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.

{audio:0:00:20} Marc, can you provide a short introduction to when you first joined Amazon in 2014?

{audio:0:00:26} 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.

{audio:0:01:10} What did Amazon’s warehouse network look like in Europe, in 2014?

{audio:0:01:16} 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.

{audio:0:02:46} 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?

{audio:0:02:58} 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.

{audio:0:03:40} 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.

{audio:0:04:09} 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.

{audio:0:06:22} 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?

{audio:0:06:38} 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.

{audio:0:07:38} 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.

{audio:0:09:06} They didn’t want to share their core IP in the sortable items, specifically?

{audio:0:09:13} Exactly. Especially as Amazon were about to deploy a step-change technology, thanks to Kiva.

{audio:0:09:23} 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?

{audio:0:09:35} 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.

{audio:0:10:21} 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?

{audio:0:10:38} 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.

{audio:0:12:00} So Amazon doesn’t have their own warehouse management system? They use off-the-shelf providers?

{audio:0:12:05} 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.

{audio:0:13:01} It was, typically, one purchase per order and bigger items, rather than many different products in one order?

{audio:0:13:09} Exactly. First of all, we used their WMS. Then we integrated their WMS within the Amazon information system landscape and we developed a specific interface, to be able to integrate all these leading WMS systems from the market, with Amazon’s own information system. It was a very clear and clean interface. Secondly, we asked the 3PL to set up their WMS in a way that would meet with Amazon’s own good practice. Maybe not all of Amazon’s good practices, but the main ones. Finally, we also made sure that the WMS could provide fully transparency to Amazon and full control of the inventory status of every item in the 3PL buildings. We needed to ensure we had full control of the inventory. This was because, first of all, we wanted to secure Amazon goods and secondly, to be able to offer the market all the inventory available – not more, not less – to secure a good customer experience.

{audio:0:14:41} It is interesting how effectively Amazon has the best warehouse management system in the market, for sortable items, but they haven’t actually sold it to anyone, apart from themselves. They must think is part of the core IP of their business, in logistics?

{audio:0:14:58} Yes. It is the way I have seen the Seattle Amazon top management look at this topic. Logistics is core business; Amazon is a tech company, an information systems company and, obviously, the logistics, supply chain and information system are core and I don’t see Amazon, over the next decade, promoting this solution to the market. By the way, Amazon’s size will soon be $400 billion a year and gross, roughly, in volume 20% to 30% annually. It is big enough, I would say, to allow Amazon to be able to afford their own system and to develop it further, the same way the leaders in this business do it. Even Amazon today certainly have more resources on WMS than Manhattan has and Manhattan is one of the leaders in the world.

{audio:0:16:07} Amazon do outsource. They do AWS and, obviously, they do Fulfilment by Amazon. But it seems as if that Fulfilment by Amazon is based on this core warehouse management system which they will not shar directly with other retailers and instead monetize it via FBA?

{audio:0:16:22} Exactly. Thanks to the development of Fulfilment by Amazon, this means that the vendor sells on the Amazon Marketplace but under his own name. The vendor will invoice the final customer himself, but he decided to outsource the logistics to Amazon, via Fulfilment by Amazon. With the development of these services, Amazon became a direct competitor of the 3PL. Today, Amazon is certainly one of the biggest 3PL in the world; maybe even bigger than DHL.

{audio:0:17:10} Because of the Marketplace?

{audio:0:17:12} Yes, but mainly due to Fulfilment by Amazon which is, in fact, really a logistics service that Amazon is selling, in addition to the Marketplace.

{audio:0:17:22} Potentially, the natural progression of this is that they go out and offer these 3PL services, end-to-end logistics, for bigger retailers?

{audio:0:17:33} It could happen. Until 2018, Amazon were offering this logistics service, Fulfilment by Amazon, only to vendors using Amazon Marketplace and, secondly, only for goods sold on Amazon Marketplace. I noticed, over the past two years, that Amazon is now accepting that the vendor can also Fulfil by Amazon goods sold on another marketplace. That is really a step towards what you describe.

{audio:0:18:14} In terms of the core intellectual property of the warehouse management system, is it only for sortable items; retail items with multiple products per order? Or can it also venture into after-parts services or goods from manufacturers or other stuff that the 3PLs do?

