Amazon's Outsourced Fulfilment Strategy: 3PL Customer Perspective | In Practise

Amazon's Outsourced Fulfilment Strategy: 3PL Customer Perspective

Former Director European External Fulfilment at Amazon

Why is this interview interesting?

  • How Amazon outsources fulfillment to 3PL’s
  • Where the core IP lies for contract logistics
  • How retailers choose 3PL providers
  • Open and closed-book pricing structures
  • Potential pricing pressures as industry moves towards closed book
  • XPO Direct challenges with multi-channel retailers

Executive Bio

Jean-Marc Francois

Former Director European External Fulfilment at Amazon

Jean-Marc is an experienced executive with over 40 years of supply chain and logistics experience. In 2014, he joined Amazon to develop, promote and deploy a strategy to outsource part of the fulfilment to 3PL’s. He was responsible for managing the 3PL contract, productivity and pricing across the outsourced fulfillment network globally. Prior to Amazon, Jean-Marc ran PE-backed ELIS and enjoyed 12 years at Michelin where he ran APAC and was on the Executive Board. Jean-Marc now advises ecommerce retailers on fulfillment and supply chain strategies. Read more

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Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Marc, can you provide a short introduction to when you first joined Amazon in 2014?

I joined Amazon in July 2014, as director of European external fulfilment. To be clear, this is to do with the outsourcing strategy regarding fulfilment in Europe. It was a brand-new role and, in fact, I was recruited to develop, promote and deploy the Amazon outsourcing strategy across Europe. When outsourcing took place, I was also responsible for managing the corresponding 3PL contract and to manage, globally, the performance of the outsourced fulfilment network.

What did Amazon’s warehouse network look like in Europe, in 2014?

In 2014, Amazon had roughly 30 plus large fulfilment centers. They ranged from 50,000 to 100,000 square meters. They were mainly in the top five countries which were Germany, UK, France, Italy and Spain although there were some small operations outside these countries. At that time, the scope of the outsourcing was really insignificant and fairly irrelevant. Amazon had also not yet deployed its robotic solution. You may have read in the newspapers that Amazon took over a company, called Kiva, in 2012 and this company became Amazon Robotics. But the deployment took some time and, in 2014, when I joined, globally, the fulfilment centers were using very classical storage and handling equipment in terms of racking, shelving and conveyance. What made Amazon really become the leader in the field was that they were using their own state-of-the-art information system as well as their own management solution to reach operational excellence benchmarks.

So Amazon bought Kiva in 2012 and it took a couple of years to deploy it. But then when you joined, they were looking to outsource to 3PL’s?

Yes; it might seem strange, but in fact, it comes back to why Amazon were considering outsourcing to 3PL. Obviously, for Amazon, warehousing and fulfilment is clearly the core business; it is one of the pillars that Jeff Bezos has always seen within Amazon. It is why Amazon, over the years – firstly in the USA and then in Europe and other countries in Asia – launched and developed its own fulfilment network globally.

In other logistics domains, such as parcel delivery services, Amazon fully outsourced, at first, to leading parcel carriers. It is only in the past five to seven years that Amazon started to progressively insource part of these parcel delivery services which today is significant but, of course, Amazon will always need a parcel carrier.

Fulfilment outsourcing was, at first, purely opportunistic; before 2014, I would say. For example, Amazon started to offer the customer some big furniture, such as sofas or white goods, such as washing machines and, for these very specific goods, Amazon decided, at first, to use 3PL. Obviously, it was very marginal in terms of value. More recently, in 2013 and 2014, Amazon had some challenges in supporting this tremendous growth on a larger and larger basis. When you are growing 30%, 50%, 60% every year, depending on the country and sometimes even more, it really is a challenge. Amazon has many resources and a lot of money but, sometimes, it is without having the resources to make it happen. It is at that time that Amazon thought, why not leverage 3PL capacity and capabilities, in very focused domains. It is clear that Amazon’s strategy was, as far as I know, to mainly keep the fulfilment network in-house. Really, this outsourcing strategy, even if it is in focused domains, is already very attractive and significant for 3PL because a small percentage of Amazon already means a lot of business for the 3PL. It is why we have been able to really develop the type of outsourcing that we like to implement and then to deploy it. I was lucky to see the 3PL carriers very hungry for Amazon’s business.

Can we just walk through how Amazon looked to work with 3PL? In 2014, Kiva was then becoming deployed in the warehouses; you were looking to work with 3PLs. What was the system that you designed for Amazon to work with these outsourcing businesses?

First of all, what were these focused domains that I mentioned before? Obviously, it was not the domain, the field, where the Kiva solution should really give Amazon the competitive edge. Kiva was a small robotic solution, dedicated more for small items which were known as sortable items. It is why Amazon focused on the fulfilment of large or very large items for outsourcing. It related to items that were above 50cm long and, often, the logistics providers call them non-sort items or heavy/bulky items. This was really the domain where we focused, initially.

This domain represented a small percentage of all the items fulfilled by Amazon because, obviously, the majority of the things you buy are small; in terms of volume and throughput, it was quite small. However, as the items are big, they require a lot of space in the building. Secondly, Amazon decided to focus only on outsourcing fulfilment services. We didn’t outsource other sophisticated services. To keep it simple and to really focus on the domain for 3PL, we also focused on large item orders, with only one item per order. At the beginning, it was really where we thought that the 3PL would easily be able to meet Amazon’s requirements while, for Amazon, mitigating too much knowledge transfer to 3PL. As I mentioned previously, Amazon saw logistics as their core business, de facto, Amazon saw themselves as competitors to the 3PL. The 3PL also saw Amazon as competitors.

They didn’t want to share their core IP in the sortable items, specifically?

Exactly. Especially as Amazon were about to deploy a step-change technology, thanks to Kiva.

Do you think there is always going to be a ceiling to the amount of logistics that Amazon outsources because they will never outsource a large portion of the sortable goods, because that is their IP?

I have learned, during my life, never say never. Since the focus on the large items, I developed some specific outsourcing for some sortable items. But they were specific items, such as dangerous goods, for example. But I agree with you; I have the feeling that Amazon will make sure they keep their competitive edge and IP in logistics fulfilment, which is mainly around sortable items. That is really where mechanization and robotic solutions bring Amazon a competitive benefit today.

In terms of using the 3PL, it would be larger items, typically single purchases and would the supplier then ship the product to the 3PL-managed warehouse directly? How would you get the inventory into the warehouse?

The strategy we had was really to be able to integrate the 3PL warehouse or fulfilment center in a similar way to the Amazon fulfilment center. Indeed, the goal was to enable Amazon’s vendor to send the goods directly to the 3PL warehouse and then to allow the Amazon business to sell this item online and to fulfil them the same way they would in all Amazon buildings. As it started out, the 3PL worked using their own warehouse management system. There are very well-known software solutions in the market, such as Manhattan, Generix and others. We made sure that we kept the 3PL’s WMS. We ensured that the 3PL’s WMS were from the best in the market.

So Amazon doesn’t have their own warehouse management system? They use off-the-shelf providers?

No; Amazon does have their own. As I said before, the performance of Amazon before the robotics came not from the mechanical equipment – racking, shelving or conveyance – but it came mainly from Amazon’s own warehouse management system which allowed very innovative practices in the way Amazon managed its own fulfilment centers. But despite this benefit, we moved forward to focus 3PL on very specific domains, not too complex, and we could afford for the 3PL to keep their usual warehouse management system. They already knew it, had mastered it and, for them, it was cheaper to deploy than to change.

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Amazon's Outsourced Fulfilment Strategy: 3PL Customer Perspective

March 12, 2021

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