Big discounts and free shipping attract hordes of shoppers, but at a steep price to the online giant. That's why its fulfillment centers work hard to cut the cost of doing business.
FERNLEY, Nev. At Amazon.com’s largest fulfillment center, one of the foulest four-letter words is spelled p-i-l-e.
These are the places where workers put damaged, duplicate and inaccurately picked items, all of which slow down shipments to customers during the busiest three months of the year.
That’s why Jeff Wilke looks into a red rework bin with dismay. The book “Eats, Shoots & Leaves: The Zero Tolerance Approach to Punctuation” sits inside, its white jacket slightly scuffed.
“When you have a guaranteed delivery system, piles are bad,” says Wilke, Amazon’s head of worldwide operations. “We aim to reduce the defects that lead to piles.”
It’s the online retailer’s fixation with refining the way it picks, packs and ships items that has enabled it to challenge one of the largest barriers to e-commerce: shipping fees.
Amazon helped to pioneer the free-shipping concept when it offered free shipping on orders of $99 or more during the 1999 holiday season.
The company extended the offer to customers year-round in January 2000 and lowered the threshold to orders of $25 or more later the same year an offer that still stands.
Free shipping, combined with deeply discounted items, became a powerful incentive for customers to shop at Amazon, helping the online retailer recharge sales growth.
For the four days of Thanksgiving weekend, consumer electronics surpassed books for the first time as Amazon’s largest sales category, as customers took advantage of deeply discounted items and free shipping that applied to even bulkier products, including certain TVs.
“Consumers have come to expect it or at least to expect the opportunity to earn (free shipping),” said Dan Hess, senior vice president at Reston, Va.-based comScore.
For Amazon, the challenge is to continue to build a business that can support free shipping. That’s where its largest fulfillment center in Fernley, Nev., comes in.
In a fulfillment center that spans 13 football fields one so huge that part of it is called Nevada, part of it, Utah the charge is to continually lower the cost to pick, pack and ship items to offset rising costs associated with deeply discounting items and shipping free.
The right spot
It means placing inventory in the right spots to ensure workers can reach it faster, and that a customer’s order, whenever possible, is shipped in a single box the advantage that allows the company to reduce shipping prices, Wilke says.
Products, for instance, are placed in the warehouses according to sales volume so that workers have easiest access to the most popular items.
On one shelf, the classic book “Native Son” is next to the children’s book “Today I Feel Silly,” a Calphalon 2-quart teakettle and the Little Tikes “Baby Tap-a-Tune Piano.” The Grand Patrician 300-thread count, king sheet set is on the bottom shelf. All these items sell at a similar rate.
Workers load orders into company-owned trucks and drive them to a dozen major shipping hubs. This holds down costs and saves time.
A shipping carrier’s performance is measured at every hub. If one hub makes too many mistakes, Amazon stops sending packages there until performance improves.
“We have a data-driven culture,” Wilke says. “We measure everything.”
This becomes critical as more customers take advantage of free shipping.
Early on, analysts questioned whether the offer would erode Amazon’s profit.
While a combination of free shipping, deeply discounted items and a wider selection seemed to spur sales, Amazon’s profit margins its profit as a percentage of sales continue to decline.
Amazon paid $118.6 million in shipping costs for the first nine months of the year, a 47.3 percent jump compared with a year ago.
Analysts say the only way for Amazon to improve margins is to increase its buying power and continue to cut costs associated with picking, packing and shipping items.
“Everything has been kind of tapped into not fully, but mostly,” said U.S. Bancorp Piper Jaffray analyst Safa Rashtchy. “There’s a little bit left (to save) in each one of them.”
Online-retail analysts expect a strong holiday shopping season; they’ll have to wait to see how the free-shipping promotion affects Amazon’s bottom line.
Consumers spent $2.03 billion online during the five days ending Friday, a 49 percent jump compared with the same days last year, according to comScore Networks, which tracks consumer buying online.
ComScore attributed the increase partly to free shipping and e-mail campaigns to remind customers of deadlines to take advantage of standard shipping rates.
“The lines have blurred so greatly between online and offline retail that a major online retailer can’t afford to be at a disadvantage,” Hess said. “That is what shipping charges can amount to.”
Monica Soto Ouchi: 206-515-5632 or email@example.com