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Blog: Amazon Looks to Drones, Mini-Fulfillment Centers

By Jack Keough

Unless you’ve been living under a rock in the past few days, undoubtedly you’ve heard about the CBS 60 Minutes interview with Jeff Bezos, the founder of Amazon.com and AmazonSupply.com, which sells industrial supplies in some 14 product categories.

In this far-ranging interview, Bezos disclosed that Amazon is developing a program in which it will deliver products to customers by unmanned small drones.

It sounds incredibly futuristic, but Bezos said his company plans to have the drones in in operation in about five years.

The packages would have to be about 5 pounds or less (which is about 86 percent of Amazon’s shipped products) and delivered within a ten-mile radius of an Amazon fulfillment center.

Even more impressive was Bezos’s contention that packages, once ordered, would be delivered within 30 minutes. The drones would deliver the packages directly to the customer’s doorstep.

If this program ever gets off the ground (pun intended) Amazon PrimeAir as it is called, will be an amazing service. It still must overcome substantial hurdles, including safety issues and FAA approval. Think about how this could affect distribution. Let’s say an electrical contractor at a construction site needs some small products or components. Using his mobile phone, he sends in the order to Amazon. In less than 30 minutes a drone, using GPS positioning, drops the package at the site.

While the story has generated headlines and it seems as if every news outlet in the country is talking about the drones, Amazon has also undertaken some other steps to position itself for future growth.

Amazon, which was started in a garage in 1995 for book distribution, is in the midst of the biggest expansion in its history. Earlier this year, Amazon said it would complete construction of five more huge distribution fulfillment centers by the end of the year. And it also announced recently that it will be building another one in Connecticut, creating 300 jobs. These highly-automated facilities, which are more than three football fields long, are located in strategic areas of the country so that Amazon will have the ability to ship quickly and accurately to major metropolitan areas.

But that’s not all it is doing.

Amazon has entered into an agreement to establish mini-fulfillment centers at some customers’ sites. At Procter and Gamble (P&G), for instance, Amazon has a small mini-distribution center within a P&G warehouse. The arrangement apparently started some three years ago, but is just now is coming to light. From the first arrangement, believed to have been in a P&G DC in Tunkhannock, PA, the consumer products and e-commerce giants have expanded the program, the Wall Street Journal reports. Amazon is now inside at least seven P&G distribution centers world-wide, including locations in Japan and Germany.

Orders are sent to P&G and brought over to Amazon which takes over shipping and delivery. This will greatly cut down the time and cost of getting orders processed directly from the manufacturer.

Amazon is reportedly thinking of undertaking the same process at a number of other manufacturers.

Just think what this could mean to the distribution sector if AmazonSupply located some fulfillment centers at an electrical manufacturer. The manufacturer could simply outsource the shipping and delivery functions to Amazon.

Amazon is now intertwined with a number of consumer and business sectors: fashion, shoes, diapers and consumer items.

What all this means for distributors is anybody’s guess. But make no mistake about it: Amazon doesn’t enter any market unless they think they can dominate it.

Amazon, in the past, has taken its time to refine its processes. It’s not uncommon for Amazon to spend up to 5 years studying and then dipping into a new market. That happened with the introduction of AmazonSupply.

And through its Amazon Fresh program, a food delivery service, Amazon is looking to same day delivery for various grocery items. The program began in Seattle, and is now is expanding to other cities.

Bezos said his company’s success is based on a long-term strategy and not for a short-term win situation.

Some distributors we have talked to do not perceive AmazonSupply as a threat-at least right now.

It was particularly interesting to note the comments from Jim Ryan, CEO of giant MRO distributor W.W. Grainger, in a recent interview with Bloomberg.com. ┬áSales through the Internet are now a third of Grainger’s total, up from 25 percent in 2010, said Ryan, whose company has been selling over the Web since 1996.”There are a number of large companies in this industry that have a catalog shipped directly to customers out of regional distribution centers — with no sales force, no branches. That’s very similar to Amazon and the many other Internet-based business models,” he said. “We’ve been competing with that model for years.”

Grainger, based in Lake Forest, Illinois is expanding U.S. sales 1.5 times faster than the industrial supplier market, maintaining its long time pace of share gain even after AmazonSupply started in April 2012 that competes directly with Grainger, Ryan told Bloomberg.

“Our U.S. business continues to be very healthy,” Ryan said in the interview. “We’re growing at a multiple of the industry. It’s not at all unusual for different types of competitors to come into this industry.”

Different types of competitors, indeed. Now including flying drones.

Jack Keough was the editor of Industrial Distribution magazine for more than 26 years. He often speaks at many industry events and seminars. He can be reached at john.keough@comcast.net or keoughbiz@gmail.com

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