As Amazon expands into logistics services, the giant retailer is taking on more of the characteristics of a third-party logistics (3PL) company. How might that shape the industry's competitive landscape?
Dr. Robert C. Lieb is Professor of Supply Chain Management at Northeastern University and author of a long-running study of the third-party logistics industry.
Amazon.com has come a long way since its founder and chief executive officer, Jeff Bezos, envisioned the company as a virtual bookstore. It has evolved into an online retail giant that generated US $74.45 billion in revenues in 2013, much of that coming from its support of more than two million companies that used Amazon to sell their products online and distribute them to customers. Under the company's various programs, Amazon not only provides its customers with a means of advertising and selling their products, but also offers to store those products in its fulfillment centers; pick, pack, and ship them; and provide customer service, including handling returns.
In the process of developing its network to support those services, Amazon has built out an infrastructure that by one recent account now includes 145 warehouses around the world (84 in the United States, four in Canada, 29 in Europe, 15 in China, 10 in Japan, and seven in India), which collectively account for more than 40 million square feet of space. Amazon has also has made substantial investments in material handling systems, including the acquisition of Kiva Systems for $775 million in 2012.1 Kiva, now a wholly owned subsidiary of Amazon, designs robots, software, workstations, and other hardware that has been used in the distribution facilities of companies such as Staples, Office Depot, and The Gap. The systems produced by Kiva are expected to be an integral part of the distribution network now being developed by Amazon. Amazon has also made major investments in cloud computing. At the same time, the company has been developing transportation capabilities to support its Amazon Fresh same-day grocery business.
Much of Amazon's recent growth has been fueled by its Amazon Prime program and Amazon Supply operations. Amazon Prime, which offers "free" two-day delivery to its more than 27 million subscribers for US $99 dollars per year, doesn't come close to recovering Amazon's related transportation costs, but on average Amazon Prime customers buy twice as much merchandise per year as do other customers. 2 Amazon Supply, which provides a marketplace for thousands of industrial suppliers, represents a major move by the retailer into the business-to-business space. Amazon advertises it as offering 750,000 "essential" products for business and industry, with free two-day shipping for orders of US $50 or more and a 365-day return policy. Amazon's increasing presence in this industrial space poses a real threat to incumbents such as W.W. Grainger and Fastenal.
While Amazon's reach into both retail and industrial markets continues to expand, profits reported by the company have been meager or, as was the case in 2013, nonexistent.3 Regardless, Bezos has been able to convince the investment community that his ventures into a wide range of industries and markets, from diapers to delivery drones to space shuttles, ultimately will be rewarded with substantial profits.
Where is all of this leading? What does Amazon want to be when it "grows up"? Bezos has often been quoted as saying that he's not sure that retailing will be the company's core business in the future. If it isn't, what is it likely to be? If one examines the distribution network the company has developed, the services it provides to affiliates that sell their products through Amazon, and its recent actual and rumored moves into transportation, then it's logical to raise the question of whether Amazon is likely to become a major third-party logistics service provider (3PL). In fact, it could be argued that the company already is a 3PL.
With those questions in mind, the authors, who conduct annual surveys of the chief executives (CEOs) of many of the world's largest 3PLs, decided to ask executives who participated in this year's surveys about Amazon's effect on the field of supply chain management, its impact on the 3PL industry to date, and the nature of the competitive threat that Amazon might pose to 3PLs in the future. Their responses to those questions are discussed below.
Amazon as a game changer
First, we asked the CEOs if they believed that Amazon has had a significant effect on the field of supply chain management. Twenty of the 25 CEOs surveyed said yes. They identified a number of ways the company has had an impact, but most frequently cited the role Amazon's high-speed delivery programs has played in raising customers' service-level expectations. Three CEOs mentioned Amazon's introduction of same-day delivery. Its free, two-day Amazon Prime shipping program was mentioned by another CEO, as was the "power" of free home delivery. Respondents also noted that these programs have had a significant impact on traditional logistics integrators, such as UPS, FedEx, and DHL, because Amazon's push toward next-day standard and same-day expedited service levels is reducing the use of expedited transportation services like air freight.
