Should FedEx and UPS fear Amazon’s new delivery service? What can 3PLs do about it?

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The implications of Amazon’s new delivery service for couriers & 3PLs

Last week, Bloomberg reported that Amazon is testing its own delivery service to rival UPS and FedEx. Their new “Seller Flex” service will focus on the pickup of packages from warehouses of third-party Amazon merchants and their delivery to customers’ homes.

The new delivery service is aimed at boosting the number of goods eligible for the its Prime free two-day delivery and, in addition, it will help Amazon free up space in their warehouses. These deliveries are now often handled by UPS and FedEx – and while Amazon might still use third party couriers for delivery, they will now have the ability to determine how each package is sent.

This is a major strategic move that will help Amazon solve two major pain-points within its supply chain: escalating delivery costs and limited warehouse space. Citigroup analysts calculated that by bypassing third-party shippers like UPS and FedEx Amazon could potentially save over $1 billion annually, translating into savings of $3 or more per average delivery, which currently costs around $7.8.

Should delivery giants brace for armageddon?

Shares of FedEx and UPS both fell Thursday after Bloomberg reported that Amazon is considering its own delivery service. However, analysts at Credit Suisse thought the move was “more noise” than anything of “substance” as it relates to a legitimate threat to FedEx and UPS. They believe the impact of Amazon’s delivery service on both FedEx and UPS is ‘negligible.’

fedexFollowing the news, Amazon clarified that the offering will continue to use some of its current delivery partners, but didn’t comment on whether it will increase the number of deliveries it makes directly to its customers. “We are using the same carrier partners to offer this program that we’ve used for years, including UPS, USPS and FedEx,” Amazon said in a statement.

To fully understand the scale that Amazon’s new delivery service could have on the FedEx and UPS bottom line, it’s also important to put in context the volume of business that Amazon represents for them. Amazon accounts for less than 10 percent of UPS revenue, while FedEx has said the e-commerce giant accounts for less than 3 percent of its sales.

How can 3PLs react and evolve within this shifting landscape?

Conquering the last mile is one of the top priorities for any e-commerce player, and delivery companies have built exceptional fleets and infrastructures in order to optimize the speed, cost and flexibility of their operation. However, the way in which Amazon is finding innovative ways to manage their warehouse capacity while optimizing and building a more flexible and extensive delivery network is giving them an edge in the market.

3PLs and retailers will have to jointly explore new ways to build a new breed of delivery solutions, from the way they stock their goods to the way they manage multiple fleets to deliver the optimal delivery experience for their customer – creating a broader network that will translate into a more efficient and effective delivery operation.

After all, Amazon is a service-driven company and their efforts to speed up fulfillment and delivery in the most efficient way possible are the driving force behind these changes.

“Seller Flex” is currently being piloted in the West Coast ahead of nationwide rollout and while we look forward to seeing how this new addition to Amazon’s logistical capabilities improves their ability to improve their service, it will be also interesting to see how retailers and 3PLs react to this new reality – with the understanding that in a not-so-distant future Amazon could become a shipping business unto itself.

Raanan Cohen

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