Evaluation of the current distribution network Amazon uses in the United States?
Currently Amazon operates a variety of different types of fulfillment and distribution
centers in the United States including small sortable, large sortable, large non-sortable,
specialty apparel and footwear, specialty small parts, returns processing centers, and 3PL
outsourced facilities.
There are a few types of facilities that make up the vast network of Amazon’s warehouses:
Crossdock Centers
Containers from foreign vendors can be held at a crossdock facility until more
stock is needed at the fulfillment center. This is the back-end of the
distribution chain.
Fulfillment Centers
Fulfillment centers are the most common type of facility in Amazon’s
distribution empire, but they serve a wide variety of purposes.
Amazon began building its distribution network in 1997, starting with two
fulfillment centers in Seattle and Delaware. The two spaces would be tiny
compared to today’s standards at 93,000 and 202,000 square feet,
respectively. Now, there is nearly 100 million square feet of active fulfillment
center space, with another 35 million on the way.
Sortation Centers
These facilities are responsible for sorting packages by zip code which are then
typically delivered to USPS sites. Since being introduced in 2014, sortation
centers have allowed Amazon to speed up the delivery process and to help
control the distribution process up to “the last mile”.
Delivery Stations
In urban areas, delivery stations are often the last step in the chain before
packages reach a customer. Courier companies – and increasingly Amazon
Flex drivers – typically handle these short-range deliveries. These stations are
often located near airports.
Prime Now Hubs
These smaller locations are specifically designed for speed. Prime Now hubs
carry a more limited selection of items – including Whole Foods inventory –
that are delivered within two hours of clicking “buy”. There are currently
around 50 of these facilities in urban areas around the United States, but that
number is expected to increase dramatically in the near future.
Prime Air Hub
Amazon doesn’t own its own airport yet, but the recently announced $1.5B
international Prime Air Hub is a step in that direction.
Over the years, Amazon has optimized every aspect of the distribution system, but one final
hurdle remains.
Conquering the last mile – the final leg before a package reaches its destination – has
proven tricky, in part because USPS already has a well-honed strategy for delivering to all
the nation’s residents.
The company’s earnest recruitment drive for Amazon Flex is the latest in a long line of
attempts to decrease reliance on third parties for package delivery. Also, by tapping into on-
demand labor, Amazon hopes to reduce costs and have more flexibility during volume
surges like Black Friday.
This desire to own the entire process is being reflected in the company’s roster of
distribution facilities. The massive fulfillment centers aren’t going anywhere, but we may
see a lot more smaller delivery hubs in cities and towns across America.
Order Fulfilment Models used by Amazon to fill customer orders in the U.S.
1. Shipping from their Warehouses: Amazon’s original model of operation was to
obtain orders from customers from their online catalogue and ship orders from their
warehouses to the customers.
Their strategy was to hold modest inventories in their warehouses and rely on
wholesalers (which initially was Ingram Books) to ship the items to them against the
order receipts immediately, which they would ship to the customers, all within a
week.
Amazon built its online catalogue and sourced its vast selection via its warehouses
by ordering inventory from wholesalers against the receipt of a new order, which
they could not fulfill based on their current stock.
a. Application:
It was done so that Amazon incurs minimum inventory cost. The
wholesaler would typically fill Amazon orders quickly because of its
accessible location, with shipments arriving at Amazon’s distribution
center within two to three days
Once the necessary titles were received in Amazon’s warehouse
either from wholesalers or publishers, Amazon employees would pick
and pack the order and ship it to the customer
b. Advantage
This process enabled Amazon to fulfill the vast majority of customer
orders within four to seven business days while keeping inventory
turns high
c. Disadvantages:
When volume increased of the orders Amazon opened direct
accounts with publishers to obtain better purchasing discounts,
although publishers were not as operationally efficient as
wholesalers and could have higher order-to-mailbox time
2. Drop Shipment: Method was to ship an order directly to the customer without first
shipping the product through an Amazon Distribution Centre. For this, Amazon
processed the order as well as collected the payment from customer. Then placed
the order with the wholesaler who directly delivered the products to the customer.
a. Applications and advantages:
Whenever it is difficult for Amazon to store or handle the items, drop
shipment is a better fulfillment option
Also, is better suited for the cases where the seller is closer to the
customer than the Amazon warehouse
Drop shipping was used as a capacity enhancing tool. For higher priced
items, (above a chosen threshold) the discount differential between
buying direct vs. from wholesalers was considered to be good enough to
warrant having the wholesaler drop ship
Drop shipments, apart from acting as “Capacity Valves”, enabled efficient
and effective fulfillment option, easing delivery time of merely 2-3 days.
Was first introduced for books, where this option was more feasible for single product
shipments. Later, was expanded to electronics. In the fourth quarter 2002, more than
10% of orders were drop shipped.
3. Partnering with other companies: For exchange of fees and a particular percentage
of sales, Amazon handled the order fulfillment; order processing, fulfillment and
customer service, where the partner covers up for the inventory cost
a. Applications and Advantages
Amazon saves up on the costs for merchandising, buying and
inventory handling, transferring the financial risk of carrying goods
that might get obsolete fast, hence not sell later/ products with
unpredictable demand
ToysR’Us, Amazon’s partner for the toys category, managed
merchandising, buying, and owning of the inventory, which was
housed in Amazon’s distribution facilities
This model allowed Amazon to transfer the financial risk of toys
inventory obsolescence
