Many in our community can relate to what is described as the “Amazon Effect” the impact that Amazon is having on disruption of consumer fulfillment in many product categories. In that light, we call attention to today’s front page of the Wall Street Journal, Soap Opera: Amazon Moves In With P&G (paid subscription or free metered view) which had better catch the eye of supply chain executives. 

It describes how Amazon is partnering with global consumer product goods producer Procter & Gamble in an ambitious pilot program termed Vendor Flex. In the program, Amazon is co-locating its online fulfillment of bulk goods or consumer staples directly within a P&G distribution center. 

Vendor Flex program objectives are compelling. Utilizing a supplier’s distribution center landscape frees-up Amazon from having to stock lower-margin, bulk goods in its own distribution centers, allowing this online giant opportunities to stock higher-margin goods. It further allows Amazon to offer its customers an automatic replenishment program for basic necessities such as diapers, groceries, toilet paper or even laundry detergent.  A consumer goods supplier such as P&G has the opportunity to save on transportation costs incurred to ship to an Amazon fulfillment center, allowing the company to leverage more online fulfillment for its customers and insure brand loyalty.

To no surprise, the WSJ notes that a few of Amazon’s rivals have discovered this new arrangement and are not happy.  It is another obvious threat not only to other online providers and retailers but to other consumer goods companies as well. According to the article, Americans currently buy just 2 percent of staple goods online, yet that tiny portion equated to $16 billion in 2012 revenues, according to Nielsen Holdings. Of even more interest, in its reporting, the WSJ indicates that Amazon is working with other CPG firms such as Georgia Pacific, Kimberly Clark and Seventh Generation on similar distribution and warehouse sharing programs. The CEO of Seventh Generation is quoting as noting that more than 20 percent of that company’s sales of diapers, baby wipes and cleaning products come from online sales.

By our view, the compelling takeaway is that consumer goods producers can ill afford the space to allow multiple online fulfillment companies into their distribution centers, thus first-mover advantage, especially since its Amazon, is rather a compelling development. The longer-term implications on logistics and transportation cost structures are profound as well, since entities like Amazon take on that burden.

This is a rather significant development in B2C fulfillment and supply chain deployment strategy and Supply Chain Matters will feature additional follow-on commentary in the not too distant future.

Bob Ferrari