Amazon's e-commerce fulfillment services were cited as a "game changer" by several CEOs; they were also mentioned as a major reason for the establishment of the many online "stores" that rely upon those services to meet their customers' needs. That expansion has subsequently led to a greater demand for e-fulfillment services. Amazon was also credited with demonstrating the power of bringing a broad range of supply chain resources under one platform, and as such was mentioned as the "obvious choice" for many new, small-scale online retailers that do not have the resources to manage fulfillment. Respondents also noted the increased interest among traditional retailers in developing omnichannel strategies to compete with Amazon as it takes a steadily increasing share of the market from brick-and mortar stores.
The CEOs offered some other interesting observations. Some said that Amazon is driving 3PLs to develop new short- and long-term plans to support online retailers with business-to-consumer and business-to-business solutions. Others noted that Amazon's aggressive infrastructure expansion has affected real estate values and labor markets, particularly when it opens a new facility. Respondents also mentioned the company's success in increasing shipment visibility, as well as its ability to reduce the service areas covered by individual distribution centers while at the same time increasing shipment velocity to customers.
Not all of the comments were complimentary. One CEO said that Amazon has substantial market clout, but it "wields it so violently that it is not a customer of choice or a desired client." Another suggested that the company "kills firms with low prices."
The impact to date on 3PLs
In today's business world a company may simultaneously be another's competitor, customer, and supplier. With that in mind, we asked the 3PL CEOs if their companies provide logistics services to Amazon, and nine of them said that Amazon is one of their customers. Those nine were then asked to identify the services they provide, which included the following: distribution, value-added warehousing, transportation services, bulky-goods fulfillment, and import/export services.
One respondent described a rather interesting relationship between Amazon and his company. Amazon employees are working in some of that 3PL's distribution centers to support some of the 3PL's customers that do business with Amazon. This relationship is similar to several others that Amazon has with key customers, including Procter and Gamble and Georgia-Pacific.4 In those cases, the retailer positions its own employees in the customers' distribution centers to manage the distribution of the products those companies sell through Amazon.
The 3PL CEOs were then asked whether Amazon has had any specific impact on the 3PL industry to date, and 10 said that it had. When asked to specify what that impact has been, most were unwilling to share that information for competitive reasons.
Those who were willing to share their thoughts identified several competitive impacts. Many retail startups are relying upon Amazon to handle warehousing, inventory management, and fulfillment for them. Without Amazon, the CEOs said, those activities would likely be managed by a 3PL. Some respondents noted that Amazon provides 3PLs' existing customers with an alternative channel to reach both business-to-business and business-to-consumer markets. Moreover, Amazon is driving change in supply chain and logistics practices, and its initiatives in those areas often force 3PLs to rethink their own service offerings, the CEOs suggested. And finally, Amazon's huge shipment volumes and the demands it places on parcel-delivery companies like UPS and FedEx, particularly during the holidays, often limit shipping and delivery capacity and cause delays for 3PLs seeking to use similar services during the same periods.
A potential competitive threat
Those surveyed were also asked whether they consider Amazon to be a 3PL. Only six CEOs said yes, and all six indicated that their companies currently compete with Amazon in various aspects of their business. Those include managed transportation, managing the tactical side of operating a supply chain on behalf of customers, and distribution of products to end customers on behalf of clients. One said, "They are facilitating supply chain services on behalf of customers, hence I classify them as a 3PL." Among those who did not classify Amazon as a 3PL were three CEOs who called it a 4PL (fourth-party logistics company), a "retailer first," and an "industry disrupter."
Seventeen of the twenty-five CEOs surveyed indicated that they believe Amazon is a potential competitor for 3PLs on a much larger scale. They see that potential competition in six specific areas.
