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Amazon’s Financial Reporting Validates Leanings Toward Continued Industry Disruption

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Last week, customer online fulfillment provider Amazon reported its best-ever financial performance that included a headline of the largest quarterly profit in the firm’s history. Within these results are more indications of evolving business strategy that includes moving further into transportation and last-mile fulfillment.  Amazon Prime Branded Trailors

For 4th Quarter financial performance, Amazon reported a 22 percent increase in net revenues to $35.7 billion while operating income increased 88 percent to $1.1 billion. Net income was reported as $482 million almost twice as that of a year ago. In its reporting for the full year 2015, Amazon recoded $107 billion in revenues. Full year operating income was $2.2 billion compared with $178 million in 2014. The Wall Street Journal observed that it took Walmart nearly 35 years to reach $100 billion in sales volume while Amazon has reached that mark in twenty years.

Indicators of Amazon’s evolving Omni-channel fulfillment business models were evident within the details of financial performance. For instance, in 2015, the Fulfillment by Amazon program that allows sellers to utilize the Amazon fulfillment processes reportedly shipped over one billion units on behalf of sellers.

An online fulfillment focused research firm had previously estimated that upwards of 40 percent of all online transactions during the 2015 holiday fulfillment period originated on the Amazon platform.  In essence, Amazon has become a dominant force for online fulfillment, either by Amazon directly or its network of hosted sellers.  In the B2B dimension, after only eight months after launch, Amazon Business serves more than 200,000 businesses ranging from small to Fortune 500.

The scale of Amazon’s fulfillment reach comes with its own set of logistics and transportation challenges. Shipping costs during the holiday fulfillment quarter rose a significant 37 percent to $4.2 billion, compared to 10.9 percent in the year earlier period.  Shipping costs as a percentage of net sales averaged 11.5 percent in all of 2015.  Absorb the magnitude of that number- over $4 billion in transportation and logistics costs in a single quarter.  That ladies and gentlemen, amounts to buyer power, influence and motivation towards a more innovative approach.

Amazon’s overall inventories have grown approximately $1 billion this year as more sellers and more merchandise become part of the Amazon fulfillment network. These combined expenses provide ample motivation for greater efficiencies and more innovative parcel delivery network approaches, especially since so many Amazon customers elect to enroll in the Amazon Prime program with its free shipping benefit. There are limits to how frequently the price of Amazon Prime can be raised over a certain annual period.

Some equity analysts question whether Amazon has been forced to resort to less efficient and more costly transportation and logistics services providers, hence the steady stream of evidence that indicates that Amazon is assuming more control of logistics and moving closer to last-mile fulfillment. In the recent earnings briefing with equity analysts, Amazon’s CFO validated that the online provider’s existing parcel delivery providers could not handle Amazon’s required delivery service commitments during the critical holiday fulfillment period.

In mid-January, Supply Chain Matters called attention to a Seattle Times report indicating the same and that within a few weeks, Amazon.com will begin competing directly with longtime partners United Parcel Service, FedEx and DHL in Europe, with pieces falling into place to make such competition a potential in the U.S. as well in time.  As the strategy continues to evolve, Amazon’s transportation and logistics capabilities will likely be shared for use by other service providers or Fulfilled by Amazon partners.

Supply Chain Matters continues to predict that Amazon will playout an industry disruptor role in 2016 and beyond.  Certain sectors of B2C / B2B online fulfillment, parcel logistics and transportation are ripe for process innovation facilitated by more innovative Cloud-based technology. We believe that Amazon is showing all of the tendencies to be that disruptor and existing industry players should be prepared.

Just like Amazon Web Services (AWS) provided a new model for utility based information technology services, Fulfilled and Delivered by Amazon will likely be the next disruption.

Bob Ferrari

© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Massive Landslide in China Impacting Industrial Factory Park Causes More Concern for Safety Standards

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At least 85 people are still missing after a huge mud slide caused by accumulated dumping of construction waste impacted the Hengtaiyu Industrial Park in the northwestern section of Shenzhen on Sunday.

