When Amazon announced it’s 2-day flat fee shipping service in 2005, Amazon Prime, a shift in industry expectations was felt by consumers and competitors alike. The service embodies Supply Chain 4.0 as it enables faster, more flexible, and more efficient shipping for customers2.Ecommerce customer decision making processes are shortened as Prime is able to deliver just in time products to their door.
In the midst of this exciting advance, one must stop to think – how does Prime impact customer’s future expectations of shipping and delivery times? Can this already sophisticated supply chain system continue to evolve to meet consumer expectations over time? What will consumer expectations look like 10 years from now? These are all questions that I urge Amazon to consider in their quest to own ecommerce.
Shipping has consistently been a key differentiator within the customer decision making process online. A survey from Morgan Stanley shows that nearly 80% of consumers would buy more online if e-commerce firms offered free shipping. It also stated that consumers value free shipping and delivery above all other e-commerce service offerings3.
Amazon’s service focuses on both price and speed, but as the retailer continues to attract new customers to the service – you have to wonder if they will be able to meet customer satisfaction? Since it’s launch in 2005, the company has increased prices twice, raising the original $79 annually fee to $99. CIRP estimates that 45% of Amazon customers in the U.S. are Prime members but churn continues to be an issue4.
What enables Prime’s strong supply chain network is economies of scale. In the free-shipping game, big shippers, who get more favorable rates from package carriers like FedEx Corp. and United Parcel Service Inc. because of guaranteed and predictable volume, have a big competitive advantage. Amazon often get volume-driven discounts of 70% or more on certain shipments, in comparison to smaller retailer’s to 5%. Amazon is among the handful of top customers who pay the Postal Service an average of $1.87 a package to make the last leg of a residential delivery. Other retailers must pay for a package’s full journey5.
Currently – only a portion of the items being sold on Amazon are eligible for the Prime service. This in comparison with the 45% of the company’s sale represented by Amazon Prime translates into an imbalance of customer’s expectations and the degree to which Amazon can meet customer demand. To meet this demand, Amazon will need to consider new ways to scale their prime program4.
The automation process is also something I encourage Amazon to consider as it would allow them to capture more vendors in the Prime program. This includes digital performance-management systems, clean-sheet models for warehousing, transport, or inventory set targets automatically. Eventually, we will see performance-management systems that “learn” to automatically identify risks or exceptions, and that change supply-chain variables to mitigate harm. The resulting continuous-improvement cycle will push the supply chains closer to its efficient frontier2.
A more Innovative distribution concept, such as drone delivery, could allow companies to manage the last mile more efficiently for single-piece and high-value, dense packages—fulfilling customers’ customization needs while delivering their orders even faster than is possible today with mass-market, standard products2..
Exhibit 1 more clearly displays how increased automation can improve the supply chain process in the future1.
In the medium to long term, I also see cause for Amazon to scale its warehouse programs so that penetration points in certain areas are deeper. This will enable Prime to better meet customer demand of eligible product which I consider to be a must for this organization to achieve long-term success in their quest to own the ecommerce channel.
The questions I would like to ask my classmates relate to their own consumer preferences and taste, as well as how they view the future of ecommerce:
My first question is – have you personally seen a shift in your customer behavior since faster shipping programs have been introduced online and have you developed a notable preference because of this shift?
Secondly – how do you see this translating to your consumer behavior in the future (ie are your expectations going to surpass 2-day shipping at a flat rate)? If so – are you waiting for companies to set this standard or do you already have your own expectations in mind?
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- PwC Strategy&. 2016. “Industry 4.0: How Digitization Makes The Supply Chain More Efficient, Agile, And Customer-Focused.”
- McKinsey&Company 2017. “Supply Chain 4.0 in consumer goods”.
- Seitz, Patrick. “Online Shoppers Rank Free Shipping As Most Important”. Investor’s Business Daily; Los Angeles[Los Angeles]28 July 2015.
- Seitz, Patrick. “Amazon Prime Churn High, but new membership growth higer”. Investor’s Business Daily; Los Angeles[Los Angeles]13 Feb 2014..