Mark Murrill9 December 2016 SCLT 3384Semester Project

Amazon

Amazon has become a household name after 20 years of operations. Its name and logo of

a curved smile that stretches from A to Z lets the customers know Amazon carries every item

from A to Z that they need. If you want to buy something online and have it delivered to your

door within days, there is only one place you would go first, “Amazon.com”. Of course to

accomplish this, Amazon requires a strong transportation infrastructure with a logistics system to

handle it and this does not come cheap. The planning started 3 years ago with a request to their

senior management team to find a way to move common everyday items from producer to user

seamlessly through a supply chain. One of Amazon’s main focuses is on the last-mile – reducing

its delivery time to under a day. I believe Amazon can reduce it to less than an hour. I feel that

Amazon will have some challenges to navigate with their shipping partners, contract drivers, and

Prime Now members, but I believe by combining the latest technology in air transport, Amazon

would be on its way of changing the small package delivery system.

History

Opened on the World Wide Web in July 1995, Amazon, led by CEO Jeff Bezos, follows

four principle guidelines: customer obsession rather than competitor focus, passion for invention,

commitment to operational excellence, and long-term thinking. Bezos moved to Seattle after

leaving his employment as vice-president of D. E. Shaw & Co., a Wall Street firm, and

incorporated the company as "Cadabra. He later changed the name to Amazon.com because it

was often misheard as “Cadaver.” Everyone now knows them as Amazon, an electronic

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commerce and cloud computing company, based in Seattle, Washington. Bezos named the

company after the Amazon River because it was a place that was exotic and different, just like

Bezos planned for his store to be. The Amazon River is also the largest river in the world, and

his plan was to make his store the biggest in the world. Today, they are the largest internet-based

retailer in the world by total sales and market capitalization, surpassing Walmart as the most

valuable retailer in the United States. As of 2016 Q3, Amazon is the fourth most valuable public

company (Webley).

Financials

Amazon's business plan was not expecting to make a profit until after four to five years.

Stockholders were worried about not reaching profitability fast enough, and they had a hard time

justifying their investments or even the company’s survivability in the long-term. Even when the

dot-com bubble crashed and destroyed many e-companies, Amazon survived and became a huge

player in online sales, turning its first profit in the fourth quarter of 2001: $5 million (i.e., 1¢ per

share), on revenues of more than $1 billion (Spector). This extremely modest profit margin

proved that Bezos' unconventional business model could succeed. Recognizing the company's

success in popularizing online shopping, Time magazine named Bezos the “Person of the Year,”

in 1999 (Ramo).

Jay Greene says in his article in The Seattle Times that the delivering of packages to

customers is a huge expense for Amazon, which comes as no surprise. They spend upward of $3 

billion each quarter. That number goes up as Amazon grows to compete against brick-and-mortar

rivals, “which offer customers something Amazon can’t: instant gratification of owning an item

the second it’s purchased” (Greene). In his article, Greene not only writes about Amazon’s

competition with brick-and-mortar stores but also Amazon’s plans to take on UPS and FedEx in

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the delivery business. Instant gratification of owning an item will be tough to beat and at an

unmatched transport cost. One way I see Amazon funding any venture, whether competing

against UPS, FedEx or brick-and-mortar, is through their Amazon Prime annual membership of

$99 per year that offers customers unlimited free two-day shipping on more than 20 million

items across all categories.

Supply Chain Strategy

Amazon’s supply chain concept changed when they unveiled their plan to have their own

fleet of cargo jets on August 4, 2016, as part of an effort to expand its logistics operation

(Bensinger, Amazon Reveals ‘Prime Air’ Cargo Jet). To take greater control of its shipping and

package delivery operations, Amazon is also using its own trucks, drivers and a fleet of third-

party couriers for the last-mile delivery, which is the most expensive leg of any trip. The theory

is that owning its own cargo fleet could help stem the rise of shipping costs, which have been

rising more quickly than sales. Another way Amazon is handling the last-mile delivery is by

using a network of independent contractors, similar to on-demand ride-hailing service like Uber