{audio:0:18:34} First of all, the Amazon WMS is state of the art for all sort types. It works for sortable, non-sort, heavy/bulky and for single orders or multi-item orders. Amazon only outsource a share of the non-sort. They have a very significant share in-house and they need the right management system for that. Regarding your second question about B2B logistics, until 2017, Amazon were mainly focused on B2C. Hence, the WMS is mainly focused on B2C features, delivering orders with a few items to the final consumer.

{audio:0:19:28} However, since 2016, 2017, Amazon have developed Amazon Business focusing on small businesses, which is becoming a B2B business. Since I left Amazon, I’m sure that the WMS has been upgraded to meet the requirement of B2B logistics with very specific features. I’ve no doubt that, over time, Amazon will be able to have a state-of-the-art B2B logistic warehouse management system.

{audio:0:20:02} When you outsource those non-sort items to 3PLs, how did you look at the delivery piece? Did you still work with the carriers directly?

{audio:0:20:15} Our aim was to outsource only the scope of fulfilment. Fulfilment means receiving the goods, storage of the goods and then, based on order assignment, being able to prepare the order and to put this order on a pallet, on the dock. Amazon were then organizing the transportation and the parcel delivery fully. At first, for a given 3PL warehouse, Amazon decided which were the relevant parcel carriers for this location, this country and this destination of the goods. They also selected those which had the right shipping method in terms of next day, two-day delivery and all the different shipment methods that a carrier may offer.

{audio:0:21:12} We built a specific ship method portfolio for every 3PL warehouse. The planning of the transportation was fully done by Amazon and then, even for the execution of the transportation, Amazon had their own information system to select the best ship method, in terms of delivery lead time and cost, for every order. Then we gave the order to the 3PL telling them, for this order, you will use this ship method. It meant, de facto, that the 3PL responsibility and involvement in transportation was only for IT integration with the parcel carrier, the ADI connection, based on the ship method defined by Amazon. Then it was for the 3PL to simply sort the parcel according to that selected ship method.

{audio:0:22:16} The positioning of these 3PL warehouses were quite similar to the way that Amazon managed their own fulfilment centers. Amazon fulfilment centers are not responsible for the inbound and outbound transportation; that is owned by another team.

{audio:0:22:36} When you are a retailer and you are choosing a 3PL business to outsource to, what are the key variables you use to make a decision?

{audio:0:22:45} Clearly, the logistics for a retailer regarding a logistics contract is obviously quite different from Amazon. Quite often, in a retail business, total logistics cost may represent 3% to 5% of total cost. In B2C, quite often, the overall logistics cost may jump from 5% to 10% to 15%. It is why what is the core business for Amazon – 10% to 15% of the cost – may not be the case for a retailer. It is really why retailer positioning cannot be similar to the one of Amazon or a big, pure-player marketplace.

{audio:0:23:41} That being said, there are a number of key variables. Obviously, the capacity of the 3PL to offer the relevant storage, throughput volume, capacity, at the right place, according to the forecasted retailer needs. It is really about looking for capacity to support the business. Secondly, quite often, retailers are multichannel. They have their own retail network, they have wholesalers and, more and more, they have their own B2C with a marketplace or, sometimes, their own website. It is why the multichannel capability is often quite important for a retailer, in order to mitigate inventory split.

{audio:0:24:35} The next major variable is about delivery lead time for national – in the country – or the international cross-border flow. Here, a company like Amazon and others have set clear standards in the market. Obviously, the retailer tries to be at the market standard which are not the same, of course, for B2B or B2C. For B2B, depending on the market, you can afford to have two to four days to deliver goods to a retail shop, a brick and mortar shop. In B2C, within a country, quite often you should be next day or two-day delivery. Delivery lead time is major.

{audio:0:25:31} Then, obviously, it is about the delivery quality. You need to make sure that the 3PL is able to deliver orders without missing items or putting in the wrong item, plus an ability to deliver on time. It is important to deliver on time, both for the B2B retail network or the B2C flow.

