Amazon spent $28B in freight costs last year. How well are they using their advantage?

Someone asked me this question on a popular social platform. The subtext was this:

What kind of discount do you think they’ve negotiated with the major carriers (UPS, FedEx, USPS, etc.)?

I have over 12 years of operational experience and 23 years of commercial negotiation experience with freight companies on large scale global freight operations.

Even though I have no direct experience with Amazon’s freight operations (and I would not reveal any inside information, even if I did) I think I am well qualified to answer this question.

Based on my review of Amazon’s cost reports, I would first question the full details of $28 Billion freight spend. My gut feel is that all of it may not be freight bill for external freight vendors such as UPS, FedEx or USPS etc.

Moving on, irrespective of the fact how big is the external freight bill – amazon’s shipping spend is huge. One of the biggest in the world.

As such, Amazon would start with a massive advantage in the price negotiations with the vendors. There are two questions here:

1. How big? And,

2. How well Amazon uses this advantage?

Let’s start with the second question first – because I have worked with many companies who had a similar massive advtange where they formed bulk of the trade on some lanes and yet did not know how to negotiate and control freight well enough.

What went wrong?

In many cases the same company has 20 or more divisions each with its shipping department – negotiating with the same vendor on the same lane. In most cases the vendors pitched their best salesmen while the buyers thought of freight as a fixed cost (an after thought).

The net result? They were paying the retail! Or, close. Worse still, they did not know the difference. I will skip a lot of other bad news, except for the worst one – they were signing contracts which were largely one sided (favouring the freight vendors). And, as usual the contracts make all the difference in any transaction.

So how well does Amazon perform on this front?

An external point of view is that it performs very well. What is my evidence? Read these articles to get a sense:

President Trump, Amazon Should Run The USPS: Here’s Why

Trump Said Amazon Was Scamming the Post Office. His Administration Disagrees.

There are many others in the same vein. Sure it is a political hot potato now, but the facts of the case are still quite clear. Amazon is using every advantage it can. And, quite well.

Let’s spend some time on the first question.

How big is the advantage?

Everyone knows that the full truck, full plane, or full ship, or full shopping centre is very lucrative proposition for the vendor. Any operation close to its peak volume is at its most productive.

Think of what kind of rent subsidies do the anchor tenants enjoy in shopping centres, and in commercial buildings?

What kind of deals do Take-or-Pay (ToP) buyers enjoy on LNG trains where investment in each train exceeds several billions of dollars. There are countless such examples in the realms of supply chains – ranging from explosives to chemicals to gases to property to FMCG etc.

Almost all commercial operations have a bulk buyer who enjoys significant cost advantage over the retail buyers.

How do you model the advantage? How do you model the industry cost curve and pick your vendors? How do you negotiate your advantage?

All this is an art – which cannot be summarised in a few pages. You have to live it all day, every day, for years to master the art.

By all indications Amazon has mastered the art. If you have not figured it out from the foregoing discussion, then I would rather not reveal my estimate of the advantage they are likely to enjoy.

In a future post I will reveal Amazon’s achilles’ heel, which none of the big box retailers have yet identified, and which would level the playing field for them.

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Vivek Sood

I write about "The Supply Chain CEOs", "The 5-STAR Business Networks", and, how to "Unchain Your Corporation". In my work, I help create extraordinary corporate results using several 'unique' supply chain methodologies. Contact me for interesting, high impact projects, or, to get access to my IP for creating transformations using these methodologies.

  • Cheryl S. Wickham says:

    Amazon’s rising shipping costs reflect its push to get products to customers at a faster and faster clip, along with the increasing popularity of Amazon Prime and its core benefit of free two-day shipping. Last April, Amazon disclosed that it had 100 million Prime subscribers worldwide, revealing its membership base for the first time. The speedy Prime Now delivery service is live in more than 10,000 cities, Amazon said in its earnings report, and it now serves the majority of Prime members. Amazon has been expanding grocery delivery from Whole Foods stores, and the service is now active in more than 60 U.S. cities

  • Beckham says:

    How did Amazon build such a strong sustainable competitive advantage? Amazon’s major difference would be providing greater value to customers by a combination of extraordinary convenience, instant access, and comprehensive selection. These differences would have been sufficient to build a competitive advantage but Jeff had one more idea. He decided to add a foremost valuable difference, low prices. Amazon would provide both value and low price.

  • Jhon Floyd says:

    Even surging losses on shipping won’t deter Amazon from the course of cheap and fast deliveries. Amazon’s representatives have attributed a quarter of its yearly growth in 2016 directly to Prime – the main culprit behind the gap between its shipping cost and shipping revenue. There is a reason why Amazon is losing money on shipping. It’s good for business. It is the main reason why it is the biggest online retailer in the world today. But does this mean you should do the same?

  • Shelley Kayle says:

    Amazon was also a pioneer not only in offering free shipping but in heavily subsidizing shipping costs for those products that did not qualify for free shipping. The only thing that has forced people to spend even more money on Amazon than implementing the threshold has been, of course, Prime. It has been often questioned if these huge losses are viable and reasonable, but over a decade of ruling the online retail market seems to suggest that, yes, yes they are.

  • Arnold Hatch says:

    Very interesting blog. Amazon’s rising delivery expenses mirror its push to get items to clients at a quicker and quicker clasp, alongside the expanding prominence of Amazon Prime and its center advantage of free two-day shipping. Last April, Amazon unveiled that it had 100 million Prime supporters around the world while uncovering its enrollment base. Amazon has been growing staple delivery from Whole Foods stores, and the organization is presently dynamic in more than 60 U.S. urban communities.

  • Martin says:

    How did Amazon manufacture such a solid economical upper hand? Amazon’s significant distinction would give more noteworthy incentive to clients by a mix of unprecedented accommodation, movement of access, and far-reaching determination. These distinctions would have been adequate to fabricate an upper hand however Jeff had one more thought. He chose to include a first significant contrast, low costs. Amazon would give both worth and low cost.

  • Lawrence says:

    Notwithstanding flooding misfortunes on delivery won’t deflect Amazon from the course of modest and quick deliveries. Amazon’s delegates have credited a fourth of its yearly development in 2016 legitimately to Prime – the principle guilty party behind the hole between its delivery cost and dispatching income. There is a motivation behind why Amazon is losing cash on transportation. It’s useful for business. It is the fundamental motivation behind why it is the greatest online retailer on the planet today. In any case, does this mean you ought to do likewise?

  • Jennie Carping says:

    Amazon was additionally a pioneer in offering free delivering as well as in intensely sponsoring delivery costs for those items that did not fit the bill with the expectation of complimentary transportation. The main thing that has constrained individuals to spend considerably more cash on Amazon than executing the edge has been, obviously, Prime. It has been frequently addressed if these gigantic misfortunes are feasible and sensible, yet over time of the decision, the online retail market appears to propose that, truly, yes they are.

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