Tuesday, January 26, 2010

disintermediation part 2: Amazon should be/buy UPS

I used to compare items for price using MySimon and Froogle, now I usually go to Amazon and pay whatever they ask. There are still companies competing on price: you can buy LCD TVs from obscure companies in Nebraska that sound like they are operating out of a bedroom, some dot com sites are still trying "shopping innovations" such as buying circles (get 15 friends to buy the same product and it's 5% less), and of course there are people selling new stock on auction sites.

All of these are a waste. A third party coming between the manufacture and me can do no more than jack up the price. My thesis is simple: the lowest possible price of an item is the price at which the manufacture is willing to put it on the loading dock, plus shipping to your door. Everything else is overhead.

You may respond "But shipping 50,000 widgets to Walmart is a lot cheaper than shipping widgets to 50,000 addresses." Sure, but Walmart has its overhead. They have to uncreate 50,000 items and put them on the shelves of big stores, then wait for them to sell.

No manufacturer wants the hassle of shipping to 50,000 customers. But manufacturers don't really want the hassle of shipping even to 100 stores either. The whole process of getting goods to you is called logistics:
Logistics involves the integration of information, transportation, inventory, warehousing, material-handling, and packaging, and occasionally security.
Many manufacturers already outsource this. What's stupid is the manufacturer pays for one logistics chain that gets widgets from it to the store, then the store pays for another chain that gets the widgets to customers' houses.

You could argue that manufacturers need stores to aggregate individual purchases into bulk orders; they can't run their assembly line in response to individual orders dribbling in, but they can intelligently respond to a 50,000 item order from a store. But bulk orders just hide inefficiency and mistakes. Some of a big order winds up on sale or dumped in discounters and outlet stores, which jacks up costs for the store. You could claim that stores should know their customers' tastes better than the manufacturer, e.g. the Super Bowl is coming up but economic conditions are poor so cheap 720p TVs will do well while 1080p will languish; but that's part of the problem: manufacturers need this information as much as stores do! A manufacturer whose customers are big stores knows less than a manufacturer whose customers are the actual users.

For years I've believed the obvious answer is for Amazon (market cap $ 52 bn, revenue $22 bn) to buy or become UPS (market cap $58 bn, revenue $ 45 bn). This results in one chain from the loading dock to the customer! Returning to my thesis, the manufacturer tells UPS/Amazon what price it's willing to put it on the loading dock, and Amazon/UPS puts it in the customer's hands. The manufacturer and Amazon/UPS can work out whether to manufacture 50,000 at once or do smaller runs, it all ends up in one supply chain. And Amazon/UPS has all the customer knowledge and programming smarts to offer sales approaches that reduce prices like bulk-buying circles, limited-time promotions, auctions, reverse auctions, overstock, etc. but in conjunction with the manufacturer.

Anyone know Jeff Bezos' e-mail address?

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