According to a published report from China Daily, the landslide buried 33 buildings at an industrial park in Shenzhen city, south of China’s Guangdong province. An initial investigation indicated that 14 factory buildings, two office buildings, one canteen, three dormitories and 13 low-rise buildings suffered extensive damage. The slide further ruptured a natural gas pipeline causing an explosion. More than 1,500 people, including firemen, policemen and medical staff were involved in the rescue operations, with more than 900 residents having been evacuated by the slide that occurred on Sunday. Other reports indicate the many of the missing are migrant workers who were employed in the park.

Various media images depict devastation and structural damage to buildings. One report indicates that the mud covered an area of 60,000 squarer meters some as much as six meters deep.

Chinese Premier Li Keqiang ordered an immediate investigation of the mud slide.

According to a published report by Reuters, the impacted site should have been closed in February, but waste had continued to be dumped at this park. More than a year ago, a government-run newspaper warned that the city of Shenzhen would run out of space to dump waste from a building boom.

To what extent this tragic disaster has to certain industry supply chains remains to be seen in the coming days. The broader implication however, points to far more growing concerns relative to enforcement of industrial safety standards across China. We join the global community in concerns for the safety of those victims still missing.

This incident follows the massive warehouse explosions that occurred in the large logistics park adjacent to the Port of Tianjin. That impact from that disaster is still being felt by certain industry supply chains.

This incident is almost certain to have its own implications for a further government crackdown on industrial safety and risk mitigation.


Supply Chain Matters Book Review: The Power of Resilience- How the Best Companies Manage the Unexpected

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From time to time Supply Chain Matters will feature book reviews which we believe would be of value and a learning asset to our extended global supply chain management community of readers.

In this particular posting, we share our review of: The Power of Resilience, How the Best Companies Manage the Unexpected. The author, Yossi Sheffi, is a well-known thought leader among the global supply chain management community serving as the Elisha Pwr_Resilence_Sheffi_350Gray II Professor of Engineering Systems at the Massachusetts Institute of Technology (MIT) and Director of the MIT Center for Transportation and Logistics. He has authored a number of previous books including: The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage and Logistics Clusters: Delivering Value and Driving Growth. Professor Sheffi was gracious to this blog by previously contributing a guest commentary related to his Logistics Clusters book.

If you have been a long time reader of this blog, you have undoubtedly read of the many disruptive events that have impacted industry and global supply chains, along with some of the consequences.  Events would include Hurricane Katrina that devastated New Orleans and the U.S. Gulf Region in 2005, the 2011 devastating earthquake and tsunami that impacted Japan and the severe floods that impacted Thailand that same year. Other events we have noted, such as additional earthquakes, major factory or warehouse fires, natural disasters and product recalls continue to uncover the vulnerabilities and dependencies among today’s globally based supply chains.  In this new book, Sheffi provides with in-depth case studies that illustrate how companies have prepared for, coped with, and demonstrated resilience following such disruption, along with important learning related to the encroaching threats facing today’s supply chains. Further included are the business processes, corporate culture and technology tools utilized to prepare and learn from disruption. Indeed, the interconnectedness of global economies, the lean aspects of multi-industry supply chains today, and the implications of vast arrays of information amplified by all forms of media imply that unexpected events in any corner of the globe can ripple through the supply chain and affect customers and shareholders.

This blogger, analyst and consultant thoroughly enjoyed reading this book which I managed to read cover-to-cover on a recent roundtrip coast-to-coast plane ride. The book immediately captures interest, flows from chapter to chapter and compels one to read more. I highly recommend this text to current or aspiring senior executives and supply chain leaders as a must-read regarding the mitigation and response to supply chain risk. I especially applaud Professor Sheffi for incorporating supply chain social responsibility strategies under the umbrella of risk, which it should be.

