So Amazon is pouring money into more distribution centers, and building mini-DC’s it calls “sortation centers’. The folks at BusinessWeek write, “Overall Amazon now has 158 fulfillment centers around the world, ChannelAdvisor estimates, and more than 100 million square feet of fulfillment capacity. That should help Santa Claus avoid getting stuck in the snow again this holiday season.” Perhaps all of this investment in warehousing and the inventory to fil it up will improve delivery, but it also exposes the inherent problem that, in the long haul, will bring about the demise of Amazon.
You see, Amazon creates no value – none. Their moment in the sun is a result of the fact that their business model is built around less waste than the brick and mortar retailers; but be it Amazon or be it Target or Walmart, they add no value.
As the above picture shows, neither Amazon nor the retailer makes anything so they create no value. All they do is spend money on inventory, freight, warehousing, advertising & marketing, and administration – plus a profit on all of that spending.
Twenty years ago it was commonly held that retailing was value adding because it served the necessary and unavoidable service of getting goods to customers. All the manufacturing value adding in the world was useless if the goods couldn’t get into the hands of the customers, so the argument went. Then along came Amazon (along with the fierce competition between FedEx, UPS, and even the USPS; as well as secure on line payment technologies) and it turned out that ‘necessary’ and ‘value adding’ weren’t one and the same. Big retailing is in trouble because it adds lots of cost without adding any value.
But turnabout is fair play. Manufacturers that sell direct online are doing the same thing to Amazon that Amazon did to the retailers – proving that they add no value. In fact Amazon is only ‘necessary’ if the goods come from China, Bangladesh, Vietnam or some other faraway place. Buying such goods necessitates lots and lots of inventory and Amazon can sit on that pile of waste and get it to customers just as well as Walmart, only without the additional waste of the brick and mortar stores. But Amazon adds no more value than Walmart et al do.
Putting in more distribution centers, even little “sortation centers” doesn’t fix the fundamental problem. In fact, it is only adding more waste.
The highest value adding model will inevitably prevail. It always does and always will. There is always lots of pain and confusion – it takes a lot of folks quite a while to see and accept the handwriting on the wall, but value always wins out in the end. And the highest value model is manufacturing close to customers and shipping directly to them.
Now we are seeing the initial death throes of the big retailers and Amazon is enjoying its moment in the sun, but they should enjoy it while they can because it won’t last for long.