{audio:0:25:53} The next major variable is the capability to manage reverse logistics, especially returns. Returns from shops, returns from consumers, where the warehouse is able to receive them, to assess them and then to bring them back on inventory to be sold. Obviously, the cost is also a major aspect, even if, for many retailers, 3% to 5% may not be the main factor. What I said before about capacity, about capability, about quality, about delivery lead time and being on time, is very important and has to be done at any cost. Obviously, the weight of the variables may be different from one retailer to the other, depending on the market. If you are in fashion or in electronics, you may have a different balance or weight between these different variables.

{audio:0:26:58} How much does the integration with the freight management side of the business matter. For example, say XPO has freight management and CMA CGM bought CEVA. Does that matter to you, as a retailer, choosing a 3PL?

{audio:0:27:15} It matters but mainly, I would say, for industrial customers of the 3PL. For some industrial companies, producing in Asia, with a customer base that is mainly in the USA or Europe, it is sometimes important to have a 3PL able to manage logistics, freight forwarding and even transportation. It is why many groups, such as CEVA, GEODIS, Kuehne+Nagel, DHL and XPO are offering all these services. Even if, in practice, the big industrial company tries to manage the selection of the best logistics, the best freight forwarding services and the best transportation.

{audio:0:28:17} I managed the Michelin Group logistics and supply chain and I had a team to make sure there was no big value in the 3PL offering the full package. I was able to go to the best contract logistics, DHL, to pick up the best freight forwarding – Panalpina, for example – in order to optimize the cost. For the retailer, especially the big retailers, such as Nike, H&M, Adidas, they also have the capacity to optimize their supply chain and I am not sure they are looking for 3PL to offer all of it together. I know 3PLs well, as they were my vendors over the years, and I was one of their important logistics customers, that quite often, within the 3PL, the different divisions – contract logistics, freight forwarding, transportation and others – are working in silos. I know the XPO CEO well and, for them, one of the challenges is to cut these silos and to optimize cross-silo teamwork.

{audio:0:29:39} XPO are splitting off their business. They are spinning out the contract logistics business.

{audio:0:29:47} They plan to do it but I am not sure it is done.

{audio:0:29:49} No; they plan to do it. They released something in December and they plan to do it this year, at some point. When we are looking at retail ecommerce businesses choosing a vendor, going back to the multichannel point you made about inventory management, what exactly do you look for in a 3PL that can signal to you that they are going to manage your inventory accurately, across different channels?

{audio:0:30:20} There are several aspects here. Firstly, I would say, state of the art WMS, such as Manhattan, Infolog and others have. They would be able to properly manage any inventory. Frankly, it is only about the 3PL having the team, setting up the right parameters within the right WMS. What is really important for multichannel is to be able to split the inventory as late as possible. Historically, the company who are managing multichannels have different inventory pillars. There were some goods dedicated to their own retail network, some goods dedicated to an external wholesaler or retail network and some goods dedicated to ecommerce, for example.

{audio:0:31:21} Quite often, a given SKU was in shortage in one channel, while having other sleeping stock in another channel. It is, therefore, important for the 3PL to be able to split the inventory by channel, as late as possible, while securing the fulfilment of any order. The split was done to make sure that when you promise a product to a customer, B2C, you are able to deliver it. When you mix all the inventory for several channels, you are bearing the risk that you might sell one item to two channels in parallel, if it happens at the same time. That means that when you have this type of set up, one inventory for multichannel, at a given time, as late as possible, you have to book one specific item for a given channel. It is important for the 3PL to be able to manage this challenge. They need to have one inventory, whilst securing that a promised order can always find available goods. That is one aspect.

{audio:0:32:43} The second aspect is about processes. The B2B processes, pallet or master box wise, are very different from B2C processes, where it is based more on single order items or multi-item orders. In terms of equipment, processes and logistics, it is a bit different and you have to have a 3PL that is able to have people being able to master these different types of processes and equipment, in one location.

{audio:0:33:24} When you look at those parameters for the 3PL, are there any specific KPIs or capabilities that you look for to manage their labor force to deliver?

{audio:0:33:38} Usually, you had better look at the engineering and concept design first. You don’t need to be as good as the 3PL in this matter, but you have to be able to assess that the 3PL solution, proposed to you, will meet your expectation. The 3PL are experts in logistics but they may not be experts in the supply chain. You have to make sure that their logistics meets your expectations. This is key to secure the performance, the quality and the cost competitiveness of 3PL.

