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OM in the News: Amazon’s Relations With UPS Are Showing Strain

December 24, 2015

ups-amazonAs the clock counts down to Christmas, workers at United Parcel Service are busy hustling packages along loading docks and conveyor belts at its Louisville, Ky., hub—part of a costly, intricate system built in part to cater to, its biggest customer. “But the symbiotic relationship between the two giants has come under increasing strain,” writes The Wall Street Journal (Dec. 23, 2015).  Rising package volumes and costs have Amazon seeking alternative delivery routes—shifting the online retailer’s role from key ally to a potentially disruptive competitor.

Amazon has held talks with air-cargo companies to lease airplanes and build its own onfreight operation. The company is already using its own trucks, drivers and a fleet of couriers for the final and most-expensive leg of an order’s trip. It has been making its own deliveries in certain high-density regions and relying more heavily on the U.S. Postal Service. Eventually, it hopes to get drones to drop packages into backyards. “Amazon’s interest is not in doing what may be good for UPS,” said an industry expert. “Their interest is in getting control over logistics.”  This year, Amazon spent over $1 billion with UPS, a 5-fold increase in the past decade. The average cost to handle a parcel was about $8 last year, up from $6.50 in 2000.

Amazon was a factor in UPS’s last two back-to-back Xmas snafus—each of which cost UPS an unexpected $200 million. Two years ago, Amazon overwhelmed UPS with hundreds of trailers of last-minute Xmas orders– and then pushed UPS to help underwrite millions in customer refunds. At Amazon, plans to handle more of its own parcels have recently accelerated, as it fears that UPS’s hub-and-spoke system is growing obsolete. Amazon has poached more than 40 UPS supervisors, managers and executives in the last 3 years.

Classroom discussion questions:

  1. What are the advantages of Amazon building its own logistics system?
  2. The disadvantages?
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