Tale of Two E-grocers: AmazonFresh and Why grocery delivery service is greener than driving to the store

In our Operations Strategy MBA class, Gad and I teach and discuss the operations and economics of Internet grocer pioneer Peapod.  Two interesting e-grocer articles appeared this week:

The first, written in Forbes by Tom Ryan, is about AmazonFresh, the grocery overnight delivery service founded by Amazon in 2007, but still only serving the greater Seattle area.  Why?  In class we show the difficulty of this business and I praise the operational focus of Amazon.  If Amazon is using this as a testbed for future expansion, it confirms our findings that this is a slow business where one must build density household by household.  It simply takes a long time to arrive at profitable density: even for Amazon, it’s taking more than 6 years.

In his article, Tom proposes a second raison d’etre of AmazonFresh:

AmazonFresh isn’t about “competing with a small market with razor-thin margins and a checkered history.” It’s all about helping Amazon.com attain the scale to support its ambition to build a national same-day delivery shipping model.

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Trains and Trucks: Evolving American logistics

The Wall Street Journal had a pair of recent article that touch on how the business of schlepping goods from Point A to Point B has been evolving in the US market. The first deals with the booming business of railroads. The major US railroads have been on a spending boom (Boom Times on the Tracks: Rail Capacity, Spending Soar, Mar 26).  See the graph at right.

Just where has that money been going? To expanding track, enlarging tunnels, replacing bridges, and adding locomotives and cars. The emphasis has, in part, been on increasing the speed and reliability of trains in serving customers such as UPS.

In the past decade, though, under pressure from customers like UPS, trains have become more dependable. UPS “trained us in what it means to perform to their very high standards,” says Mr. Rose at BNSF. “I’m sure there were many times they were very frustrated.”

“I don’t know if we’re the largest customer [of the railroads] but I would tell you we’re certainly the most demanding,” says Ken Buenker, a vice president in UPS’s Corporate Transportation Group. UPS’s goal is an on-time arrival rate of 99.5%, he says. “So think about how much you risk with a train.” One breakdown could delay many deliveries.

Railroads used technology and strategy to tackle such problems. They used sensors to detect mechanical issues before they caused delays. They developed their own version of the airline “hub and spoke system” and organized shipments in trains all bound for the same destination. The latter move eliminated the time- and labor-wasting stops to break trains apart and reset them. It also paved the way for longer and speedier itineraries. Railroads “are always talking about efficiency and speed,” says Mr. Buenker. “The velocity of the network is really key for them.”

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Would you deliver packages for Wal-Mart?

Right now, same day delivery is one of the hottest topics in e-commerce with multiple firms experimenting with different ways of fulfilling on-line orders tout suite. See this Wired graphic-fest for a summary of what different firms are trying.

Then there is this.

Wal-Mart Stores Inc is considering a radical plan to have store customers deliver packages to online buyers, a new twist on speedier delivery services that the company hopes will enable it to better compete with Amazon.com Inc. …

“I see a path to where this is crowd-sourced,” Joel Anderson, chief executive of Walmart.com in the United States, said in a recent interview with Reuters.

Wal-Mart has millions of customers visiting its stores each week. Some of these shoppers could tell the retailer where they live and sign up to drop off packages for online customers who live on their route back home, Anderson explained.

Wal-Mart would offer a discount on the customers’ shopping bill, effectively covering the cost of their gas in return for the delivery of packages, he added.

(Wal-Mart may get customers to deliver packages to online buyers, Reuters, Mar 28)

The article describes this as being at the “brain-storming stage” and I must admit that I don’t know where that lands on Woody Allen’s notion-concept-idea spectrum. Indeed, it strikes me as being something of an elaborate April Fools’ joke.

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Evolving supply chains

As the New York Times tells it, supply chains are changing (New Hubs Arise to Serve ‘Just in Case’ Distribution, Feb 12).

Major storms like Hurricane Sandy and other unexpected events have prompted some companies to modify the popular just-in-time style of doing business, in which only small amounts of inventory are kept on hand, to fashion what is known as just-in-case management. …

Just-in-case is a response to the vulnerability of just-in-time supply chains, said Rene Circ, CoStar’s director of industrial research. Since the 1990s, just-in-time has made sense for many companies looking to reduce the cost of keeping large inventories on hand. Technology enabled retailers and manufacturers to closely track and ship items to replace merchandise sold or components consumed in production.

This model also reduced transportation costs, because goods would be shipped only as necessary. By combining the just-in-case with just-in-time strategy, Mr. Circ said, companies are trying to strike a balance between “carrying the minimum inventory possible, yet never running out of things, because inventory equals cost.”

