Welcome to the April issue of CrossDock.
Numerous stories drew our attention, but the industry buzzed most about Amazon's optimization of its fulfillment network to enhance the speed and precision of its operations.
The beauty of Amazon’s fulfillment network, for the longest time, was in its nationwide chain of warehouses that enabled the movement of products from one end to another in a few hours.
Customers got what they wanted – a vast product catalog and lightning-fast deliveries. Many changed their shopping habits to favor Amazon while the giant continued to acquire customers in hoards.
However, the Prime-like deliveries and continuous availability of every product imaginable come at a cost. Amazon bore this cost all this while as the customers rejoiced. With the deteriorating macroeconomic conditions and shareholder pressure around improving operational efficiency, Amazon’s looking at a significant change.
For the first time, Amazon is moving from a national fulfillment model to a regional one. It expects to have eight distinct and mostly independent regional fulfillment networks instead of a single one. Read through to learn more about how Amazon aims to reduce its fulfillment costs and offer deliveries faster than ever.
In this newsletter:
- Record high-ground parcel delivery costs
- NYC micro hubs for sustainable deliveries
- Ikea’s online-focused US expansion
- Amazon moves to a regional fulfillment model
- Walmart’s automation ambitions
Ground parcel delivery costs hit record high
Ground parcel delivery costs surged to a record high in Q1, with the TD Cowen/AFS Freight Index indicating a 29.5% increase above its January 2018 baseline. This rise resulted from annual rate hikes and fuel surcharges not declining as sharply as fuel price indices over the past year.
Discounts offered to mitigate rate hikes
Carriers had to raise shipper discounts by an average of 1.6% to counterbalance the impacts of rate hikes. FedEx and UPS, citing inflationary pressures, implemented higher rate increases for 2023 compared to the previous year. This additional pressure strained shippers' parcel delivery spend, which was already burdened by recent delivery surcharges.
The growth of alternatives in the parcel delivery sector, combined with excess capacity as delivery activity decreases from pandemic levels, has prompted carriers to offer larger discounts to attract customers.
A bid for profitability
As a countermeasure, carriers like FedEx and UPS are concentrating on increasing per-package revenue by targeting more profitable shipper segments. As a result, carriers might selectively offer discounts to strategic accounts while allowing less valuable customers to move their volume elsewhere.
The index projects that ground parcel shipping rates will rise to 31.7% above the baseline in Q2, and express parcel shipping rates will increase to 4.6% above their January 2018 baseline, up from 3.5% in Q1.
NYC Tests Microhubs for Sustainable Deliveries
Amazon continues cutting its fulfillment network in 2023 in a larger effort to cut costs and retain some of its margins.
New York City plans to test micro hubs this summer to reduce truck traffic and emissions, opting for sustainable transportation options like electric vehicles or cargo bikes for last-mile delivery. The city's Department of Transportation (DOT) aims to launch up to 20 sites in the program's first phase, from summer to fall.
Rising B2C deliveries spark concerns
The pandemic saw residential deliveries in NYC rise from 40% to 80%. This surge caused increased concerns about environmental impacts and resident safety due to double parking and sidewalk obstructions. Carriers have been exploring creative ways to address these issues; with FedEx Express, UPS, Amazon, and DHL testing electric carts and cargo bikes.
Microhubs provide safe transfer spots
Despite these efforts, nearly 90% of NYC's goods still move via truck. Microhubs will offer safe locations for drivers to transfer deliveries to low-emission transport modes. Hub locations will consider factors like proximity to truck routes, public transit, bike lanes, and high-density areas with mixed land use.
On a side note, we have put together a comprehensive guide on choosing and implementing a Warehouse Management System (WMS) for your e-commerce fulfillment business. Make sure to check it out here!
Ikea Announces Major US Expansion
Swedish home goods company Ikea plans to invest over $2.2 billion in a three-year expansion of its US presence, opening 17 new stores focusing on the South. The locations will include eight full-size stores and nine "Plan & Order" points, creating 2,000 jobs. Ikea currently operates 51 stores in the US and aims to make the country its largest market, surpassing Germany.
Adapting to the US market
To boost profits and diversify global revenue amid lingering inflation in Europe, Ikea will adapt its business model to US consumer needs by offering more delivery and pickup options. Over half of the new stores will be Plan & Order points, with smaller outlets dedicated to kitchen, bedroom, and living room projects. These locations will provide a more intimate shopping experience, including free design consultations.
Renewed focus on online orders
Ikea will also create 900 new pick-up locations for online orders. UBS found that 25% of overall furniture sales and 20% of all retail sales in the US take place online, which is expected to increase by 2027. Strengthening delivery services could boost Ikea's business in the US, where connecting rural and suburban areas to mega-stores is challenging.
Ikea's US operations reported $5.9 billion in sales last year, with a 19% increase in e-commerce sales despite supply challenges and increased costs.
Amazon Shifts to Regional Fulfillment Hubs
Amazon CEO Andy Jassy announced the reorganization of the company’s national fulfillment network into eight interconnected regional hubs. This change aims to reduce costs and boost delivery speeds by positioning goods closer to customers.
Jassy said the company made significant internal changes, including placement and logistics software, processes, and physical operations.
Efficiency and cost reductions
The regionalized fulfillment model replaces the previous national distribution system, which required shipping products from other parts of the country if a local fulfillment center didn't have the item in stock. This increased costs and delivery times.
With this new model, Amazon intends to ramp up next-day and same-day delivery activity. Jassy states that the company is on track to have its fastest delivery speeds ever for Prime members in 2023.
Shorter travel distances result in lower costs, reduced environmental impact, and faster deliveries.
AI-driven inventory prediction
Alongside the regional fulfillment network shift, Amazon is deploying new AI-driven algorithms to predict customer needs in regional hubs and guide inventory placement systems. This technology is expected to streamline the logistics process further and improve overall efficiency.
Walmart Targets 65% Store Automation by 2026
Walmart plans to have 65% of its stores serviced by automation by the end of its fiscal year 2026; focusing on using its brick-and-mortar network for online-order deliveries and investing in automation to speed up e-commerce fulfillment.
The company aims for 55% of packages processed through its fulfillment centers to move through automated facilities by January 2026, improving unit cost averages by about 20%.
As automation increases efficiency, Walmart anticipates a reduction in lower-paid roles and the creation of higher-paying positions. The retail giant's vast brick-and-mortar network, with inventory within 10 miles of 90% of the US population, serves as a competitive advantage, shortening the last mile and reducing costs.
Capital expenditure focus
In the next five years, nearly 90% of Walmart's capital expenditures will be allocated to high-return areas like e-commerce, supply chain, and store investments. The company has invested billions in technology for online-order facilities, partnering with companies like Alert Innovation and Knapp to streamline e-commerce order processing.