Amazon Prime Day creates logistics challenges and opportunities alike

As you may likely know, today and tomorrow are both part of Amazon Prime Day, which the global e-commerce titan refers to as “a 2-day parade of epic deals.” If that does not sum up exactly what Amazon Prime Day is, then there is a chance not much else will.

This year marks the fifth year of Amazon Prime Day. And while it has become an event eagerly awaited and anticipated by consumers, the logistics planning and preparation it requires by Amazon grows incrementally by the year.

That was made especially clear earlier this year, when Amazon announced in late April on its first quarter earnings call that it was at on evolving its ubiquitous Prime Two-Day Shipping program into a One-Day Shipping program, to the tune of an $800 million investment, in tandem with the more than 20 years Amazon has spent expanding its fulfillment and logistics network.

While this endeavor is for every day, not just Amazon Prime Days, it speaks to what its plans are for faster shipping on an accelerated basis, said Amazon CFO Brian Olsavsky on the first quarter earnings call.

“We have been offering…faster than Two-Day Shipping for Prime members for years, one day, same day, even down to one-to-two hour delivery for Prime now,” so we are going to continue to offer same day and Prime Now selection on an accelerated basis. But this is all about the core free Two-Day offer morphing into - or evolving into a free One-Day offer. We've already started down this path. We've in the past months significantly expanded our one-day eligible selection and also expanded the number of zip codes eligible for one-day shipping.”

While Prime Day does materially bump up demand and subsequently network volume levels, it also has a trickle-down effect, of sorts, on other major supply chain stakeholders, too, like UPS and the United States Postal Service, among others.

Since Amazon initially introduced Prime Two-Day shipping in 2005, domestic margins for UPS fell from 15.7% in 2005 to 8.9% in 2018, noted Robert W. Baird and Co. analyst Ben Hartford in a research note earlier this year.

“Amazon has been increasingly developing its own logistics capabilities since the early 2000s, leading some investors to believe that insourcing from Amazon's logistics efforts have led to margin erosion at UPS (and FDX),” he wrote. “We think the impact has been less direct but nonetheless still very consequential: Amazon's creation of customer demand and expectations for B2C led to e-commerce's rapid development over the past 10-15 years. As a result, we recognize the risk a similar headwind being presented to parcel providers if the migration to free ‘One-Day’ becomes adopted and expected in customer preferences.”

And there is also clearly a subsequent post-Prime Day impact on the USPS, too, according to Carson Krieg, co-founder and director of Carrier Operations at Austin, Texas-based Convey Inc., a software company focused on improving the delivery experience for retailers.

“Last year, the week after Amazon Prime Day, USPS shipping volume across Convey retail customers dropped dramatically — from a typical 20-30K/week down to 2.1K/week (or approximately 92%), said Krieg. “This raises important questions about whether retailers chose to purposely avoid USPS that week, if the glut of orders created too many logistical issues for the carrier, or if retailers lost that much in business after consumers spent their hearts out on Prime Day. One thing is clear: for parcels that did go through the USPS system, average transit times spiked from 3.3 days to 4.4 days (33%), and negative customer feedback increased by 10%. It’s an important warning sign for USPS and the retailers who rely on it this year: Amazon is not only expanding its own delivery footprint, but also increasingly biting into sales and shipping capacity for others during this period — requiring them to find new ways to create positive customer experiences and uphold brand promises through actionable insights and collaboration.” 

Convey’s Krieg added that the two-day Prime Day spike, in a sense, serves as a third major shopping holiday, with Black Friday and Christmas, with the common theme being the Prime Day impact on parcel carrier capacity. As for Amazon Prime Day itself, he said, he said it swamps the abilities of the USPS, adding that the impact of the rest of the e-commerce retail group for those few days is also pretty significant.

“Having a multicarrier ecosystem [during Amazon Prime Days] means retailers are not relying on a single point of failure,” he said. “If you are going to leverage the USPS by itself, what we saw last year was a spike in FedEx volume, which speaks to the need for a backup, or contingency plan, for things like origins, when an order is processed and inventory planning, and exception management,” he said. “What we see in our data is that 70% of our exceptions can happen in the first [part] of delivery and not the final mile, which is kind of counterintuitive to what people think of the last mile being the hardest, due to things like incorrect deliveries and addresses. With Prime Days, the exception issues relate more to carrier or customer load times, origin source problems, unreadable bar codes, and other things that can go a awry when a ton of volume disrupts the status quo.” 

While Amazon Prime Day is well known as an annual event, that does not mean it is not overhyped, noted Jerry Hempstead, president of parcel consultancy Hempstead Consulting.

“Today is the premier example of hype, excess, and impulse buying,” he said. “Does any prime day buyer really need their purchases tomorrow? My birthday is two months away and Christmas is five months away. Amazon is promoting next day delivery because they can do it (much of the time) but in the end what is lost if the item is delivered in two days or five? One of the big items hyped today is the Echo Dot for $22. The world will not cease turning if you don’t get it tomorrow…or the Fire stick for your TV.”

Hempstead also observed that unfortunately all this excess will put a strain on UPS and the USPS the remainder of this week, noting that the possibility exists that really urgent deliveries might get delayed as Amazon (and other retailers piggy backing on the sales hype) flood the networks with items that may not truly need this level of next day delivery. FedEx and DHL also benefit from Amazon Prime Day, he said.

Whether you are keen on online shopping or not, it goes without saying that Amazon Prime Day has become more than a big deal in supply chain and logistics circles. There are many spokes on the wheel it creates over a two-day period that go on and on, and it will only continue to spin as e-commerce continues to take a bigger piece of the action going forward.