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The costs of the “Free Shipping” option at Amazon November 29, 2007

Posted by The Armchair Economist in Business, Economics, shopping, Technology.
Tags: , , , ,

This morning, I caved and bought the Nikon D40 D-SLR that I’ve been fantasizing about on and off for 6 months. In any case, I ordered the camera with an extra 55-200mm VR zoom lens in addition to several other accessories (which came to almost free taking advantage of various promotions). Being the cheapass that I am, of course I opted for the ‘Free Shipping’ option.

I wouldn’t call myself a frequent buyer from Amazon, for one, I feel that their prices aren’t all that much better than elsewhere (especially on textbooks and review books, where there is often a 0% discount, go figure.. they have less overhead but charge full price?). But on occasion, a deal crops up where I’ll bite the bullet and buy from them, always using the free shipping option. I noticed that up until maybe 2 or 3 years ago, anytime I used the free shipping option, it would ship within a few hours. However, within the past 3 years, my “free shipping” items would often be delayed a few days before it shipped. This coincided with the “Amazon Prime” offering, where you could get free 2nd day air if you pay them 79$/year. I figured the delayed shipping on the “Free” option was just their strategy to artificially inflate the ‘value’ of Amazon Prime. This time is probably a record, the ship date is 5 days AFTER i placed the order.. and all of my items are in stock and are available for 1 day shipping. This got me curious enough to do a quick google search and I info (posted below)… apparently its from an insider and provides some details into the free shipping/ estimated date of shipment algorithms.. [source: techdirt.com]

I used to work at Amazon, in fact I was responsible for a lot of the algorithms used in Amazon’s logistics network in use today. I’ve read a lot of FUD about Amazon order fulfillment so I have to try to add some facts to these discussions.

Amazon’s order fulfillment process is insanely complex and involves hundreds of different variables which impact customer satisfaction and costs. Since keeping costs (and thus prices) as low as possible is also a major factor of customer satisfaction, it’s important to understand that the underlying principle for all of the algorithms used is to maximize the customer experience. But that’s very complicated. Without disclosing any trade secrets, here are a few of the types of parameters which go into the order fulfillment decisions:

* What has the customer paid for? If they’ve paid for next-day delivery, Amazon assumes they want their order as quickly as possible. Likewise, if they’ve chosen super-saver free shipping, they assume it’s not needed that quickly.

* Where is the inventory? Amazon has many distribution centers scattered across the U.S.A. and not all items are available at each center. It obviously costs less to quickly get an item to a customer from a nearby warehouse. But it might be necessary to ship from further away.

* Are inventory levels as low as possible? To maximize cash flow and utilization of its warehouse space, Amazon is very aggressive about managing its inventory levels. This may mean that rarely ordered items are not kept in inventory and may require time to source from a supplier. It also means that Amazon tries to move inventory out to customers as quickly as possible. Usually, delaying shipments has inventory costs. Believe me, Amazon has no desire to own inventory one minute more than it has to.

* Where is there space for inventory? Related to the above point, space can get very very tight in the Amazon warehouses, especially before the holidays. They just may not have room for dozens of 60″ plasma TVs in every distribution center.

* Does the item need to be ordered from a distributor or manufacturer? If an item is not in Amazon’s inventory it may already be on order and due on a future date supplied by the source or it may need to be ordered. Obviously it’s cheaper to buy large volumes directly from a manufacturer, but those items may not be available quickly. If a customer has paid for next-day delivery though, Amazon will pay to get that item to them.

* Which distribution center has enough people working today? To help keep employees happy, Amazon tries to smooth work loads. Employees prefer to know when and how many hours they will be working next week. When there are high volumes of orders, this may mean delaying some low-priority orders.

* Which distribution center has capacity in their automated systems? It’s much cheaper to fulfill an order using Amazon’s automated facilities than to do it using manual labor. But only so many orders can go through these automated systems a day. Orders may be routed to a different fulfillment center, or delayed to minimize the handling costs.

* Are there any automated fulfillment lines? For big ticket items (think new Harry Potter book) Amazon will often dedicate mechanized packaging and shipping hardware to just that product. It may be much cheaper to wait a couple days until one of these mechanized production lines is in place before fulfilling an order.

* Which shipping company is cheapest? Amazon utilizes just about every common carrier in the U.S. and can even use them together to minimize shipping costs and reduce delivery times. These rates change regularly and service levels can vary from day to day. It may cost 50% less to get a non-next day order to a customer by waiting a day or two before shipping it.

