Why Amazon's bold move to dominate logistics just might work

Why Amazon's bold move to dominate logistics just might work
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Axios reported last week that Amazon is taking an interesting hybrid approach to conquering the shipping and logistics industry.

“It's not as glossy as space travel or flashy as AI, but the $1.5 trillion a year business of moving stuff around is one of the most lucrative and complex industries in the U.S. And Amazon is attempting to conquer it. … It wants to build an army of deliverers. It's adding robots and collecting tons of data about the billions of boxes it will ship. And it's turning logistics from a cost to a revenue source by offering its shipping capabilities as a service.”

So, on the one hand, it’s building more reliance on robots, and on the other hand, suggesting to its employees that they should start small businesses around shipping. I would like to focus on the latter and the immense potential it has.

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The main idea is the following: Amazon is paying employees $10,000 plus three months of pay to quit and start small businesses that deliver Amazon packages.

The operational model here is not all that different from what we see in China, where Cainiao — a firm in which Alibaba is a majority stakeholder — is already doing exactly what Amazon is only now beginning to do. Whether you call it fourth-party logistics (to distinguish from third-party logistics) or name it Logistics as a Service, this approach has vast potential.

Amazon’s plans will entirely disrupt the logistics industry — even just moving Amazon’s shipping from FedEx and UPS to its own platform is bound to send tremors throughout the industry — and it’s going to start by first perfecting the model for itself.

However, this is going to be only the first step. Just like for Amazon Web Services, these will be internal services modularized within the organization, allowing any business unit or service to access them. The next step will be then to open these services, once perfected with the right interfaces for outside usage, in what we referred to earlier as Logistics as a Service.

Amazon has already demonstrated the power of this approach. Not only does offering this service not require significant investment in assets, it attracts more logistics service providers, whether those created by former Amazon employees or elsewhere. This in turn attracts more customers, which then attracts more service providers, resulting in the flywheel effect Amazon has previously perfected in its retail and cloud businesses.

While initial media coverage makes it sound like a new business model, and reports are quite skeptical of the approach, it’s actually Amazon's predominant approach to new markets. So why do I think it's going to work? And what are the criteria under which such an approach might succeed?

Amazon already owns quite a bit of data that can be used to leverage existing assets, and this model is going to create even more data. Furthermore, the logistics tasks that are going to be completed by these service providers are well defined, making them able to be "modularized" — that is, one can create a clear interface between that service and preceding and succeeding services. There is potentially ample capacity — and potential to invest in it — due to the lack of unique skills needed to accomplish the tasks. These are precisely the type of services that benefit from creating an eco-system where the firm (in this case, Amazon) is merely the platform that mediates the market between consumers (mostly retailers) and small logistics providers.

The industry has two major players in FedEx and UPS, and many small players with different roles along the value chain. However, it is clear that with the significant growth in e-commerce and the relative structural stagnation of logistics, this is an industry that is prime for disruption (no pun intended). The approach Amazon is taking, and the fact that the firm has significant experience with it, is promising, and exciting.

Gad Allon is director of the Jerome Fisher Program in Management & Technology and professor of operations, information & decisions at Wharton. He is also co-founder of ForClass, an education technology tool designed for educators by educators. Follow him on Twitter @g_allon.