned.
In a 50-page study accompanied by more than 25 charts and tables, a summary of which was made available to our sister publication, DC Velocity, SJ Consulting Group Inc., a transport and logistics consultancy founded by Jindel, said that Amazon's goal is to be the primary conduit between manufacturers and customers. Everyone in the middle will be forced to work with Amazon or disappear, and producers will have no choice but to do business only with Amazon because there will be few, if any, alternatives available, according to Jindel.
Traditional retailers such as Bentonville, Ark.-based Wal-Mart Stores Inc., Richfield, Minn.-based Best Buy Co. Inc., and Minneapolis-based Target Corp. will survive only if they build models similar to Amazon's, which at this stage seems highly unlikely, Jindel said. In fact, while Amazon's strategy stands to badly hurt Wal-Mart's bricks-and-mortar profit margins, Wal-Mart's e-commerce channel will not threaten Amazon's position, Jindel said. Wal-Mart generated about $355 billion in total sales last year, nearly four times as much as Amazon.
Retailing practices will change forever as a result, SJ forecast. Free shipping will become a universal service; retailers that don't offer it will be unable to compete, according to the report. Amazon, which currently charges a $99 annual fee for two-day deliveries under its "Prime" service, will eventually offer two-tier pricing for delivery services, Jindel said. One will be a "Gold Prime" membership costing $199 to $249 a year that covers next-day deliveries, the other a platinum membership for $399 a year that includes same-day deliveries. Jindel said the pricing scheme will take effect only after Amazon builds out its distribution infrastructure, which is a work in progress. However, it will be a template that all retailers will need to follow to recover their shipping costs and remain relevant to the demands of modern-day consumers, according to the report.
Jindel said Amazon plans to leverage its massive procurement power to force logistics companies to either work with it on an exclusive basis or be pushed out of business. Amazon will rely on specialists for the blocking and tackling, but it will become so deeply embedded in its partners' operations that it will be able to buy services at wholesale prices instead of at retail cost, and will become the exclusive partner of the providers it chooses through its massive and growing volume base, Jindel said.
Without identifying any company by name, SJ warned in the report that the established parcel giants will be severely punished for failing to adjust their networks as fast as Amazon to the rapidly changing needs of e-commerce, namely in speed of delivery, fulfillment strategy and execution, and customer experience. Though not cited in the report's summary, Jindel said after the ATSG deal was announced that Atlanta-based UPS Inc. could face the biggest hit, because two-day deliveries from Amazon's warehouses and DCs to consumers accounted for two-thirds of the $2.1 billion in revenue UPS generated from Amazon last year.
Jindel said Amazon has the capability to build an "asset light" ground-delivery model—one that effectively controls the capacity without owning the equipment—similar to what the former Roadway Package System Inc. did in the 1980s and 1990s to pose the first meaningful challenge to UPS' near monopoly of the U.S. ground parcel market. Memphis-based FedEx Corp. acquired RPS' parent in 1998, rebranded RPS as FedEx Ground, and turned it into a $14-billion-a-year business that is today solidly profitable.
To put Amazon's shipping growth in perspective, it transported more than 1 billion parcels of its own goods last year, more than FedEx Ground's entire fiscal year 2012 annual volume. If current trends continue, Amazon by 2019 could be shipping as many parcels per year as FedEx Ground, SJ forecast.
Amazon will continue to invest heavily in transport services. It spent $11.5 billion in outbound shipping in 2015, and SJ forecasts that number to rise to $16.4 billion in 2016, $22.34 billion in 2017, and $29.6 billion in 2018.
Unless a better mousetrap comes along, Alibaba remains Amazon's sole long-term threat, Jindel said. In a bid to build logistics capabilities to establish itself as the sole middleman in all e-commerce transactions, Alibaba owns a 48-percent stake in Cainiao.com, a logistics consortium founded in 2013 to support deliveries across China and worldwide. According to a mid-March story in the publication Techcrunch, Alibaba, through Cainiao, operates 128 warehouses and 180,000 express-delivery stations in China, offering same-day delivery in seven Chinese cities and next-day delivery in an additional 90. On November 11, 2014, the date of the popular "Singles Day" in China, Cainiao handled 278 million packages, according to the story. Other reports said Cainiao will spend billions of dollars through the rest of this decade and into the next in order to deliver goods anywhere.
