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On Amazon’s New Delivery Service: Don’t be surprised to see some significant shifts in global shipping
Burak Kazaz, professor of supply chain management at Syracuse University’s Whitman School of Management reacts to news that Amazon is set to launch a delivery service that would compete with FedEx and UPS.
“In recent years, Amazon decided to develop its own logistic capabilities,” says Kazaz, the Steven Becker Professor of Supply Chain Management. “They built Prime Air and already have forty 767 jumbo airplanes that can move a lot of products, both between their fulfillment centers and to reach their customers. I would not be surprised to see more than one hundred 767 jumbo airplanes in Prime Air at the end of 2018. This is a significant investment in the firm’s logistical capabilities, one that would pose the type of threat mentioned to UPS and Fedex. These giant flying birds, when run efficiently, mean a significant transportation capacity.”
“Let’s talk about Amazon’s initiative on moving parcel for businesses and their newly advertised Shipped with Amazon (SWA)” say Kazaz. “Why would Amazon provide this service? It is important to understand the demand pattern for this online retailer. Quarter 4 is when the company has its highest logistical needs with Thanksgiving, Black Friday, and the holiday season. In the three remaining quarters, this transportation capacity might be at utilization rates less than ideal. SWA fulfills the need to make use of the unused capacity while providing the firm with the ability to serve its customers during high demand season, namely Quarter 4. If pricing reflects this reality, then Amazon’s new initiative sounds like creating efficiency in the utilization of this transportation capacity.”
Kazaz on analyst reports
“I certainly understand the concern that Amazon may not be asset heavy when evaluating its logistics network,” says the professor. “This is in alignment of the traditional perspective in analyzing financials of the transportation companies. However, we also need to be cognizant of the fact that we live in an era of light asset networks being much more valuable nowadays, at least in the way that Wall Street and investors see them. Take Airbnb, which does not own its accommodation facilities, but has the consumer demand and its value is extremely high in the financial market. The reason for the high valuation is that the firm has more leverage by keeping its cash and not making these long-term, and potentially risky, investments.”
“In addition to the transportation capacity in North America, Amazon can serve as a brokerage firm between shipping companies and businesses that need these shipping services. They have the technology who can develop such applications. I would not be surprised if Amazon takes this initiative seriously, and play a significant role in controlling the global shipping capacity,” says Kazaz.
“And, let me add that Amazon may not be the most efficient logistics provider early on with these initiatives. The company has proven to be a quick learner from its experiences as indicated from the missed deliveries in 2013. Given the history, I would not be surprised to see some significant shifts in the playing field with new equilibriums in the transportation services both in the US and in global services.”
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