Amazon’s Profit Strategy: Spend to Save.

Jan. 31, 2013
Material handling and logistics are a big part of their investment.

I just got done looking at the preliminary results of a conveyor user survey we’re conducting when I picked up the Wall Street Journal and read this headline:

“Amazon’s Margins Improve.” The deck underneath added an important nuance to the headline: “Profit shrinks 45% due to expansion costs for fulfillment centers.”

The reason this story grabbed my attention was that according to our survey, many readers are doing the opposite of Amazon—at least where conveyors are concerned. They seem to be taking a “wait-and-see” attitude toward investment in material handling improvements this year, waiting to see if the economy improves. More than 71% of our respondents don’t plan on any system improvements this year. Those who do plan to invest in their material handling cited a mix of conveyor, forklifts and robotics.

More than 56% of the conveyor spend will be on servicing existing equipment. Many will be making their equipment more capable. Controls are the next highest spend category at 21%.

What do these respondents look for in a conveyor system? Safety and quality are the most important criteria in a conveyor purchase, followed closely by compatibility with existing systems and service quality—which seem to support the desire for system improvement. Energy efficiency was further down on the list—below labor savings, price and the warranty service agreement.

I wondered how Amazon would answer this survey, in light of the fact they’re making a substantial investment in their material handling infrastructure, even if it means their profitability takes a temporary hit.

After doing a Google search, I found an article about Amazon’s  Coffeyville, Kansas, fulfillment center, where 33 miles of conveyor belts route orders through the packing and shipping processes. The story said that previously the conveyor belts operated continuously throughout the day. After a Kaizen team learned about this they recommended that timers be installed so that the conveyors automatically shut down when they weren't in use. This resulted in that facility using 30% fewer kilowatt-hours of power to run its conveyors.

That was a smart investment and probably one of the reasons Amazon’s profit margins, while thin, are moving up rather than down.

There’s an important moral in this. Something like, “Don’t wait for the economy to improve, make YOUR economy improve.” I hope our survey’s “71 Percenters” factor that into their investment strategy.

About the Author

Tom Andel Blog | former Editor-in-Chief

As editor-in-chief from 2010-2014, Tom Andel oversaw the strategic development of MH&L and, bringing 30+ years of thought leadership and award winning coverage of supply chain, manufacturing logistics and material handling. Throughout his career he also served in various editorial capacities at other industry titles, including Transportation & Distribution, Material Handling Engineering, Material Handling Management (predecessors to MH&L), as well as Logistics Management and Modern Materials Handling. Andel is a three-time finalist in the Jesse H. Neal Business Journalism Awards, the most respected editorial award in B2B trade publishing, and a graduate of Cleveland’s Case Western Reserve University.

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