Cognizant of the threat, Amazon will do what it can to limit Alibaba's ability to help manufacturers sell directly to consumers, Jindel said in his summary. One tailwind for Amazon is that while it has established a decent footprint in China, Alibaba is unlikely to make a dent in Amazon's U.S. dominance. "That train has left the station," he said in a phone interview.
SJ's report is not the first tome to examine Amazon's fulfillment strategy and its implications for the retail supply chain. But it stands out for several reasons. Jindel is a seasoned and highly regarded consultant with a reputation for producing thoughtful reports bereft of any eyeball-luring sizzle. Moreover, Jindel has been a long-time Amazon skeptic. While consistently lauding the company for executing a highly effective model, he has for years been dubious about its profit-generating potential. Jindel held to that position as Amazon's stock marched from $8 a share some 14 years ago to yesterday's closing price of $683.50 a share. The takeaways from his firm's research have made Jindel rethink his views, he acknowledged.
What may go unnoticed is that, despite its burgeoning size, Amazon controls just a fraction of the total U.S. retail market, Jindel said. According to SJ estimates, e-commerce accounts for about 12 percent of all retail sales, and Amazon has a roughly 30-percent share of the e-commerce market. Thus, Amazon has roughly 5 to 6 percent of the overall market, and there is a lot of share opportunity still available to it, Jindel noted.
Ron Marotta of Yusen Logistics listens to Rick DiMaio of Ace Hardware talk about the steps Ace is taking to keep its store stocked after Hurricane Helene and during the East and Gulf Coast Port Strike.
The East and Gulf Coast port strike was the top discussion point during a panel discussion of shippers and logistics providers at the Council of Supply Chain Management Professionals (CSCMP) annual EDGE Conference this morning. The session, which was supposed to be focused on providing an update to CSCMP’s “2024 State of Logistics Report,” quickly shifted to addressing the effect that the strike by nearly 50,000 dockworker at 36 ports in the Eastern half of the U.S. could have on supply chains.
“The seriousness of this action cannot to be taken lightly,” said Ron Marotta, vice president of the freight forwarder and supply chain service provider Yusen Logistics (America). “It has not happened since 1977. Our lives depend on sustaining a smooth global supply chain.”
Marotta warned that for every day that the ports were not open, it would take four to five days to recover from the impact. One added concern is how the port closures would affect recovery efforts for Hurricane Helene. “There’s a huge amount of item that would normally be replenished by importers and retailers,” Marotta said.
Rick DiMaio, executive vice president and chief supply chain officer, for Ace Hardware Corp., commented that the hardware retail cooperative was doing okay for now keeping stores in stock, although he did expect the company would be “chasing generators for awhile.” “But in this recovery phase [from the hurricane], we certainly don’t need a strike right now,” he said.
The port closure will also have a knock-on effect on other transportation modes. For example, Andy Moses, senior vice president of sales and solutions for logistics services provider Penske Logistics, expects to see some companies turn to air freight as a result of the strike. This will, in turn, cause air freight capacity to tighten up and rates to rise. Furthermore, the longer the ports are closed, the more likely inflation is to rise again, according to Moses.
Nor will the effects of the strike stop at the U.S. border, according to Marotta. Many Caribbean Island nations depend on food import from the U.S. that move through East Coast ports. Additionally, some medical supplies typically are exported through the ports to Europe.
On a positive note, however, many companies took actions earlier in the year to prepare themselves for a potential strike. Ammie McAsey, senior vice president of customer distribution experience for the pharmaceutical distributor McKesson, said the pharmaceutical industry has brought in enough extra inventory that there will not be a short-term impact on the U.S. health care system due to the strike.
Government intervention?
Marotta hopes that the U.S. government takes the step of invoking the Taft-Hartley Act to stop the strike and send the International Longshoremen’s Association (ILA) and the port management group, United States Maritime Alliance (USMX) back to the negotiation table. In 2002, for example, President George W. Bush used the Taft-Hartley Act to end an 11-day lockout of union workers at West Coast ports. President Joe Biden, however, told reporters on Sunday that he would not do this.
“I hope that cooler heads prevail and that the executive branch realizes that it’s not just a labor issue, it’s also a humanitarian issue,” Marotta said.
Confronted with the closed ports, most companies can either route their imports to standard East Coast destinations and wait for the strike to clear, or else re-route those containers to West Coast sites, incurring a three week delay for extra sailing time plus another week required to truck those goods back east, Ron said in an interview at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
However, Uber Freight says its latest platform updates offer a series of mitigation options, including alternative routings, pre-booked allocation and volume during peak season, and providing daily visibility reports on shipments impacted by routings via U.S. east and gulf coast ports. And Ron said the company can also leverage its pool of some 2.3 million truck drivers who have downloaded its smartphone app, targeting them with freight hauling opportunities in the affected regions by pricing those loads “appropriately” through its surge-pricing model.
