Transcript 

(This transcript has been lightly edited) 

Host Stacy Nick: Hi Zac, thanks for being here today. 

Zac Rogers: Thanks for having me. 

As we’re heading into the 2023 holiday shopping season, a lot of that money is going to be spent online and a lot of that will be spent at sites like Amazon where you can often get your purchase at your door within 48 hours. I want to start by having you explain how a fast delivery works. How are we able to push a button and presto, there’s a delivery box at the door? It’s not magic, but it feels a little bit like magic. 

It’s not magic. It’s just sophisticated science, and sometimes it’s hard to tell the difference. Actually, my background was as an operations manager at Amazon before I went back to school. This was 2010, 2011, 2012 and we were in the early days of figuring this out, and there’s a few big things that made this possible. 

The first is where you put distribution centers and fulfillment centers. The warehouse where the goods come out of has really changed. The fulfillment center I was in is one of the earliest ones they built. It was out in the middle of nowhere in rural Nevada, and that (location) was totally based on costs. And that’s how warehouses always worked. We have giant boxes somewhere cheap as just a waypoint. 

Today, think about the Amazon warehouses coming up just around Colorado. We have one in Loveland. We have one in Denver. There are giant fulfillment centers in the suburbs of Denver that are right across the street from a mall. That’s not a cheap place to be, but it’s a convenient place to be. And it allows us to position goods really close to where the consumers are so that we can get things to them faster. So, one way — and this isn’t that sophisticated of a trick — is just, well, put the goods closer. They don’t have as far to go. It’ll be faster. 

The other thing that’s happened is companies have really moved towards automation. What that does is it really speeds up the efficiency you can have inside of a warehouse. We were one of the pilot warehouses for the Kiva robotics system. So, in a normal warehouse, if you’re picking an order, you have maybe a sheet of paper or maybe an app on your phone or something that says, okay, we need to put these three orders in the box, go to aisle one. Okay, pick this this item. Now go to aisle five, pick this item, and you can maybe pick one or two items a minute in that old system, which is the picker goes to the goods. 

With automation — and it’s not just at Amazon but Amazon was certainly the pioneer of really doing this on a huge scale — the picker stands in one place. And these robots — just to help you picture them in your head — are sort of like an 800-pound Roomba. It’s just a big orange thing that drives around low to the ground, and it can pick up shelves. So, it can spin around and make itself a little bit taller, pick a shelf up of inventory and bring it right up to you as the picker. And then four more robots come up alongside you and they have shelves and these shelves have maybe three or four boxes each. So, it’s just you and five robots — very chill — and a laser points over your shoulder and says, “Pick this,” and it points right where you need to pick. You pick it out. There’s a scanner like at the grocery store (boop) put it in the box. Another one right here, (boop) put it in the box. So, it’s really fast. You go from one to two items a minute to 25 items a minute. So, it really speeds up the velocity of orders. 

For a place like Amazon or really any e-commerce, velocity is critically important because the way supply chains were designed was for economies of scale. Put the most stuff in a truck and drive it the furthest you can because it gets cheaper on a per mile or per pound basis. With Amazon, people are buying one box of pens and getting that shipped is not incredibly efficient. So, they have had to put automation in. All the packaging is automatically sized. If you’ve ever gotten anything in the envelopes, you’ll notice there’s not a lot of extra space in there. That’s because things come through an envelope machine and then it’s immediately heat-sealed in once the goods are small enough. They’ve been very scientific about how to increase efficiency, which then allows them to increase the velocity. And it’s turned into an arms race for everybody where the day after Amazon said they were going to do next-day delivery, Wal-Mart said they were going to do it, too. 

It’s turning into this thing where now it’s just an expectation and really a critical part of service. People sign up for Amazon Prime not because they want to see the Lord of the Rings show so badly — because it wasn’t that good — but because they want things to get delivered to their house right away. Amazon knows even if they’re losing money on it, which sometimes they still do, Prime drives the flywheel of the whole company. So, having really high levels of service is the number one goal for many of these e-commerce platforms. 

Now this is very normalized. Was it the pandemic? I think people largely point to that as kind of the beginning of this expectation of: “I want it now. I want it at my door. I don’t want to go out to get it.” 