First, with the continued expansion of the company's warehousing, distribution services, order fulfillment, and transportation services, Amazon might become a formidable competitor by offering shippers a broad range of services that 3PLs already provide. As one CEO wrote, "Amazon developed a substantial infrastructure to support the sale of books, DVDs, and music that now only require digital distribution. They need to do something with that infrastructure." Second, Amazon's existing platforms support the entrance of many new shippers into the marketplace, and the company can easily capture those new shippers' demand for services. Third, an Amazon trucking fleet that supports not only its own same-day delivery service but also (potentially) that of other companies would pose a serious competitive threat to 3PLs whose primary market niche is transportation. Fourth, Amazon's expansion into the business-to-business space through Amazon Supply could take many industrial customers away from 3PLs. Fifth, Amazon might leverage its investment in cloud technology to become a clearinghouse for a steadily increasing share of e-commerce business. And finally, Amazon could be in the process of making a committed move into third-party logistics. One respondent suggested that Amazon's core competencies appear to be shifting to those of a traditional 3PL in such areas as order management, inventory control, delivery, and billing. More importantly, as another suggested, Amazon could spin off its logistics function as a 3PL serving clients in a variety of industries.
The big question
Based upon our survey results, it is clear that the CEOs of 25 of the largest 3PLs in the industry believe that Amazon has already had a significant impact on the field of supply chain management. Nearly one-quarter of those 3PLs currently provide logistics services to Amazon. While acknowledging the retailer's disruptive impact on the field and its expansion of supply chain and logistics activities, only six of the 3PL executives consider Amazon to already be a 3PL, but 17 of them see the online retailer as a potential competitive threat.
In the opinion of the authors, in many situations Amazon already acts as a third-party logistics service provider. The company has an enormous fulfillment and distribution infrastructure in place that provides its customers with a full range of logistics services, including order management, warehousing, inventory management, fulfillment, distribution, and returns management. Smaller companies can rely upon Amazon to provide a virtual supply chain for them. The actions Amazon has taken to develop its own transportation capabilities may be a forerunner of a move into the realm of for-hire transportation in selected markets. At the same time, Amazon Supply has now targeted the business-to-business market in an aggressive, strategic move that is likely to pull customers away from traditional 3PLs.
The big question is, what are Amazon's plans in this regard? Does the company want to become a major player in third-party logistics? It certainly has an infrastructure that would support such a move. It has also developed a solid reputation as an innovative company that regularly delivers on its ever-expanding and aggressive marketplace promises.
As for Amazon's competitive threat to existing 3PLs, those companies would be well advised to prepare for the possibility that Amazon will make a major push into their industry. As noted earlier, Jeff Bezos has often been quoted as saying that he is not sure whether retailing will continue to be Amazon's core business. If it's not retailing, then it may well be the logistics service industry.
What makes the threat even more significant is that Amazon continues to avoid pressure from the investment community about earnings, which have been minimal to this point. That, coupled with investors' tolerance for Amazon's continued involvement in diverse activities ranging from diapers to drones, would seem to give Bezos the freedom to pursue acquisitions in the 3PL space if he were so inclined. If he decided to move in that direction, Amazon could—through a series of strategic acquisitions and business alliances—very quickly become an important player in the 3PL industry. We have seen this happen before, when similar moves were orchestrated by private equity companies, such as when Apollo Capital built CEVA Logistics.
Of course, becoming a major player doesn't necessarily guarantee success in what is already a highly competitive industry. Nevertheless, 3PLs' contingency plans should reflect the potential entry of Amazon into the industry and its use of pricing as a means of attracting market share. Its past history of setting prices with limited concern for costs suggests that it could pose a real, destabilizing threat to an industry that already suffers from price compression.
Obviously, Amazon may decide not to go in that direction. Recently there have been signs that Amazon's investors are becoming impatient and are looking for increased profits. Those pressures may force the company into a less-aggressive expansion posture—something that would be seen as good news in the 3PL community.
A hefty 42% of procurement leaders say the biggest threat to their future success is supply disruptions—such as natural disasters and transportation issues—a Gartner survey shows.
The survey, conducted from June through July 2024 among 258 sourcing and procurement leaders, was designed to help chief procurement officers (CPOs) understand and prioritize the most significant risks that could impede procurement operations, and what actions can be taken to manage them effectively.