Technologies, Inc. and Postmates, Inc. Amazon rolled out Amazon Flex in September 2015,

which delivers merchandise through third-party couriers to customer’s homes in Seattle. For this

program, people sign up for shifts through an app that prompts them to fetch packages from

mini-storage houses as opposed to Amazon’s massive fulfillment centers and take them to

customers' homes in as little as one hour (Bensinger, Amazon Taps ‘On-Demand’ Workers for

One-Hour Deliveries). The program is now available in 14 cities, including Las Vegas, Phoenix,

and Dallas.

With this type of logistics strategy, the more packages Amazon sends to a fulfillment

zone, the cheaper the average delivery cost of each package. Basically, once a package-delivery

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vehicle has made a delivery to one location, it does not take much more fuel and time to go to the

next location. To keep the cost low consistently, Amazon just needs to sell more items to the

same area. Amazon is moving in that direction by selling fresh food and other grocery items with

a same-day delivery service (Leonard). With this new program, called Prime Now, customers

can select tens of thousands of items, including wine or beer from their website and have it

delivered right to their door. In a Wall Street Journal article Greg Bensinger quoted Gene

Munster, a Piper Jaffray analyst, “As Prime Now expands, Amazon is becoming a greater threat

to brick-and-mortar retailers. Same-day and same-hour delivery have the potential to open an

entirely new retail segment to Amazon – the instant gratification market” (Bensinger, Amazon

Reveals ‘Prime Air’ Cargo Jet). Just think, the only thing the traditional retailers historically had

going for them is that their customer could enjoy driving to the store to pick up the items they

consume every day. Now that advantage is slowly going away.

These ambitious supply chain strategies started with a 2013 report to Amazon’s senior

management team that proposed an aggressive global expansion of the company’s fulfillment

service dubbed project “Dragon Boat.” The program was designed to find ways to provide

storage, packing and shipping for independent merchants selling products on the company’s

website. It envisioned a global delivery network that would control the flow of goods from

factories in China and India to customer doorsteps in Atlanta, New York and London (Weise).

This will put Amazon at the center of the small package shipping industry along with the giants

like FedEx and UPS. Amazon wants to also bypass the middlemen who handle cargo and

paperwork associated with transnational trade. Amazon’s intent is to channel the inventory from

thousands of merchants around the world and then buy space on trucks, planes and ships at

reduced rates. These merchants will be able to book cargo space online or via mobile devices,

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creating what Amazon described as a “one click-ship for seamless international trade and

shipping” (Soper). According to Spencer Soper’s article on Bloomberg Technology website,

“Amazon will partner with third-party carriers to build the global enterprise and then gradually

squeeze them out once the business reaches sufficient volume and Amazon learns enough to run

it on its own” (Soper). Soper may be going a little overboard in his “Amazon taking over the

shipping business” theory. The small package delivery business is extensive and Amazon is

adding on more packages to be transported. I believe Amazon is trying to control the inventory

in transit, keeping the warehouse in motion and selecting items to be removed or added to a

massive supply chain of everyday items.

Challenges

As described in Jay Greene’s Seattle Times article referencing FedEx quarterly earnings

call in January 2016, Frederick W. Smith, FedEx chairman, president and chief executive, noted

in response to a question about the potential competitive threat from Amazon that FedEx has a

vast logistics network that would be hard to replicate, “FedEx is a highly integrated global

transportation network, in fact, one of only two operating at a significant scale in the United

States today, and only one of three major delivery networks in the U.S. – the other two being

UPS and the United States Postal Service,” Smith said. “That’s not likely to change in the

foreseeable future, as these networks are very capital-intensive and information-intensive”

(Greene). The challenge for Amazon is to not lock horns with these giants and to just find ways

of transporting small package better, especially the last-mile. The technology is out there; each

small package shipper will need to find what will work for them at the right cost.

