The next time you’re cruising the Internet, type in this URL:
You’ve arrived at Amazon, courtesy of one of the early working names for the site that Jeff Bezos was considering way back when people were still referring to this thing as the information-superhighway. Just as it’s been a very long time since you’ve heard anybody use that term, Amazon has evolved over the past two decades as the dominant online retailer, much to the embarrassment of the rest of American retailing, which should be ashamed of how they let Bezos and company kick their e-butts.
As many wise and learned observers — not the least of whom is the namesake of this noble enterprise, my friend Robin Lewis — have noted, Amazon is far from done in changing the rules of how Americans buy stuff and its continued lack of profitability should be of little concern for the long-term viability of its business model. If most people are coming to realize the enormous impact Amazon is having on the business-to-consumer relationship, it is perhaps less well known how the company is also significantly changing the business-to-business model. It is every bit as radical a transformation.
Three Distribution Revolutions
You can make the case that there have been three major revolutions in the history of supply chain management in American retailing…the Wells Fargo Wagon not withstanding. The first took place in the 1920s when retailers first started to take ownership of their suppliers. Certainly Sears was in the forefront of that movement, owning major stakes in many companies, including ones that eventually became Kellwood and Whirlpool after being cut loose. Sears wasn’t the only retailer to go this route. The famous Fieldcrest towel began life as the house brand for one Chicago department store by the name of Marshall Field.
The second major revolution in how suppliers dealt with retailers came into its own in the 1980s with three initials: EDI. Electronic Data Interchange was championed by Walmart (then still porting the hyphenated Wal-Mart nomenclature). Orders were transmittedelectronically from the store to the supplier, eliminating the infamous order pad that had been the backbone of the ordering process since the days of the general store. With it came unprecedented access to data all up and down the food chain. Suddenly vendors could see what was selling and where and could anticipate their next orders. This transparency trickled down to other retail operations but nobody did it better than Walmart… and many vendors will tell you that’s still the case today. The third revolution in the supply chain came with the institutionalization of the product sourcing process from China. American suppliers were practically on the next plane to Beijing after Richard Nixon in 1972, but it was very much a haphazard process for many years until The Gap turned to a small Hong Kong trading company called Li & Fung to manage its supply chain process in China.
That model of course became THE model, still in use by virtually every company that sources product from Asia. All of these developments have several things in common. Each was initiated by a dominant retailer looking for a more efficient model. Each took place in a time when the scale of business was being significantly ramped up allowing for these greater economies of scale to be effective. And each gave the early adapters a tremendous competitive advantage that often took others decades to catch up.
If you’re starting to think that those conditions exist again in American retailing, you may be related to Bezos… except that as with many things, he’s way ahead of the rest of us.
And Now, the Fourth Revolution
Amazon has created the next great revolution in B2B supply chain management and it is part of the reason why no other retailer will ever catch up with them in the field of e-tailing. Quite simply, Amazon allows a vendor multiple ways to sell consumers under a system that in the parlance of today can only called distribution-neutral. It is this reason as much as its facing to shoppers that makes Amazon invincible.
There are slight twists and turns to all of these distribution models, but put them all together and one thing is unbelievably clear: Amazon is business generations ahead of the rest of retailing in managing the process of getting goods from the seller to the buyer. Walmart and others can talk about using their stores as distribution points and many stores trump the ability of consumers to place orders online and pick it up in their physical stores. These are valiant attempts to compete but they are so far out of their e-league compared to how Amazon manages the process. As with the other revolutions in the supply chain, it will take other retailers decades to catch up and by then it will be too late, the next revolution will already be here.
Relentless doesn’t even begin to describe it.
Consider all the ways vendors can put their products through the Amazon pipeline:
#1. Amazon Owns and Sells
This is the conventional supplier-retailer model where the store orders goods, takes ownership of the inventory and sells it to the consumer. A vendor gets their wholesale price and is then out of the rest of the transaction.
#2 Vendor Owns and Amazon Sells
Suppliers retain ownership of inventory at their facility until Amazon sells the product. The fulfillment of the order is done by the supplier under the auspices of Amazon, which takes a cut of the sale, generally between 15 and 20 percent.
#3 Vendor Owns, Amazon Sells and Fullfills
Again, the supplier retains ownership of inventory until the sale is made but now the product is physically stored at an Amazon distribution facility. This allows for the fast delivery that is a cornerstone of the Amazon strategy yet Amazon never actually owns the goods, adding to their profit margins. Again, Amazon’s cut is 15 to 20 percent but it also charges some fees for processing the actual order. The trade has come to call this model FBA, or Fulfilled by Amazon.
#4 Vendor Owns and Sells, Amazon Fulfills
Similar model except that the vendor is identified on Amazon as the seller through its own storefront. Amazon is still fulfilling and taking its cut but the supplier is getting some identity with the consumer. Goods can be kept at a supplier DC or by Amazon.
#5 Vendor Sells a Third Party, Amazon Fullfills
Yet another variation, the supplier sells its goods to another entity, sometimes an actual retailer, sometimes an online storefront. That seller then shows up on Amazon beyond the control of the supplier. This is often the case when products turn up on Amazon — often at a screwy price — despite the denials from suppliers that they are selling Amazon directly. In the old days, this used to be called transshipping. And while the tendency might be to think of this being smaller stores employing this strategy, you’ll often see online giants like Sears or Wayfair on Amazon, further muddying up the distribution picture.
Warren Shoulberg is editorial director of several Progressive Business Media business publications for the home furnishings industry. He made his first Amazon purchase in 1997 and hasn’t stopped since.