The Fascinating World of Amazon Logistics

Jeff Bezos
Jeff Bezos

Word’s out that Amazon is planning on opening its first brick and mortar shop. With such news the retail world is now buzzing with questions:

Is Amazon really going head to head with mainly brick-and-mortar retailers? Should the likes of Walmart be paying attention to such tactics? Could this mean a new way of doing business for Amazon?

The answer is no.

First of all Amazon is not opening actual stores. It’s opening pop-up stores. The big difference is pop-up stores are available for just a limited amount of time. They pop-up and then they pop-off. For example the two stores Amazon is now opening will be in San Francisco and Sacramento and will be open just for the holidays.

Amazon will use these stores to showcase its proprietary mobile devices (tablets, ebook readers, the smartphone). Once the holidays are over – puff – they disappear.

There is, however, one report from the Wall Street Journal, not yet confirmed by Amazon, saying the company would actually be looking for more. This report points to a New York location in Midtown Manhattan that would serve as a permanent physical presence. Again, this won’t be your typical store but rather a location designed to respond to specific Amazon needs.

Such needs would include testing Amazon products, order pick-up, returns and local delivery. Maybe even a drone helipad. Who knows?

Seriously now – with the store working as a mini-warehouse, the company could easily offer same-day delivery to near-by customers. That’s a great way to compete with Google’s same day delivery. These type of operations (pop-up shops and drop-shops) could become mainstream in the future as retailers need to bridge the gap in omnichannel retail AND provide faster shipping.

However, Amazon’s offline presence should be scanned from a different perspective:

Amazon is not moving offline. It is already there.

There are no Amazon stores just yet. Except for a few Amazon lockers and the occasional pop-up stores, the largest online retailer remains a pretty digital presence.

Except for its logistics.

Beneath the magic of Amazon’s online retail presence lays an well-oiled logistics machine. Amazon combines advanced IT systems, human operations, robots, huge warehouses and a complex shipping operation to fulfill its daily orders. And some underpaid workers but that’s another thing.

Inside one of Amazon's Warehouses. Source: Wired
Inside one of Amazon’s Warehouses. Source: Wired

How many products does Amazon ship? Billions.

In 2012 Amazon sold and shipped more than 10 million products each day. The total number of products shipped in the last quarter of 2012 was 1.05 billion. Yes, that is a Billion with a B and it is reportedly the first time in the company’s history when it sold more than 1 billion products in just one quarter.

The number of listed products is also huge. Its top 5 markets all list more than 100 million products, with the US totaling a whooping 253 millions, as reported by Export-X:

The total number of products listed on Amazon's top markets. See more here.
The total number of products listed on Amazon’s top markets. See more here.

Amazon Fulfillment: 83 million square feet of storage and fulfillment centers

You’ve probably guessed that shipping 1 billion products per quarter to more than 200 million customers worldwide requires a bit of work. What you probably don’t know is that such a large-scale operation uses 50 million square feet of storage in the US and 33 million square feet of storage outside US (source).

There is no other ecommerce competitor with such storage and fulfillment potential. Its dominant position allowed for two interesting business models to evolve: The Amazon Marketplace and Fulfillment by Amazon.

To reach sales as those shown above, Amazon lists and sells both its own products and those from 3P (Third Party) merchants. Merchants can join its Fulfillment By Amazon program, ship the product to Amazon’s Fulfillment centers and than leverage Amazon’s Logistics.

This means the company can count on its sales AND influence to shape the future of retail. Its logistics are probably the most useful and under rated tool in expanding globally. While everyone wonders if Amazon will set foot in the offline world, the company has already laid the foundations to what will probably be the future of retail.

Of course, the numbers listed above can only show a small bit of what is required to keep Amazon moving and growing. The operational tools Amazon employs and the processes behind this amazing machine will be uncovered in an upcoming ebook. Until then – check out “Understanding Omnichannel Retail” – a comprehensive report on how online and offline sales are now connecting.

