Amazon’s Last-Mile Delivery is Reaching New Heights
Digital technology is transforming Amazon’s supply chain through Amazon Prime Air, an initiative to develop a fleet of unmanned aerial vehicles (UAVs) to digitize and automate its last-mile delivery process.
Digitization of Delivery
Digital technology is transforming Amazon’s supply chain. In 2013, Amazon announced Amazon Prime Air, an initiative to develop a fleet of unmanned aerial vehicles (UAVs) to digitize and automate its last-mile delivery process.[1] UAVs will enable Amazon to deliver within 30 minutes, thus enhancing its customer promise of fast, convenient product delivery.[2]
Amazon’s investment in digitizing its own logistics operations will be a significant driver of future profitability, making this of notable concern for Amazon management.[3] In 2016, net shipping costs grew by 43%, outpacing net sales growth of 27%.[4] Although the vertical supply chain integration through UAVs would require significant up-front investment, it would ultimately lower variable delivery costs by avoiding markups from traditional third-party carriers. Additionally, electricity-powered UAVs would decouple Amazon’s shipping costs from the price of oil and reduce its carbon footprint.
When combined with Amazon’s digitized fulfillment centers, UAV delivery will help increase visibility of product movement from warehouse to consumer, thus providing Amazon with increased data which could help inform demand predictions.[5] Shorter lead time would also increase supply chain efficiency and limit the amplification of issues within the chain.
Redesigning the Airspace From the Ground Up
To address the digitization megatrend in the short- and medium-term, Amazon is focusing on regulation and R&D.
Operating at the forefront of a new technology, Amazon is facing a regulatory environment that is not yet equipped to handle the change. Amazon is working with the Federal Aviation Administration (FAA) to develop an air traffic system that will enable safe operation of commercial UAVs.[6] In 2016, the FAA announced preliminary rules for autonomous drones, including weight limits, daylight-only operation restrictions, and designated no-fly zones (i.e. near airports).[7] The most limiting regulation for Amazon is that drones must operate within a visual line of sight (VLOS).[8]
Amazon has focused its R&D efforts in the UK, where airspace regulation has been less stringent. This year, Amazon opened a new R&D facility in Cambridge, UK where it continues to refine its sense-and-avoid technology and autonomous vehicle maneuverability.[9] In December 2016, Amazon successfully delivered its first package via UAV during a beta test in Cambridge, UK.[10]
Ultimately, Amazon’s fulfillment centers are at the core of its strategy to deliver to customers quickly. Amazon is expanding its network of fulfillment centers by over 30% year-over-year, bringing Amazon closer to end consumers.[11] This network will be a critical component supporting its UAV strategy.
Despite technological advances, regulation represents the greatest barrier to UAV delivery. Continuing to work with government and regulatory bodies around the world over the next decade will be critical to Amazon’s success in rolling out this potentially industry-altering service.
Getting Off The Ground: Additional Considerations
There are a number of additional considerations that Amazon management will need to address in order to make drone delivery a reality:
Air Traffic Control Capacity: Air traffic control tends to be the limiting factor on airspace capacity.[12] US Air Traffic Control currently manages 85,000 flights per day.[13] As more UAVs enter the airspace, finding ways to alleviate this bottleneck, such as creating a separate air traffic control system for low-altitude aircrafts, is critical.[14]
Safety and Security: In the event of a malfunction, a drone could fall from the sky and cause serious injury. Amazon needs to navigate potential legal consequences and proactively develop its technology to avoid these incidents. Amazon will also need to secure its drones to prevent hacking. In the wrong hands, drones could potentially be used by terrorists to deliver bombs. Unattended packages also present opportunities for theft. This risk could be mitigated by adapting and expanding Amazon’s existing locker system to create a network of secure personal mailboxes capable of receiving drone deliveries.
GPS Accuracy: Amazon will need to develop constraints for dealing with less-than-perfect GPS accuracy levels that prevent package delivery. For example, if a drone is uncertain about a delivery location, it should be programmed to return to the nearest fulfillment center.
Optimizing Fleet Size: Given the capital-intense investment required, Amazon will need to optimize the size of its drone fleet relative to anticipated demand to avoid underutilization during periods of low demand, and avoid capacity constraints during periods of high demand (i.e. Christmas).
Weather: Weather could introduce significant variability to UAV flight paths and could inhibit Amazon’s ability to deliver during stormy periods. Amazon will need to establish procedures for mitigating customer dissatisfaction if they are unable to deliver on their 30-minute on-demand promise.
Outstanding Questions
In conclusion, digitization of last-mile delivery represents an enormous opportunity for Amazon to revolutionize the e-commerce and aviation industries. But do consumers really need such instantaneous delivery? Will consumers value 30-minute delivery more than their safety?