{audio:0:34:27} The second aspect is that you have to make sure that, from the 3PL, you are getting the relevant KPI and dashboard which allows you to make sure that the 3PL is monitoring the right parameter, in order to meet your expectation. Of course, you are not replacing the 3PL’s job, but it is simply to make sure that the management granularity of the 3PL is at the level you need for your supply chain.

{audio:0:35:01} Are these going to be KPIs like picks per minute or incorrect items delivered or errors and so on?

{audio:0:35:12} Exactly. It starts with the inventory quality; how much information and data in the WMS is wrong? There are also factors such as inventory and storage density; if you pay for the building, you had better have a full building. Then you go into more process parameters such as overall lead time to prepare an order, about the productivity at different levels. For a retailer, I have to say, the 3PL doesn’t usually like to communicate widely about their own costing parameters and, obviously, productivity is a major costing parameter. Due to the Amazon competency and name, the 3PL will usually accept being more open to us in this matter.

{audio:0:36:06} You would look at labor productivity or parcels delivered per minute, in terms of productivity measures?

{audio:0:36:13} Exactly. I think, for Amazon, we were really looking deep, during the tender phase, to make sure we got all the parameters so that we could understand the fixed cost drivers as well as the variable cost drivers. For the fixed cost drivers, I was making sure that I was able to know exactly what the cost drivers were for the building, for the management team, for the IT, for the taxes. We were working, I would say, in a cost-plus approach, making sure that the cost was at the right level, at the market level.

{audio:0:37:05} Regarding the variable costs, we were looking at productivity, at equipment costs and their depreciation, at consumables and, potentially, sometimes at energy and power, in order to know the main variable cost drivers. Based on that, we were able to set a fixed rate, per unit, with the 3PL, in a closed-book approach, where we had a list of tariffs per unit, covering the right granularity, in order to make sure that the variable costs of the 3PL are at the best possible level. Due to this approach, the 3PLs were really incentivized to be as productive as possible as their revenue was fixed for a given task and, therefore, all the productivity they could gain was their margin. This is the way we tried to manage the overall performance for the economics of the 3PL.

{audio:0:38:20} Regarding the quality, we went a level even deeper. We were able to convince the 3PL to use some Amazon good practices, in terms of inventory management or in terms of process management. In terms of the dashboard, we were really making sure that the 3PL could implement the best possible solution, according to the Amazon experience.

{audio:0:38:55} You had a fixed price per product or per parcel that flowed through the 3PL?

{audio:0:39:04} First of all, as I said before, the fixed cost, such as the buildings or the management team, were often fixed with a markup. With a fixed rate, we pay every month or every year. Obviously, we were able to make these fixed costs variable when the volume doubled, tripled or increased frequently. Regarding the variable costs, we had fixed rates for a given task but it was not at item or parcel level. We went at process level, per item. For example, something like inbound cost for one item or, sometimes, it was outbound cost for one item. There were also some specific tasks where it was not per item, but per parcel. Typically, packing can sometimes be considered per parcel. It was really not just a couple of rates. We had rate cards with up to 30 or 40 rates, for one building.

{audio:0:40:24} Is that typical of the pricing in contract logistics or is that just because you were Amazon and you could go to the 3PL and say, this is how it works and they accept it because you get huge volume from Amazon. Do other retailers work that way?

{audio:0:40:40} Clearly, we set new ways of working with the 3PL and, at least, for the 3PL, it was a new field. However, if we look at the history of the market, contract logistics were on cost plus. That means the 3PLs were making all costs transparent to the customer. The customer could audit them and then the 3PL would apply an agreed markup on this cost. Obviously, in that case, the more cost, the more margin there was for the 3PL. It is not the best way for the customer to manage his costs because the 3PL has not as much incentive to be cost-effective.

{audio:0:41:32} Then, especially with the development of B2C retailers, which were difficult to predict, some retailers asked for a fully variable rate, paying per parcel, per order or per item. This contract had the benefit of being very simple and it was easy to predict the costs for the customer, especially if you have to resell the cost to your B2C customer. However, it is very risky because the fixed costs are, de facto, embedded in the variable cost. That means that if the volumes are not as high as expected, the 3PL is not able to recover all its fixed costs.