The 7 Most Important Components of an Ecommerce Business … that are usually ignored

When it comes to ecommerce most of the information you’ll be able to find online is marketing related. Because marketing is the easy part. That’s why almost everybody assumes that all it takes to build an ecommerce operation is good marketing, a technological sound shopping catalogue solution and a lot of luck.

Marketing and frontend ecommerce solutions are just the tip of the iceberg and in this post I’ll walk you through the most important areas you need to focus on (and you probably don’t) when building an online commerce business. Not site, not catalogue, business.

ecommerce-iceberg

What does it take to build a great online store?

No successful store was ever built on luck and marketing alone. Top online retailers got where they are selling great products at great prices, delivering fast and making sure that customers are well rewarded for their choice. That takes a lot of work in areas most of us never notice, areas such as:

1. Suppliers and supply chain management

You are or plan to be a retailer in an increasingly competitive market. It means a lot to come up with a great idea, drive good traffic and convert it to sales but you can’t do that without the right products, delivered at the right time, with a price the market is willing to pay.

Suppliers meant a whole lot when ecommerce was not around. Now – even more so. When it comes to ecommerce, suppliers can provide you with the right merchandise but they can also take the stocks burden off your shoulders. Amazon, for example, relies heavily on its marketplace partners to increase listed products number, without buying stocks for those products.

Key take away: before starting an ecommerce operation make sure:

  • you have enough and the right merchandise suppliers
  • they are financially and operational safe
  • they are able to provide real-time stock inventory
  • they are able to deliver purchased products fast

[Read more Supply Chain Management in Omnichannel Retail]

2. Warehouse operations

Post brick-and-mortar retail relies on electronic communication and product display. But when a product is bought it has to come from somewhere, right? Seal the deal with the suppliers and it’s off to the Warehouse, that magical place where online retailers pick products from the shelf, pack them neatly and prepare those products to be delivered.

Sounds simple? Well, usually, it is not. A decent store with its own warehouse operations has thousands of products at any time on its inventory, employs at least a couple of dozens of people to store products, pick and pack, and prepare for delivery. That’s why so many large companies choose to outsource their fulfillment operations to “third party logistics” suppliers such as Anchor 3PL or the ever-growing Fulfillment by Amazon so they can focus on what they do best (usually purchase the best assortment of merchandise, service customers and marketing).

Key Take Aways: A much larger post regarding 3PL/YPL (third party logistics) will soon be available on Netonomy.NET but until then, let’s have a look at things to consider when developing your own warehouse operations:

  • technology is the key – all 3PL service providers use technology (warehouse management systems) to know at all times where the products are, what’s the most efficient way to pick those products, who should be the person in charge for each package and others
  • think about the season – some seasons (such as the Holidays) are more operationally intensive then others. Be ready to employ temporary workforce to fulfill your orders
  • everything needs to be tracked and monitored – security and accountability are the key to handling large numbers of orders and workforce

3. Shipping and returns

Just as mentioned above your merchandise may be displayed and marketed online but it has to be packed and reach its destination in the real world. That’s why you need a good warehouse management and that’s why you need a great shipping service.

Shipping is usually an outsourced service. The best thing to do, unless you’re swimming in cash and you want to start competing the likes of FedEx and DHL, is employ one of the shipping providers and negotiate your way to a marketable shipping cost. Such a cost is likely to be, in the future, one you will be paying yourself – so pay attention.

Once you’ve contracted these shipping providers integrate their system with yours so you can streamline packaging and delivery.

Once in a while customers do not like what they’ve bought. You will need to handle the returns and reimburse customers for their purchase. Here you can team up with the shipping provider but your store has to handle all the communication.

