Worley Blog

INTRODUCING A NEW WORD INTO THE SUPPLY CHAIN

Posted on: May 6th, 2019 by Clifford F. Lynch

It will come as no surprise that the major supply chain news last week concerned Amazon. First reported by FreightWaves, Amazon’s freight brokerage is now live. A visit to www.freight.amazon.com will show an offering of freight brokerage now available in Connecticut, New York, New Jersey, Maryland, and Pennsylvania. Freight will move in truckloads utilizing 53-foot dry vans. According to FreightWaves, but disputed by Amazon, market prices are being cut by as much as 26 to 33%. This of course, is no major surprise for the industry as Amazon continues to extend its tentacles into all segments of the supply chain.
This recent move does not bode well for the remainder of the brokerage industry; and as the Amazon offering expands, it will put pressure on the competition. Benjamin Hartford of Robert W. Baird & Company, stated on Aril 29, “Amazon’s launch of Full Truckload Services is a net-negative for investor sentiment on incumbent domestic U.S. truck brokers, and adds to what we expect to be gradual erosion in industry gross margins over time.” He further pointed out that since Amazon introduced Prime Member Two Day Shipping in 2005, UPS domestic margins fell from 15.7% in 2005 to 8.9% in 2018.
What does Amazon have to say? This is where I learned a new (to me) word – disintermediation. As defined by Webster, disintermediation is “the reduction in the use of intermediaries between producers and consumers”. And Amazon has a disintermediation strategy. Simply stated, its goal is to remove every company or function that stands between it and its customers. In doing so, it is expected to deploy massive amounts of capital at little or no margin until it captures the market.
Many industry watchers believe that the building of a logistics service provider network will not be far behind.
As if this were not enough, the company also announced it would spend $800 million in the current quarter to reduce Prime member delivery service from two days to one. During the last few years, two-day service has become an industry standard, with competitors following Amazon’s lead. This latest move however, is sure to produce some serious heartburn in the industry. For all competitors, it will be challenging. For some it could be disastrous.
The big question is, “WWWD?” (What Will Walmart Do?). Generally considered to be Amazon’s strongest competitor, Walmart is almost certain to react. They currently operate 156 distribution centers, primarily in urban areas, and are in the best position to be a major threat. According to Supply Chain 24/7, Walmart research indicated that only eight additional distribution facilities would be necessary to offer one-day shipping.
As is supply chain managers were not under enough pressure, it now appears we must be concerned about being disintermediated. If your supply chain role requires more than a passing interest in Amazon, I recommend a reading of “The Everything Store – Jeff Bezos and the Age of Amazon”, by Brad Stone. It gives some interesting insights into the Amazon mentality and is available at where else? or Barnes & Noble if you prefer.