OCTOBER 18, 2013

At the end of a road in Tunkhannock, PA., called P&G Warehouse Way, sits a warehouse stocked with Pampers diapers, Bounty paper towels and other items made by  P&G. Inside the distribution center, reports The Wall Street Journal(Oct.15, 2013), is another company: Amazon.com. Each day, P&G loads products onto pallets and passes them over to Amazon inside a small, fenced-off area. Amazon employees then package, label and ship the items directly to the people who ordered them.

The e-commerce giant is quietly setting up shop inside the warehouses of a number of important suppliers as it works to open up the next big frontier for Internet sales: everyday products like toilet paper, diapers and shampoo. The under-the-tent arrangement is one Amazon’s competitors don’t currently enjoy, and it offers a rare glimpse at how the company is trying to stay ahead of rivals.

Logistics have long been crucial to success in retail. Years ago, Wal-Mart set up a system that lets suppliers monitor what needs to be replenished. Amazon instead is going out to its suppliers by piggybacking on their warehouses and distribution networks. Amazon is able to reduce its own costs of moving and storing goods, better compete on price with Wal-Mart and club stores like Costco, and cut the time it takes to get items to doorsteps. P&G began sharing warehouse space with Amazon 3 years ago and has expanded the practice. Amazon is now inside at least 7 P&G distribution centers world-wide,

The economics of the arrangement benefit both sides. For Amazon, “co-location” reduces the cost of storing bulky items like diapers and toilet paper and frees up space for the Web retailer to stock higher-margin goods in its own distribution centers. P&G, meanwhile, saves on the transportation costs that it would have incurred trucking products to Amazon’s regional distribution centers. Plus, it gets Amazon’s help in boosting online sales, a priority for many in the industry.

This post provided courtesy of Jay and Barry’s OM Blog at www.heizerrenderom.wordpress.com. Professors Jay Heizer and Barry Render are authors of Operations Management , the world’s top selling textbook in its field, published by Pearson.