Key take aways:

  • hire a shipping provider – It’s probably not worth it to have a shipping service of your own
  • pay attention to systems integrations when it comes to online store – warehouse – shipping flow
  • handle your returns as gracefully as possible – it may mean the difference between an unsatisfied customer and a lifetime brand ambassador

Before we skip to the next component I just wanted to make sure you’ve noticed I haven’t yet mentioned anything you would expect would be ecommerce related or innovative. So far – it’s just plain ol’ supply chain management and logistics. Got it? Great. Let’s move on to …

4. Client Relationship Management (CRM) – software and policies

Before even considering selling – you need to think about how are you going to treat your customer and keep him coming back. That’s where CRM comes in. While the term is usually used to describe a type of software, it is actually the term describing the whole policy on how are you going to handle interactions between you and your customer.

CRM needs to be “customer-centric”. Big words – but what do they mean? It just means that everything you do needs to be done “for the customer, by the retailer”. You need to understand the customer purchase patterns so you can recommend the most suited products. You need to record purchases, interests, preferred channels and basically all there is to it when it comes to understanding your customer.

Then act on that – after you’ve analyzed data make sure customer care, warehouse operations, shipping providers and even your purchase operations – all know who the customer is and what it wants.

Key Take Aways:

  • CRM is not just software – it’s a company policy on how to treat clients
  • Profiling is a must – understand as much as possible about your customer so you can serve better
  • “Customer-centric” is not a buzz-word – it’s common sense
  • There is no “client service department” – everybody working in an ecommerce store needs to know who the client is, record interactions and treat customers accordingly

5. Ecommerce catalogue and product display

Here’s one you surely expected, maybe not so down the list: your online store catalogue. Of course – this one is important. Without one we would be back to mail orders and inventing the wheel. However, as you’ve probably seen so far – it is just a small part of the whole ecommerce store business.

When it comes to it some things you really should be taking into account:

  • make sure you don’t over-design your store – your products are the most important items. Make them shine.
  • analyze and predict: predictive analytics is the practice of analyzing users behavior and predicting what would they rather buy at any given time. Read more about it here.
  • search, search and let’s not forget search: most of your customers will be using a search engine to navigate to your store (1) . Make sure your store is optimized. Once there, when in doubt, they will want to search for products (2) – make sure your site search works. Finally – when their order was shipped they will want to search for its location (3). Show them.

6. Marketing and loyalty programs

I know, i know – one includes the other. But for the sake of the argument let’s just assume that maybe loyalty programs online are so important that they should be a separate item to marketing. Because they are.

Loyalty is really hard to acquire these days. Especially when it comes to ecommerce. Most users will be searching for the lowest price and buy from whomever the seller is. But you can fight the trend with loyalty programs such as:

  • rewarding purchases – reward your users with points they can spend on your store. It’s really effective in keeping your customers tied to your brand, as well as making them feel great about it
  • social shopping – make your customer feel like a king when he can give out discounts and freebies to its peers and friends
  • reward social media – most online users have some kind of influence in their micro community of friends. Encourage them to take part in your story, share your products and reward them with freebies, discounts and … well …sometimes “Thank you” is enough

As for marketing at large – there is an increasing number of marketing solutions you an use to market your products and store but not all are alike. Not all are as efficient. Focus on:

  • Search engine optimization and paid search results
  • Email marketing
  • Social media
  • Branding

They may not look like much but together the “incredible four of ecommerce” can mean the difference between a failed startup and the next Amazon.

Last but not least …

7. Showroom and offline purchases

What – you thought that brick and mortar is all gone? Of course not. Online retail is still at just 7% of total retail but growing fast. One of the things that’s helping it grow is showrooming. That is the practice of checking a product in-store and buying it (usually cheaper) – online.

Don’t think about ecommerce as online-vs-offline. Think in terms of customer. The customer wants to feel the product before it makes the purchase. So you’ll need to show it to him. Even a small offline showroom can work miracles for your online store.

So now you have it – online retail is a rather big iceberg. Most of it unseen. Check where others don’t look because that’s where you’ll find success in ecommerce.