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Chasing Amazon:
Dynamic Warehouse Strategies
Journal of Commerce Webinar
April 13, 2016
Karl Siebrecht
CEO, FLEXE
Amitabh Sinha
Assoc. Prof. of Technology and Operations, Ross School of Business at U. Michigan
...
Amazon Has Changed Consumer Expectations
Amazon Holiday Performance
Amazon’s 2015
Cyber Monday
was 21.1%
better than
2014
CYBER MONDAY
Black Friday
was up 20.8%.
[...
They are accelerating their share growth….
24% of total US
retail growth
...by fundamentally changing distribution
Source:...
Plus an estimated an additional $1.2B to build 7.2 million square feet of new fulfillment
center space in the US in the ne...
Amazon
fulfillment
centers
How do you compete?
There is a New Strategy
The Dynamic Warehouse Network:
• A peer-to-peer marketplace for warehousing
storage and services
•...
Business Profile
• $50MM sales
• SKUs: 500
• Orders per year: 1MM
• Units per order: 1.5
• Customer demand map:
mirrors US...
Step One:
Network modeling exercise to determine
warehouses locations based on delivery goals
Scenario A:
70% of orders delivered within two days
Size
(sqft)
Utilization Startup
Costs
Annualized
Lease Cost
Fullerton,...
All warehouses utilized at 95%.
Transportation Cost-per-Order: $7.48
Scenario B:
90% of orders delivered within two days
8...
Scenario C:
90% of orders delivered within ONE day
Step Two:
Compare economics of traditional warehouse
network expansion vs. dynamic warehouse
network expansion
Key Model Assumptions
Outbound Transportation
Inbound Transportation
Labor Productivity
Lease Cost
Lease Term
Dynamic WH C...
Total Year 1 Distribution and Startup Costs
$-
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000...
Comparative Warehousing Costs – Year 1
Year 1 Warehousing Costs
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3...
Comparative Cost per Order – ”No Growth” Case
Year 1 Distribution Cost per Order in 8 DC Scenario (90% within 2 days)
Tota...
Comparative Cost per Order – Growth Uncertainty
High growth (30%)
Warehouse Utilization: 95%
Moderate growth (20%) Low gro...
Dealing with Variability
Differences in
cost structure
[e.g. labor wage inflation
much higher in some
places than others]
...
Summary Implications
Logistics market: massive, outdated & increasingly broken
US	
  Business	
  Logistics
Inv Carrying
Costs
Transportation
Ad...
One Key: Dynamic Warehousing
1. Add more options & iteration into standard warehouse network
planning
2. Cost/benefit anal...
Questions?
Whitepaper available mid-May: www.tauber.umich.edu/research/published-articles
karl@flexe.com | steve@starboard...
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Chasing Amazon: Dynamic Warehouse Strategies

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Amazon has changed consumer expectations. One or two-day shipping is no longer a luxury, it is now crucial to winning and keeping customers. How are retailers without Amazon’s 90+ North American warehouses supposed to compete? How can wholesale distributors keep up with ever-increasing expectations? And more specifically, how do these new consumer requirements change distribution network design and management?

The answers to these questions require rethinking the nature of distribution networks and the traditionally static warehouses that define them.

Published in: Technology
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Chasing Amazon: Dynamic Warehouse Strategies

