What Amazon is doing with its supply chain could devastate the competition

A huge planned global supply chain move by Amazon could disrupt product access, sharply lower Amazon's costs and accelerate product delivery to shoppers.

supply chain

Note to all retailers: No matter how much you fear Amazon, regardless of how many sales you think you've lost to it, I am here to tell you that it's about to get much worse. This is because of a huge global supply chain move planned by Amazon, one that could disrupt product access, sharply lower Amazon's costs and accelerate product delivery to shoppers. 

How can some changes to the supply chain do all that? Let's look at what we know.

The news started with a report from Bloomberg Business that detailed a multiyear plan to have Amazon compete with UPS, FedEx and — most interestingly — Alibaba. This includes leasing planes and registering an ocean freight booking business. The plan, according to documents Bloomberg examined, is for "a global delivery network that controls the flow of goods from factories in China and India to customer doorsteps in Atlanta, New York and London. The project, called Dragon Boat, is proceeding."

The plan is massive in scope, entirely bypassing brokers that deal with cargo and global transit paperwork. Amazon would then be "amassing inventory from thousands of merchants around the world and then buying space on trucks, planes and ships at reduced rates. Merchants will be able to book cargo space online or via mobile devices, creating what Amazon described as a "one click-ship for seamless international trade and shipping."

Think is just some optimistic plan floated before the Amazon board, but something that will never happen? So did I, until USA Today reported that Amazon "had gotten its license to act as a wholesaler for ocean container shipping from the U.S. Federal Maritime Commission on Nov. 13." The story added that the Chinese Ministry of Commerce granted the license on Sept. 17. "The license was given under the name Beijing Century Joyo Courier Service Company Limited, one of the trade names for Amazon China and Amazon Global Logistics China, according to documents posted on the Ministry of Commerce website. Having licenses on both ends means Amazon can now buy space on shipping containers at wholesale rates and resell it at retail rates."

What this all means is that Amazon is actually doing this, and it may get fully under way in time for this year's holiday shopping season. Until now, Amazon's threat was that it could deliver simplicity, speed and a healthy dose of "one-stop shopping" (that last one courtesy of its massive third-party seller program).

With pricing, though, Amazon's only play was waiving shipping charges — sometimes. But its base price was usually within pennies of what Walmart and Target were selling things for. Amazon's pitch was a superior and effortless experience.

This supply chain gambit could change all of that. In theory, this move could sharply cut Amazon's costs. A normal retailer would simply add it to margin, but that's not how Jeff Bezos sings. He'll forgo profits every time if it means boosting market share and eliminating competition. In effect, this is Amazon's rather sophisticated twist on Walmart's original attack plan for smaller physical chains.

Price reductions on top of Amazon's service is frightening. But this gets worse. This has the potential to deliver some serious acceleration in delivery times, even without resorting to last-mile clones.

Consider this phrasing from the Bloomberg story: "amassing inventory from thousands of merchants around the world." Of course, Amazon already does much of this, but what if Amazon exacted a price from merchants who wanted to play? Say, perhaps, distribution exclusivity? Could this lock down even more merchandise? Locked-down merchandise doesn’t need to have lower prices.

I have been impressed with Amazon's execution for a long time. Who else could get the U.S. Postal Service to deliver packages on a Sunday?

Permit me one Amazon gripe. As impressive as its overall operation is, I have found its site information to be sorely lacking. I have often placed orders for in-stock products, only to be told three days later that it was back-ordered and that the site was wrong. Or I'll call customer service and be told that the item will arrive in five days — and then it arrives later that day.

That's not beating expectations. That's having no clue about where products are in your supply chain. And that brings us around to the only bit of potentially good news here for physical retail chains. What Amazon is tackling here is several orders of magnitude more complex than what Amazon — or, for that matter, any other retailer — has ever tried.

Given that Amazon doesn't seem to have fully mastered accurate visibility into routine domestic shipments — not knowing that you're selling an item that is out of stock is a big part of the "supply" in "supply chain" — it's not a massive leap to assume that this may implode.

That's the tricky part of global supply chains. When they work precisely, they will deliver devastating competitive advantages. But it only takes a supply chain to be off a little bit before those advantages evaporate and, depending on the size of those errors, potentially turn into disadvantages. Say what you will, but FedEx is brilliant at delivering what and when it is supposed to.

Betting against Amazon doing something right is remarkably risky — and the odds are against you. But that's a physical chain's only hope right now.

By the way, Dragon Boat is a brilliant code name, as it hints at the essence of the service, but this time, it's the dragon that will be doing the slaying.

Copyright © 2016 IDG Communications, Inc.

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