DIY Delivery System

Amazon’s latest push to expand Sunday delivery to more cities made me start thinking about Amazon’s veiled predictive logistics and stocking efforts last Christmas. This news comes off the heels of an article detailing Amazon’s moves to lessen their dependence on shippers like UPS and Fedex. I’ve always been such a fan of Amazon’s ruthless mission of customer satisfaction.

One of the problems with being an online retailer is shipping and supply. First, you need a place to hold inventory. For Amazon, this began as one big warehouse in Nowhere, Kansas. The problem with this is:

  1. You need to spend money to keep the lights on
  2. You need to pay to have products shipped in
  3. You need to pay to have products shipped out

Most companies drive down shipping costs by shipping things in big batches, but for a middle-man retailer like Amazon, that’s hard, with inventory coming from all over and any X number of products being ordered at any time.

A really amazing thing that Amazon decided on a strategy-front early on was to focus solely on customer satisfaction (this sounds like a digression, but I promise you it’s not).

To achieve customer satisfaction, they installed this Virtuous Cycle. A virtuous cycle, which they referred to as a “flywheel” is an idea where you can feed inputs into the cycle, which serve to increase the next input, which increases the next input, all of which cause the cycle to move faster.

The Amazon Flywheel has three inputs:

virtuous_cycle

  • Customer satisfaction
  • Greater selection
  • Lower prices

If customer satisfaction increases, they get more orders. With more orders, they have greater leverage and bargaining power to drive down shipping prices (as well as supplier-side prices, but that’s something else). With lower shipping prices, the total price of the product is cheaper, which increases customer satisfaction. By feeding one input, that creates a self-sufficient cycle that spins faster and faster.

This is one way to lower shipping costs (another way is to create more fulfillment centers closer to large cities), which Amazon has done to great aplomb. But I don’t think it’s enough. Or at least, Jeff Bezos must not think it’s enough.

There’s a great line in Delivering Happiness, a book about the founding of Zappos, written by Zappos’ founder Tony Hsieh. He says, “Never outsource your core competency”: If you’re in the business of shipping people products, you never let anybody else handle shipping and storing those products. He learned this after an outside shipping and logistics company failed Zappos in its early days and nearly caused the entire company to shut down.

Amazon is insourcing their core competency in an extreme way: by developing their own network of delivery methods. Their drones were in the news recently, promising delivery times that would make your favorite pizza joint jealous. But for deliveries farther than 10 miles, a homegrown network of delivery vehicles is vital. With their own methods, Amazon is free to experiment with driving routes to cut down on time and fuel expense. They’re free to deliver at night. They’re free to deliver as much or as little as they want as they optimize and experiment with a service that’s stood unchanged for quite some time.

It’s also worth mentioning that Google and eBay have delivery services that use consumer vehicles to deliver things, much like Uber. It’s even more worth mentioning that Uber is stretching its own delivery muscles, and is a step away from creating their own courier service.

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