Amazon Logistics And Trucking: Virtuous Cycles and The Flywheel Effect
Amazon is once again demonstrating that it is unstoppable. Check out the chart below, which tracks the crazy ascent of Amazon’s logistics business.
Its growth has led to deep conflict with other carriers, like FedEx, which decided to drop its relationship with Amazon earlier this month. Rakuten Intelligence, that captured the data behind the chart above, estimates that Amazon is now delivering as much as half of their own shipments. Erica Pandey spoke with Alex Pellas, a logistics expert at Rakuten, who said,
Amazon is about 40% of all e-commerce. If they’re handling half of their own shipments, that’s 20% of the whole market. That’s huge.
Amazon’s focus on speed of delivery has led to it being faster than competitors, which is attracting more companies to use Amazon’s logistics service. This is the ‘virtuous cycle’ of innovation, once again, the ‘flywheel’ underlying ecological growth.
The two drawings above are on the left, the original sketch by Jeff Bezos for Amazon (2001), and on the right, a sketch by David Sacks for Uber (2014).
Strangely enough, the Uber diagram is more pertinent to the logistics business at Amazon. Here’s my recast of it:
As Amazon improves its delivery time — at first by its aggressive push for one-day delivery to Amazon ecommerce customers — it drives higher demand because it can offer faster delivery at lower costs than its competitors. This in turn attracts more customers, which means even more freight in Amazon’s logistics system, which… and so on.
There are likely deeper ecosystem effects at work here too. As customers become more engaged with Amazon’s logistics, they are likely to adopt Amazon’s logistics platform, which opens up higher levels of data sharing, the benefits of which grow exponentially as a function of the number of customers. This means Amazon’s algorithms for logistics planning can improve non-linearly, too, which in turn leads to even faster shipping.
The power of aggregation in that flywheel would seem to argue against a different initiative at Amazon. The company has announced the expansion of a program to help its employees start their own delivery businesses. As reported by the AP,
The offer, announced Monday, comes as Amazon seeks to speed up its shipping time from two days to one for its Prime members. The company sees the new incentive as a way to get more packages delivered to shoppers’ doorsteps more quickly.
Amazon says it will cover up to $10,000 in startup costs for employees who are accepted into the program and leave their jobs. Those who participate will be able to lease blue vans with the Amazon smile logo stamped on the side. The company says it will also pay them three months’ worth of their salary.
Amazon in this case is trying to take advantage of ecosystem economics: by creating an ‘army’ of delivery partners, each with some seed money and the promise of steady work, Amazon sidesteps the costs of buying, insuring, and maintaining the fleet of delivery trucks it needs if it wants to replace UPS and the USPS in delivering its own goods. It helps the delivery partners get low-cost leases and loans, certainly, but the liabilities never hit Amazon’s books. So it can scale at very low cost, the $10,000 seed money for each notwithstanding.
And of course, they don’t have to pay the delivery companies’ employees, pay their health insurance, social security, or other benefits. Those costs will fall on the delivery companies in Amazon’s army.
And just as fast as possible, you can bet Amazon will be telling its freight customers that Amazon’s army will deliver their freight to its final destination, as well, cutting out USPS, Fedex, and UPS. Another cycle in the flywheel.