The logistics industry can be easy to overlook. It refers to the expenses of storing and shipping goods--costs that from the perspective of consumers are baked into the overall prices and thus largely invisible. However, the ability of US firms to be supplied continuously and on schedule, while tracking its far-flung supply chains, means that firms can shop around for suppliers and don't have to hold as much in costly inventories. The ability of consumers to buy from faraway sellers, and to count on rapid and reliable delivery, is the basis for all e-commerce. For a lot of consumers, "free" shipping is what draws them online; for the logistics industry, who pays for "free" shipping can be a major challenge.Here is some quick background on the size and shape of the US logistics industry
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Here is some quick background on the size and shape of the US logistics industry from the 30th Annual State of Logistics Report, written by AT Kearney for the Council of Supply Chain Management Professionals (June 2019). Their overall estimate is that the US logistics industry is $1.6 trillion in size, or about 8% of the entire US economy.
The rapid increase in e-commerce sales is driving changes in the logistics industry. By one estimate, in 2017 spending on e-commerce logistics in the United States was $117.2 billion, accounting for 6.9 percent of total U.S. logistics costs (up from 5.2 percent in 2016). This growth in e-commerce has resulted in a higher volume of low-value shipments. In response, retailers are increasingly decentralizing their distribution centers and establishing so-called “last-mile” fulfillment centers to keep inventory closer to consumers. Due to the growing efficiency of last-mile transportation, online orders are increasingly being delivered on a same-day basis. One study found that small fulfillment centers accounted for 73 percent of the industrial warehouse market in 2017, compared to 58 percent in 2016. E-commerce is also increasing the demand for “reverse logistics” because e-commerce merchandise is returned to the seller more often than products bought in retail stores. By one estimate, consumers return 5 to 10 percent of in-store purchases, but 15 to 40 percent of online purchases.Industry experts also point out that as 5G networks become widespread, it will be possible for a firm to track each part of its supply chain through each step to to its own production facility.
Over the past few years, Amazon has been developing its own logistics capabilities. In 2015, it launched the “Amazon Flex” package delivery service in a few American cities, which employs delivery drivers as independent contractors. In the same year, Amazon also started its own freight airline, Amazon Air, based in Hebron, Kentucky. As of 2019, Amazon Air maintains a fleet of 40 Boeing 767 planes.105 In 2016, Amazon started calling itself a “transportation service provider,” reflecting its role in managing inventory and arranging transportation for third-party sellers. In its 2018 10-K report on the year’s financial performance, Amazon added “transportation and logistics services” for the first time to its list of competitor industries. The firm has multiple “fulfillment by Amazon” centers in North America, Europe, and Asia that provide warehousing and transportation services. Currently it is testing an invitation-only program, “Fulfillment by Amazon” or “FBA Onsite,” that offers shipping, storage, and software services to other companies. Other innovative fulfillment-related Amazon services include contracting Sears Auto Centers to install tires purchased on Amazon, as well as the “Amazon Key” service, which delivers packages directly into customers’ homes with the aid of a smart front-door lock and an internet-connected camera.108 Additionally, in 2017, Amazon purchased Whole Foods (a U.S.-based grocery store chain). This large-scale acquisition of brick-and-mortar locations has given Amazon a new platform to increase the efficiency of last-mile deliveries.Whole Foods also offers Amazon a large amount of data on pricing and customer behavior.
Amazon’s move into logistics services has increased competitive pressures within the industry. For example, its formidable command of cloud computing (and other digital technologies) has compelled legacy logistics firms to make IT investments and hire personnel to digitize traditionally manual processes. Amazon has been driving down costs, testing new delivery systems (for example, electric delivery drones with a range of 15 miles), and whetting customers’ appetites for advanced services like real-time shipping status updates. By one report, Amazon’s adoption of warehouse robots has reduced the time of human labor required to stack a package on a delivery truck to one minute. Some of these technologies lower costs by reducing employees: a 2019 report estimated that newly installed machines that box customer orders could eventually replace 1,300 employees at 55 U.S. fulfillment centers. Although such boxing machines cost roughly $1 million each, the payback period is estimated to be less than two years. Amazon’s broad logistics efforts are beginning to impact traditional logistics companies. In 2019, for example, XPO Logistics lowered its projected revenue estimates, citing reduced demand for high-volume package deliveries to the post office from its largest customer, which industry observers believed to be Amazon. Also in 2019, FedEx decided not to renew its contract to provide express shipping services to Amazon in the United States, and to focus on its relationship with rival retailer Walmart instead, which reflects Amazon’s shift from FedEx customer to FedEx competitor.
For a lot of US households, perhaps the main question about logistics is whether there is "free" shipping. In the Amazon business model, those who pay an annual subscription fee get "free" shipping as one of the benefits, and one result is that other online retailers also feel compelled to pay the shipping fees for their customers. The [email protected] website offers an interesting overview of this issue in "Is Free Shipping Sustainable for Retailers?" (December 10, 2019). The website also has a link to a 12-minute interview with Ron Berman on the subject. The article notes:
The National Retail Federation (NRF) reported nearly 190 million consumers made purchases in the five days from Thanksgiving to Cyber Monday, an increase of 14% from last year. But more of them abandoned physical stores for the ease and limitless choices of online shopping. The biggest draw to digital was free shipping, according to NRF. Nearly half of shoppers surveyed said free shipping was the push they needed to make purchases they were otherwise hesitant about. A fifth of shoppers cited the option of buying online and picking up in store as another factor in favor of virtual retail. ...
While studies show that free shipping entices more customers to click the “order” button, it is also associated with a high volume of returns. The return rate can be as high as 40% or 50%, Berman said. It’s easy for shoppers to buy multiple sizes to try on at home knowing they can return what doesn’t fit, or take a chance on a product they aren’t completely committed to, knowing they can send it back for free or at a nominal cost. ... One thing is clear: It’s hard for firms to shrink from the pressure to offer free shipping.