How Many Fulfillment Centers are Needed for Amazon to Achieve Same Day Delivery to the Top 20 U.S. Cities?
Supply Chain Digest Blog Entry: July 24, 2013 (here).
eBay recently announced that they intend to compete head on against Amazon Prime and Walmart by providing home delivery of consumer orders within a one-hour time frame. You can learn more about their service called eBay now by clicking here. This is the emerging "virtual shopping mall" concept that allows a consumer to shop from multiple retail stores from the comfort of their home and receive their goods within one hour. As long as it fits in a car, you can get it in one hour! Indeed, at the time of this article, 16 different major retailers are participating in the program. Talk about great customer service! But let's face it folks, there are at least a dozen reasons why this concept will not work in the real world. My personal top five reasons are listed below:
- Traffic congestion in target markets (larger metropolitan cities) is a major challenge that will result in the "over-promise and under-deliver" syndrome as far as the one-hour delivery promise is concerned. Four hours maybe. One hour - only if you get lucky.
- The accuracy of retail store inventory is never as good as inventory accuracy in a distribution center because consumers are constantly touching and moving the stock. In a distribution center, the inventory being handled is recorded in real time by internal associates. In a store, anyone can throw an item in a basket and later take it out and dump it somewhere else. There is also inventory held in the back room that the eBay valet can't access but can show up as being available for sale. There is also the issue of theft which causes inventory at the store to shrink and therefore be less accurate. This implies a higher percentage of unfilled order lines when they are being filled from stores versus from a distribution center. This equates to a lower customer satisfaction rating and a higher defection rate over time. Just think about the frustration you felt the last time you drove to your local store to pick up an item being promoted in weekly flyer only to be told it is out of stock and there is no rain check policy - and it’s the first hour of the promotion!!!.
- Peak shopping season (Cyber-Monday, Christmas, etc.) is a nightmare in most retail stores and I feel sorry for the poor eBay valet who has to get in and out of multiple stores to buy multiple items to deliver to a customer in one hour during this time of year. Good luck. I have trouble just finding my car in the parking lot.
- Scalability is constrained by the fact that the more stores that are introduced to the virtual mall, the harder it becomes to execute with the one-hour promise. After all, the valet has to get in and out of all more stores to pick customer orders and this adds time to the process. Introducing more stores implies a higher probability that the consumer will order from more locations which in turn increases the time required to execute the fulfillment function.
- This level of uber-service comes with a big price tag. Profit needs to be made after all and retail is a business of pennies. The slightest deviation away from efficiency kills profits. Let us say that I order five different items that total $25 (to meet the minimum order criteria) and I do this for five different retail stores and now I expect the goods in one hour. This can easily generate at least three hours of work to pull off. Let's say that the valet labor costs $15/hour fully loaded thus we spend $45 on the valet alone, never mind the transportation cost to perform the delivery. Now in reality most orders will be for one or two items so this example is extreme, but it serves to make the point that this concept is very expensive to pull off. Especially when one considers that the delivery fee is only $5. I am sure that many of us spend at least $5 in gas when we go shopping so profit margins can quickly be eliminated.
- To be successful at this game, you need to have enough volume and precise execution so that deliveries are spaced apart by say 5 - 10 minutes as opposed to being spaced apart by 20 - 30 minutes. This requires a centralized dispatch and optimization concept. The idea of course is to maximize the deliveries per hour. Stop and think of the military precision with which UPS runs its operations and the decades that it has taken to develop their logistics systems. Now imagine that this type of logistics execution excellence needs to be deployed overnight. Without a highly optimized transportation operation, we end up with the scenario that is similar to the pizza delivery guy who drives through your neighborhood and runs every stop sign to get to the customer on time, except now we are talking about delivery vans.
As you can probably guess, I am a skeptic that this concept will fly and I suspect it will eventually need to be modified significantly to work. Frankly I think this is a reaction to the ever-increasing Amazon and Walmart threats. In my opinion, eBay needs to think this one through quite differently.
For starters, this concept might be more effective and plausible if (a) a centralized distribution concept was introduced and (b) the delivery window time was opened up to 4-6 hours. Here's how it could work:
- Consumer visits virtual mall and places orders of multiple items from multiple retailers.
- The retail stores are responsible for picking hourly batches of orders from their stores and having a truck move the goods to a small eBay depot located in close proximity to the stores and to the target market. This can be a small facility since it is mainly intended to flow through and stage merchandise in a quick time frame. The key is to minimize warehouse labor expense.
- The goods are received and consolidated using smart material handling equipment so that the consumer's order is married up into a standard entity such as a tote.
- The drivers and fleet equipment ate centrally managed so that shipping routes are optimized and released in discrete waves to minimize the time between deliveries. Clearly the wider the delivery window, the greater the opportunity to reduce operating expenses by better optimizing the outbound routes.
- Drivers are dispatched to specific regions of the city. Trucks are equipped with the latest GPS and traffic reporting systems to enable dynamic re-routing on the fly.
There's much more to be said on this topic but in the interest of time I will end by saying that there needs to be a reality check put in place when these headline-grabbing concepts are announced. Heck, if I can't even get my local Chinese restaurant to deliver take-out within the hour on a Friday night, how are they going to pick, pack and ship multiple orders from multiple retail store locations in one hour when the Queen's Midtown Expressway is locked up in traffic?
Marc Wulfraat is the President of MWPVL International Inc. He can be reached by clicking here. MWPVL International provides supply chain / logistics network strategy consulting services. Our services include: supply chain network strategy; distribution center design; material handling and automation design; supply chain technology consulting; product sourcing; 3PL Outsourcing; and purchasing; transportation consulting; and operational assessments.