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Endnotes
[1] Amazon.com, Inc., “Amazon Prime Air,” https://www.amazon.com/Amazon-Prime-Air/b?node=8037720011, accessed November 2017.
[2] “Amazon’s Jeff Bezos Looks to the Future,”60 Minutes, CBS, December 1, 2013, https://www.cbsnews.com/news/amazons-jeff-bezos-looks-to-the-future/, accessed November 2017.
[3] Wall Street Journal, “Today’s Top Supply Chain and Logistics News”, January 29, 2016, accessed via ProQuest November 2017.
[4] Amazon.com, Inc., December 31, 2016 Form 10-K, https://www.sec.gov/Archives/edgar/data/1018724/000101872417000011/amzn-20161231x10k.htm, accessed November 2017.
[5] Philipp Berttram, Stefan Schrauf, “Industry 4.0: How digitization makes the supply chain more e cient, agile, and customer-focused”, Strategy&, 2016, https://www.strategyand.pwc.com/reports/industry4.0, accessed November 2017.
[6] Amazon.com, Inc., “Revising the Airspace Model for the Safe Integration of Small Unmanned Aircraft Systems,” https://utm.arc.nasa.gov/docs/Amazon_Revising%20the%20Airspace%20Model%20for%20the%20Safe%20Integration%20of%20sUAS%5B6%5D.pdf, accessed November 2017.
[7] Lisa Eadicicco, “Here’s Why Drone Delivery Won’t Be Reality Any Time Soon,” Time, November 3, 2015, http://time.com/4098369/amazon-google-drone-delivery/, accessed November 2017.
[8] Federal Aviation Administration, “Summary of Small Unmanned Aircraft Rule,” June 21, 2016, https://www.faa.gov/uas/media/Part_107_Summary.pdf, accessed November 2017.
[9] “Amazon to Expand Development Centre in Cambridge, Boosting Investment in Machine Learning and other Research and Development Programmes”, press release, May 4, 2017, on Amazon website, http://phx.corporate-ir.net/phoenix.zhtml?c=251199&p=irol-newsArticle&ID=2269691, accessed November 2017.
[10] Amazon.com, Inc., “Amazon Prime Air,” https://www.amazon.com/Amazon-Prime-Air/b?node=8037720011, accessed November 2017.
[11] Amazon.com, Inc., December 31, 2016 Form 10-K, https://www.sec.gov/Archives/edgar/data/1018724/000101872417000011/amzn-20161231x10k.htm, accessed November 2017.
[12] Amazon.com, Inc., “Revising the Airspace Model for the Safe Integration of Small Unmanned Aircraft Systems,” https://utm.arc.nasa.gov/docs/Amazon_Revising%20the%20Airspace%20Model%20for%20the%20Safe%20Integration%20of%20sUAS%5B6%5D.pdf, accessed November 2017.
[13] Amazon.com, Inc., “Revising the Airspace Model for the Safe Integration of Small Unmanned Aircraft Systems,” https://utm.arc.nasa.gov/docs/Amazon_Revising%20the%20Airspace%20Model%20for%20the%20Safe%20Integration%20of%20sUAS%5B6%5D.pdf, accessed November 2017.
[14] Amazon.com, Inc., “Revising the Airspace Model for the Safe Integration of Small Unmanned Aircraft Systems,” https://utm.arc.nasa.gov/docs/Amazon_Revising%20the%20Airspace%20Model%20for%20the%20Safe%20Integration%20of%20sUAS%5B6%5D.pdf, accessed November 2017.
As Amazon and its competition turns increasingly to automation, the problem of the last mile, or even the last 100 feet (delivery truck to front door), will become a huge focus. As shown in this article, even the most promising solution has many obstacles. In my prior role, I worked in the area of autonomous vehicle safety and certification for a government contractor. We had many systems and processes in place for verifying aerial vehicles to a degree of safety that would satisfy government standards. It was completely apparent that autonomy posed a major challenge to being able to quantitatively prove that one could meet these high standards. I think many of the commercial companies who have tried to enter this space underestimated how inflexible the government would be on this issue. I also believe the government’s inflexibility is completely justified. This is a matter of public safety and from what I saw, commercial companies were not even in the ballpark in terms of reliability so any negotiation was pointless. In addition, this doesn’t solve an important enough problem to justify changing standards. I will be very interested to watch this space unfold. In addition to regulatory issues, Amazon should also be looking into technology to reduce the noise created by UAVs (a potential public nuisance if not addressed) and more advanced localization techniques to supplement GPS. With these capabilities along with continued development of autonomy algorithms, I believe Amazon can bring to market safe UAVs that their consumers will welcome.
Amazon’s autonomous drones have the potential to change both regular consumer and commercial deliveries. While safety is a big concern in near-term, similar to the evolution of airplanes, I think we can expect the technology to improve rapidly in the near future. In this sense, I don’t think rapid delivery is at inherent odds with safety. I would also add that there are some emergency, non-frivolous use cases in which the speed could be need-driven (not just convenience-driven). For example, drones could be used to deliver medicine on-demand at the site of a car accident in a high traffic area.