"CPOs’ concerns about supply disruptions reflect the often unpredictable nature and potentially existential impacts of these events," Andrea Greenwald, Senior Director Analyst in Gartner’s Supply Chain practice, said in a release. "They are coming to understand that the reactive measures they have employed to manage risks over the past four years will not be sufficient for the next four.”
Following supply disruptions at #1, the survey showed that the second biggest threat to procurement is seen as macroeconomic factors, which include economic downturns, inflation, and other economic factors. While more predictable, those variables can substantially influence long-term procurement strategies.
And the third-most serious perceived risk was geopolitical issues, including tariffs and regulatory changes, and compliance issues, including regulatory and contractual risks.
In addition, the survey also revealed that “leading organizations” are 2.2 times more likely to view energy availability and cost as a top risk; indicating a focus on future emerging risks. As electrification drives demand for power, brittle grid infrastructure raises concern about whether the energy supply can keep pace. Therefore, leading organizations recognize that access to energy will become a significant future risk.
The firms’ “GEP Global Supply Chain Volatility Index” tracks demand conditions, shortages, transportation costs, inventories, and backlogs based on a monthly survey of 27,000 businesses.
The rise in underutilized vendor capacity was driven by a deterioration in global demand. Factory purchasing activity was at its weakest in the year-to-date, with procurement trends in all major continents worsening in September and signaling gloomier prospects for economies heading into Q4, the report said.
According to the report, the slowing economy was seen across the major regions:
North America factory purchasing activity deteriorates more quickly in September, with demand at its weakest year-to-date, signaling a quickly slowing U.S. economy
Factory procurement activity in China fell for a third straight month, and devastation from Typhoon Yagi hit vendors feeding Southeast Asian markets like Vietnam
Europe's industrial recession deepens, leading to an even larger increase in supplier spare capacity
"September is the fourth straight month of declining demand and the third month running that the world's supply chains have spare capacity, as manufacturing becomes an increasing drag on the major economies," Jagadish Turimella, president of GEP, said in a release. "With the potential of a widening war in the Middle East impacting oil, and the possibility of more tariffs and trade barriers in the new year, manufacturers should prioritize agility and resilience in their procurement and supply chains."
For example, millions of residents and workers in the Tampa region have now left their homes and jobs, heeding increasingly dire evacuation warnings from state officials. They’re fleeing the estimated 10 to 20 feet of storm surge that is forecast to swamp the area, due to Hurricane Milton’s status as the strongest hurricane in the Gulf since Rita in 2005, the fifth-strongest Atlantic hurricane based on pressure, and the sixth-strongest Atlantic hurricane based on its peak winds, according to market data provider Industrial Info Resources.
Between that mass migration and the storm’s effect on buildings and infrastructure, supply chain impacts could hit the energy logistics and agriculture sectors particularly hard, according to a report from Everstream Analytics.
The Tampa Bay metro area is the most vulnerable area, with the potential for storm surge to halt port operations, roads, rails, air travel, and business operations – possibly for an extended period of time. In contrast to those “severe to potentially catastrophic” effects, key supply chain hubs outside of the core zone of impact—including the Miami metro area along with Jacksonville, FL and Savannah, GA—could also be impacted but to a more moderate level, such as slowdowns in port operations and air cargo, Everstream Analytics’ Chief Meteorologist Jon Davis said in a report.
Although it was recently downgraded from a Category 5 to Category 4 storm, Milton is anticipated to have major disruptions for transportation, in large part because it will strike an “already fragile supply chain environment” that is still reeling from the fury of Hurricane Helene less than two weeks ago and the ILA port strike that ended just five days ago and crippled ports along the East and Gulf Coasts, a report from Project44 said.
The storm will also affect supply chain operations at sea, since approximately 74 container vessels are located near the storm and may experience delays as they await safe entry into major ports. Vessels already at the ports may face delays departing as they wait for storm conditions to clear, Project44 said.
On land, Florida will likely also face impacts in the Last Mile delivery industry as roads become difficult to navigate and workers evacuate for safety.