{audio:0:42:30} On the other hand, for the retailer, if the retailer has much more volume than expected – maybe double or 50% more, which can happen in B2C markets, especially for startups – the retailer may feel that they are paying too much in fixed costs and it is difficult to manage. It is why the variable costs are called closed-book contracts, versus open-book. Open-book is cost plus and closed-book is fixed rate.

{audio:0:43:03} Finally, what my team and myself developed with Amazon was to try to find a solution getting the best of the open-book and closed-book contracts, mitigating their weaknesses. What I described before was in between. On the fixed cost, I was more an open-book and, on the variable cost, I was more closed-book. I have to say, for the 3PL, this was really new. My first challenge was to convince them to go this way. It was not easy, but it worked, as Amazon could offer big growth to them. I have a lot of experience in the market with 3PL and retailers and, as far as I know, many are very far from this state-of-the-art solution and many retailers and 3PLs are still struggling with classical open-book or closed-book contracts.

{audio:0:44:17} I guess the big risk for the 3PL is, as you said, the volume changes a lot and then, eventually, you end up capitalizing your fixed cost into that per-parcel rate, which could be really expensive for you?

{audio:0:44:32} We have to keep in mind what the typical 3PL contract structure is for a retailer. As you said, at first, it is based on a given forecasted volume and mix. We all know that forecasts are all wrong. Secondly, the 3PL contract with a retailer is often only focused on warehousing and fulfilment.There are very rare cases where a retailer asks a 3PL to combine warehousing and delivery together. Quite often, the contract duration ranges from about three to five years. The 3PL is often renting the building and the building lease is often back-to-back with the duration of the contract, to mitigate the risk for the 3PL.

{audio:0:45:39} Of course, the service needs some equipment and it is up to the 3PL to procure the equipment, to invest in the equipment – it could be forklifts; it could be storage – and also to invest in the information system, the WMS. Usually, the corresponding investment has to be fully paid, plus markup, plus interest rate, by the customer, over the contract duration. For some equipment, with long depreciation periods, even the customer is committed to pay the net book value of the equipment, if it is not fully depreciated, when leaving the contract. As the 3PL is really taking the risk on the building lease and on the investment, it is very important for them that the volume is similar to what has been forecasted. If it is way below, they will usually lose money.

{audio:0:46:52} Usually, in standard 3PL contracts for a retailer, the retailer does not have as much access to the operating parameters that I mentioned before, such as inventory, density or productivity. They are normally all embedded in the global rate, fixed or variable, from the 3PL to the retailer.

{audio:0:47:18} Let’s say that I’m a retailer or ecommerce marketplace, such as Zalando, and I go to XPO or CEVA and I say, I want fulfilment services, only the warehousing, inbound packing and preparing for outbound, what would they say? Would they say, this is the fixed price, this the variable price, per parcel? Then I would look at how many parcels to deliver, per year, plus the fixed rate. How would that work, in terms of my invoice for example?

{audio:0:47:51} First of all, you mentioned Zalando. Zalando is one of the leading marketplaces. It means that Zalando has certainly very good expertise in contract logistics. Zalando is not the standard retailer and I would bet that they are going the same way as Amazon went, maybe with Zalando ideals, but similar in mindset.

{audio:0:48:23} The standard retailer is very different. The standard retailer is someone who has not as much experience in logistics but they normally have good experience in the supply chain; they are very good in procurement. But in logistics operations and logistics solution design, not so much experience. Typically, the 3PL will often try to go as close as possible to an open-book. For the 3PL, open-book is, I would say, the less risky solution. At first, the 3PL will try to be cost-plus. That means they accept they will give you the item at cost but tell you that you have to pay 8% markup on the building and maybe 20% on manpower.

{audio:0:49:25} For some retailers, which are a bit more advanced, they will try to have a mix between some parts fixed and some parts which are variable. In that case, the 3PL will ask the retailer to commit to some volume. That means that if the volume is not delivered as planned, then the retailer will have to pay some of the non-consumed variable costs. De facto, with this approach, the 3PL will bring back the contract to a kind of open-book.