I’ve been trying to think what I should say about this article for several weeks. I have felt conflicted because, on the one hand, it hits on some interesting points. On the other hand, it also leads with one of my pet peeves of business reporting. Specifically, it links any change in inventory management to some failure of just-in-time management. However, I am not convinced that is actually a good description of what is going on here.

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What’s it like to work in an Amazon fulfillment center?

If a major firm opened a new facility in an otherwise depressed area, that would be good news, right? An article in the Financial Times suggests that there may be some caveats on that conclusion in the modern economy (Amazon unpacked, Feb 8). The firm in question is Amazon and the location is Rugeley, Staffordshire, in the West Midlands region of England. As the article tells it, the town was once a booming coal mining center but has steadily been on the skids since the mine closed in 1990. Hence, there was much excitement when Amazon announced it was opening a fulfillment center in 2011. Amazon also brought modern management techniques to Rugeley with kaizen events and gemba walks.

How has all that played out for the workforce?

What did the people of Rugeley make of all this? For many, it has been a culture shock. “The feedback we’re getting is it’s like being in a slave camp,” said Brian Garner, the dapper chairman of the Lea Hall Miners Welfare Centre and Social Club, still a popular drinking spot. …

Others found the pressure intense. Several former workers said the handheld computers, which look like clunky scientific calculators with handles and big screens, gave them a real-time indication of whether they were running behind or ahead of their target and by how much. Managers could also send text messages to these devices to tell workers to speed up, they said. “People were constantly warned about talking to one another by the management, who were keen to eliminate any form of time-wasting,” one former worker added.

The former shop-floor manager and another worker described a strict “three strikes and release” discipline system – “release” being a euphemism for getting sacked. In the early days, people were “released” frequently and with little warning or explanation, workers said. A very large number were laid off after the first busy Christmas period, some of whom had assumed their jobs would be permanent. Chris Martin says his job lasted less than a week after he took a day off for blisters and returned to find the night shift he was on had been abruptly cancelled.

It is this job insecurity that has most disappointed Glenn Watson at the district council. “Our definition of a good employer is someone who takes on people and provides them with sustainable employment week in week out, not somebody who takes on workers one week and gets rid of them the next,” he said. The council had understood Amazon would use the first 12 months to gradually build up its own workforce, transferring agency staff on to its payroll, but by last autumn Watson thought there were still only about 200 Amazon employees, with the rest of the workers supplied by Randstad and two smaller agencies. One young man strolling out of the warehouse last September said he was still an agency worker, even though he had been there since the site opened.

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Redefining last-minute shopping on the web

How late can you delay Christmas shopping? If you are content to shop in physical stores, you can push things right to the bitter end. There is nothing but self-esteem keeping you from stopping at the Wal-Mart on the way to midnight mass.

Of course, if you like the selection and convenience of shopping on-line, things are a little tougher. Delivery takes time. Sure you can order a present right up till Christmas eve but there is no way it will be there for Christmas morning. On-line retailers, consequently, need to announce deadlines before which they can commit to getting you the goods before the big day.

If you stop for a moment, you will realize that this implies two things. First, whatever cutoff is announced is going to affect the demand the retailer sees. In particular, this is going to cause a spike in the last hour or so as procrastinators rush to get their shopping done. Second, hours are going to count, so if one retailer can stretch out the window for ordering — even a little bit — it will have a competitive advantage.

These observations are the central point in a Wall Street Journal article about GSI Commerce (Web Retailers Scrap for Last-Hour Sales, Dec 19). GSI is a division of eBay that provides fulfillment services for the likes of Aéropostale and Estée Lauder. They have set out to squeeze as much time as possible out of their operations so customers can order as late as possible. This year they are letting customers order as late as 11:00 PM Eastern time on December 22nd. It’s not exactly Christmas eve ordering, but it is eight hours later than Amazon.

So how have they done this?

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Toys R Us and the logistics of Christmas when you don’t have flying reindeer

If you sell toys, this is a big time of year. If you are the world’s largest toy store chain, this is a REALLY BIG time of the year. For Toys R Us, this is a critical time to sell and that put a serious burden on their supply chain. They need to both keep their store supplied and fill individual customer orders that come in from their website. And everything has to come together right on time so that there is the right thing under the Christmas tree.

Today’s Wall Street Journal has an interesting article about how Toys R Us is tackling the holidays and trying to stay competitive with Amazon (The New Logistics of Christmas, Dec 13). There is also a video showing their New Jersey fulfillment center in action. One of the interesting points in the article is that like Wal-Mart and Macy’s they are filling some orders directly from stores.

