Chasing Amazon: Dynamic Warehouse Strategies
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The document discusses dynamic warehouse strategies presented in a webinar, highlighting Amazon's impact on consumer expectations and e-commerce growth. It outlines Amazon's successful expansion into same-day shipping and the competitive challenges faced by traditional retailers, urging the adoption of a dynamic warehouse network for flexibility and cost efficiency. The presentation emphasizes the need for adaptive logistics solutions to cope with changing market demands and increasing consumer expectations.
![Amazon Holiday Performance
Amazon’s 2015
Cyber Monday
was 21.1%
better than
2014
CYBER MONDAY
Black Friday
was up 20.8%.
[Sales for brick
and mortar
retailers fell
>10% ]
BLACK FRIDAY
Amazon
aggressively
established 24
major markets
for same day
shipping
SAME DAY SHIPPING
Amazon
signed up
more than 3
million Prime
members
during the
third week of
December
alone
PRIME SIGN-UP](https://image.slidesharecdn.com/jocwebcastvfinal-160425194933/85/Chasing-Amazon-Dynamic-Warehouse-Strategies-4-320.jpg)
![Dealing with Variability
Differences in
cost structure
[e.g. labor wage inflation
much higher in some
places than others]
Geographical
differences in
demand
Products of some
suppliers selling
much faster than
others
Growth rates
different from
forecast
If actual demand is highly variable compared to forecasts used for capacity
planning, then cost per order can increase significantly.
Variability can arise in many forms:](https://image.slidesharecdn.com/jocwebcastvfinal-160425194933/85/Chasing-Amazon-Dynamic-Warehouse-Strategies-21-320.jpg)
Chasing Amazon: Dynamic Warehouse Strategies
- 1. Chasing Amazon: Dynamic Warehouse Strategies Journal of Commerce Webinar April 13, 2016
- 2. Karl Siebrecht CEO, FLEXE Amitabh Sinha Assoc. Prof. of Technology and Operations, Ross School of Business at U. Michigan Steve Johanson CEO, Starboard Corp. Vivek Rajeevan Student Consultant, MBA Class of 2017, Ross School of Business at U. Michigan
- 3. Amazon Has Changed Consumer Expectations
- 4. Amazon Holiday Performance Amazon’s 2015 Cyber Monday was 21.1% better than 2014 CYBER MONDAY Black Friday was up 20.8%. [Sales for brick and mortar retailers fell >10% ] BLACK FRIDAY Amazon aggressively established 24 major markets for same day shipping SAME DAY SHIPPING Amazon signed up more than 3 million Prime members during the third week of December alone PRIME SIGN-UP
- 5. They are accelerating their share growth…. 24% of total US retail growth ...by fundamentally changing distribution Source: Company Data, U. S. Department of Commerce, Macquarie Research, December 2015 51% of total US E-commerce growth
- 6. Plus an estimated an additional $1.2B to build 7.2 million square feet of new fulfillment center space in the US in the next two years. >$8 billionInvested in US fulfillment centers alone
- 8. How do you compete?
- 9. There is a New Strategy The Dynamic Warehouse Network: • A peer-to-peer marketplace for warehousing storage and services • Counter size with flexibility • Counter Amazon scale with industry scale
- 10. Business Profile • $50MM sales • SKUs: 500 • Orders per year: 1MM • Units per order: 1.5 • Customer demand map: mirrors US population • 1 current DC: 95k sqft in Ontario, CA • Current delivery: 12% orders 2 days or less • Transportation Cost-per-Order: $9.53 • Goal: 70-90% of orders delivered in 2 days or less LA-based Ecommerce Co.
