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Operations
01 September 2022
With AWD, Amazon is introducing 'supply chain as a service'
Amazon Warehousing & Distribution is offering bulk inventory storage to third-party sellers.
Inside an Amazon warehouse. Photo by Flickr user Jaimie Wilson, used under a Creative Commons license)
Amazon is set to introduce a service for third-party sellers: Storage.
At a time when many brands and retailers continue to face supply chain issues, Amazon Warehousing & Distribution (AWD) is set to provide sellers with space to store bulk inventory.
Amazon said it is making new facilities available for the program, where sellers can store goods that are awaiting the move into position for ordering and shipment. From these facilities, the inventory can then be tapped to automatically replenish supplies at Amazon's fulfillment centers, where orders are packed and shipped to customers.
“With this simple pay-as-you-go service, sellers are free from the time-consuming, cumbersome process of moving inventory from upstream facilities to Amazon fulfillment centers,” Amazon VP of Distribution and Fulfillment Solutions Gopal Pillai, wrote in a blog post announcing the service. “AWD makes the promise of supply chain as a service a reality and is specifically designed to solve inventory management challenges and deliver operational efficiencies.”
Amazon added that sellers using the service will be able to consolidate global inventory into one pool, which can in turn be managed through Seller Central.
In 2023, Amazon said the service will be available for sellers to send their inventory to “any location,” including wholesale customers or brick-and-mortar stores.
At a time of supply chain headaches, storage has become one of the biggest challenges for brands and retailers selling consumer goods over the last three years. According to a recent report on the state of US logistics by the global management consulting firm Kearney, warehousing capacity reached its peak in 2021. Vacancy rates dropped to their lowest point on record, while the cost of storage per square foot rose to the highest. Michael Zimmerman, a partner at Kearney who runs the global logistics practice, told attendees of the NACDS Total Store Expo that supply chain issues are likely to continue, and advised them to work to add capacity.
“You’ve probably heard the expression, ‘Hope is not a strategy,’” said Zimmerman. “This is a perfect example of that. Get your supply chains ready.”
For its part, Amazon said a recent survey of US sellers showed that the three biggest pain points for sellers in upstream warehousing and distribution operations are:
- High prices for storage
- Complicated fee structures
- Insufficient storage capacity.
As it navigated skyrocketing demand for goods sold online and sought to speed delivery times, Amazon added significantly to its logistics network over the last three years. It now stands at about 1,250 facilities in the US, according to the supply chain and logistics consulting firm MWPVL. In fact, the network had grown so large that in April executives said the company had overbuilt warehouse space, and would pursue subleasing and consolidation while slowing expansion in the latter half of 2022.
With new facilities coming online for AWD, apparently that doesn't mean expansion is being halted together. With AWD, Amazon is putting warehouses to work for sellers, who run independent businesses that sell on Amazon's marketplace. AWD will be a service offered to third-party sellers in addition to Fulfillment by Amazon, the service that allows third-party sellers to allow the fulfillment of orders to Amazon. It is also rolling out Buy With Prime, a service that allows brands to make Amazon's shipping and returns services available to websites outside of Amazon.com, and, in turn, presumably will lead these brands to tap into FBA.
For its part, AWD offers a path to enter Amazon's logistics network earlier in a good's journey, and adds capacity to that network. The new warehouses that will be part of AWD are “purpose-built facilities for bulk inventory storage and automated distribution,” the company wrote.
“With one click sellers can send their inventory to Amazon Distribution Centers and significantly reduce storage costs, while eliminating complex pricing schemes and long-term contracts that are common throughout the industry,” Pillai wrote. “Sellers can integrate their upstream inventory storage operations with the Amazon Fulfillment Network, ensuring they always have the right amount of inventory in stock, in the right places and at the right times.”
Cost center to profit center?
There are still specifics of AWD that must be filled in ahead of the 2023 launch. The blog post quoted Harris Chan, senior business manager at AmaMax, who said that," Automated replenishment and master case handling is the key of the program," but it's not clear how. Other details on how AWD will work and pricing were not immediately available. Amazon said it will share more about AWD at Amazon Accelerate, the annual seller conference that is set to take place September 14-15.
Offering services to third-party sellers has proven kind to Amazon's business. In its second quarter earnings report, the company said these sellers were responsible for 57% of sales on Amazon, which was a record. Revenue from third-party seller services rose 13% to more than $27 billion, a record for a non-holiday quarter. On the other hand, Amazon's overall sales from ecommerce fell 4%.
Amazon built its logistics network to serve its own needs in moving inventory into place, shipping and delivering packages. Now, it is one of the largest in the country. With that scale, it is offering parts of that network up to others, turning what could be a cost center into a potential business booster.
It recalls how Amazon offered the cloud infrastructure it built to others through Amazon Web Services (AWS), which was long run by current Amazon CEO Andy Jassy and is now one of the company's most lucrative divisions. Along with similar acronyms, the two services will now share a similar primary offering: storage.
Logistics are one of the most expensive parts of ecommerce, so it would be all the more impressive if Amazon could turn a profit in an area that leaves many in the red.
At the same time, the service arrives as other retail leaders are building out supply chain networks. Shopify is making a big investment in building an "asset light" fulfillment network following the $2.1 billion acquisition of Deliverr. Meanwhile, American Eagle Outfitters is standing up Quiet Platforms as a vertical network of logistics partners that can join forces and take on the biggest names. Gap Inc. said last week that it is making its fulfillment logistics services available to other brands and retailers, as well.
But Amazon remains the largest and most mature logistics network. New services like AWD show how it can press that advantage by adding major capacity. It also shows how it can create an easy-to-use service that is difficult for sellers to refuse. Amazon grew by promising one click service to consumers. Now, it wants to offer that convenience to sellers, too.