The world’s largest toy chain earlier this year began turning stores into online order-fulfillment centers where workers pluck toys from shelves and ship them to customers, part of an ambitious but complicated plan to use its inventory more efficiently and gain an edge over online-only competition. …

But the current systems need fine-tuning. If a store does too much packing and shipping it could disrupt in-store shoppers. If it doesn’t do enough, it can be more expensive than shipping from a distribution center where workers are doing it all day. “It can be three to five times more costly,” Mr. Sambar said.

Filling orders from stores also adds new layers of complexity. At Toys “R” Us, analysts have to determine whether it is ultimately more economical to ship from a company distribution center or a store, depending on how much inventory is in each and how fast it is moving.

For example, it might be more profitable to ship from a store farther away from a customer, if it has slower-selling inventory that might otherwise be marked down. …

For the stores, the biggest challenge is not knowing how many daily Internet orders they have to fill, said Troy Rice, executive vice president of stores at Toys “R” Us. Still, the stores managers like the program, because “it helps meet their overall sales objective,” he said.

Mr. Storch said the undertaking will ultimately pay off because it will increase the amount of inventory the company can offer online, and increase its overall profit.

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How far does supplier responsibility extend?

How much responsibility does a downstream buyer have for how its suppliers behave? That has been a recurring question over the last several years as various news reports have highlighted tough working conditions in (largely) overseas factories. Apple’s relationship with Foxconn has been front and center here.

Now we have two stories that leave Wal-Mart facing similar questions. A horrible garment factory fire in Bangladesh killed over a hundred workers, some of whom were apparently making clothes for Wal-Mart. The problem, according to the Wall Street Journal,  is that they weren’t suppose to be (For Wal-Mart, Sears, Tough Questions in Bangladesh Fire, Nov 29).

Wal-Mart says it followed its play book when it yanked its business from a Bangladesh garment factory after the retailer’s inspectors found problems. But the chain’s clothing was still being produced there when the factory went up in flames last weekend, leaving at least 112 workers dead. …

The world’s largest retailer said it had revoked the factory’s authorization to make its products months before the fire, but declined to elaborate. It would not name the supplier it said was responsible for giving its business to Tazreen Fashions Ltd., a modern factory set up in 2007 near the Bangladeshi capital of Dhaka. …

Wal-Mart’s system of inspecting factories grades them on a color scheme ranging from green to red. It said most of the audits are done by outside firms, though Wal-Mart has an internal team that conducts surprise audits and checks factories with known problems. Factories with repeated bad grades can be banned from doing business with the company.

Wal-Mart said it is the responsibility of the suppliers to use factories approved by the company, and warns suppliers in an extensive manual that they can be banned from doing business with the retailer if they fail to do so.

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Where are the Kiva Robots Amazon Bought?

Several months ago Amazon bought Kiva, a firm that develops robotic fulfillment systems.  Several photos and tours of Amazon’s newest warehouses were released this week, and people were shocked to see that the warehouses are still built for human pickers, with no robots in sights. Bloomberg’s BusinessWeek ran an article trying to explain this observation. (Amazon’s Robotic Future: A Work in Progress)

After all, aren’t robots supposed to be the future of such places as distribution centers and warehouses? Didn’t Amazon buy a robot manufacturer, Kiva, in March? The online retailer announced in October that it was taking on 50,000 additional part-time workers for the holiday season. Shouldn’t some of those spots be taken up by mechanical arms and wheels?

The article provides several explanations:

Bruce Welty is chief executive officer of Quiet Logistics, an order-fulfillment company that manages the online inventory and distribution for retailers like Gilt, Zara, and Bonobos. He uses robots made by Kiva, the company Amazon purchased, but his warehouse in Massachusetts is not bereft of humans. “Robots aren’t very good at picking up things,” he says. “They aren’t very good at looking at a bin of different things and distinguishing one item from another.

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What’s the biggest thing Amazon will ship for free?

A brief follow up to Tuesday’s post on Amazon’s Add-on Items. Recall that was the program that keeps Amazon’s Prime customers from ordering pesky small items without compiling them into bigger orders. If Amazon is willing to limit what they will do at the low end, are they also limiting what one can do at the high end? Is there something so big and so bulky that they won’t ship it for free? According to MarketWatch, apparently the answer is “no” (The elephant in Amazon’s mail room, Nov 28).

I give you the Cannon Safe CO54 Commander Series Premium 90 Minute Fire Safe in Gloss Champagne.

 

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