Blog postsJune 15, 2016
Chasing Amazon: Building a Dynamic Warehouse Network White Paper
In this episode of Logistics 2.0, we discuss our recent white paper: "Chasing Amazon: Building a Dynamic Warehouse Network". Watch the video, or read the transcript below.
After yet another successful quarter, Amazon has proven once again that it continues to redefine the future of logistics. We're going to explore what other companies can do to try to keep up, today on Logistics 2.0.
This week we're excited to publish a brand new white paper that's been a long time in the making. We've talked previously about how one-day shipping and two-day shipping is no longer a luxury, but that we as consumers now expect that as a normal part of e-commerce. Well, Amazon is primarily responsible for setting our expectations that way. Through their massive investment in infrastructure and their application of advanced technologies, they've built the capability to deliver on this consumer promise.
In previous episodes, we've explored this in quite a bit of depth. Through our interactions with companies across the industry, retailers, their wholesalers, and the manufacturers who sell to them, a common question keeps coming up. "How can I compete with this massive distribution network that Amazon has built? How can I deliver on that consumer expectation of one-day or two-day shipping and do it in a cost effective way? Are there things I can do, or should be doing that I'm not doing yet?" We started to explore answers to these questions in the white paper.
Our approach was to take an example e-commerce company, who at the time had one distribution node in their network. And we explored what it would take for that company to expand their distribution network, such that 70% of their customers could receive their orders in 2 days. And then the next iteration was, what would it take to deliver 90% of orders within 2 days?
So, first we looked at the network requirements. How many nodes, how many warehouses would it take to deliver on that expectation, both at the 70% level and the 90% level? And to do that, we worked with the company Starboard Solutions who helped with a network design and optimization part of the equation.
Next, we looked at what the economics of building that new infrastructure would be. How much would it cost to build a warehouse network that could deliver 70% of orders within 2 days? How much would it cost to build a warehouse network that could enable 90% of orders to go in 2 days?
To help drive the analysis, we engaged Dr. Amitabh Sinha, who's the Associate Professor of Operations and Technology at the Ross School of Business at the University of Michigan. He and his graduate team looked at the economic analysis and compared and contrast the costs of deploying a traditional warehouse network, versus deploying a new dynamic warehouse network. The results were very compelling. The upshot is that in a dynamic model, companies can avoid very significant fixed costs and upfront costs as they look to expand their warehouse network.
In particular, when you trade fixed cost for variable cost, you can start to be more dynamic and reactive, not just to what your customers need but potentially also to what your competitors are doing, and then also just for common needs like seasonal peaks or even product promotions. Having that dynamic flexibility is critical to being more responsive and enabling a better experience for your customers.
In a nutshell, dynamic warehousing allows companies to fight Amazon scale with industry scale. It allows them to combat size with flexibility. By transforming fixed costs into variable costs, it allows them to be more reactive and proactive to help again, drive a better consumer experience and ultimately compete better as a company.
If you'd like to learn more about the analyses, and the conclusions from this white paper, download it here. And also, if you like the content here and on previous episodes, sign up for our email, subscribe to our channel and comment. We'd love to hear from you. That's it for this week. I'm Karl Siebrecht. Thanks for joining me on Logistics 2.0.