Noted in a November 11, 2013 Business Wire article, Amazon is already working with

the U.S. Postal Service to deliver packages on Sunday in the Los Angeles and New York

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metropolitan areas (Business-Wire). Amazon Prime members can now receive unlimited free

two-day shipping on millions of items on Sunday as well in these areas. Amazon and the U.S.

Postal Service plan to have this service available for their Prime members in other heavy

populated cities like Dallas, Houston, New Orleans and Phoenix (USPSOIG). The challenge will

come when Prime members in the suburbs and other remote areas demand the same type of

service for their annual Prime payment plan of $99.

However, the Flex program opens up Amazon to new challenges as well. Bensinger in his

Wall Street Journal article provides some insight into this Uber driver type program, in that many

workers enjoy the flexibility of being a contractor and not an employee. They typically pay these

drivers between $18 and $20 an hour, but drivers can make more if they deliver more packages

quickly because many customers also pay tips (Bensinger, Amazon Taps ‘On-Demand’ Workers

for One-Hour Deliveries). For Amazon to hit their target goals, they most likely will need to

partner with these types of carriers in an attempt to keep package delivery cost low. Unlike

FedEx, UPS and USPS, there may be some areas of concern if they are not able to deliver

customer orders consistently and quickly with the same shipment visibility at a reasonable rate.

Lastly is the challenge with the drone program. During a CNN Doug Gross interview

with CEO Jeff Bezos, these drone “octocopters” will have a 10-mile radius. So, it's likely that

only the folks in big cities located near an Amazon distribution site would qualify for delivery.

The octocopters will initially carry items up to five pounds, which is roughly 86% of all

deliveries Amazon makes (Gross). But for even that 10-mile range to work, Amazon better be

onto something about battery life that the rest of us don't know. Gross also noted in his CNN

article a conversation with drone expert Missy Cummings, “drones this size will have a battery

life of about 30 minutes, and the weight of their cargo could make that even shorter” (Gross). I

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feel there are only two things that can be done: either develop a way to extend the battery life or

bring the warehouse or fulfillment station closer to where customers are and find a way to make

this work for Prime members not living in big cities. With everyone waiting in anticipation for

the FAA to announce the rules for legal, commercial operation of drones (French), Amazon may

want to start thinking about what to do next.

Opportunities

CEO Jeff Bezos eventually wants to use drones to get packages to customers. Will that

program replace the Amazon Flex program that works like on-demand ride-hailing service Uber?

Remember, these drivers would pick up packages at small warehouses near “metropolitan” areas

and deliver them to customers’ doors. This is a huge opportunity for Amazon to cut transport

cost because the more customers buy stuff online and packages are being delivered within the

same zone; the more deliveries can be combined into single runs. Also, this would be a great

benefit for their Prime members with a selection of tens of thousands of items through the Prime

Now program delivered to them without leaving home. But this is a fraction of the more than 200

million products on Amazon’s main e-commerce site.

The “last mile” portion of delivery is usually the most expensive and difficult to combine

stretch of a package’s journey from a fulfillment center to a customer’s front door and has

become the biggest demand to beat as shoppers expect cheaper and faster delivery. I can see why

the CEO wants to use drone octocopters to make the final leg of this journey. The use of drones

could especially be cost-effective in out-of-the-way areas where smaller regional couriers deliver

parcels to Amazon customers. Such couriers charge an average 35% of the total shipping cost

(Reuters). Also quoted in the same article was Rob Howard, chief executive of Grand Junction, a

San Francisco-based logistics technology company, “[If Amazon finds a more efficient way] this

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is a huge competitive advantage for Amazon. It’s not a death sentence yet for local carriers, but

it’s a new path” (Reuters).

I would think this would be an opportunity for small regional carriers as well; by

consolidating their runs from local grocery markets, specialty shops, and department stores to

Amazon fulfilment station or fulfilment air vehicle that transfer packages to drones. I believe

Amazon can change the package delivery service by adding a new leg – the last hour leg.

