Amazon Rattles the Supply Chain

Books. Retail. Groceries. Amazon’s track record of disruption follows a similar pattern: partner with established players, learn the business from the inside, and then build a competing operation either organically or through acquisitions.

Now, for its next act, the e-commerce giant is apparently moving straight into the global parcel delivery business. In this case, its hand may have been forced, as FedEx has just revealed it won’t be renewing its express-shipping contract with Amazon. Now, the question is, how easily can this rather enormous and complex business be disrupted?

“There are significant barriers to entry; it is a very high fixed-cost business and is labor intensive,” says Tom Terragno, a senior client partner at Korn Ferry who specializes in the consumer market. “The nature of the business requires significant volume to cover the fixed-cost requirements.”

The interplay between Amazon and FedEx comes as firms all over the world are facing one critical challenge after another along the supply chain. Events like Brexit and the United States-led tariff wars—not to mention tech disruptions, the continued use of online buying, and even the purpose movement—have brought supply-chain matters front and center even before things go wrong. The question now is whether a company—and virtually every industry can be affected—will have enough time to stay ahead of the critical links in its business.

Amazon’s agile leadership and consumer-driven culture give some logic to the notion of bringing the delivery portion of the supply chain in-house. And the company certainly has the volume to make it financially feasible. Analysts estimate the company, which spent $27 billion on shipping last year, could end up saving billions of dollars using its own air delivery service.

For his part, Bernhard Raschke, head of the Supply Chain Center of Expertise in EMEA for Korn Ferry, says transportation companies view Amazon as a competitor to fear. Not unlike how movie and television studios initially embraced Netflix, only to build up the streaming service into its most formidable competitor, Raschke says transportation companies understand that they are “in bed with their competitor.”

“It was an opportunity when Amazon needed to fill demand and didn’t have the capacity. But now, FedEx is raising the possibility that it isn’t such a great idea,” says Raschke.

FedEx has been more cautious than UPS and others in terms of its Amazon relationship. Amazon accounted for just 1.3% of its total revenue last year, FedEx says. “Seeing the potential threat early on, FedEx purposefully would not allow Amazon to exceed more than a few percentage points of their overall volume,” says Dustin Ogden, a principal in Korn Ferry’s Logistics and Transportation Services practice, noting that Amazon’s percentage of UPS’s overall volume, by comparison, is likely in the double digits. “At the same time, FedEx is in a great position to support other emerging e-commerce businesses, particularly cross-border.”

Raschke says Amazon is also in a great position to support other emerging e-commerce businesses with its own transportation delivery system. He says the company could build capacity either through acquisitions or by opening up its service to other companies. Raschke draws an analogy to how Amazon built up its cloud computing service, first for themselves and then taking it to others. “They’ve been learning the business from the inside,” he says.