{audio:0:50:18} This actually increases transparency in the pricing which also puts the 3PL’s margin at risk, if they don’t really deliver on the volume and efficiency?

{audio:0:50:30} Yes, exactly. That is why, at the beginning, the 3PLs were not very enthusiastic in following the Amazon proposal.

{audio:0:50:42} This should benefit the larger players. The bigger the contract logistics companies should benefit in being the most efficient and having the scale and the volume to offer the best price?

{audio:0:50:55} Yes. Due to Amazon’s volume, we only went to the leading 3PL companies where we could trust them to be able to put the relevant operational excellence aspects into place. At the end of the day, the contracts with the 3PLs will last if the 3PL is making some money, whilst being competitive. For us, the name of the game was, what can we do to have the right contract structure which allows a win/win partnership, over time? It is very expensive for a customer, for a retailer, to change a 3PL. It is why you had better make sure that, on one side, you get the best cost but, at this cost, the 3PL is making some money.

{audio:0:51:53} Indeed, over the past 10 years, many of the 3PLs have developed significantly, on the ecommerce wave. They accept fully variable rates, with ecommerce. At the beginning, it went well, because the ecommerce companies were all growing like startups. Recently, many of the small 3PLs have gone bankrupt or had challenges because some ecommerce companies had less growth and, overall, the services were more and more complex. The small 3PL companies did not have the backbone to put in place the right information system and the right operational, lean, good practice, in order to secure the right productivity and to meet the pricing they had sold to their customer.

{audio:0:52:52} Do you price separately for reverse logistics?

{audio:0:52:55} Yes; reverse logistics is something completely different because it is a completely different task. Usually, the reverse transportation back from the consumer to the warehouse is priced differently from the first delivery. You can mix them, with a percentage, but it can be dangerous because the costs are very different; the cost structure is very different. Secondly, in the warehouse, the reverse logistic tasks are very different from the one of new goods because, firstly, you receive them in small parcels and the quality of information is not as good as the vendor information. Then you have to be able to assess the product; are they good enough to be resold or not? Then you have to store them, one by one where, in a normal flow, you store master box by master box or pallet by pallet. It is why the reverse logistics is always priced separately. Or, at least, it should be priced separately.

{audio:0:54:01} When does it make sense for the retail customers to insource the logistics and not outsource to 3PLs?

{audio:0:54:09} Firstly, logistics costs have to be significant for the P&L of the retailer. That’s why, in the past, retailers with logistics costs that were 2%, 3%, 4%, 5% did not want to insource because it was not as relevant for them compared to product development, marketing or the retail shop network management. More and more, as the retailers are going into B2C, they discover that B2C logistics costs are three times higher than B2B and, for some retailers, it starts to become important and they start to think about whether they want to insource or not.

{audio:0:54:59} When the costs make it relevant to think about insourcing, the second major thing is that the retailer has to be committed or has to trust himself to be able to build, in-house, the relevant logistics competencies and resources. It is mainly about the information, the solution engineering and about operation management. When you say that you are insourcing, you have to make sure that you will do better than the 3PL. If not, you may save the 3PL’s margin, but you will have higher costs because your productivity, globally, will not be as good or, sometimes, if you are not able to manage the information system, you will kill your business because you will provide a bad experience for your customers.

{audio:0:55:53} For a retailer, these two conditions are met when you are, typically, a very large retailer, where you are able to think about insourcing some logistics. In my experience, it is not black and white. It is not fully insourced or fully outsourced. Quite often, a retailer may consider having a good mix between insourcing and outsourcing. For some retailers, it could make sense to have some operations in-house, to set an internal benchmark and this benchmark will help to procure better third-party logistics services.

{audio:0:56:38} Also, outsourcing can mean a lot of different things. You may keep a 3PL operating for you but you may be strongly involved in the warehouse design, even in the warehouse equipment investment, in the information system, for example. In this case, I would say that the 3PL is mainly dedicated to people management and daily management. I think it is what some companies, like Zalando, have done in the past. To do so, you have to be a large retailer and to trust yourself to be able to master all of these domains, in terms of the information system, structure and design and operations management.

