How Amazon Logistics works

The emergence of Amazon has completely changed the eCommerce landscape and, of course, also the logistics and transport landscape.

Many predicted the end of logistics operators and transport companies with the arrival of Amazon as if it could extend its tentacles to the entire market to take it over. The reality after a few years is completely different, as there are still powerful logistics operators as well as many transport companies that want nothing to do with Amazon.

Faced with this situation, Amazon had to devise a mechanism to supply its own demand in order to control its distribution. Another objective was to reduce its exposure to transport companies that were not very keen to offer it the service once the 2008-2016 crisis had passed. This is how Amazon Logistics was born

1-Background and case studies
We have seen the precedent that pushed the company to create its own logistics network. They started with air freight and in Spain, their network began by prioritising the distribution of prime now services in the large capitals.

Over time and as the economy improved, the main parcel delivery companies in Spain reduced the exposure of Amazon’s services in their accounts, which in many cases, instead of generating profits, generated losses or zero revenue. As a result, companies such as Seur and MRW reduced their services, which forced Amazon to look for an external ally such as Correos and Correos Express on the one hand, and on the other, to create its own distribution network in Spain.

2-The model
The model that Amazon has implemented in Spain is not very different from any franchised parcel delivery network such as MRW, for example, but with some differences, especially in terms of image, but in the operational part the basis is the same.

Amazon does not have its own network in Spain, it does not have any agency for delivery but rather contracts with transport companies that carry out the daily operational work of delivery. These companies have a contract with Amazon by which they are assigned a distribution area (province, part of a province, a town, etc.). From that moment on, this company will work on a day-to-day basis under an operational manual that Amazon indicates to it, as happens in the case of franchise networks.

What Amazon has with this is a contract with a company that will carry out the operations as they indicate, from the reception of goods, the number of couriers they need, the number of routes they have to take, how many packages each courier has to deliver and they even stipulate the courier’s salary. Basically, what Amazon does is to have a centre that functions as if it were their but without being theirs…..

3-Logistics as part of the business
Before going into detail on the logistics operation, we have to understand that for Amazon the logistics part is not a business but part of the business. This concept is very important because the entire operational structure of distribution is visualised to provide a solution to an internal demand; delivering their own packages is the priority.

Another variable that we have to take into account is that Amazon knows that its network cannot deliver all its packages, so it needs external allies such as Correos and Correos Express. In this situation, what Amazon does is to “split” the shipments so that its network delivers a part and the external partners deliver another part. We do not have the real figures but it is possible that they are currently half and half. But the real difference is not in the numbers but in the destinations: the easy ones and the difficult ones.

What is each?

The easy ones are the parcels that are very easy to deliver, city centres where many deliveries are concentrated in a small place, which allows a lot of parcels to be delivered in a short time. And the difficult ones are those that have a low concentration of delivery or those that have a displacement of kilometres, such as shipments from empty Spain and rural or remote areas.

Making this partitioning of your shipments allows you to work with a lot of foresight since, together with your Big Data, you have a purchase prediction by which 3 weeks in advance you have a very approximate estimate of purchases and, as a consequence, of logistical distribution. This allows them to demand the necessary resources from their logistics network 2 weeks in advance and the week before they already have 100% control. They have already controlled all the couriers and routes that they will have for the following week and if any route falls through for whatever reason (absence of the driver due to illness, vehicle breakdown, etc.) they will divert those packages to the external network (Correos and Correos Express).

4- What happens when you make your purchase
We have already explained how it works before a customer makes a purchase via the web. What happens once the purchase is made is a global system that we can call “delivery prediction”, a concept that is nothing new and that consists of predicting when the order will be delivered to the recipient’s home (day and time) from the moment the order is placed.

It was 1999 when, together with Juan Manuel Quelle, at that time National Commercial Director of one of the main Spanish express transport companies, we worked on how to delimit the possibility of knowing when a parcel would be delivered. At that time we worked with what were called “massive” shipments, i.e. when a customer delivered 50,000 shipments at once, in order to know how to organise and know when everything would be delivered so as not to saturate the distribution network.

Taking this concept, what Amazon does is to assign the route and the courier from the moment we make the purchase. The label that goes out to prepare the order is already assigned the delivery delegation, the route and the courier number.

