Amazon spent $28B in freight costs last year. How well are they using their advantage?
Someone asked me this question on a popular social platform. The subtext was this:
What kind of discount do you think they’ve negotiated with the major carriers (UPS, FedEx, USPS, etc.)?
I have over 12 years of operational experience and 23 years of commercial negotiation experience with freight companies on large scale global freight operations.
Even though I have no direct experience with Amazon’s freight operations (and I would not reveal any inside information, even if I did) I think I am well qualified to answer this question.
Based on my review of Amazon’s cost reports, I would first question the full details of $28 Billion freight spend. My gut feel is that all of it may not be freight bill for external freight vendors such as UPS, FedEx or USPS etc.
Moving on, irrespective of the
As such, Amazon would start with a massive advantage in the price negotiations with the vendors. There are two questions here:
1. How big? And,
2. How well Amazon uses this advantage?
Let’s start with the second question first – because I have worked with many companies who had a similar massive advtange where they formed bulk of the trade on some lanes and yet did not know how to negotiate and control freight well enough.
What went wrong?
In many cases the same company has 20 or more divisions each with its shipping department – negotiating with the same vendor on the same lane. In most cases the vendors pitched their best salesmen while the buyers thought of freight as a fixed cost (an after thought).
The net result? They were paying the retail! Or, close. Worse still, they did not know the difference. I will skip a lot of other bad news, except for the worst one – they were signing contracts which were largely one sided (favouring the freight vendors). And, as usual the contracts make all the difference in any transaction.
So how well does Amazon perform on this front?
An external point of view is that it performs very well. What is my evidence? Read these articles to get a sense:
There are many others in the same vein. Sure it is a political hot potato now, but the facts of the case are still quite clear. Amazon is using every advantage it can. And, quite well.
Let’s spend some time on the first question.
How big is the advantage?
Everyone knows that the full truck, full plane, or full ship, or full shopping centre is very lucrative proposition for the vendor. Any operation close to its peak volume is at its most productive.
Think of what kind of rent subsidies do the anchor tenants enjoy in shopping centres, and in commercial buildings?
What kind of deals do Take-or-Pay (ToP) buyers enjoy on LNG trains where investment in each train exceeds several billions of dollars. There are countless such examples in the realms of supply chains – ranging from explosives to chemicals to gases to property to FMCG etc.
Almost all commercial operations have a bulk buyer who enjoys significant cost advantage over the retail buyers.
How do you model the advantage? How do you model the industry cost curve and pick your vendors? How do you negotiate your advantage?
All this is an art – which cannot be summarised in a few pages. You have to live it all day, every day, for years to master the art.
In a future post I will reveal Amazon’s achilles’ heel, which none of the big box retailers have yet identified, and which would level the playing field for them.