Amazon.com – The OM Blog by Heizer, Render, & Munson

OM in the News: Is Fast Shipping Fast Enough?

Everlane, an online clothing and accessories brand, offers one-hour shipping in New York at no extra charge and in San Francisco for $2

“Free shipping isn’t enough any more,” writes The Wall Street Journal (Jan. 28, 2016). Online shoppers want fast shipping, too, and their expectations of an acceptable delivery window are shrinking. The new demands are largely a result of Amazon Prime, rival retailers say. Tens of millions of Amazon Prime members pay $99 a year and get unlimited 2 day shipping on millions of products, from snow boots to dog food. Now, the retailing giant is upping the ante, offering same day shipping in some markets. Other retailers, whose default shipping option is often 5 business days or more, are scrambling to keep up. Customers for the most part are no longer willing to pay extra for expedited delivery.

With shipping an increasingly expensive part of the business equation, operations managers are looking for cost effective ways to ship faster. They are building more distribution centers, fine tuning ship-from-store logistics and devising more creative delivery options. “Amazon kind of set the path for everyone with Prime. People just expect things faster,” says a luxury competitor. Cole Haan offers free 2 day shipping to online shoe shoppers who spend more than $250. Nearly 1/4 of customers either meet the threshold or pay $15 extra for 2 day shipping. Next month, Gap will narrow its free shipping window to 5-7 business days, down from 7-9 days. To shave off those 2 days, the company is relying on new technology to better manage logistics and routing.

Even just a few years ago, online shoppers were content to wait a week or two. Last year, the average delivery time for online orders was 4.1 days, down from 4.6 days in 2013. To speed up their delivery times, retailers are putting product closer to customers. Some of the biggest companies have a distribution center within a 10-hour drive of anyone in the country.

Classroom discussion questions:

What are the advantages and disadvantages of adding distribution centers (see Figure 11.3 in the text)?
Why does a shoe company, like Cole Haan, offer expedited shipping?

OM in the News: Amazon’s Relations With UPS Are Showing Strain

As the clock counts down to Christmas, workers at United Parcel Service are busy hustling packages along loading docks and conveyor belts at its Louisville, Ky., hub—part of a costly, intricate system built in part to cater to Amazon.com, its biggest customer. “But the symbiotic relationship between the two giants has come under increasing strain,” writes The Wall Street Journal (Dec. 23, 2015). Rising package volumes and costs have Amazon seeking alternative delivery routes—shifting the online retailer’s role from key ally to a potentially disruptive competitor.

Amazon has held talks with air-cargo companies to lease airplanes and build its own onfreight operation. The company is already using its own trucks, drivers and a fleet of couriers for the final and most-expensive leg of an order’s trip. It has been making its own deliveries in certain high-density regions and relying more heavily on the U.S. Postal Service. Eventually, it hopes to get drones to drop packages into backyards. “Amazon’s interest is not in doing what may be good for UPS,” said an industry expert. “Their interest is in getting control over logistics.” This year, Amazon spent over $1 billion with UPS, a 5-fold increase in the past decade. The average cost to handle a parcel was about $8 last year, up from $6.50 in 2000.

Amazon was a factor in UPS’s last two back-to-back Xmas snafus—each of which cost UPS an unexpected $200 million. Two years ago, Amazon overwhelmed UPS with hundreds of trailers of last-minute Xmas orders– and then pushed UPS to help underwrite millions in customer refunds. At Amazon, plans to handle more of its own parcels have recently accelerated, as it fears that UPS’s hub-and-spoke system is growing obsolete. Amazon has poached more than 40 UPS supervisors, managers and executives in the last 3 years.

Classroom discussion questions:

What are the advantages of Amazon building its own logistics system?
The disadvantages?

OM in the News: Amazon–From Warehouse to Retail Bookstore

Bookstore owners often think of Amazon.com as the enemy. Now it’s becoming one of them. Yesterday morning the online retail giant opened its first-ever brick-and-mortar retail store in its 20-year life, in Seattle, reports The Seattle Times (Nov. 3, 2015). The store, called Amazon Books, looks a lot like mall bookstores. Its shelves are stocked with over 5,000 titles, best-sellers as well as Amazon.com customer favorites.

There is some irony in Amazon’s opening a physical store. For years, it could undercut physical retailers on price because it didn’t have brick-and-mortar locations. But those stores offered something Amazon couldn’t: the instant gratification of owning an item the second it was purchased, as well as the personal touch of a knowledgeable sales clerk.

Amazon is betting that the troves of data it generates from shopping patterns on its website will give it advantages in its retail location that other bookstores can’t match. It will use data to pick titles that will most appeal to shoppers. And that could also solve the business problem that has long plagued other bookstores: unsold books that gather dust on shelves and get sent back to publishers. More than most book retailers, Amazon has deep insight into customer buying habits and can stock its store with titles most likely to move. It will stock best-sellers, but will also include books that get the highest ratings from its customers, including little-known titles. One other way the store, with 5,500 square feet of retail space and 2,000 square feet of storage, is distinct from traditional bookstores: Every book will face out, rather than be stacked tightly with only their spines showing. That leaves far less space for books. And while the store will showcase some of Amazon’s gadgets, such as its Kindle e-readers and Fire devices, it will be first and foremost a bookstore.

Classroom discussion questions:

What is Amazon’s strategy in opening this (and future) retail stores?
Discuss the capacity issues and compare Amazon to a large competing bookstore chain.

OM in the News: UPS Tries On 3-D Printing

At its hub in Louisville, Ky., UPS just rolled out 100 industrial-grade 3-D printers to make everything from iPhone gizmos to airplane parts. UPS wants to find out if 3-D printing centers could shorten supply chains and cut into its $58 billion-a-year transportation business—or give it a leg up in a potentially emerging market for local production and delivery. The difference could be existential. It doesn’t want 3-D printing to disrupt its business the way the Internet pulled the rug out from overnight document deliveries more than a decade ago. The company, writes The Wall Street Journal (Sept. 19-20, 2015), plans to expand next year with another 900 printers, and is looking at opening “print factories” outside the U.S. (Sales in the 3-D printing industry have risen 34% annually for the past 3 years).

UPS isn’t the only delivery company exploring the printing business. FedEx is examining the field, while Amazon.com has filed a patent for a 3-D printing truck, aimed at creating an on-demand system printing goods from inside delivery vehicles. UPS expects more companies will migrate some production to 3-D printing from traditional manufacturing on an aggressive growth curve.

In Louisville, UPS has used its own service. The company needed to develop a replacement floor beam support bracket for its fleet of Airbus A300 aircraft, which are out-of-production. 3-D printers made the part within hours and workers walked it across the runway for testing in a UPS plane.

Classroom discussion questions:

Why is UPS so interested in 3-D printing?
What are the shortfalls of 3-D printers?