The pandemic didn’t start this, but it sped it up. If you look at trends in supply chain pre-pandemic/post-pandemic, it’s almost like the pandemic was a time machine and it brought us forward way faster than we were prepared to go. That’s why you saw the supply chain problems during the pandemic. Why don’t we have enough trucks? Why don’t we have enough boats? Because we didn’t think we were going to need this many. 

If you look at the growth of e-commerce as a percentage of general retail, from about 2010 to 2019 it went from about 6% of retail to about 10% of retail. Basically, that means out of every dollar in 2010, 6 cents was spent on e-commerce, by 2019 it was 10 cents. In Q2 of 2020, when everyone really locked down, it had jumped up to 16.5%. So, the same amount of growth we had done in the 10 years before, we did in four months in the beginning of 2020. That’s why it was like, “Why are supply chains broken?” 

Imagine if you’re driving down I-25 and one day there was just 50% more cars; it would be a disaster. That’s sort of what happened to supply chains. It is true that (the pandemic) brought a lot of this mainstream. They were already developing it and they had same-day, but it was sort of a specialty thing. In certain markets we were really concentrating on it. But then it turned into everybody’s e-commerce for everything. 

Plus, the other thing that happened during the pandemic that really kind of goosed all these numbers was the only thing we could spend money on was goods. There was no billion-dollar Taylor Swift concert in 2020. People couldn’t go to a basketball game. You couldn’t go to your grandma’s house. But we had a trillion dollars of stimulus money and we had to spend that on something. And so, all of it moves over to goods. That’s why you see supply chains just absolutely crash. All these other companies wanted to take advantage of this trillion dollars. We weren’t going to let Amazon have everything. 

So, everyone gets big into e-commerce. You see a ton of investment in automation, in new warehouses, in trucking fleets, and all the trucking fleets built up like crazy. It was basically a gold rush. I mean, I would compare it to California in 1849. It was weird having this insane period of growth, six or seven years of growth in the three-month period, a trillion dollars in people’s pockets. We can’t afford to not get in on this. So, the trends that already existed were catalyzed by the pandemic. 

How did that continue to impact the supply chains? I’m thinking about all the times there were certain things that were really hard to get, and it did set off this chain reaction. It felt like for a while, even now, post-pandemic, the chain seemed to be broken. And I think for a lot of people, supply chains are something that they really didn’t think about until the pandemic hit. And then suddenly everyone was very keenly aware of the supply chain.  

Yeah, that six-week period where we were using toilet paper as currency … Because basically what happened was nobody was going to the bathroom at work anymore or at businesses, and the toilet paper supply chain is set up to not have a lot of extra slack. That’s really where a lot of the problems came from. 

Toilet paper is actually a great way to talk about it because they make the same amount of toilet paper every day. There’s no seasonality. It’s not like toys every year, pretty much we’re using the same amount all day, every day. Because of that, it’s not like there’s a lot of extra capacity like, “Oh, well, November we got to really crank up the toilet paper machine.” Suddenly we needed all this extra toilet paper, or we thought we needed extra toilet paper, which was because now everyone’s not going to work and is at home. And the toilet paper that they make for the home market is different. It’s a little thicker, a little nicer. 

So, what happened is Kimberly-Clark and Georgia-Pacific totally changed their factories because they weren’t making printer paper anymore, because nobody needed printer paper; everything was online. But all of it comes from the same pulp and so everything got transferred to toilet paper.  That’s why about six weeks in, everyone was pretty much fine. What happened was both consumers and toilet paper manufacturers overreacted. So, we all bought way too much toilet paper. Every time we saw it at Costco, we’d just buy it. And so, it took us a long time to get through it. So, not a lot of people were buying it (later). We changed all this capacity over it. Kimberly-Clark and Georgia-Pacific, their worst quarter in the history of those companies was Q1 of 2021. Basically, they had built all this extra capacity with the expectation that it was going to be like this forever and then everything kind of went back to normal. And you see these repercussions throughout supply chains. 

With all the buying that was happening during the pandemic — as you mentioned we suddenly we had all this money and were looking to spend it, and we were looking to spend it online — this has become a real challenge for physical retailers. They’ve had to really change their game as well. They’re offering drive-up and same-day delivery service in an effort to compete with organizations like Amazon. How has that impacted their logistics? 

