Supply chain: Amazon is changing the rules of the game

I did something online the other day that I don’t often do. But heck, if you’re honest, you’ve probably done it too. I bought a Christmas gift on Amazon. After all, it ‘tis the season for online shopping.

My real interest in the world’s biggest online retailer isn’t just that they had the DVD’s I wanted for my brother-in-law. Rather, it’s how Amazon continues to change the game for retailers. A few Christmases ago, they set the retail world on its backside with the introduction of free shipping – regardless of the fact that it costs Amazon, and everyone else, something to provide that service for free. More recently, Walmart announced that it plans to offer same-day shipment of online orders in select markets. You have to assume it’s an effort to keep up with Amazon’s move in that direction.

In fact, Amazon is dictating the rules of the game that other retailers have to play by. In the view of Jim Tompkins, president of Tompkins International and one of the sharpest observers of our industry, its going to have a profound impact on retail distribution and retailers in general. “Retail is at a crossroads,” Tompkins says. “The reality is that Amazon is so big that they are now mandating what the customer satisfaction requirements are for everyone, even if you don’t think that you compete with Amazon.”

Tompkins has been blogging about the Amazon effect in recent months. As examples of how Amazon is redefining the retail game, he points out that most shoppers expect free shipping. They expect free returns. And unless you live in the plains of North Dakota, you expect your order to show up in a day or two. Or faster.

Those customer expectations are reshaping how companies design their networks and operate their distribution centers. “In the old days, we looked at the transportation costs, inventory carrying costs, the taxes and a couple of other factors to come up with a network of DCs to service customers in a set of zip codes,” says Tompkins. “Now, we realize that how much we sell in a given area, like San Francisco, is dependent on the level of service we can provide in an area.” After all, Amazon is investing like crazy to get closer and closer to its customers and provide faster and faster service.

Tompkins, for one, has been tracking the way Amazon is building out its network. The company, he says, is building tens of millions of square footage of DC space. More and more of that space is near major metropolitan areas. “In 2004, 38% of Amazon’s fulfillment capacity was less than 200 miles from a major metropolitan area,” he says. “If you look at what Amazon is building today, 79% of its DCs are within 200 miles of a major metropolitan area.”

“For anyone who doesn’t get it, Amazon is absolutely going to same day delivery in major markets,” Tompkins adds. “It’ll be next day delivery in secondary markets and two day delivery in tertiary markets. If you’re going to do six days to North Dakota, you’re dead.”

For those of us in the materials handling industry, it’s a potential godsend. Amazon’s competitors are in an arms race to try to keep pace. To that end, Tompkins offers a few pieces of advice. “Retailers need a strategy that addresses four areas,” he says, adding that its probably tough to match Amazon in those four areas.

Price: Can you beat Amazon on price? For most, that’s hard to do, just as it was once hard to beat Walmart on price alone.

Selection: Can you offer more selection? As with price, that’s increasingly hard to do given that Amazon stocks deep and works with partners that carry what it does not carry.

Experience: Can you beat them on experience? Amazon invented this type of retailing.

Convenience: It may be hard to get product to a customer as fast as Amazon.

While those appear to give Amazon a daunting edge, Tompkins thinks brick and mortar retailers have some strengths if they can figure out how to turn their stores into an asset. “If I can give customers a reason to come into my store and offer online shopping as well, I have a competitive weapon,” says Tompkins. He points out that Walmart is adopting that strategy. Along with offering every day low prices, Walmart is creating small convenience locations and turning its stores into online pickup points. “They’re not making as much margin as if you just bought it off the shelf in the store,” he says. “But they’re intelligently making money on everything.”

Moving forward, Tompkins adds, retailers will have to rethink how and where they distribute product and what those distribution centers look like inside the four walls. “Supply chain is taking on a whole new role with respect to retailers,” he says. “It’s no longer just about cost reduction. The supply chain is the vehicle that delivers the company’s strategy to the customer.”

“It’s a whole new game,” he adds.

To learn more, you can watch Tompkins’ video blog on the Amazon Effect.