This is the big difference compared to traditional transport companies. The latter receive a lot of merchandise from many customers and for many destinations, so they have to “gather” all this merchandise on platforms or hubs for removing merchandise, classify it and send it again to its destinations. In Amazon, this is already done from the beginning so the cost savings are brutal. It must also be said that Amazon can do this because, as we have said, logistics is part of their business and they are managing their own orders, something that transport companies are external and cannot do (they do not know which customers will call them and how much merchandise they will have).

5-Pre-qualified
Once the order has been processed (remember that the label has already assigned the route and the courier) and the picking/preparation has been carried out, the package will arrive at the sorting area. Here we find the second of the big differences between Amazon and the rest of the companies. As we have explained, transport companies classify the packages once they have been collected and transported to their logistics platforms; Amazon classifies the packages in its own logistics warehouse before they are sent to the agency that will carry out the distribution.

And the difference is that they sort the packages by routes and couriers in a kind of sacks/boxes that fit perfectly by height in a small van. We will see the reason for this later, but the important thing is that they already classify the packages that each courier working for Amazon will deliver the next day from the point of origin.

6-Transport and distribution at destination
This classification into sacks by courier is transported in one or more vehicles to the agency or franchise to be distributed. Here we find the third big difference and that is that when the truck arrives, as the goods are already classified for each driver, they are unloaded from the truck and put directly into the van (that is why the size of the sack is important, as we mentioned before).

At this point, Amazon stipulates a maximum time from the arrival of the lorry to the departure of the couriers for delivery, which can be approximately 20 minutes. Traditional courier agencies receive all the goods for their distribution area and have to sort them by route and courier, which, in addition to the cost of labour, can take between 1 and 2 hours depending on the volume.

This action gives the Amazon courier additional time for delivery than the traditional courier does not have or simply gives Amazon more time to prepare more orders in its warehouses.

7-Delivery route planning and incidents
Once the courier has all the goods in his van, he will start the distribution. Amazon has very well studied each of the hundreds of delivery routes it has in Spain, so it knows in detail how many packages each driver can deliver. To do this, they have installed an app of the company that shows them the delivery route they have to take at all times. In this way, the driver only has to follow the order indicated by the App and look for the package in the bag in his van.

In addition, this App allows us as a customer to geolocate the courier, see where he is and how many stops he has left to get to our house. Another technical advance that other courier companies also offer.

What happens if we are not at home? In that case, the driver has to make a call via the app itself (so that the call and the conversation are recorded) and must “close” a second delivery on the same day. If the recipient does not answer, they are notified via the app and an Amazon customer service centre will manage the delivery.

In traditional transport companies, the delivery agency is contacted and the second delivery has to be arranged. At Amazon, they are the ones who control the incidents through their call centre, ensuring the correct management of the incidents. As soon as they have the solution, they transmit it via the App to the courier so that he can execute it, since they introduce it again in his delivery route.

With this system and taking into account what we said in point 1 about Amazon delivering the “good” part of their own shipments, they achieve spectacular delivery figures on the first attempt (over 90%) as well as being able to close the day with a delivery rate of over 95% of their shipments. Against these figures, no traditional transport company can compete, but of course, it has its tricky ….

8-Internal quality ranking and corporate image
As a good American company, Amazon creates and generates competitiveness among its network of franchisees. It generates rankings of successful deliveries on the first attempt or even on the first day, for example. This way if you are a franchisee you know where your percentage is and where the network is.

Another objective of this type of ranking is also to generate “new franchisees”, that is, Amazon rewards companies with better ratios with the possibility of opening in other places in Spain; and on the other hand “pressures” the bad franchisees because they know that if they continue with bad figures Amazon can terminate the contract and offer it to those who are at the top of the ranking.

If we talk about marketing and corporate image, in informacionlogistica.com we have already talked at length about why we will never see an Amazon delivery van in our cities. They are also different from the transport companies in this respect.

Conclusions
The first conclusion is that Amazon Logistics is an Amazon shipping service provider created to serve the parent company itself. Its structure, functioning and operation is based on being a part of the system and not a business as such, so that the economic question is secondary.

Amazon Logistics could NOT have other customers because its structure is not prepared for it, they can only offer service to their own parent company and that is why they try to have “global customers”, customers to whom they make online sales, logistics storage, logistics preparation and of course delivery.