The first five chapters of this book provides various insightful case studies of companies that experienced and responded to risk events including Cisco, General Motors, Intel, Medtronic, Procter & Gamble, Western Digital and others. These case studies bring out the importance differences among business continuity planning (BCP) and business continuity response (BCR).  There are examples of risk metrics such as Value-at-Risk (VaR), Time-to-Impact and Time-to-Recovery, very similar to those defined in the latest releases of the APICS Supply Chain Council’s Supply Chain Operations Process Framework model (SCOR).

Chapters 6 through 11 address the strategy, preparation, communication and supply implications of supply chain risk and resiliency. Sheffi observes: Building a resilient enterprise involves two broad categories of options: building redundancy and building flexibility of supply chain assets and processes.” Chapter 8, Detecting Disruption, explores methods for incident monitoring, mapping the supply chain for vulnerabilities, monitoring suppliers, and a rather important section related to leveraging social media in risk detection and response. Chapter 9 is a rather important read since it explores means for securing the information supply chain and the tendencies of cyber criminals to exploit supply chain partners as targets of information security vulnerability, as was the case of the Target credit-card hack where penetration vulnerability came from the stolen login credentials of a regional store refrigeration maintenance services vendor.

Chapter 12 addresses today’s “new normal” of disruption and risk along with methods to benefit from longer-term implications. In the final two chapters, Professor Sheffi explores the growing dependency on all levels of suppliers, including those in the lower-tier of industry supply chains. Sheffi notes: Supply chain risk management is in a race between the fragility of complex supply chains and the resilience created by better risk management.” In Chapter 13, an argument is made that systemic supply chain risk, one that can bring an entire industry to a halt, has not occurred because of the combined efforts of today’s more responsive supply chains. Sheffi opines:

Thus, it’s hard to conclude that modern global supply chains show evidence of true systemic risks. Companies have developed efficient response mechanisms, and the same globalization trends that could create disruption risks for specific companies that use suppliers from faraway lands may also contribute to the prevention of systemic risk by spreading manufacturing capacity around the globe. Most important, global capacity for manufacturing and distribution is large, and while it is crucial for any company to prepare and respond effectively to disasters, there are always others ready to take its place if it fumbles.”

We quoted that entire passage because upon reading and contemplating the book’s case studies, we were not as sure regarding this conclusion.  While many firms have been able to eventually overcome supply and services risk, the open question is scale and timing of supply continuity. Customers, consumers and activist investors are far more impatient and unforgiving today, and the clock speed of business and industry change may not tolerate forms of extended supply chain disruption.  However the one conclusion that is clear is that speed, resilience and flexibility are indeed the most important capabilities of any supply chain.

This book is an obvious must-read and we highly recommend it to our Supply Chain Matters audience. The book is available through MIT Press and Amazon.

Bob Ferrari


UPS Pilots Union Calls for October Strike Vote

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It seems that the forthcoming holiday fulfillment surge will again present challenges for some industry supply chains. The Independent Pilots Association, the labor union representing 2500 pilots for UPS has called for a strike vote among its UPS members, as contract talks enter their fifth year of negotiations. Talks among UPS and its pilots have been assisted by federal mediators since early 2014.

A union statement declares: “But after four years of contract talks with UPS, we’ve reached a point where UPS needs to hear loud and clear from our membership that they are willing to do whatever it takes to secure an industry leading contract.”

The vote is currently scheduled for October 23 and timing is key, since the vote will come at the near height of the holiday focused shipping surge. In its reporting, The Wall Street Journal indicates that while a full walkout seems unlikely, UPS has plenty to worry about. A UPS spokesperson indicated to the WSJ that the move was a routine show of solidarity in negotiations, and that the global carrier has successfully negotiated four contracts with its pilots, and plans to reach a new agreement as quickly as possible.

The move by the UPS pilots union comes on the heels of the recent tentative settlement of labor contract talks involving FedEx pilots. Negotiations involving the FedEx pilots similarly began extended back to 2011 with renewed negotiations occurring in 2013. A earlier rejection of a contract order invoked a firm response from FedEx senior management.