Future Focus

Since Amazon is striving to provide easy-to-use functionality, fast and reliable

fulfillment, and timely customer service, Amazon’s future focus should be the area of Airship

transport technology. Major Zachery B. Jiron of U.S. Air Force wrote a 33-page research paper

on the capability of the Airship in 2011, the following are some extracts from his paper: The

Airship is an aircraft that combines characteristics of heavier-than-air (HTA) technology, fixed-

wing aircraft and helicopter, and lighter-than-air (LTA), aerostat technology. This type of aircraft

is particularly safe given it achieves lift from a combination of – buoyant lift (using helium

which does not burn), aerodynamic lift due to its innovative design, and direct rotary lift. Its

unique outer skin can sustain damage while allowing graceful degradation to landing if

necessary. With a possible flight range of 6,800 nautical miles at a speed of 100 knots and a very

large payload capacity of 500 tons coupled with an air cushion landing system, the Airship will

reinvigorate the transportation community and those seeking ultra-heavy and affordable airlift

transport options (Jiron).

Commercial freighters will be able to pick up product at the point of origin and deliver

directly to distribution centers, bypassing ship, train and truck transport handling areas. By

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providing a transformational airborne logistics service, this immediately enables the transport of

goods, supplies, and commerce to locations where access was previously impossible or cost

prohibitive. Airships will revolutionize the way Amazon executes their drone octocopters

missions. This would be a game-changer for Amazon.

Combining the drone octocopters with the Airship offers a point-to-point direct airborne

freight delivery, bypassing traditional delays in the trucking, intermodal, airline and shipping

industries. This technology will alleviate port congestion, which is becoming increasingly

problematic with a grim outlook for the future. This allows delivery from harvesting directly to

the customer, plant or port for the fresh produce industry. In other industries, Airship allows

development in remote locations without the need for traditional infrastructure development of

roads, rail, or runways. Operating in areas that lack airports, seaports, railroads, and

infrastructure will give the commercial industry unprecedented access to remote suburban areas.

The CEO of Global Hybrid Company David A. Kalinske wrote an executive summary in

2015 that provided some insight to the cost of utilizing an Airship for commercial use. The

Airship ability equates to transporting goods of any kind nonstop from Chongqing, China to

Chicago. Assuming capacity exists for transporting this shipment by traditional air transport

(excluding customs), it would cost $9.37M as compared with potential Airship transport cost of

$1.09M, an 800% cost savings. These savings are realized while also reducing transport time

from 14 days down to 2 days by traveling via the most direct routing, over land, ice and water

(Kalinske).

No aircraft design has ever been developed past the initial experimental stages despite

many such designs having been proposed over the years. However, recent advances may indicate

that the technology has matured as several manned and unmanned prototypes have flown and

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successfully demonstrated the concept. Some companies that have working porotypes include

Lockheed Martin’s hybrid airship (Lockheed), Hybrid Air Vehicle’s Airlander (Hybrid-Air-

Vehicles), and Aeroscraft’s Dragon Dream (ACWEEK).

To be the world’s most customer-centric company, Amazon may want to look at utilizing

the Airship for the movement of their 200 million products available on their website from

producer to customer. They may need to draw their logo smile a little bit bigger because of a

possible 800% transport cost savings. If they are willing to buy some cargo aircrafts to reduce

cost, what’s a couple billion to invest in the Airship program and put that up in the air? Who

knows, they could be already working on this because one of manufacturers for the airship,

Aeroscraft Corporation, has a prototype named “Dragon Dream” (ACWEEK) and the 2013

report to the Amazon senior management team was named project “Dragon Boat.”

Amazon has started up some great programs so far, and they are giving the brick-and-

mortar stores a run for customers’ money. “Last hour leg” of package delivery is the key to

breaking the “instant gratification” barrier and continuing a relationship with other carriers. The

drone program will work well with Airships because it would bring a flying warehouse closer to

Prime members who have chosen to live in remote suburbs, not in large cities. Amazon’s

hometown of Seattle would be a great place to test this program by providing the soon-to-be

Prime members in Alaska the same Prime Now support as the members in Dallas. We may even

need to add a new term to our logistics vocabulary – instead of cross-docking, it would be called

cross-flocking, meaning a ferry aircraft group in flight under the guidance of a lead storage

aircraft. Jeff Bezos wanted his store to be exotic, different and big like the Amazon River, and

the Airship program would reflect all these ideals.