A lot of them have had to move to something called the omnichannel. That’s when you have a seamless experience between online mobile ordering, in-person pickup, delivery to your house, all that kind of stuff. And that makes it difficult to track. 

I remember around the holidays of 2020; my daughter was eight at the time and she was obsessed with Baby Yoda from The Mandalorian. I was looking at all these Targets and online it would say they had three in inventory in the store in Longmont. And I’m driving down — and this is like December 23rd — and I could still see on my phone it said there were three in the store. But when I got there, there weren’t any there. I was talking to one of the folks there, this poor kid who probably had gotten a million questions like this that day. He said the system that sells them online — because Target was just shipping out of the back of their stores as their warehouses because targets are close to people’s houses so next-day delivery is possible — he said that system doesn’t really talk to the system in the store. It’s kind of two different things. 

That was early enough in the pandemic that they hadn’t figured out how to make that all one thing. A lot of companies had been approaching it, especially traditional brick and mortar retailers who had like Walmart and then we have Walmart.com, and those are sort of two different siloed entities. The challenge of the pandemic for brick-and-mortar retailers was how do we take what we’re already good at, the in-person, and combine it with this thing that’s kind of been like a hobby for us, sort of experimental. Walmart, Target, all these places were sort of bringing their online along slowly because they thought they were just brick and mortar. Now suddenly when this brick and mortar doesn’t work anymore because of the pandemic, they really had to boost up all the online stuff. 

Moving forward, it’s really interesting because some of them have pulled back a little bit. Target is not shipping out of the back of the stores that much anymore. If you go down to Denver right now — folks who live in Colorado will know where the big Wonder Bread factory is right off I-25 — right behind that is a brand-new fulfillment center for Target. That’s where their online orders will be coming from now in Colorado. It’s funny, everyone kind of tried to have it both ways. Partly that was because the pandemic, it was an emergency. 

Now we’re actually seeing more going to the traditional model, like if they’re going to do online, they’re going to really do it with a big fulfillment center, a lot of robotics, a lot of technology and emulate what Amazon is doing. Target and Walmart thought they could just ship out of the back of their stores because they’re Target and Walmart. Their stores are in great locations, close to where people live. But it’s really hard to do both at the same time. So having those affiliate centers, I think, really changed it for them. 

People get worried that everything eventually will be online. Really, what we’re seeing is it seems like we’re doing an “online plus one,” or an “online plus two or three.” Think about books. Books were one of the first things to get killed off by online, because remember, Amazon started as a bookstore, which is hilarious now that it was like a library. There’s basically one big book chain left — Barnes & Noble. Walden is gone. All the other bookstores that used to be in the mall — all those bookstores are gone. But you still need a bookstore. There’s going to be a time where your kid has to do a report for tomorrow and it’s 8:00 at night — my daughter is in middle school now, so I’m familiar with this — and you’ve got to get a book.  So, you’re seeing a lot of one to two stores in kind of a niche area stick around. 

Sometimes some of those shift over, like Bed, Bath and Beyond is gone because maybe people go to Target to get towels and whatever. There will always be a need for brick and mortar that will never go away because it’s just easy and convenient, and there are limits to online. We saw what some of those limits are. 

The other thing with online is it’s kind of come time for some of them to show real profit. Forever online was, with ecommerce, all we care about is growth and we don’t have to show profit. Investors were totally fine with that. Well, now that the rate of growth has slowed down — it was 6.5% during Q2 of 2020, now it’s about 15% and it’s stabilizing and returned as a regression to the mean. We’re kind of back on the trend line. So now we’ll continue to see some slow growth. But we’ve built up more capacity than we need for the levels that we’re at now. So now a lot of investors are wondering if they can see some return, show some profit. 

So, you won’t just see this rampant craziness, that they’re fine losing money as long as things grow, because everybody knows about e-commerce now. It’s not like 10 years ago and people’s aunts didn’t know how to go on Amazon and buy something. Everybody learned how to do it. Grandma is using ClickList, I mean, everyone knows how to do this stuff now. So, I think that will be a big factor going forward as we sort of balance out this e-commerce to brick and mortar and figure out where equilibrium is. 