* Do the shipping companies have capacity? Many of Amazon’s distribution centers are in low-cost rural areas. It’s not uncommon for Amazon to max-out the capacity of UPS, DHL, USPS, FedEx, or other shipping companies from one of these centers. If that happens, an order for New York City may end up coming from Nevada rather than near-by Pennsylvania.

* How quickly can Amazon be paid for an order? Legally, Amazon can’t charge you for an order until that order has shipped. To maximize cash flow, Amazon normally tries to get orders out as quickly as possible so they can be paid as quickly as possible.

* How good of a customer is this? And yes, if you’re a good customer, Amazon will spend more to keep you happy. In extreme cases, I’ve seen Amazon send employees to local Walmarts or other retailers to buy an item which is then couriered to a great customer. Believe me, this isn’t cheap. This cost and effort doesn’t go into a first-time buyer’s Super Saver order.

These are just a handful of the types of decisions which have to be made for every order. During peak periods Amazon handles over a million orders a day; trying to balance and optimize all of these constantly changing variables is a difficult job but I believe the company does a pretty good job of it. And yes, I believe there is intellectual property in the software created by Amazon to make this happen.

In general, I think Amazon’s customer service is great. But when I hear that some individual customer service rep, who is probably sitting in West Virginia or India and has never seen the algorithms used for fulfillment or even been to one of Amazon’s fulfillment centers explains how free shipping works, I just have to giggle. They really have no idea.

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1. The Armchair Economist - June 17, 2008

Out of curiosity, why is this article getting so many hits all of a sudden?

2. Jennifer - June 17, 2008

It was linked by an Amazon customer in the Gold Box Forum on Amazon under the thread “Amazon Shiping [sic] sucks.”

3. The Armchair Economist - June 17, 2008

Thanks for the clarification.. This post almost has more hits today than it has in total since publication.. 🙂

4. Terri Shanahan - June 17, 2008

Actually, Jennifer, it was worse than that. The thread was Amazons (sic) shiping (sic) sucks.

5. Jennifer - June 17, 2008

So, Terri, it’s not just me who gets a little irked by bad grammar?? 😉

Anyway, to the Armchair Economist, this little article is very interesting. I had no idea how Amazon shipping worked but that it was far from “sucking.”

6. The Armchair Economist - June 17, 2008

Jennifer, Glad that you found it interesting.. the first time I read that posting i certainly found it very enlightened. I actually don’t feel as ‘shafted’ for picking the free shipping option anymore.

7. Mae - June 18, 2008

Good article… I’m glad someone shared this in the Gold Box Forum.

8. ritzone - June 18, 2008

Amazon states on their help pages that SuperSaver Shipping takes 3-5 business days to ship out and 5-9 in the shipping process not sure why people think it should ship out asap (Hello it’s free) when it’s clearing stated how long it takes??!!!

9. Mohammad Afaneh - June 18, 2008

Very interesting and helpful article! I’ve been an Amazon Prime Member for almost a year now, and after reading this article I’m even happier that I subscribed! I think Amazon has very outstanding customer service and I prefer buying from them than from any other online store..

10. RFoster - June 22, 2008

I also want to thank the Armchair Economist for this article and to the poster who linked it in the Gold Box Forum. There are many dedicated GB Forum posters who love Amazon. I’m one of them because they do good work, have a great range of product, and gets the product to me on my doorstep. The last is very important since I’m physically unable to do real shopping at B&M shopping these days. I’m also glad to have found the Armchair Economist site because there are interesting things to read here. Consumerism is something I find very interesting.

11. jcorn - July 7, 2008

As someone who has a past in selling books, I wanted to add some info that might be helpful. Amazon has offered options and changes that could affect shipping speeds. Even so, I usually get items within 1-2 days of ordering them, based on the last 20 orders made from them. I find that pretty amazing. Keep in mind, however, that my results are based on only ONE person’s experience and may vary widely depending on an individual buyer’s location, popularity or rarity of an item, etc. For instance, after ordering an Kindle, I got it within days. Right after that, they ran out. It was pure luck, my timing.

12. jcorn - July 7, 2008

And I sat and watched as people could not get the Kindle by Christmas and the prices on Ebay went to double the retail price -and people paid those prices! I wonder how many regret that in the face of the current economic climate. Perhaps someone here can explain why those same people didn’t just give a gift recipient the extra money and a coupon for the Kindle to be redeemed at normal retail price later? That way, the recipient would get the money, not someone selling it for double or triple the price on Ebay. It really did puzzle me, the economic logic of that. But emotions, wanting to make someone happy during the holidays and the willingness to pay far more than an item’s retail price to get it for the holiday or birthday all factored into the decision to spend big bucks on Kindles when they ran out at Amazon.

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