  1. 1. Chasing Amazon: Dynamic Warehouse Strategies Journal of Commerce Webinar April 13, 2016
  2. 2. Karl Siebrecht CEO, FLEXE Amitabh Sinha Assoc. Prof. of Technology and Operations, Ross School of Business at U. Michigan Steve Johanson CEO, Starboard Corp. Vivek Rajeevan Student Consultant, MBA Class of 2017, Ross School of Business at U. Michigan
  3. 3. Amazon Has Changed Consumer Expectations
  4. 4. Amazon Holiday Performance Amazon’s 2015 Cyber Monday was 21.1% better than 2014 CYBER MONDAY Black Friday was up 20.8%. [Sales for brick and mortar retailers fell >10% ] BLACK FRIDAY Amazon aggressively established 24 major markets for same day shipping SAME DAY SHIPPING Amazon signed up more than 3 million Prime members during the third week of December alone PRIME SIGN-UP
  5. 5. They are accelerating their share growth…. 24% of total US retail growth ...by fundamentally changing distribution Source:  Company  Data,  U.  S.  Department  of  Commerce,  Macquarie  Research,  December  2015 51% of total US E-commerce growth
  6. 6. Plus an estimated an additional $1.2B to build 7.2 million square feet of new fulfillment center space in the US in the next two years. >$8 billionInvested in US fulfillment centers alone
  7. 7. Amazon fulfillment centers
  8. 8. How do you compete?
  9. 9. There is a New Strategy The Dynamic Warehouse Network: • A peer-to-peer marketplace for warehousing storage and services • Counter size with flexibility • Counter Amazon scale with industry scale
  10. 10. Business Profile • $50MM sales • SKUs: 500 • Orders per year: 1MM • Units per order: 1.5 • Customer demand map: mirrors US population • 1 current DC: 95k sqft in Ontario, CA • Current delivery: 12% orders 2 days or less • Transportation Cost-per-Order: $9.53 • Goal: 70-90% of orders delivered in 2 days or less LA-based Ecommerce Co.
  11. 11. Step One: Network modeling exercise to determine warehouses locations based on delivery goals
  12. 12. Scenario A: 70% of orders delivered within two days Size (sqft) Utilization Startup Costs Annualized Lease Cost Fullerton, CA 22,000 95% $110k $158k Decatur, IL 38,000 95% $130k $275k Statesville, NC 34,000 95% $125k $244k 3 DC Network Transportation Cost-per-Order: $7.76
  13. 13. All warehouses utilized at 95%. Transportation Cost-per-Order: $7.48 Scenario B: 90% of orders delivered within two days 8 DC Network Size (sqft) Startup Costs Annualized Lease Cost Santa Fe Springs, CA 21,300 $99k $153k Fort Worth, TX 10,700 $88k $77k Kansas City, MO 3,400 $81k $24k Decatur, IL 4,900 $82k $35k Statesville, NC 9,400 $87k $68k Montgomery, AL 13,200 $91k $95k Syracuse, NY 18,800 $96k $135k Milwaukee, WI 12,500 $90k $90k
  14. 14. Scenario C: 90% of orders delivered within ONE day
  15. 15. Step Two: Compare economics of traditional warehouse network expansion vs. dynamic warehouse network expansion
  16. 16. Key Model Assumptions Outbound Transportation Inbound Transportation Labor Productivity Lease Cost Lease Term Dynamic WH Costs Annual Order Growth Standard Parcel Rates FTL 120 Orders per Warehouse FTE $.60/sqft Per Month 3 Years Based on FLEXE Marketplace Rates Baseline = 0%
  17. 17. Total Year 1 Distribution and Startup Costs $- $2,000,000 $4,000,000 $6,000,000 $8,000,000 $10,000,000 $12,000,000 $14,000,000 Current Traditional (70%) Dynamic (70%) Traditional (90%) Dynamic (90%) Startup Costs Committed Costs (Lease) Variable WH Costs Inbound Transportation Outbound Transportation Year 1 Total Warehousing and Transportation Costs
  18. 18. Comparative Warehousing Costs – Year 1 Year 1 Warehousing Costs $- $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 Current Traditional (70%) Dynamic (70%) Traditional (90%) Dynamic (90%) Startup Costs Committed Costs (Lease) Variable WH Costs
  19. 19. Comparative Cost per Order – ”No Growth” Case Year 1 Distribution Cost per Order in 8 DC Scenario (90% within 2 days) Total Warehouse Utilization: 95% $-­‐ $2.00   $4.00   $6.00   $8.00   $10.00   $12.00   Traditional Dynamic
  20. 20. Comparative Cost per Order – Growth Uncertainty High growth (30%) Warehouse Utilization: 95% Moderate growth (20%) Low growth (10%) Warehouse Utilization: 75% Warehouse Utilization: 58% Suppose you’ve built up assuming 30% annual growth, but actual growth is different. $-­‐ $2.00   $4.00   $6.00   $8.00   $10.00   $12.00   Traditional  (90%) Dynamic  (90%) $-­‐ $2.00   $4.00   $6.00   $8.00   $10.00   $12.00   Traditional  (90%) Dynamic  (90%) $-­‐ $2.00   $4.00   $6.00   $8.00   $10.00   $12.00   Traditional  (90%) Dynamic  (90%)
  21. 21. Dealing with Variability Differences in cost structure [e.g. labor wage inflation much higher in some places than others] Geographical differences in demand Products of some suppliers selling much faster than others Growth rates different from forecast If actual demand is highly variable compared to forecasts used for capacity planning, then cost per order can increase significantly. Variability can arise in many forms:
  22. 22. Summary Implications
  23. 23. Logistics market: massive, outdated & increasingly broken US  Business  Logistics Inv Carrying Costs Transportation Admin/Other $1.45T Source: 2015 CSCMP State of Logistics Report Supply Chains Today • Complex • Built for efficiency • Process + enterprise IT = rigidity Supply Chains Tomorrow • Still must be efficient • But also flexible & adaptable Market Dynamics Causing Stress • Consumer expectations for same/next day/free shipping • Shorter product lifecycles • Amazon pushing competitive bar higher US Business Logistics Spending 2014 Warehousing
  24. 24. One Key: Dynamic Warehousing 1. Add more options & iteration into standard warehouse network planning 2. Cost/benefit analyses change 3. Dynamic solutions do not require capital outlays or long-term commitments 4. Significantly reduce the costs, time and complexities involved in network expansion 5. Fight Amazon size with dynamic flexibility 6. Use industry scale to compete with Amazon’s scale
  25. 25. Questions? Whitepaper available mid-May: www.tauber.umich.edu/research/published-articles karl@flexe.com | steve@starboardcorp.com | amitabh@umich.edu | vivekraj@umich.edu

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