- 11. Step One: Network modeling exercise to determine warehouses locations based on delivery goals
- 12. Scenario A: 70% of orders delivered within two days Size (sqft) Utilization Startup Costs Annualized Lease Cost Fullerton, CA 22,000 95% $110k $158k Decatur, IL 38,000 95% $130k $275k Statesville, NC 34,000 95% $125k $244k 3 DC Network Transportation Cost-per-Order: $7.76
- 13. All warehouses utilized at 95%. Transportation Cost-per-Order: $7.48 Scenario B: 90% of orders delivered within two days 8 DC Network Size (sqft) Startup Costs Annualized Lease Cost Santa Fe Springs, CA 21,300 $99k $153k Fort Worth, TX 10,700 $88k $77k Kansas City, MO 3,400 $81k $24k Decatur, IL 4,900 $82k $35k Statesville, NC 9,400 $87k $68k Montgomery, AL 13,200 $91k $95k Syracuse, NY 18,800 $96k $135k Milwaukee, WI 12,500 $90k $90k
- 14. Scenario C: 90% of orders delivered within ONE day
- 15. Step Two: Compare economics of traditional warehouse network expansion vs. dynamic warehouse network expansion
- 16. Key Model Assumptions Outbound Transportation Inbound Transportation Labor Productivity Lease Cost Lease Term Dynamic WH Costs Annual Order Growth Standard Parcel Rates FTL 120 Orders per Warehouse FTE $.60/sqft Per Month 3 Years Based on FLEXE Marketplace Rates Baseline = 0%
- 17. Total Year 1 Distribution and Startup Costs $- $2,000,000 $4,000,000 $6,000,000 $8,000,000 $10,000,000 $12,000,000 $14,000,000 Current Traditional (70%) Dynamic (70%) Traditional (90%) Dynamic (90%) Startup Costs Committed Costs (Lease) Variable WH Costs Inbound Transportation Outbound Transportation Year 1 Total Warehousing and Transportation Costs
- 18. Comparative Warehousing Costs – Year 1 Year 1 Warehousing Costs $- $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 Current Traditional (70%) Dynamic (70%) Traditional (90%) Dynamic (90%) Startup Costs Committed Costs (Lease) Variable WH Costs
- 19. Comparative Cost per Order – ”No Growth” Case Year 1 Distribution Cost per Order in 8 DC Scenario (90% within 2 days) Total Warehouse Utilization: 95% $-‐ $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 Traditional Dynamic
- 20. Comparative Cost per Order – Growth Uncertainty High growth (30%) Warehouse Utilization: 95% Moderate growth (20%) Low growth (10%) Warehouse Utilization: 75% Warehouse Utilization: 58% Suppose you’ve built up assuming 30% annual growth, but actual growth is different. $-‐ $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 Traditional (90%) Dynamic (90%) $-‐ $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 Traditional (90%) Dynamic (90%) $-‐ $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 Traditional (90%) Dynamic (90%)
- 21. Dealing with Variability Differences in cost structure [e.g. labor wage inflation much higher in some places than others] Geographical differences in demand Products of some suppliers selling much faster than others Growth rates different from forecast If actual demand is highly variable compared to forecasts used for capacity planning, then cost per order can increase significantly. Variability can arise in many forms:
- 23. Logistics market: massive, outdated & increasingly broken US Business Logistics Inv Carrying Costs Transportation Admin/Other $1.45T Source: 2015 CSCMP State of Logistics Report Supply Chains Today • Complex • Built for efficiency • Process + enterprise IT = rigidity Supply Chains Tomorrow • Still must be efficient • But also flexible & adaptable Market Dynamics Causing Stress • Consumer expectations for same/next day/free shipping • Shorter product lifecycles • Amazon pushing competitive bar higher US Business Logistics Spending 2014 Warehousing
- 24. One Key: Dynamic Warehousing 1. Add more options & iteration into standard warehouse network planning 2. Cost/benefit analyses change 3. Dynamic solutions do not require capital outlays or long-term commitments 4. Significantly reduce the costs, time and complexities involved in network expansion 5. Fight Amazon size with dynamic flexibility 6. Use industry scale to compete with Amazon’s scale
- 25. Questions? Whitepaper available mid-May: www.tauber.umich.edu/research/published-articles karl@flexe.com | steve@starboardcorp.com | amitabh@umich.edu | vivekraj@umich.edu
Editor's Notes
- #7: http://www.scdigest.com/firstthoughts/16-02-18.php?cid=10305
- #8: Simple math: more product closer to end consumers = faster + cheaper delivery. 100 FC and sortation centers, plus additional 60 other facilities for Prime Now and delivery sortation in US. http://www.businessinsider.com/how-many-fulfillment-centers-does-amazon-have-in-the-us-2015-3