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Amazon Turns Challenge Into Bold Fulfillment Opportunity

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All of this week, the Financial Times has been featuring a series of in-depth articles titled The Amazon Economy, (paid subscription or free metered view) all of which focus on Amazon’s current and future business strategies.  These articles are well worth the reading, especially if you reside in the retail sector, or serve as a supplier to this giant of online commerce.

Our supply chain community has always had its eye on Amazon, namely because the company represents the most unstoppable force of online and retail fulfillment. One article in the FT series, Amazon finds upside to sales tax payment, (paid subscription or free metered view) especially captured our attention, because it provides clues to Amazon’s next thrust in online commerce, that being same-day or next day delivery.

Amazon has long savored the advantage of not having to collect individual U.S. state sales taxes related to its online sales activity but that era may well be coming to an end as individual U.S. states and brick and mortar presence retailers increase the pressure to collect such taxes from the purchases of online providers. Amazon already has plans underway to collect sales taxes levied for purchases in 6 U.S. states with much speculation that the U.S. Congress will pass legislation removing the sales tax exemption for all online transactions.

Amazon’s existing physical distribution strategy was to locate major order fulfillment centers in tax-exempt states, avoiding a trigger of sales tax collection.  As the FT article points out, if a state threatened to enforce the collection of sales taxes, Amazon would respond by removing all physical presence in that state. Further in its article, FT speculates that Amazon will now leverage the collection of state sales tax by seizing on the opportunity to expand its current network of 34 distribution and fulfillment centers. That would include the ability to support same day or next day delivery within major geographic market areas, allowing consumers the same convenience and gratification that they would get by purchasing goods from a physical store.  As part of its sales tax collection deals, Amazon has thus far negotiated to open additional warehouses in California, New Jersey, Texas and Virginia.

Supply Chain Matters readers can recall the announcement in late March of Amazon acquiring warehouse automation provider Kiva Systems for $775 million, a considerable premium over existing Kiva revenues.  This deal was the biggest acquisition by Amazon since its 2009 takeover of Zappos.com, and we and others speculated to the importance of robotic fulfillment technology to Amazon’s future online fulfillment strategies. Kiva’s marketing boasted of doubling or even quadrupling warehouse fulfillment productivity.

We can now further interpret Amazon’s longer-term strategy, a network of highly automated physical fulfillment centers located in major geographic markets with the option of providing same-day delivery capabilities.

Supply Chain Matters speculates that there are two other key components for successful deployment of a same-day delivery strategy.  They would include an advanced inventory management or vendor managed inventory capability that can support more physical presence without a larger increment of inventory investment.  Amazon’s current working capital strategy is one of extending supplier payments upwards of 90 days, while collecting customer cash in less than 15 days.  One wonders how much existing suppliers are willing to collaborate in added inventory investment with this current strategy of extended supplier payments. The other key component is carrier support for same-day delivery, without an appreciable increase in delivery costs.  Will Amazon be willing to extend its generous free shipping policies on same day shipments?  We think not without coming up with a far different paradigm of physical same-day delivery execution, or limiting same-day shipments to certain high value / high profit products.

The FT article has a tone that reflects the complete demise of smaller or mid-sized retail outlets as Amazon marches forward with its strategies for dominance. We would caution, from a supply chain management lens, that while this threat is credible, more of the pieces to this strategy have to be deployed. Operating at less than 2 percent margin, however, provides certain limitations.  Just ask any supermarket chain.

Amazon is no doubt focused to “considerably up its game” in advanced supply chain management and physical execution. This online provider blends an aggressive win at all costs strategy with technological capabilities that together exist as an unstoppable force in physical and digital based fulfillment of customer needs.  Its culture is one of sacrifice of short-term gains for the bigger long-term prize.  Turning the situation of having to add sales tax collection to its pricing has been re-focused into an opportunity to once again redefine the paradigm of retailing. The real question is how far are paradigms changed and how long will it take.

Bob Ferrari

© 2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.

 

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