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Amazon: continual innovation


Amazon’s 500,000sq ft warehouse in Hemel Hempstead is just one of 10 which the retail behemoth operates in the UK, forming part of a network of 130 across the globe. From here a range of products, including cuddly toys, bags and books, are shipped to its customers and those of the myriad sellers on its marketplace, writes Emma Herrod in this feature taken from the current eDelivery Magazine.
“Sellers ask us to check the level of stock on their shelf,” says Katie McQuaid, director of Fulfilment by Amazon (FBA) UK but – as soon becomes apparent – that is impossible since stock is dispersed and located wherever there is appropriate space.

Once items have been scanned at goods in, they can be put away, either in the pigeon hole racking of the first floor or ground floor pick tower, or in an area called pallet land in which larger items can be stored. Hand-held scanners keep the warehouse management system updated on the location of each product and the number of units since every time something is moved it is scanned, along with the label at its new location, whether that’s a shelf edge or a pick tote.

Pickers work on a single floor and use the hand-held scanners to update the products picked and to see the location and description of the next item to be picked. They might be picking for the same customer or for different orders into the same yellow tote; once that’s full it’s placed on a conveyor to take it to the next location for the order to be consolidated.

On the ground floor, each tote is scanned and placed on a yellow and black trolley, which is chosen by the system depending on the tote’s contents and consolidates each customer’s order onto the same trolley. From there, they are decanted into individual pigeon holes for each customer order before being moved to a pack station. The system continues to control the process, telling the packer which size box to use for each customer’s order with optimal amounts of tape being dispensed for the size.

Deciding on which warehouse to store each seller’s goods is down to the size and type of product, as well as factors such as the sell-through rate, McQuaid explains; apparel is handled differently from books. Amazon still wants to keep things convenient for its sellers, though, and if they are close to a specific warehouse their products can be delivered there and then moved to the best location, or split across a number of warehouses.

Some sellers have turned up with boxes of their products in a taxi and taken them to reception, explains McQuaid, so it now has a service operated by UPS that brings in small amounts of product from these sellers, consolidated with other goods in. Larger retailers have to book time slots for pallet deliveries.

Sellers are customers to Amazon so the aim is to give them choice in how to handle their product and how to sell it (as in sponsored or lightning sales), as well as helping them to grow their business. “My innovation is around how we help sellers and how we help them to grow their business,” says McQuaid. This support can include giving them a loan to help with cash flow. This innovation is clearly paying off: in Q4, marketplace accounted for 47% of Amazon’s business by unit of sales.

She is keen to highlight how the company can help its sellers with cross-border sales with the aim of making the process as frictionless as possible for them. In the past year, she says its UK sellers exported £1.4bn worth of goods. Once they have inventory in the UK warehouse, it’s part of the European network so it can be cross-shipped to Germany, for example, or be sent in-bound to the German warehouse. “Many retailers are asking us about accessing the US market,” adds McQuaid.

FBA is meant to be flexible for all retailers, with them deciding how they want to use it; they can partner for short periods such as during peak times or an opps build, or longer term. “The key is consistency,” says McQuaid, and no matter the size of the retailer Amazon will offer them the same service.

To be eligible for Prime delivery, though, product has to be fulfilled by Amazon rather than the retailer themselves. In this way, Amazon keeps control of the service right the way through from pick to the end customer, especially if the customer chooses the increasingly popular Prime Now service which sees orders delivered the same day, within an hour.

Prime & Prime Now

Since rolling out Prime Now in London last year, the service has been made available in several other UK cities including Liverpool, Manchester, and Newcastle. Prime members can have their order delivered within one hour, from 8am until midnight (for £6.99) or during a two-hour bookable delivery slot that day at no additional cost. There’s a minimum order value of £20. Customers can track their delivery, seeing the name of the driver and how far away they are. Currently, around 10,000 items are available on the Prime Now app, but fresh and frozen groceries can only be delivered within London and Birmingham.

“Increased speed is not a premium service,” says McQuaid, possibly hinting at a new norm for standard delivery since there’s no extra charge for customers opting for same-day delivery within a two-hour time slot. “Speed is more like an offline experience for customers,” she adds. However, Amazon offers them choice through lockers and same-day / next-day services, and if a Prime customer isn’t in a rush to receive their order they can get a no-rush credit in the form of a £1 voucher redeemable against a digital product such as a Kindle, music or television download. From Amazon’s point of view, the shipping cost is less as the order is sent via a slower, cheaper delivery method.

Again, customer choice is the message being pushed by McQuaid, as some customers want their order delivered quickly and for others convenience is the main factor.

“We spend our time on getting the Prime service right,” explains McQuaid. “We believe in innovation and Prime is the way we are choosing to do that,” pointing out that, worldwide, Prime accounts for £1bn in delivery fees that customers have not had to pay.

