Amazon today announced a new program designed to encourage entrepreneurs to enter into an agreement with Amazon to open their own Amazon-backed delivery service. In exchange for a $10,000 investment, Amazon will provide up to 40 vans and allow drivers to wear Amazon-branded uniforms. Entrepreneurs can earn up to $300,000 annually according to Amazon.
The goal of the program is to increase Amazon’s delivery network to be on par with that of FedEx and UPS. I worked for Amazon from 2015 to 2017 and one of the biggest challenges confronted by Amazon was last-mile delivery of packages and scaling their network.
As e-commerce grows, so too does the need for drivers to deliver packages. Unlike traditional retail shopping where customers walk into a physical retail store to buy products off the shelf, e-commerce succeeds by shipping products direct to the customer’s home. Last-mile delivery is inherently unprofitable as most delivery trucks have to travel long distances between deliveries. Operating a delivery truck costs money and drivers don’t drive for free. The economics of last-mile delivery improve when delivery vehicles drive less miles and deliver more packages in a smaller radius from where they departed.
A recent example of a company wanting to expand their last mile capabilities to reduce costs and increase customer experience is Home Depot who announced their intention to invest $1.2 billion to open 170 distribution facilities. Home Depot’s executive team understands the importance of investing in logistics to create a competitive advantage.
What I find interesting is the parallel between Amazon’s need for an increased delivery network and Amazon’s public disagreement with U.S. President Donald Trump over Amazon’s supposed abuse of the United States Postal Service.
Is Amazon Friend Or Foe?
President Trump has been vocal in his belief that Amazon is costing the USPS—and American taxpayers—money because the retail giant isn’t paying the post office enough to ship their packages. The President believes the USPS is subsidizing last-mile delivery shipments for Amazon, effectively allowing Amazon to ship their packages at a discount. That Amazon isn’t paying their “fair share” to the USPS is the view of many in Washington, including the President. The USPS reported a loss of $2.7 billion for its most recent fiscal year (ending September 30, 2017) and a 3.6% drop in mail volume. The USPS generates 70% of their revenues from mail delivery.
It is the deeply-held belief of President Trump that something is amiss and that something must be done to correct the problem. I appreciate President Trump taking an interest in wanting to make the USPS profitable but should he view Amazon as friend or foe of the USPS? Is Amazon really the problem? The USPS generated $19.5 billion from shipping packages for companies such as Amazon and other retailers that offer e-commerce. The USPS generated an additional $2.1 billion in revenue because of the increase in package shipping.
To identify the optimal strategy for the USPS, President Trump has requested that a task force conduct a thorough review of the USPS with a goal of answering these questions: Should the USPS implement a new methodology for pricing the delivery of packages? Should the USPS become a self-financing organization? Should the USPS be privatized and sold? The report is due August 10, 2018.
A recent proposal titled “Restructure the Postal Service” presents the argument that USPS should be restructured to convert the USPS from a government-run agency into a privately-owned and operated corporation. The report outlines a litany of digital solutions and operational improvements to make the USPS more efficient.
The report also outlines the myriad of challenges facing the USPS including the fact it has over $100 billion in unfunded liabilities, an aging infrastructure of post offices and sortation centers, a backlog of capital investments and no agreed upon strategy to achieve profitability. Frankly, there is nothing new in the report as there have been multiple government-funded studies over the years focused on identifying ways to improve the USPS.
The Optimal Solution
I believe the optimal solution for the USPS requires one thing: President Trump and Jeff Bezos meet privately and discuss the situation. I believe Amazon should be viewed as a solution for the USPS versus being branded as the problem. I recommend the following as a potential solution for how to improve the USPS:
- Amazon has contracts with government agencies, including a 10-year contract with the CIA to meet their cloud technology needs utilizing AWS. Amazon is favored to win several pending cloud computing contracts for additional government agencies. Contract Amazon to run the technology of the USPS on AWS for ten years.
- Request Congress to fund the unfunded liabilities of the USPS and remove several archaic rules that prevent the USPS from competing more effectively.
- Amazon requires extensive assets if it wants to be able to reduce costs and increase speed of delivery to their customers. The USPS offers both.
- Contract Amazon to work jointly with the leadership of the USPS to utilize Amazon’s expertise across logistics and last-mile delivery to identify the optimal transportation and logistics network for mail and package delivery.
- Contract Amazon to run the USPS for 10 years with an option to acquire the USPS. If the goal is to take the USPS private, Amazon would be wise to consider acquiring the USPS.
- Allow Amazon to make acquisitions that will increase the ability of the USPS to offer shippers and customers increased Last Mile Delivery for heavy/bulky items such as exercise equipment, furniture and appliances as these items require a specialized distribution network. My primary recommendation would be for Amazon to acquire XPO Logistics and integrate XPO’s capabilities into the USPS network. This will effectively increase the ability of the USPS to serve more customers and generate more revenue and profits for the USPS.
- Contract the U.S. Government Accountability Office (GAO) and one or more external third-party audit firms to provide oversight of Amazon. This will ensure transparency of pricing and eliminate any concerns that Amazon and any other shipper isn’t paying its fair share.
President Trump is doing his job by asking tough questions about how to solve the riddle of making the USPS profitable. The USPS is the consummate independent entity—regardless of which party controls the White House and Congress, the USPS remains inefficient and a burden.
Taking the USPS private is an admirable idea but execution of such a strategy would be problematic and enormous. The USPS has extensive supply chain, logistics, transportation, last-mile delivery, customer experience and technology challenges.
In addition to Amazon, Walmart, FedEx and UPS come to mind as companies that have the ability to undertake a transformation at the USPS. I am not advocating that Amazon be given preferential treatment. Any company interested in running the USPS should be allowed to throw its hat in the ring. However, based on my research of the USPS and my global logistics experience, the problems of the USPS are so vast it limits the number of companies available to even attempt acquiring or fixing the USPS. It may in fact require multiple companies partnering to acquire and fix the USPS.
I do not disagree with the sentiment that the USPS is broken. But I do disagree with trying to paint Amazon as the primary reason for why the USPS is losing money. President Trump and Jeff Bezos should be able to work together to solve the problems of the USPS.
Mr. President, if the federal government can trust Amazon to keep the secrets of the CIA, I have to believe we can trust Amazon to deliver the mail and packages for all customers. Trust but verify.
Brittain Ladd is a globally recognized consultant/corporate leader in strategy, operations, supply chain management, logistics and Last Mile Delivery.
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