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.

1. Chasing Amazon:
Dynamic Warehouse Strategies
Journal of Commerce Webinar
April 13, 2016

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. Amazon Has Changed Consumer Expectations

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. 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. 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. Amazon
fulfillment
centers

8. How do you compete?

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. 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. Step One:
Network modeling exercise to determine
warehouses locations based on delivery goals

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. 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. Scenario C:
90% of orders delivered within ONE day

15. Step Two:
Compare economics of traditional warehouse
network expansion vs. dynamic warehouse
network expansion

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. 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. 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. 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. 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. 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. Summary Implications

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. 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. Questions?
Whitepaper available mid-May: www.tauber.umich.edu/research/published-articles
karl@flexe.com | steve@starboardcorp.com | amitabh@umich.edu | vivekraj@umich.edu