Taking a page from the traditional retailers' book, e-retailer Amazon.com is
putting together an ambitious network of brick-and-mortar distribution
centers.
James Aaron Cooke
Senior Editor
------------------------------------------------------------------------------
--
Amazon.com may have built its reputation as an online retailer with its
virtual virtuosity, but it's since decided that old-fashioned
bricks-and-mortar distribution is what's required to stay on top of
e-commerce. The company, whose name has become synonymous with online
retailing, began with a single warehouse in Seattle from which it distributed
books to customers across the country. In the past year, however, it has
built a network of seven distribution centers whose combined U.S. acreage
exceeds three million square feet. In fact, in one year, Amazon.com has
increased its distribution center footage to 10 times as much space as it had
in 1998.
The construction of that network is an apparent effort by the company to
shore up the back end or distribution part of the best-known cyberstore
operation in the world. Web retailers like Amazon.com have long tended to
rely on expensive outside delivery services rather than address the issue of
economical distribution.
There's no question that Amazon.com executives have begun tackling the
distribution question in earnest. But have they hit upon a solution? This
past Christmas season--which promised to be the biggest yet for Web
merchants--was expected to provide a true test of the effectiveness of
Amazon.com's distribution network.
The Number-One Online Retailer
Amazon.com opened its virtual doors in July 1995. Founded by Jeff Bezos, the
online retailer began by selling books. It has since expanded into selling
music CDs, videotapes, DVDs, computer games, toys, greeting cards, and
consumer electronics. In the past five years, Amazon.com has racked up
incredible sales. During the 1998 holiday season alone, it shipped some 7.5
million items. But despite that sales growth, the company has yet to show a
profit.
To help turn that situation around, Amazon.com in the summer of 1998 brought
in former Wal-Mart executive Jimmy Wright to develop a world-class logistics
operation. In the months that followed, Wright worked with Jeffrey A. Wilke,
Amazon's general manager of operations, and Chris Arnold, logistics director,
to create a plan to help distribution keep pace with the company's
fast-growing Web sales. "We wanted to provide the best experience we could
for every e-commerce customer," says Arnold. "The goal was to reduce the
order-to-mailbox time."
The executives decided that rather than create specialized DCs for the
various products, each distribution center would handle the full array of
items. "We were challenged to build a system that could carry every item
except for handguns and live pets," says Arnold.
The company also decided to take advantage of some of the latest
materials-handling technologies for its warehouses. As a result, each DC has
a pick-to-light system, which uses a terminal display mechanism to guide a
worker through the picking and packing process; radio-frequency technology,
which directs workers to warehouse locations via radio signals; and voice
technology, which allows computers to communicate instructions to workers.
"We looked at every picking technology available to us," says Arnold. "We
were designing a flexible, agile, and world-class logistics system."
Instead of purchasing an existing warehouse management system (WMS), the
e-retailer opted to write its own software, using Amazon.com's own staff of
code writers. "We reviewed a number of third-party software companies, and we
were impressed [with their offerings]," says Arnold. "But in order to control
the customer experience, we wanted to own that software."
Bricks and Mortar
Amazon.com next had to decide how many distribution centers to construct and
where to locate them. In late 1998, the e-retailer already was operating two
warehouses in the United States--one was the original site, a
93,000-square-foot building in Seattle; the other was a 202,000-square-foot
building the company had recently opened in New Castle, Del. But the
executives knew that more warehouses would have to be built to meet customer
demand.
In the summer of 1998, Amazon.com turned to two outside experts, professors
Christopher D. Norek of the University of Tennessee and Brian Gibson of
Auburn University, for help in siting the DCs. The company originally asked
them to site a West Coast distribution center. Within a month, however,
Amazon.com had decided that it needed to develop a national network.
The project's expansion meant that sophisticated analytical tools would be
necessary. With the help of the two professors, Amazon.com chose the Supply
Chain Strategist software package from i2 Technologies in Dallas to help it
determine the optimum distribution network. The software examines such
factors as location of customers and suppliers, inbound and outbound freight
rates, warehousing expenses, labor issues, and cost impact.
The new software helped Amazon.com determine which regions of the country the
company should look at when siting its distribution facilities. Once they had
identified those areas, Amazon.com's management looked at such issues as
taxation, employment levels, and the nature of the community to pinpoint the
exact location. In fact, Arnold says the executives visited cities to get a
feel for the community.
The Web merchant's first pick was a warehouse in Nevada to serve the southern
California market with two- to three-day leadtimes. It leased a
322,560-square-foot highly mechanized distribution facility in Fernley, Nev.
Located 30 miles east of Reno, the site formerly belonged to Stanley Tools.
Later that year, Amazon.com opened its second new facility in southeast
Kansas, in the town of Coffeyville. The distribution center was intended to
serve customers in the Chicago, St. Louis, Dallas, and Minneapolis areas.
Once again, Amazon.com leased a former distribution center, a facility that
had been used for shipping by Golden Books. The company expanded the existing
460,000-square-foot building into a 750,000-square-foot facility.
The next two facilities opened by the e-retailer were located in Kentucky.
Amazon.com leased a 570,000-square-foot facility in Campbellsville and
another 600,000-square-foot facility in Lexington. Both sites had been
distribution centers for other companies: The Campbellsville building was
formerly used by Fruit of the Loom, while the Lexington site had been used by
the W.T. Young Storage Co.
The last site the online retailer chose was located in McDonough, Ga. That
leased facility, located about 20 miles south of the Atlanta airport, is
designed to serve customers in the Southeast. At the moment, the
800,000-square-foot Georgia warehouse is the largest facility in Amazon.com's
distribution network.
Uniform Materials Handling
With all of the new distribution centers, Amazon.com wanted to maintain some
consistency in the materials-handling equipment used. "We have tried to
create a cookie-cutter approach for the DCs," says Arnold.
One of the innovations the online retailer has embraced in all of the DCs is
the use of radio-frequency technology to direct its warehouse associates'
activities. Arnold reports that when it first installed RF technology, the
company saw a 70-percent improvement in operational efficiency.
The DCs also maintain a pick profile for the fast-selling items. The
company's WMS system has information on the length, width, height, weight,
and velocity of each stock-keeping unit (SKU) in the building. The software
examines pick rates, location, and picking and storage patterns, and builds
combinations of customer orders for shipping.
To maintain quality in shipping, the online retailer measures its workers'
productivity and then shares that performance information with the
individuals. "What gets measured is what gets done," Arnold says. "We share
the volume and accuracy metrics with [the warehouse workers] daily."
At the moment, the e-retailer's warehouse operations handle fulfillment for
all orders placed on the company's Web site. "Amazon feels strongly about
filling its own orders," says Paul Kreuser, director of supply chain
development. "We can control the customer [satisfaction] when we fulfill the
orders in-house."
For actual deliveries, the company still relies on parcel giant United Parcel
Service (UPS) and the U.S. Postal Service. Nonetheless, Arnold recently told
the audience at a Council of Logistics Management annual conference session
that the company would like to try "zone-skipping," a practice in which a
shipper linehauls a consolidated truckload of product to a breakbulk center
for local distribution.
Although many Web retailers such as Wal-Mart have turned to third-party
logistics companies to fulfill orders taken on the Web, Amazon.com has chosen
to do its distribution in-house. "We are not seeing the kinds of problems
that e-merchants that relied on third parties had [during the 1999 holiday
season]," says Amazon.com spokesman Bill Curry. "Distribution does matter." |