{audio:0:57:28} When looking at these 3PL companies – XPO, CEVA, Kuehne+Nagel, DHL – given the change in the pricing structure that you mentioned plus, potentially, a somewhat slowdown in ecommerce growth, over the next five to seven years, which companies are best positioned to win?

{audio:0:57:54} Clearly, it is common sense, but it’s important to mention; it is to have a 3PL which is customer-oriented. It sounds obvious, but customer-oriented doesn’t mean to have the right people at the top management, to have a nice dinner together once in a while, or to play golf together. Customer-orientation, for me, means that the 3PL really tries to understand the retailer’s supply chain, in order to help the customer to express their needs. Not all retailers are able to express what they need, in a clear way and I think the 3PL leading the market will be the one which is really customer-oriented.

{audio:0:58:51} The second important element is the information system. There has always been an information system within contract logistics services. But with a trend towards multichannel or omnichannel and the trend towards B2C, the information system is really the pillar of the operation. You have to make sure that you have the IT and the IS team able to select the right structure, to select the right hardware and to select the right cloud solutions.

{audio:0:59:29} How would we analyze that? Let’s say that I’m an outsider, looking in. How would I analyze whether a warehouse management system of XPO is really good or really bad?

{audio:0:59:41} First of all, as a retailer, you need to have some expertise in this area. If you don’t, you could use a consultant, such as myself, who could help you to do it. Clearly, when I am about to look for a 3PL for a large tender, I make sure, in the early stages of the tender, that I meet the CIO, chief information officer, of the company and deep-dive their solution, in terms of hardware, security and safety of data and the WMS overall. It is important to make sure that you are talking to someone who has the right information system solution and team. Obviously, many retailers are not able to do that. Big retailers, such as Zara, H&M and Adidas, are able to do it because they have a lot of IT.

{audio:1:00:53} How would you compare the positioning of the likes of XPO, CEVA and Kuehne+Nagel in contract logistics?

{audio:1:01:03} First of all, I would say that the big ones that you mentioned, they are quite close in picking. They are leading because they are strong enough in this domain. The problem is, more often, to compare these big names with a smaller one which could be more competitive. You could go to a smaller one, let him speak, show you his solution and you can see if it will meet your need or if he will be able to step change, to update his solution to meet your need.

{audio:1:01:37} For the bigger ones, for picking, they are using a similar solution, similar software, but they are big enough to afford a good IT team. This is not a differentiating factor for the top five or top 10 companies. But the 3PL world is still very fragmented and you have a lot of medium-sized companies. Within these medium companies, you have big differences from one to the other.

{audio:1:02:05} Do you think we are going to see a continued consolidation because of the move to more transparent pricing, that makes it harder for smaller companies to compete with the larger ones?

{audio:1:02:13} Yes, it will be a long journey because, on one side, you have many small or medium-sized companies, with difficulties, who are being taken over; it’s happening every day. But you also always have new markets, in B2C, where you have a new 3PL startup who are building and developing a new offer. It is difficult to talk about the pace but, of course, it has happened over the past 10 years and it will continue. But there is space for medium-sized companies.

{audio:1:02:48} Coming back to your question about the key parameter, I mentioned customer-orientation and the information system. The next major topic for big customers, big retailers, is the real estate; the capacity for a 3PL to quickly find the right location, the right building, at the right place.

{audio:1:03:10} Then, I would say, solution engineering is important; to really have people who can select the right solution for the right supply chain. Everyone knows about the latest technology so they will be happy to promote their solution. But the name of the game is to select the right technology for the right supply chain.

Amazon's Outsourced Fulfilment Strategy: 3PL Customer Perspective

How Amazon outsources fulfillment to 3PL’s

Where the core IP lies for contract logistics

Potential pricing pressures as industry moves towards closed book

XPO Direct challenges with multi-channel retailers

Amazon's Outsourced Fulfilment Strategy: 3PL Customer Perspective

Former Director European External Fulfilment at Amazon

inpractise.com/articles/amazon's-outsourced-fulfilment-strategy:-3pl-customer-perspective

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Jean-Marc Francois

Former Director European External Fulfilment at Amazon

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Amazon's Outsourced Fulfilment Strategy: 3PL Customer Perspective(March 12, 2021)

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