It’s no secret: Amazon has dramatically changed consumer expectations by rethinking the retail supply chain. As a result, Amazon has become the world’s largest retailer and likely the greatest competitive threat to most of the world’s most established retail brands (My most recent series on “Amazonified Logistics”, goes into much greater detail about Amazon’s innovations). At the core of Amazon’s success is their culture of customer-centric innovation. Rather than simply adopting and shoring up the decades-old supply chain practices of other retailers, Amazon started with a different premise: What do customers want?
It turns out (and this shouldn’t surprise anyone) that consumers want access to more stuff, they want it quickly and at a low price. Amazon offers exactly that and it’s largely why they’re so successful. As you know, those advantages are tied closely to their innovative approach to Supply Chain Design, particularly pricing and quick delivery. As you know, most of Amazon’s competitors are feverishly playing catch-up and if your company is among them, rethinking your Supply Chain Design is a good place to start.
The best example of Amazon’s Supply Chain Design in action is Amazon Prime. Amazon Prime members enjoy free two-day shipping on many of the items they purchase which creates four primary problems for Amazon competitors (before you even get to the resulting virtuous cycle):
- More Sales for Amazon: It drives Amazon Prime members to purchase more of their products on Amazon, which means fewer purchases on competitor sites or physical retail locations.
- New Shipping Standard: Two-day shipping has become the standard shipping service millions of those consumers expect across all online retailers. The old 5-10 day ground delivery standard doesn’t cut it with them anymore.
- Low Shipping Rates: The perception of “free shipping” makes it very difficult for other online retailers to appear price competitive.
- Shopping Cart Sell-Through: Many studies have been conducted on the reasons consumers abandon online shopping carts before they complete their purchase. One of the top reasons consistently cited in those studies is the surprisingly high shipping costs that are revealed when the customer goes to check out. Amazon’s free two-day shipping service eliminates that common cause of cart-abandonment for millions of their customers.
How can online retailers compete with Amazon’s standard two-day delivery service?
There are tons of factors to consider, but most of them have to do with reducing shipping costs, which can be significantly reduced by adjusting your supply chain design. Starting with customer expectations, you know that two-day shipping has become the new standard and Amazon offers that for free. As a supply chain & logistics professional you know it’s a tall order to offer that service level for free, so the equation to solve for is how much you can reduce your shipping costs to offer the most price competitive two-day shipping service possible. Here are a few items to consider when reviewing your customer shipping costs:
- The most sweeping reduction in customer shipping cost is, obviously, realized by adding distribution centers to your distribution network. This sounds counter-intuitive to some because of the additional real estate, staffing and other operational costs but over the long run you know you can off-set those costs and more by strategically locating multiple distribution centers around the country. Expanding your distribution network can significantly reduce shipping costs by shortening shipping distances. Amazon now has more than 90 distribution centers in the U.S. alone helping them get as close to their customers as possible. Shortening the last leg between warehouse and customers reduces the number of shipping zones packages must travel through, shortens delivery times, and lowers delivery rates.
- When analyzing the cost benefits of network expansion, determine what percentage of your solutions can arrive in two days via ground shipment from your current distribution center. For example, one distribution center might be able to deliver 35% of shipments via two-day ground. Adding a second distribution center in the right location might get you up to 50%, and so on. Approaching Supply Chain Design with the shortest possible last leg in mind is the key.
- Amazon’s massive distribution network also enables them to offer an aggressively-priced next-day delivery service. To determine whether or how you can compete with Amazon’s next-day delivery offering, you simply extend the same network expansion analysis to additional markets. Such an expansion would likely position a distribution center in most of the major metro areas.
- Weighing how many distribution centers and where to place them for the best results is a highly effective way to reassess competitive Supply Chain Design. However, the analysis can be complicated and involve a number of factors. To simplify the process and easily test different scenarios, you may want to use a supply chain visualization tool like Tactician from http://www.starboardcorp.com/.
In my next article I’ll dive deeper into Supply Chain Modeling and provide some insights on how to weigh the costs of distribution network expansion versus the benefits of lower-cost next-day and two-day distribution service and coverage.
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