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Can Amazon grow and cut at the same time?
The company is pulling back after breakneck pandemic expansion. Will it sacrifice the shopping experience along the way?
Amazon is in a period of rebalancing.
The company has long scaled at a relentless pace as it sought to not only provide a marketplace for commerce, but the infrastructure that enabled it, as well. Amazon found another level of overdrive over the last two years, as demand spiked to unseen heights during the pandemic and the company tried to build to keep up.
This wasn’t necessarily a period that saw the kind of invention that Jeff Bezos made an existential tenet of the company, but it nonetheless seems to be shaking out as a cycle that included risk and fallout.
In this case, the risk was not a new device like a smartphone or a move to bend the future to Amazon's will like drone delivery. Rather, it was an expansion that took its already-vast operations to new heights.
Nowhere was this more evident than the company’s logistics network. As CEO Andy Jassy described it to analysts Thursday on an earnings call, the company doubled the size of a fulfillment network it took a quarter-century to build in two years. It also built out a last-mile delivery network that was the size of UPS, which is one of the top two carriers in the U.S.
In 2022, all of that expansion ran into 40-year-high inflation, war in Ukraine and a pullback in demand for goods amid reopening. The company first admitted the problem: It had overbuilt.
But the solution is not to tear down. It had to keep expanding as only Amazon does, while still cutting back in a period of “belt-tightening,” as executives have put it.
That’s evident in watching developments out of the logistics network alone. Amazon pulled out of some areas, and canceled plans to expand into some new warehouses. Yet, as Business Insider reported, it still added 79 million square feet – a footprint that is equal to half of next-closest competitor Walmart’s entire distribution network. It is also expanding Buy with Prime, a new program that will allow direct-to-consumer brands to offer Prime benefits, and, by extension, access to Amazon’s logistics network. Another service, called Amazon Warehousing and Delivery, is designed for upstream storage, necessitating more space to be made available in the network.
At the same time, it will seek to keep doing more for consumers.
Jassy indicated as much when he was prompted to outline his priority areas. Beyond cost-cutting, he said speed is the second highest priority for Amazon. As if to conform this, he said later in the call that one-day shipping is getting off the ground in North America.
Selection is another priority area. At Amazon, that phrase translates to a few things, but top of mind is “expanding the third-party seller marketplace.” Third-party sellers accounted for 59% of sales in Q4. Beyond sales, Amazon’s work with the sellers who post their products on the marketplace is also lucrative for the company. Amazon allows these sellers to tap its logistics network to offer Prime through the Fulfillment by Amazon program. Its business segment called third-party seller services grew 20% year-over-year in the fourth quarter, right in line with the massively profitable cloud computing division Amazon Web Services.
Price, Jassy said, is another area of importance, especially with the consumer pullback on discretionary purchases being observed amid inflation.
“I think pricing being sharp is always important,” Jassy said. “But particularly in this type of uncertain economy, where customers are very conscious about how much they're spending, having the millions of deals that we put together with our selling partners in the fourth quarter was an important part of the demand that you saw.”
Finally, Jassy cited a priority of improving the customer experience. He said Buy with Prime would give subscribers the ability to use their benefits across the web, and noted that virtual try-on for shoes brings change to the shopping experience.
But it’s in this area that the tradeoffs that may be happening under the surface may rear their head again. GlobalData Managing Director Neil Saunders noted that online shopping generally is becoming “more difficult" on Amazon.
“While the Amazon marketplace is far from a terrible place to shop, it has become more complex and cluttered with a multitude of products, delivery options, and prices levels for shoppers to sift through,” Saunders wrote in note released at the time of the earnings call. “The result is that impulse buying has dropped and that more people are migrating away to other retailers. This is not yet a serious problem as erosion has only happened at the margins, but it is something Amazon will need to address and arrest to prevent further decline.”
Taking a rhetorical step further, the journalist John Hermann wrote this week that a “junkification” of Amazon is taking place, while arguing that “everything is going according to plan" for the company.
He placed the growth of the third-party seller marketplace at the center of this trend. But it also comes as Amazon grows its advertising business, with many taking note of a growing number of ads on the platform. The company also wants to keep growing Prime, and is now using content such as Lord of the Rings and NFL’s Thursday Night Football as key acquisition channels. Both had “record” signups of new Prime members, CFO Brian Olsavsky said.
“We see a direct link between that type of engagement and higher purchases of everyday products on our Amazon website,” he said.
It will have to do each of these things at once, while entering a period that will require it to be “more targeted with its growth ambitions,” as Saunders put it.
"Since its inception, Amazon has had a culture of throwing dollars at many different things to see where they led and what they could learn," Saunders said. "That approach worked well for a younger, fast-growth business. It works far less successfully for a more mature entity. In our view, management deserves credit for recognizing this and quickly responding. However, the shift requires a lot of care because Amazon needs to find a new balance between being ambitious and innovative and being more frugal with its spending – which will be very challenging."
Jassy said the changes of the pandemic made its logistics a "different network." That may be true of the whole company. Rather than an isolated cycle of overbuilding and pulling back, this may prove to be a period that changes Amazon altogether. The bets will still be there, but the risk will be magnified with fewer dollars that don't pay off to go around. As hinted by the logistics buildout of the pandemic and even Buy with Prime, they also may look more operational.
Less delivery robot, more delivery optimization.
As Jassy put it: “We're going to be very thoughtful about how we streamline our costs, and I think you see a lot of that, but we're also going to continue to invest for the long term.”
The recipients of those investments will say a lot about where it wants to head in this next year.
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