It seems that every year we can expect Amazon to test a new delivery service.
In 2017, we saw the rise of Seller Flex, and 2018 it was introduction of the Amazon Delivery Service Partners (DSP) program.
Amazon is looking for new ways to boost its supply-chain efficiency, from the way it receives packages from sellers to its own fulfillment centers, distribution efforts, and last-mile delivery. The company is hoping to shave its own costs, which it can then potentially pass on to customers and sellers.
To understand if this is a threat or not, fulfillment and shipping operations are going to need to look at Amazon’s efforts in a holistic sense, learn what it means for existing carriers, then look inward to determine impacts on their own partners and workforces.
For Amazon, DSP is a long-term play, and companies need to start thinking in that same way.
Amazon’s Big Picture
To fully understand the aim of Amazon’s DSP program, we need to look at its August, 2017 purchase of Whole Foods. It could easily be seen as just a grocery and physical retail play, one of many brick-and-mortar efforts that the company is running.
Instead, put on your fulfillment hat and check out the footprint of those stores. In that hub-and-spoke logistics model, Amazon just gained an entrance into major markets across the country. Those roughly 465 stores gave the company a significant boost in its logistics network.
Whole Foods represented many experts and massive amounts of data. Amazon secured a very clear way to understand the last mile, and see how tweaks across hundreds of warehouses and stockrooms could change delivery and fulfillment. Paired with its online-business distribution centers, Amazon possesses some of the most comprehensive data around for manufacturing, fulfillment, shipping, last mile, and how it all impacts the customer.
In June, Amazon put out its casting call for DSP, and we have to believe that every aspect of its promotional materials, especially that $10,000 starting requirement, was guided by this data. In September, the company ordered 20,000 delivery vans, which it plans to lease to third-party partners to support last-mile delivery.
At the same time, this is all very good P.R. for Amazon. We normally hear holiday stories about working conditions, but DSP is still holding the public’s attention. The company plans to have about 100 DSP partners by the end of 2018, and many companies are sharing this news with local papers whenever an award happens. Amazon sees the P.R. value as well, with some of its pages, including the DSP Opportunity URL, literally containing the word “marketing.”
Everything is connected, and we’re going to need to keep that in mind as 2019 progresses.
A Shift From Traditional Partners
Fulfillment businesses are going to see a small impact from DPS, and it will mostly be when they work with companies outside of FedEx, UPS, and USPS. It will hit when you work with those small carriers that are willing to jump at Amazon’s offer.
However, you might not be losing any access to large carriers. Amazon’s move is to gain much more control of its delivery operations and reduce its costs. This is especially true for USPS, as President Trump continues to threaten forced rate hikes for the e-commerce giant and others.
On the other hand, FedEx and UPS won’t feel much pain as Amazon shifts its operations to smaller companies. The two brands say they only received 3 percent and 7 percent, respectively, of their 2017 revenue from Amazon.
For third-party logistics providers that run warehouses and fulfillment centers and rely on FedEx and UPS, there’s going to be a little more room on the trucks for you. It’s unlikely that you’ll see any major disruptions from your partners on this side of things. What you might have to be concerned with is a potential loss of customers.
Terms and Conditions May Apply
The threat for fulfillment and shipping companies is most likely a year or more away. When Amazon can fully open the DSP floodgates, it might start offering more shipping and fulfillment efforts for companies who aren’t solely in the e-commerce space.
DSP should play a role in the continued growth of its Fulfillment By Amazon (FBA) option. The FBA service supports sales from Amazon, as well as when a company sells on other marketplaces or its own website. We can see the DPS expansion making it easier for Amazon to guarantee that it meets the two-day Prime delivery window, and even supporting a growth in a greater number of distribution centers around the U.S.
By expanding its set of logistics partners, Amazon can easily create significant competition and drive down prices, if it ever introduces a bidding process for carrying certain order volumes or locations. The more Amazon controls distribution, the more it controls overall price, and can then undercut costs for fulfillment businesses.
Your mission is going to be to keep those thin margins as low as possible, while still affording to operate a successful business. To achieve this, we expect to see fulfillment and shipping companies start spending a lot more time and marketing on educating customers about their offers and the concerns around FBA or related programs.
FBA is tricky for some businesses. There are concerns around strict requirements for delivering goods to Amazon, as well as concerns about commingling for drop shippers and other businesses. There are lots of pros and cons to weigh, and fulfillment companies have a variety of ways to position themselves well against FBA.
For example, sales tax calculations can change, depending on where the seller and buyer are located, and where goods are shipped to and from for each order. A fulfillment center with a few fixed distribution points might best be able to help partners estimate costs, compared to a large company with a growing number of D.C.s and logistics partners.
Workforce Shortages and Your Team
One big unknown and potential concern is if Amazon takes a page from Uber to bulk up its number of drivers and logistics partners. We’ve heard for years that there’s a driver shortage; that number was at about 60,000 extra truck drivers needed in the middle of 2018, and nearly tripling by 2026.
Uber and similar services have been able to boost drivers for its service by offering an incentive for rides provided in the initial months. They also help with some insurance, cars, and maintenance costs.
If Amazon follows the ride-share route, we might see the truck-driver shortage start negatively impacting non-DSP companies, either in their ability to hire drivers or having partners who are losing drivers. The industry is struggling, and Amazon might be a disrupter in some important markets.
There’s no clear signal of how this will play out just yet, but it’s worth keeping a close eye on, because driver shortages have already dramatically shifted cost and availability for many.
Get Flexible Today for Tomorrow
The heart of Amazon’s DSP is last-mile management. That’s the space where an e-commerce company of any size faces its most common make-or-break moment: goods arriving safely and on time.
Shipping and fulfillment businesses will have to focus their 2019 efforts on this space as well, looking for ways to introduce flexibility and cut costs. Amazon will have an edge as its DSP gets off the ground, but it doesn’t have to be a very large one.
It’s time for fulfillment and shipping companies to start looking at who is being impacted by all of this on a broad level. Retailers are fighting Amazon for market share, so they could be more open to a new agreement that provides flexibility around warehousing and order fulfillment. It might be smart to try and renegotiate with carriers that face increased competition for Amazon’s business — which could push for even lower rates in 2019.
Growing your network can be a mutually beneficial way to stave off losses. Amazon is looking for ways to make fulfillment more accurate, and shipping faster and cheaper. Shipping and fulfillment businesses have much the same goals. The difference is that Amazon has the cash to build out a network specifically for Amazon deliveries, while the rest of us are going to need to get a little crafty, and start thinking of the rest of the market as our own network.
Jake Rheude is director of marketing for Red Stag Fulfillment, an e-commerce fulfillment warehouse.