The air cargo business never really recovered since the global financial crisis of 2008-2009. The entire air freight sector has been impacted, prompting both UPS and FedEx to scale back air assets and revise route scheduling.

Unlike pilots within traditional passenger airlines, air freight pilots fly long routes or segments, mostly in the middle of the night, and face a number of added safety concerns with the composition and mix of freight carried by aircraft.

In 2009, a FedEx cargo plane enroute from Guangzhou China was involved in a fiery crash while attempting to land in Tokyo, killing both pilots.  Hazardous cargo was suspected. On August 14, 2013, a UPS cargo plane bound for Birmingham Alabama from Louisville Kentucky crashed in the early morning hours just short of the airport runway, tragically killing both pilots on-board. Pilot fatigue was cited as a possible factor.

In 2013, former U.S. Airways pilot hero Chesley ‘Sully’ Sullenberger co-authored a Wall Street Journal editorial calling for safeguards for avoiding pilot fatigue. The editorial pointed out that while U.S. FAA standards addressing fatigue standards for pilots employed by passenger airlines would soon be in effect, these requirements did not apply to pilots of cargo planes. The premise of these authors was that by excluding cargo pilots, who often fly continuous long inter-continental routes, compromised the mission for making safety the first priority for aviation.

For retailers and other B2C and B2B fulfillment operational teams, the threat of a UPS pilot strike has to be of some consideration, especially in light of other global capacity cutbacks in air, ocean container or surface trucking. During last year’s disruptive slowdown involving U.S. West Coast ports, many shippers had limited options, and turned to air carriers to move goods to needed holiday fulfillment channels. Contingency planning is wise, since waiting to the last minute for events to unfold will likely result in limited options.

We trust that UPS and its pilots will come to some form of resolution prior to October.


Blue Bell Creameries Resumes Production After Product Recall

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Roughly four months after Blue Bell Creameries voluntarily recalled most of its ice cream and frozen yogurt products and suspended operations after listeria outbreak concerns, the Texas based producer has now resumed selling and distributing its products in select locations.  Blue Bell Ice Cream recall

In April, Blue Bell widened a series of voluntary recalls to now involving all of its branded ice cream, frozen yogurt, sherbet and frozen snacks branded products distributed among 23 states and various international locations. The recall was prompted after samples of Blue Bell Ice Cream chocolate chip cookie dough ice cream tested positive for the potentially deadly disease, listeria. The illness was tracked by health officials to a Blue Bell production line in Texas, and later to another production line in Oklahoma. Three deaths were linked to the outbreak.

Production plants in Alabama, Oklahoma and Texas have since undergone extensive cleaning and decontamination under regulatory oversight. Alabama Public health officials gave Blue Bell the OK to resume production and sale of ice cream manufactured at its Alabama plant in early August.

At the time of the voluntary recall, Blue Bell took relatively swift action by actively removing products from retailers and other food service facilities it served. A statement from Blue Bell’s CEO Paul Kruse apologized to consumers along with a firm commitment to fix the problem.

Today’s visit to the Blue Bell web site features a prominent commitment to consumers for producing safe, high quality, great tasting ice cream as well a statement related to upgrading of procedures and employee training. Blue Bell notes that it continues to retain an independent microbiology expert for ongoing evaluation and has implemented a “test and hold” process where production runs are tested and held until results are received before distribution to markets.

The company remains very active on Twitter and Facebook, thanking consumers for their patience and providing updates as to which flavors of ice creams are currently available and in which states.

However, the cost of this recall, as has been the case with many other product recalls, remains troublesome. Four months of limited revenues can do that.

In July, Blue Bell management reached out to a prominent Texas billionaire investor for an added infusion of cash. That investment was reported as “significant” and came with a partnership arrangement with the company.

Hopefully, with new processes, training and revamped production facilities, consumers can look forward to enjoying a popular brand of ice cream.


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