Now, I want to talk a little bit about one of the unintended consequences of the fast delivery model, because we also have a lot more buyer’s regret. I was reading that the total value of returned goods in the U.S. now exceeds our defense budget. What kind of ripple effect is that going to have? 

Yeah, National Retail Federation, I think it was $814 billion (Editor’s note: It was $816 billion) in returns last year, which is — just to put that in context — about the GDP of Turkey, which is a G20 country. So, it’s a lot. It’s become a culture of returns, and there’s no putting that toothpaste back in the tube. I have had conversations with large companies asking about how they can reduce returns. It’s like, well, you reduce sales. That’s how you do it — especially online. 

If you look at something like apparel, the average rate of return for apparel bought in brick-and-mortar stores is about 9%. E-commerce is 30%, so it’s triple. And between two to three times the return rate for e-commerce is a pretty good number for some stuff. Electronics it’s like 1.5 %, but generally it is higher for e-commerce. 

I had a lady in one of my classes and we were talking about who does a lot of returns. She said her brother was getting married over the winter break and so she bought nine dresses and was going to try them all on, keep one of them and send the other eight back. And that is like a totally normal, regular approach that people take because you can’t try it on if it’s online. I mean, they tried doing that thing where people sent their (Amazon) Echo all of their dimensions and would transpose the outfit over their body. People didn’t like that. It’s much easier just to do returns. And so, returns are a gigantic part of the economy. 

We’ve been tracking something called the secondary market ever since 2008. I started this as an undergrad when I was a research assistant. Basically, what we look at is the value of all the goods that move through secondary channels, salvage dealers, online auctions, dollar stores, pawn shops, value retailers. A value retailer would be like Nordstrom Rack or outlet malls. It was $715 billion last year, which is 3% of GDP. So, this gigantic piece of GDP is just the goods being resold through these secondary channels. That does have a big impact because it’s expensive, but there’s a lot of good to it, actually. 

People tend to focus on the costs such as having to send a truck to go pick it up. But resold goods, whether they’re excess inventory or returns, go back into the system. Every system has drains, and these drains are really important to certain parts of the economy. I grew up in Nevada and in Nevada, there’s basically two cities: There’s Reno and Las Vegas and then a bunch of little places in between. 

A lot of those little towns aren’t big enough for a Walmart, but they have a Family Dollar or Dollar Tree. And probably a lot of the goods they sell are secondary-market goods. They’ll have say, some lunchboxes for a movie that didn’t do as well as the film company thought it would. Target didn’t sell them. But now Family Dollar has them, or it’s canned goods or shoes or school supplies. So, actually a lot of that $715 billion does kind of a social service because it moves to retail deserts. 

It might not be a retailers’ first choice to sell these lunch boxes in Hawthorne, Nevada. But for the people who live in Hawthorne, Nevada — who are there basically because there’s a military base — it’s great. Now they can get the lunchboxes from the new Spider-Man movie or whatever that weren’t going to come out there otherwise. So, there’s a social good to it. 

The other thing is, all $715 billion of those products would have otherwise ended up in a landfill. So, from a social and environmental sustainability piece returns are actually not the worst thing in the world. You see that $800 billion number that you mentioned and think, “We’re so wasteful. We’re the bad guys in ‘The Hunger Games,’” and maybe there’s some truth to that. But all of that recycled stuff usually ends up in a pretty good place. The last choice is the landfill. 

Companies hate to throw things away because it costs money to throw things away, and it’s not great for your reputation. We have gotten such robust “reduce, reuse, recycle, remanufacture” programs in the U.S. now, and a lot of it has actually been fueled by these rates of returns. 

In terms of companies going to someone and saying they’d like returns to go away, good luck. Good luck getting Gen Z, who has never known a world where they could pull out their phone and order something on Amazon and then return it instantly and for free if they don’t want it, to think maybe they don’t want returns. It’s baked into the cake now. There’s no getting around it. Now for companies, it’s how do we maximize the return we can get from this and turn returns from something that’s a loss center to a profit center. That profit tends to do — as a byproduct — some social, environmental good. 

Zac Rogers is an associate professor of operations and supply chain management at Colorado State University’s College of Business. I’m your host, Stacy Nick. And you’re listening to CSU’s The Audit.