Likewise, freight rail networks are also shifting engines, cars, and shipments out of the path of the storm as the industry continues “adapting to a world shaped by climate change,” the Association of American Railroads (AAR) said. Before floods arrive, railroads may relocate locomotives, elevate track infrastructure, and remove sensitive electronic equipment such as sensors, signals and switches. However, forceful water can move a bridge from its support beams or destabilize it by unearthing the supporting soil, so in certain conditions, railroads may park rail cars full of heavy materials — like rocks and ballast — on a bridge before a flood to weigh it down, AAR said.
Imports at the nation’s major container ports should continue at elevated levels this month despite the strike, the groups said in their Global Port Tracker report.
To be sure, the strike wasn’t without impacts. NRF found that retailers who brought in cargo early or shifted delivery to the West Coast face added warehousing and transportation costs. But the overall effect of the three-day work stoppage on national economic trends will be fairly muted.
“It was a huge relief for retailers, their customers and the nation’s economy that the strike was short lived,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said in a release. “It will take the affected ports a couple of weeks to recover, but we can rest assured that all ports across the country will be working hard to meet demand, and no impact on the holiday shopping season is expected.”
Looking at next steps, NRF said the focus now is on bringing the International Longshoremen’s Association (ILA)—the union representing some 45,000 workers—and the United States Maritime Alliance Ltd. (USMX) back to the bargaining table. “The priority now is for both parties to negotiate in good faith and reach a long-term contract before the short-term extension ends in mid-January. We don’t want to face a disruption like this all over again,” Gold said.
By the numbers, the report forecasts that U.S. ports covered by Global Port Tracker will handle 2.12 million twenty-foot equivalent units (TEU) for October, which would be an increase of 3.1% year over year. That is slightly higher than the 2.08 million TEU forecast for October a month ago, and the strike did not appear to affect national totals.
In comparison, the August number was 2.34 million TEU, up 19.3% year over year. The September forecast 2.29 million TEU, up 12.9% year over year, November is forecast at 1.91 million TEU, up 0.9% year over year, and December at 1.88 million TEU, up 0.2%. For the year, that would bring 2024 to 24.9 million TEU, up 12.1% from 2023. The import numbers come as NRF is forecasting that 2024 retail sales – excluding automobile dealers, gasoline stations and restaurants to focus on core retail – will grow between 2.5% and 3.5% over 2023.
Global Port Tracker, which is produced for NRF by Hackett Associates, provides historical data and forecasts for the U.S. ports of Los Angeles/Long Beach, Oakland, Seattle and Tacoma on the West Coast; New York/New Jersey, Port of Virginia, Charleston, Savannah, Port Everglades, Miami and Jacksonville on the East Coast, and Houston on the Gulf Coast.
The North American robotics market saw a decline in both units ordered (down 7.9% to 15,705 units) and revenue (down 6.8% to $982.83 million) during the first half of 2024 compared to the same period in 2023, as North American manufacturers faced ongoing economic headwinds, according to a report from the Association for Advancing Automation (A3).
“Rising inflation and borrowing costs have dampened spending on robotics, with many companies opting to delay major investments,” said Jeff Burnstein, president, A3. “Despite these challenges, the push for operational efficiency and workforce augmentation continues to drive demand for robotics in industries such as food and consumer goods and life sciences, among others. As companies navigate labor shortages and increased production costs, the role of automation is becoming ever more critical in maintaining global competitiveness.”
The downward trend was led by weakness in automotive manufacturing, which traditionally leads the charge in buying robots. In the first half of 2024, automotive OEMs ordered 4,159 units (up 14.4%) but generated revenue of $259.96 million (down 12.0%). The Automotive Components sector was even worse, orders 3,574 units (down 38.8%) for $191.93 million in revenue (down 27.3%). Declines also happened in the Semiconductor & Electronics/Photonics sector and the Plastics & Rubber sector.
On the positive side, Food & Consumer Goods companies ordered 1,173 units (up 85.6%) for $62.84 million in revenue (up 56.2%). This growth reflects the increasing reliance on robotics for efficiency in food processing and packaging as companies seek to address labor shortages and rising costs, A3 said. And the Life Sciences industry ordered 1,007 units (up 47.9%) for revenue of $47.29 million (up 86.7%) as it continued its reliance on robotics for efficiency and precision.