| By Bryan Wyatt | Senior Manager, Transportation | Chainalytics |
Amazon, with the announcement of its new Delivery Service Partners Program, is once again creating industry disruption, this time by entering the last mile delivery market. In their quest to be the most customer-centric retailer on the planet, the e-commerce giant is taking the initiative to protect the customer experience by ensuring orders get delivered on time as promised without having to rely 100% on outside last mile delivery companies such as UPS, FedEx, USPS, etc., some of whom saw a significant stock drop due to the announcement.
With the new program, Amazon is creating a “small business opportunity” where entrepreneurs become “Delivery Service Partners” (DSPs). For as little as $10k (basically a franchise fee), DSPs become local delivery operators for Amazon. The DSP leases an Amazon van or fleet, are given a uniform, and are responsible for hiring drivers, potentially operating up to 40 vans (these look to be the larger Sprinter vans….another smart move because cube is king, and delivery density is needed to keep costs down). It is interesting that the maximum fleet size any single entrepreneur can have is 40, perhaps as a means to ensure no one DSP gets too big to be replaced or acquired by a competitor.
Under the DSP model, drivers will go to designated Amazon facilities each day to pick up Amazon freight for last mile delivery to Amazon’s customers. Routes will be designed and optimized each day by Amazon, who is also offering to help each DSP purchase discounted supplies and insurance for their employees. But one has to wonder how this will qualify in terms of co-employment laws, which have impacted the courier industry for years. In fact just three years ago FedEx, whose model, by the way, is strikingly similar to what Amazon is setting up, settled a lawsuit in California for over $200 MM dollars. The suit was, at its core, due to the mislabeling of independent contractors.
In my opinion, Amazon will be able to avoid co-employment legislation essentially by setting up each DSP as its own staffing company; one who specializes in last mile parcel delivery and has one primary client. Like any temp agency, drivers/employees of the DSP will be required to sign several legal documents detailing their responsibilities and acknowledging their understanding that they work for the independent DSP, not Amazon. The DSPs will be required to pay the drivers, withhold taxes, and cover required employer insurance (workers comp and unemployment). The DSP will also carry general liability insurance for the vehicles, drivers, and cargo.
Amazon will need to keep a very close eye on this process in order to ensure DSPs are following the terms of their contracts, maintaining the correct levels of insurance, and following all local, state and federal laws including minimum wage and overtime laws. Amazon will also need to watch its own people as there is no doubt each DSP will be held to several performance metrics, but Bezos and Co. have to be careful not to provide direct instructions and not control the drivers directly. If these lines begin to blur, Amazon will find itself in a co-employment lawsuit just like FedEx.
As far as Amazon’s long term strategy is concerned, this move will certainly help the bottom line, but make no mistake, the primary motivation for this program can surely be seen as a direct response to UPS and FedEx being crushed by the flood of deliveries during the 2017 holiday season. Starting this initiative now is perfect timing to get eager entrepreneurs up and running during the summer slowdown so they are ready and stable for the holiday rush of 2018.
However, another aspect of the timing of this announcement does raise a few eyebrows as well seeing as UPS and Teamsters just reached a handshake agreement for the next five years and are about to have their final vote. With the new Amazon program now available, who knows if both sides still feel comfortable with the terms recently negotiated. Teamsters may see this as a new business opportunity to pursue, and UPS must be thinking about how this will impact volume levels and profit margin.
Amazon’s DPS program is just the latest example of the company’s quest to have an impact on last mile delivery. Also centering on last mile delivery, they recently introduced delivery lockers simply known as “Hubs by Amazon” to be placed at apartment complexes and other residential locations that allows carriers to leave any package inside, regardless if it was purchased from Amazon or not.
Most of Amazon’s strategies usually work out well for the shareholders, but it will be interesting to see how well Amazon navigates the “independent contractor” world of last mile delivery, particularly if they don’t achieve the service levels they hope to establish. The impacts the new program will have on the major parcel carriers will also be something to monitor closely, particularly as peak season planning starts ramping up. Last mile delivery management provides a multitude of challenges that come with a steep learning curve; I guess only time will tell if Amazon can successfully conquer another piece of the industry.
A senior manager in the Chainalytics’ Transportation competency, Bryan Wyatt has over 20 years of experience and expertise in transportation operations, strategic sourcing, data analysis and logistics planning, as well as logistics/supply chain change management.
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