Pushing Europe

Innovation is nothing new for Amazon and the same goes for innovating to improve operations in its warehouses. It’s a case of continual improvement, explains McQuaid. “We’ve invested £4.6bn in the UK since 2010,” she says, and although most of the automation is in the US, the company is investing in bringing it to Europe.

It’s also continuing to expand; a new, one million sq ft fulfilment centre will open in Coalville, Leicestershire, later this year employing 500 people over three years on full-time contracts. Automation will not come at the expense of jobs, McQuaid says, arguing the number of employees grows in line with the increase in automation. “Automation works hand-in-hand with warehouse and opps teams,” she says. She believes that automation should be a priority for retailers, although everyone will be at different places and have different pain points which they want to address.

Amazon Logistics

Ever the innovator and disruptor, Amazon has been expanding its logistics business to encompass air freight and shipping as well as delivery by a variety of road transport methods. Amazon Logistics launched in the UK in 2012 and Roger Sumner-Rivers, Founder of ParcelHero, believes Amazon will use logistics to become the “pipe through which everything you buy flows”. By the end of 2014, the firm had expanded to 13 delivery hubs and two sorting hubs to complement UK carriers.

Amazon’s same-day, one-hour Prime Now delivery service is being rolled out to more UK cities and is now available in Birmingham, London, Newcastle, Manchester and Liverpool. Tamebay’s Chris Dawson believes that “sellers previously invited to participate in the Amazon Prime programme without using Fulfilment by Amazon are to be forced to use Amazon Logistics”. This is something which McQuaid wouldn’t be drawn on, apart from to say that products couldn’t be offered for Prime delivery if they weren’t fulfilled by Amazon.

Dawson also reported in January that Amazon has registered as a freight forwarder, meaning that it will be able to sell space on ships to retailers wishing to move goods around the world.

Ryan Petersen, CEO, Flexport, comments: “The key competitive advantage that Amazon has over its competitors across all verticals is automation, something no legacy competitor can offer. Just as it disrupted retail by using automated processes to eliminate transaction costs, Amazon is able to apply this model to other industries.

“In terms of its shipping play, Amazon could generate $100m (£70m) of free cash flow very easily by running shipping from China.”

The company is also rumoured to be in talks to lease 20 Boeing 767 aircraft to move goods around the US as well as flying a Boeing 737 between its fulfilment centres in the UK, Germany and Poland up to five days a week during December. Dawson says: “This explains how they’re able to ship goods from Germany to the UK or vice versa, to arrive within just two days for free if you’re an Amazon Prime customer, without racking up enormous courier fees.”

Sean Fleming, editor of, comments that this would give Amazon “a fleet of around one tenth the size of UPS, one of its key air freight carrier partners”.

He adds: “As much as this kind of move might give Amazon more control over the business of delivery, it would also saddle the company with an almost unimaginably high cost base – everything from recruiting and retaining pilots, through to leasing and running the aircraft. It would also be subject to exacting levels of bureaucracy and regulation, which would also sit as substantial costs on its balance sheet.”

eDelivery reader Tristan Carter, Supply Chain Change Manager, BrightHouse believes that it’s the “natural progression for a company that sends 3 million packages a day to take a greater control over the delivery of those packages, as this will represent either a massive cost which can be reduced or an opportunity to grab revenue for those happy to use FBA.”

Carter adds: “It may also be a response to Alibaba – who ship three times as many packages a day as Amazon – who are investing in their own logistics model in China (there may be a threat there one day).

“Carrying their own product instead of using carriers could be something to explore; if you have good volume which is constant, then you could undercut the carrier on some legs where they would build in an operating margin, for instance. Amazon also stated many times they want to add a fully fledged logistics division, so this may be a way of exploring what that really means on a global scale.”

McQuaid would not comment on speculation.

However, the figures do seem to stack up for Amazon. Fulfilment cost the company £9.38bn ($13.4bn) over the course of 2015 compared with 2014’s £7.49bn ($10.7bn), a year-on-year rise of 32.8%. Worldwide shipping costs hit £8.05bn ($11.5bn) against shipping revenue of £4.55bn ($6.5bn), leaving the company with a net cost of £3.5bn ($5bn). Net sales for the full year increased by 20% to £74.93bn ($107bn). “Delivering for free in two hours is hard and expensive, but customers love it,” says Brian Olsavsky, Chief Financial Officer, Amazon.

The number of Prime members is on the increase, too – up by 51% outside of the US and by 47% in its home US market. FBA service shipped more than one billion units on behalf of sellers in 2015. The number of active sellers using FBA grew by more than 50% with FBA units representing nearly half of total third party units.

Is Amazon now looking to shake up the logistics industry with its own vans, planes and ships? McQuaid wouldn’t comment but it’s not surprising that it would consider something that could reduce its costs while maintaining or improving the customer experience. Whether that will expand into a service for other retailers is unlikely – unless, of course, they sell on Amazon.

And if you’re not an Amazon seller and not able to go on a seller tour, book yourself onto one of the public tours which run at Hemel Hempstead and Rugeley warehouses and see the operation for yourself.

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