Tuesday, February 11, 2014

Amazon's FC network strategy for same day delivery

Amazon has been aggressively building out its network in the recent years.  In 2004, only 38% of the Amazon's Fulfillment Centers (FCs) were less than 200 miles from the Major Metropolitan Areas (MSA). But in recent times, more than 79% of the FCs are within 200 miles from the major metropolitan areas. They are gearing towards a widespread same day delivery services for majority of the items. Currently they offer these services to selected cities for selected items.

The above table lists the top 20 cities in US which totals to nearly 117 million people. This total accounts for more than 37% of the US population. We are working under the assumption that there needs to be a FC within a 100 miles radius in order to provide the same day service. Under this assumption, 8 out of the top 20 MSAs have the same day service which covers around 14% of the entire US population. 

The largest U.S. metropolitan population is New York City at  19 Million people which includes surrounding cities in NJ, CT, NY and PA.  The nearest Amazon fulfillment center to this megalopolis is in Breinigsville, PA where two Amazon facilities are located (ABE2 & ABE3).  The distance from these facilities to the center of Manhattan is 104 miles which exceeds the 100 mile maximum radius assumption that we defined earlier on, hence we state that Amazon is not currently in a position to provide same day service to New York City.  This will of course change if the company starts up distribution operations in Woodbridge, NJ but at the moment, based on our 100 mile assumption, we categorize New York City as a city that is not same-day ready. The geographic graph (below) depicts all the major metropolitan areas (MSAs) that has a FC within the 100 mile radius  in yellow and the ones that do not have an FC within the 100 mile radius in red.

Source: Marc Wulfraat, MWPVL

Amazon is currently in the process of opening a general merchandize FC and a food FC in northern New Jersey. This would greatly help the company in covering huge New York MSA. Amazon is employing the phased implementation strategy for rolling out the same day service. One of the reasons for this phased approach could be the fact that there is no competition that is capable of tapping into the vacant market in the mean time. Hence Amazon is taking time to strategically position the FCs to create a robust supply chain network. 

Final Thoughts:
Amazon needs at least another 12 FCs near the top 20 MSAs to cover 37% of the US population. Add the Amazon Air (drones) project on top of this, Amazon will have the most efficient and fastest delivery system in its category. How long will it take for all these projects to come together and be a part of the routine Amazon supply chain?

1. http://www.scdigest.com/experts/Wulfraat_13-09-03.php?cid=7366
2. http://www.mmh.com/article/supply_chain_amazon_is_changing_the_rules_of_the_game
3. http://www.kellogg.northwestern.edu/faculty/chopra/htm/research/deliverynetwork.pdf
4. http://www.scdigest.com/assets/newsviews/13-09-26-1.php?cid=7448

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