Fulfillment: Amazon’s Operations
Earlier in the year we had a fascinating talk to our MBA class from John Abate of Amazon in Dunfermline. A long time ago I was involved in developing control systems for distribution systems and the assumption was that as robots became cheaper we would soon be seeing distribution centres with the lights off and robots shuttling up and down the racks. What we see in Amazon is a blend between the use of technology and people: the technology is used for sorting and checking, with people picking products from the racks and packing them for despatch. The main benefit of this model is its resilience: if picking is automated, a broken robot makes a section of the racking unavailable; the item lines held in centres are duplicated across Europe, so that if a centre is closed their orders can be fulfilled from another centre; and using manual processes combined with the use of temporary staff during peak periods allows capacity to be flexed to follow seasonality.
Amazon fulfillment processes can also be used a by other firms to deliver product to customers. This is a video from Amazon in the US describing their fulfillment service for other sellers. The Amazon business model is to drive up volumes at small margins. In today’s Guardian it is reported that Morrisons, the last major holdouts from home deliveries in the UK grocery sector, will soon be running a home delivery service to stem their market share slide. But the companies already providing home delivery may not be making any money from it. The online grocery business models of Tesco, Sainsbury and Waitrose, based on picking stock off the shelves and vanning it to the customer had the initial attraction of requiring low capital investment, but the costs of handling and inefficiencies in van routing sour the economics. Currently the volumes of groceries sold through Amazon are small, but as the Guardian notes in relation to Morrisons: “The online grocery market is worth £5bn and is growing at £1bn a year – that’s a big pie to refuse to fight for”. At what point do Amazon decide to push hard on gaining a position in ambient groceries?