DC Velocity - May 2013

to Tompkins International. Amazon plans to use separate centers to fulfill consumer and industrial orders, according to Jim Tompkins, the consultancy’s CEO.

Amazon Supply offers free two-day deliveries to any customer as long as the order is more than $50 and bound for one address. Amazon’s “Prime” service, where users pay a $79 annual fee for free two-day shipping regardless of the order’s cost, has been made available to Amazon Supply customers. In addition, Amazon Supply offers free returns every day of the year.

Kiva Systems, acquired by Amazon last May for $775 million in cash, will become a key part of Amazon Supply’s strategy. Procurement in the industrial distribution world is “a mile wide and an inch deep,” meaning buyers have a wide variety of items to choose from but generally order in relatively low volumes. As a result, a typical MRO order involves small quantities of multiple SKUs.

Kiva’s mobile robots, which scoot around warehouses and DCs bringing racks of goods to human pickers and packers, will enable Amazon Supply’s efforts to provide an “endless aisle” of online buying choices while yielding substantial labor savings by eliminating the need for humans to travel around the warehouse locating and picking items.

THE SHIPPING CHALLENGE

The biggest challenge for Amazon Supply will be keeping shipping costs under control. It’s an issue the mother ship is all too familiar with. Amazon’s 2012 shipping expenses rose to more than $5.1 billion, up from nearly $4 billion in 2011, according to the company’s 2012 10-K filing with the Securities and Exchange Commission. Shipping costs last year outstripped shipping revenue by nearly $3 billion, according to the filing. Amazon generates much of its shipping revenue from third-party merchants who sell products through the company’s site and use its fulfillment services for storing inventory, picking and packing, and shipping.

In the filing, Amazon said it expects its “net cost of shipping”—the ratio of shipping expenditures to revenue—to continue rising as parcel rates increase and more

customers take advantage of the company’s low-priced delivery offerings. Amazon mitigates some of the pain by using its massive volumes to leverage better pricing from its parcel carriers.

Bezos is doing what he can to fine-
tune Amazon Supply’s transport cost
structure. Amazon has been running
its own vehicle fleet in Seattle to sup-
port its “Amazon Fresh” online gro-
cery business. The Amazon Fresh
operations, which have never
expanded beyond Seattle are
designed more to tinker with
dynamic routing schedules than as

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