“If this [strike] continues a month, we will see severe disruptions,” Ron said. “So we can offer them alternatives. We say, if one door is closed, we can open another door? But even with that, there are no magic solutions.”
Turning around a failing warehouse operation demands a similar methodology to how emergency room doctors triage troubled patients at the hospital, a speaker said today in a session at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
There are many reasons that a warehouse might start to miss its targets, such as a sudden volume increase or a new IT system implementation gone wrong, said Adri McCaskill, general manager for iPlan’s Warehouse Management business unit. But whatever the cause, the basic rescue strategy is the same: “Just like medicine, you do triage,” she said. “The most life-threatening problem we try to solve first. And only then, once we’ve stopped the bleeding, we can move on.”
In McCaskill’s comparison, just as a doctor might have to break some ribs through energetic CPR to get a patient’s heart beating again, a failing warehouse might need to recover by “breaking some ribs” in a business sense, such as making management changes or stock write-downs.
Once the business has made some stopgap solutions to “stop the bleeding,” it can proceed to a disciplined recovery, she said. And to reach their final goal, managers can use the classic tools of people, process, and technology to improve what she called the three most important key performance indicators (KPIs): on time in full (OTIF), inventory accuracy, and staff turnover.
CSCMP EDGE attendees gathered Tuesday afternoon for an update and outlook on the truckload (TL) market, which is on the upswing following the longest down cycle in recorded history. Kevin Adamik of RXO (formerly Coyote Logistics), offered an overview of truckload market cycles, highlighting major trends from the recent freight recession and providing an update on where the TL cycle is now.
EDGE 2024, sponsored by the Council of Supply Chain Management Professionals (CSCMP), is taking place this week in Nashville.
Citing data from the Coyote Curve index (which measures year-over-year changes in spot market rates) and other sources, Adamik outlined the dynamics of the TL market. He explained that the last cycle—which lasted from about 2019 to 2024—was longer than the typical three to four-year market cycle, marked by volatile conditions spurred by the Covid-19 pandemic. That cycle is behind us now, he said, adding that the market has reached equilibrium and is headed toward an inflationary environment.
Adamik also told attendees that he expects the new TL cycle to be marked by far less volatility, with a return to more typical conditions. And he offered a slate of supply and demand trends to note as the industry moves into the new cycle.
Supply trends include:
Carrier operating authorities are declining;
Employment in the trucking industry is declining;
Private fleets have expanded, but the expansion has stopped;
Truckload orders are falling.
Demand trends include:
Consumer spending is stable, but is still more service-centric and less goods-intensive;
After a steep decline, imports are on the rise;
Freight volumes have been sluggish but are showing signs of life.
CSCMP EDGE runs through Wednesday, October 2, at Nashville’s Gaylord Opryland Hotel & Resort.
The relationship between shippers and third-party logistics services providers (3PLs) is at the core of successful supply chain management—so getting that relationship right is vital. A panel of industry experts from both sides of the aisle weighed in on what it takes to create strong 3PL/shipper partnerships on day two of the CSCMP EDGE conference, being held this week in Nashville.
Trust, empathy, and transparency ranked high on the list of key elements required for success in all aspects of the partnership, but there are some specifics for each step of the journey. The panel recommended a handful of actions that should take place early on, including:
Establish relationships.
For 3PLs, understand and get to the heart of the shipper’s data.
Also for 3PLs: Understand the shipper’s reason for outsourcing to a 3PL, along with the shipper’s ultimate goals.
Understand company cultures and be sure they align.
Nurture long-term relationships with good communication.
For shippers, be transparent so that the 3PL fully understands your business.
And there are also some “non-negotiables” when it comes to managing the relationship:
3PLs must demonstrate their commitment to engaging with the shipper’s personnel.
3PLs must also demonstrate their commitment to process discipline, continuous improvement, and innovation.
Shippers should ensure that they understand the 3PL’s demonstrated implementation capabilities—ask to visit established clients.
Trust—which takes longer to establish than both sides may expect.
EDGE 2024 is sponsored by the Council of Supply Chain Management Professionals (CSCMP) and runs through Wednesday, October 2, at the Gaylord Opryland Resort & Convention Center in Nashville.