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Works Cited

ACWEEK. Aeros’ Dragon Dream prototype takes flight. 27 September 2013. <http://www.aircargoweek.com/aeros-dragon-dream-prototype-takes-flight/>.

Bensinger, Greg. Amazon Reveals ‘Prime Air’ Cargo Jet. 5 August 2016. <http://www.wsj.com/articles/amazon-reveals-prime-air-cargo-jet-1470378818>.

- Amazon Taps ‘On-Demand’ Workers for One-Hour Deliveries. 29 September 2015. <http://www.wsj.com/articles/amazon-taps-on-demand-workers-for-one-hour-deliveries-1443499263>.

Business-Wire. Amazon and the United States Postal Service Now Delivering Packages on Sunday, Making Every Day an Amazon Prime Delivery Day. 11 November 2013. <http://www.businesswire.com/news/home/20131110005058/en/Amazon-United-States-Postal-Service-Delivering-Packages>.

French, Sally. 6 myths about Amazon Prime Air and drone delivery, debunked. 2 December 2015. <http://www.marketwatch.com/story/6-myths-about-amazon-prime-air-and-drone-delivery-debunked-2015-12-02>.

Greene, Jay. Amazon poised to take on UPS, FedEx in delivery business. 10 January 2016. <http://www.seattletimes.com/business/amazon/amazons-delivery-ambitions-take-on-industry-giants/>.

Gross, Doug. Amazon's drone delivery: How would it work? 2 December 2013. <http://www.cnn.com/2013/12/02/tech/innovation/amazon-drones-questions/>.

Hybrid-Air-Vehicles. n.d. <https://www.hybridairvehicles.com/>.

Jiron, Zachery. HYBRID AIRSHIPS FOR LIFT: A NEW LIFT PARADIGM AND A PRAGMATIC ASSESSMENT OF THE VEHICLE’S KEY OPERATIONAL CHALLENGES . Maxwell Air Force Base, Alabama: Air Force Fellows, 2011.

Kalinske, David. "Executive Summary - Global Hybrid Company." 2015.

Leonard, Devin. It’s Amazon’s World. The USPS Just Delivers in It. 30 July 2015. <https://www.bloomberg.com/news/articles/2015-07-30/it-s-amazon-s-world-the-usps-just-delivers-in-it>.

Lockheed. Hybrid Airship. n.d. <http://www.lockheedmartin.com/us/products/HybridAirship.html>.

Ramo, Joshua. Jeffrey Preston Bezos: 1999 PERSON OF THE YEAR - TIME. 27 December 1999. <http://content.time.com/time/magazine/article/0,9171,992927,00.html>.

Reuters. How Amazon Is Making Package Delivery Even Cheaper. 18 February 2016. <http://fortune.com/2016/02/18/amazon-flex-deliveries/>.

Soper, Spencer. Amazon Building Global Delivery Business to Take On Alibaba. 9 February 2016. <https://www.bloomberg.com/news/articles/2016-02-09/amazon-is-building-global-delivery-business-to-take-on-alibaba-ikfhpyes>.

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Spector, Robert. Amazon.com: Get Big Fast. 2002.

USPSOIG. No More Day of Rest for Postal Package Delivery. 13 November 2013. <https://www.uspsoig.gov/blog/no-more-day-rest-postal-package-delivery>.

Webley, Kayla. Online Shopping. 16 July 2010. <http://content.time.com/time/business/article/0,8599,2004089,00.html>.

Weise, Elizabeth. Amazon's Chinese shipping license reflects global goals. 10 February 2016. <http://www.usatoday.com/story/tech/news/2016/02/09/amazon-shipping-license-china-united-states-dragon-boat/80074510/>.