FedEx’s Break with Amazon: What Does This Mean for ISPs?
In July 2019, FedEx Express decided to terminate its contract with Amazon, with FedEx Ground following a month later. Amazon is one of FedEx’s larger clients, accounting for more than 1% of its annual revenue, and the breakup made waves in the delivery world when it broke. It also contains several clues about the future of shipping and its challenges for ISPs and their daily operations.
In the early days, Amazon was a perfect client for FedEx’s services. Amazon dominated the e-commerce boom largely by offering free, fast shipping, and the company needed a large network of trucks and distribution centers to bring this to life across the United States.
However, Amazon has run most of its Prime Shipping services through UPS over the last decade, while investing heavily in its own delivery infrastructure to save on long-term costs and control its product movement more closely. Amazon spends almost 30 billion dollars a year on “sortation, fulfillment, and transportation costs,” and throwing in an additional 120 billion dollars to cut its average shipping costs by a third — from $9 per package to $6 — makes sense at this scale.
Much of this investment has gone into improving Amazon’s last-mile capabilities, from experimental drone delivery and massive discounts for its new DSPs to an air center in Cincinnati/Northern Kentucky International Airport. Trust in Amazon’s delivery capabilities is likely to increase once it owns its full supply chain: the platform would control more of its schedules down to the doorstep. It will also rely on delivery providers only for uneconomical routes and bulky packages — not such a good deal for FedEx and its ISPs.
What’s more, Amazon has hinted at offering logistics services to independent sellers with its new “Shipping with Amazon” service, and FedEx’s move shows that it is finally treating the newcomer as a dangerous competitor. Amazon’s network of large warehouses and experience with handling third-party inventory promise speedy last-mile deliveries, but FedEx must first collect and send its clients’ goods to a distribution center, which slows down its delivery process. In a world marching toward shaving hours off same-day delivery, this is a key advantage in the making for Amazon.
Amazon’s potential here places FedEx in something of a role reversal. The shipping giant is now courting other big name shippers in addition to Walmart and Target as ideal clients, since these companies own large, well-stocked stores and warehouses all over the country but lack their own delivery systems. ISPs will most likely have to pick up packages from Walmart and send these to customers while servicing their usual routes, all on the same day. As adaptive routing becomes the new way things are done, odds are good that regular work areas themselves will go out the window, with drivers expected to run routes that shift greatly throughout the day.
ISPs will soon need responsive systems that adjust drivers’ schedules and routes on the fly to stay competitive. These tools must account for real-time changes in priorities and precise estimations of routing time despite environmental and traffic conditions. The result? A delivery choreography much more like Uber’s route-management systems than traditional, dependable directives from control centers to operators.