DC Velocity - April 2014

AMAZON.COM INC. IS REVAMPING ITS DELIVERY network to gain more control over its fulfillment infrastructure while reining in spiraling transportation costs, according to a supply chain consultant with close ties to the e-tailing giant.

James Tompkins, who runs Tompkins International, a Raleigh, N.C.-based consultancy, said Amazon has divided the nation into three segments based on population size: the top 40 markets, which comprise about half of the U.S. population; the next 60 largest population areas, which account for about 17 percent; and the remaining areas, which account for about one-third.

The top 40 markets will be served by a private fleet being built by Amazon to support an expansion of its online grocery business, called “Amazon Fresh,” according to Tompkins. The next 60 will be served by an array of regional parcel carriers, he said. The remainder will be served mostly by the U.S. Postal Service (USPS), he said.

UPS Inc., which today handles a large share of Seattle-based Amazon’s deliveries, will not play a prominent role in the network realignment, Tompkins said. Nor will FedEx Corp., which manages a lesser portion of Amazon’s delivery business. An Amazon spokeswoman was unavailable to comment.

Orders will be routed through
Amazon’s 55 fulfillment centers, with deliveries made the
same day, the next day, or, at most, in two days, Tompkins
said. Inventory will be positioned to exclusively support
local deliveries. A national delivery network as operated by
providers like FedEx and UPS will be rendered irrelevant
because it would be considered too slow to suit the typical
Amazon customer, he said
Tompkins said that Amazon has a timeline for its rollout,
but that he is unaware of the details. “They are moving on
this very aggressively,” he said.

Amazon two years ago seriously considered a bid for
FedEx as a means of buying into an existing delivery oper-
ation, according to Tompkins. However, Jeffrey P. Bezos,
Amazon’s founder and CEO, backed away after determin-
ing FedEx’s network structure was too national in scope
to fit Amazon’s strategy of local fulfillment and delivery,
Tompkins said. A FedEx spokesman declined comment.
Tompkins has worked in the supply chain management
field for decades and is considered one of the nation’s lead-
ing authorities on its role in e-commerce. His relationship
with Amazon is not clearly defined, a status seemingly
more by design than coincidence. When asked
to describe the nature of his involvement with
Amazon, Tompkins replied that he was contrac-
tually obligated not to comment.

A “FRESH” EXPANSION

Though Amazon Fresh has been operating for five years, it is today only available in Seattle, Tompkins said the private fleet network would commingle groceries with general merchandise, thus building the scale needed to make ground shipping cost-effective and to offer a compelling value to customers, Tompkins said. It would also set in motion a chain of events that would result in Amazon’s competing with FedEx and UPS.

The online grocery business, which is plagued by high fulfillment costs, is not considered a particularly attractive enterprise on its own. However, Bezos has used Amazon Fresh as a proving ground to test a more ambitious delivery model rather than as a way to build a national grocery footprint, according to Tompkins. By using his own vehicles to deliver groceries, Bezos has been able to fine-tune his own delivery network and gain a better understanding of the pros and cons of leveraging his own infrastructure instead of those of the incumbents, Tompkins said. Now, Bezos is poised to apply that knowledge on a broader scale, Tompkins said.