Is Amazon a 3PL?

Is Amazon a 3PL?

By Robert C. Lieb and Kristin Lieb

As Amazon expands into logistics services, the giant retailer is taking on more of the characteristics of a third-party logistics (3PL) company. How might that shape the industry’s competitive landscape?

Amazon.com has come a long way since its founder and chief executive officer, Jeff Bezos, envisioned the company as a virtual bookstore. It has evolved into an online retail giant that generated $74.45 billion in revenues in 2013, much of that coming from its support of more than 2 million companies that used Amazon to sell their products online and distribute them to customers. Under the company’s various programs, Amazon not only provides its customers with a means of advertising and selling their products, but also offers to store those products in its fulfillment centers; pick, pack, and ship them; and provide customer service, including handling returns.

In the process of developing its network to support those services, Amazon has built out an infrastructure that by one recent account now includes 145 warehouses around the world (84 in the United States, four in Canada, 29 in Europe, 15 in China, 10 in Japan, and seven in India), which collectively account for more than 40 million square feet of space. Amazon has also made substantial investments in material handling systems, including the acquisition of Kiva Systems for $775 million in 2012.¹ Kiva, now a wholly owned subsidiary of Amazon, designs robots, software, workstations, and other hardware that has been used in the distribution facilities of companies such as Staples, Office Depot, and The Gap. The systems produced by Kiva are expected to be an integral part of the distribution network now being developed by Amazon. Amazon has also made major investments in cloud computing. At the same time, the company has been developing transportation capabilities to support its Amazon Fresh same-day grocery business.

Much of Amazon’s recent growth has been fueled by its Amazon Prime program and Amazon Supply operations. Amazon Prime, which offers “free” two-day delivery to its more than 27 million subscribers for $99 dollars per year, doesn’t come close to recovering Amazon’s related transportation costs, but on average Amazon Prime customers buy twice as much merchandise per year as do other customers.²Amazon Supply, which provides a marketplace for thousands of industrial suppliers, represents a major move by the retailer into the business-to-business space. Amazon advertises it as offering 750,000 “essential” products for business and industry, with free two-day shipping for orders of $50 or more and a 365-day return policy. Amazon’s increasing presence in this industrial space poses a real threat to incumbents such as W.W. Grainger and Fastenal.

While Amazon’s reach into both retail and industrial markets continues to expand, profits reported by the company have been meager or, as was the case in 2013, nonexistent.*³ Regardless, Bezos has been able to convince the investment community that his ventures into a wide range of industries and markets, from diapers to delivery drones to space shuttles, ultimately will be rewarded with substantial profits.

Where is all of this leading? What does Amazon want to be when it “grows up”? Bezos has often been quoted as saying that he’s not sure that retailing will be the company’s core business in the future. If it isn’t, what is it likely to be? If one examines the distribution network the company has developed, the services it provides to affiliates that sell their products through Amazon, and its recent actual and rumored moves into transportation, then it’s logical to raise the question of whether Amazon is likely to become a major third-party logistics service provider (3PL). In fact, it could be argued that the company already is a 3PL.

With those questions in mind, the authors, who conduct annual surveys of the chief executive officers (CEOs) of many of the world’s largest 3PLs, decided to ask executives who participated in the 2014 surveys about Amazon’s effect on the field of supply chain management, its impact on the 3PL industry to date, and the nature of the competitive threat that Amazon might pose to 3PLs in the future. Their responses to those questions are discussed below.

AMAZON AS A GAME CHANGER

First, we asked the CEOs if they believed that Amazon has had a significant effect on the field of supply chain management. Twenty of the 25 CEOs surveyed said yes. They identified a number of ways the company has had an impact, but most frequently cited the role Amazon’s high-speed delivery programs have played in raising customers’ service-level expectations. Three CEOs mentioned Amazon’s introduction of same-day delivery. Its free two-day Amazon Prime shipping program was mentioned by another CEO, as was the “power” of free home delivery. Respondents also noted that these programs have had a significant impact on traditional logistics integrators, such as UPS, FedEx, and DHL, because Amazon’s push toward next-day standard and same-day expedited service levels is reducing the use of expedited transportation services like air freight.

Amazon’s e-commerce fulfillment services were cited as a “game changer” by several CEOs; they were also mentioned as a major reason for the establishment of the many online “stores” that rely upon those services to meet their customers’ needs. That expansion has subsequently led to a greater demand for e-fulfillment services. Amazon was also credited with demonstrating the power of bringing a broad range of supply chain resources under one platform, and as such was mentioned as the “obvious choice” for many new, small-scale online retailers that do not have the resources to manage fulfillment. Respondents also noted the increased interest among traditional retailers in developing omnichannel strategies to compete with Amazon as it takes a steadily increasing share of the market from brick-and mortar stores.

The CEOs offered some other interesting observations. Some said that Amazon is driving 3PLs to develop new short- and long-term plans to support online retailers with business-to-consumer and business-to-business solutions. Others noted that Amazon’s aggressive infrastructure expansion has affected real estate values and labor markets, particularly when it opens a new facility. Respondents also mentioned the company’s success in increasing shipment visibility, as well as its ability to reduce the service areas covered by individual distribution centers while at the same time increasing shipment velocity to customers. Not all of the comments were complimentary. One CEO said that Amazon has substantial market clout, but it “wields it so violently that it is not a customer of choice or a desired client.” Another suggested that the company “kills firms with low prices.”

THE IMPACT TO DATE ON 3PLs

In today’s business world, a company may simultaneously be another’s competitor, customer, and supplier. With that in mind, we asked the 3PL CEOs if their companies provide logistics services to Amazon, and nine of them said that Amazon was one of their customers. Those nine were then asked to identify the services they provide, which included the following: distribution, value-added warehousing, transportation services, bulky-goods fulfillment, and import/export services.

One respondent described a rather interesting relationship between Amazon and his company. Amazon employees are working in some of that 3PL’s distribution centers to support some of the 3PL’s customers that do business with Amazon. This relationship is similar to several others that Amazon has with key customers, including Procter and Gamble and Georgia-Pacific.up>4 In those cases, the retailer positions its own employees in the customers’ distribution centers to manage the distribution of the products those companies sell through Amazon.

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