Beyond the technology, there are a lot of implications for government oversight that are worth considering. For example, the introduction of drones puts considerable additional burden on the local civil aviation authority for monitoring in parallel to commercial aircraft. Amazon should think critically about how it can partner to make this as easy as possible for governments.
Great topic, it is always interesting to think about future technologies like Amazon drones and how they will shape our future! You successfully highlighted many obstacles facing the implementation of this technology. The regulatory environment I find particularly interesting, and Amazon is not the only company/industry facing this same issue due to technological advances. If standards cannot be made and enforced, technology will not be allowed to make the positive changes on society that we know are possible. I wonder if there is room for collaboration with other companies facing the same regulatory challenges in order to speed up the regulatory process. For instance, companies like Google, Tesla, GM, and Ford have autonomous vehicles today. The technology exists right now. The issue, like you mention in your article, is the regulatory environment has not changed as fast as the technology has developed. Never before have drones and cars driven themselves. We as a society, and the government as the regulatory body, must now answer questions that have been posed by our technological advances. Questions such as, who is responsible when the inevitable accident occurs? How should the software be programmed: to protect occupants of the the drone/vehicle, or bystanders, or calculate some path of least damage?
These essentially are tough ethical questions that need to be answered through regulation.
The 2017 article below covers this ethical question. One example from the article: in a forced choice scenario, should an autonomous vehicle be programmed to hit a parked car or pedestrian on an ice covered road?
Fleetwood, Janet,PhD., M.P.H. (2017). Public health, ethics, and autonomous vehicles. American Journal of Public Health, 107(4), 532-537. doi:http://dx.doi.org.ezp-prod1.hul.harvard.edu/10.2105/AJPH.2016.303628
Vanessa, you did a phenomenal job of distilling Amazon’s drone delivery program to its core issues. Having worked to build out the drones program of a large company (AIG, insurance) over the last few years, I can really sympathize with the challenges you mentioned – regulatory requirements, ATC capacity, security, etc. A few thoughts:
To your question of whether consumers really need instantaneous delivery, I think the answer is a resounding ‘no’. That said, consumers want 30-minute delivery, and that fact alone is enough to provide the financial incentives for Amazon to build out a drone delivery program. The potential market size is huge.
Regarding security, I think most of the concerns you’ve highlighted are currently resolved by the FCC’s VLOS requirement. That said, many organizations have started to experiment with BLOS (beyond line of sight) flights. That’s where things can get dicey. Most drones flown commercially today are still pilot-operated, even in BLOS conditions. In other words, if anything does go awry (drone crashes, hacking, etc.), it’s easy to immediately address the mishap. The problem with this is that by using an operator, the labor requirement for delivery is quite high. As more of the process becomes automated, it becomes harder to control. Luckily, secure software systems to manage drone fleets are one of the fastest growing areas in the drone space today. The security question then becomes a standard cyber-security concern, which has been resolved in a number of ways in the past.
I might just be too spoiled, but I tend to disagree with Sarina — I think consumer’s do need instantaneous delivery. This need is most relevant for the supplies of grocery and food products. Amazon could really win big with its acquisition of Whole Foods and with Amazon Fresh if it is able to expedite its delivery time. In addition, Amazon’s impact on the regulatory landscape and investment in improving drone technology, could also enable drones to enter the food delivery space for services such as UberEats and Seamless.
Some experts seem to estimate that it will take up to 20 years until we see drones truly adopted by retailers. And I also think that given the safety and air traffic complexity, this technology will not be utilized in high-density urban areas in the near-term future. But if Amazon makes the right technological advances within five years I could see drones adding incredible value to retail delivery in rural or more spread-out suburban areas.
Accidentally posted before adding source for reference above: Champaign Williams, “Future Of Retail: Drones To Play A Big Role In The Next 10 To 20 Years,” Forbes, July 6, 2017. https://www.forbes.com/sites/bisnow/2017/07/06/future-of-retail-drones-to-play-a-big-role-in-the-next-10-to-20-years/
Thanks Vanessa. I also did a bit of research on a Chinese e-commerce, JD.com, which is developing a large drone delivery network within China. Although there are differences in terms of market opportunities and regulatory landscapes between China and US, both markets share quite a few common challenges. One potential solution to partially mitigate end-customers’ concerns over safety/ security in the near-term, with drones increasing overall supply chain efficiency, could be using drones between warehouses or between warehouse and local distribution center which locates closer to package receivers. The last mile may still require manual delivery, but once the drone network/system is fully developed/ tested, it can expand to the real “last mile”. Overall I agree, drone delivery for e-commerce has huge potential in future.