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THE IMPORTANCE OF ROUTE OPTIMIZATION IN MODERN LOGISTICS –

THE SUCCESS STORY OF AMAZON USA

Basma Taoufiq 30024694

Ibrahim Mansour 30026234
Sanket Maharjan 30034808
04.06.2021

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Table of Contents
ABSTRACT.................................................................................................................................................. 3
Introduction .............................................................................................................................................. 3
Research Questions .................................................................................................................................. 4
Research objectives .................................................................................................................................. 5
Methods and concepts ............................................................................................................................. 5
Application of the concepts to the case ................................................................................................. 15
Result ...................................................................................................................................................... 27
Discussion................................................................................................................................................ 29
Recommendations .................................................................................................................................. 34
References .................................................................................................................................................. 36

Basma Taoufiq
Ibrahim Mansour
Sanket Maharjan

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ABSTRACT
This paper will contain the notion of route optimization or more particularly the importance of

route optimization in modern logistics, and to better explain it, we have integrated a well-detailed

case study, which is the successful story of AMAZON USA.

We will go through the definition of modern logistics, and route optimization, and why it is

important and almost a success key for each company. And explain the several advantages of route

optimization, and how it affects companies’ productivity, and then projecting it on AMAZAON USA,

starting with its history, how this successful company started and where it arrived now in the

present time. and analyse how this company uses all its different logistic services, from its storage

centres to the distribution’s ones, up to the customers doors, to be number one on its field.

Moreover, it discusses about the possible computer sciences problem faced during route

optimization such as Travelling Salesman Problem, Vehicle Routing Problem and Vehicle Routing

Problem with Drones with possible algorithm to solve these problems.

Introduction
Today, the strong expansion of logistics worldwide reflects the importance of the added value of

it on the management of companies. Logistics, being defined as a management of physical,

financial and IT flows to meet customer expectations, to make available resources corresponds to

needs, gives a clear reference to the notion of optimization and more precisely optimization over

time, costs and space.

It was during the second world war that Europe included Logistics, accompanied by extensive

financial economic efforts on the battlefields around the world. As a result, Logistics initiated some

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new ways in supporting strategy and tactics. From then on, it had to stand the want to conquer

and overcome the limitations and the constraints of space and time.

Nevertheless, considerable differences appear between Military Logistics (political strategy) and

civil (economic) logistics.

Military logistics has reached a high level of perfection and efficiency, thanks to the development

of scientific methods (particularly in the operational research) and the rise of electronic data

processing and communication technologies that followed the second world war, thanks also to

the experience and knowledge.

The economic logistics took off in the 1970s, when companies have sought to limit the costs of

managing their inventories and to apply new methods, including the introduction of methods of

planning their production and in-house supplies.

In the years 90, logistics has expanded to include business-to-business flows from the initial

suppliers until the final customer Today, logistics is an essential sector of economic activity and

constitutes a new form of industrial and service activity. It has won as an element of differentiation

by the service (respect for deadlines, ability to handle customer returns...) and offers a wider range

of activities. It is inseparable from production systems and closely intertwined with all the

company's functions. (Logmore, 2019)(Yunging,2017)

Research Questions
 Why is route optimization important?

 How can route optimization increase a company’s productivity and return on investment?

 Why should companies be interested in modern logistics?

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Research objectives
To see:

 How AMAZON USA use modern logistics to increase productivity and to maintain a great base

of customer loyalty?

 why is route optimization important for AMAZON USA?

 How route optimization was a key factor in AMAZON success?

Methods and concepts

The data analysis of this paper will be collected mostly from articles, books and other paper

research from internet, and will be presented on qualitative manner however there will be few

quantitative solutions. The case study will be restricted only at AMAZON USA, and not at its whole

other branches.

1. why is route optimization important?

Professional use of route optimization software can be a major competitive advantage. The gains

are multiple and benefit the entire structure: reduction of operational costs, productivity gain for

transport and planning, improvement of the quality of service and respect for the "customer

promise", digitalization of the routes, employee retention, etc.

 What is route optimization?

route optimization is a process consists of selecting the optimal route solution, based on several

key elements such as directions, needs, costs, delivery addresses and other key factors to consider

when planning, to get a package from the transportation hub to its end recipient as quickly and

cost effectively as possible. (Routific, 2021)

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 Can companies Manually Plan Routes?

They could but why would they want to?

Unless it is a small company with only one or two delivery cars or trucks, any more cars than,

planning gets more and more complicated. As the number of stops, and possible routes increases.

When the company tries to find the best cut manually, the process gets complicated and almost

impossible. If we take for example few cars that has shipment to deliver with 10 stops each, it can

be millions of different directions to take. (Espatial, 2015)

I. Advantages of route optimization

1. Time gain and increasing productivity.

Using route optimization software reduces the operational costs. Indeed, through the adoption of

an optimization approach, the productivity of the company is improved and the rate of

exploitation of resources increases.

Based on a cloud of points to visit or deliver, identify the best route thanks to its intelligent

algorithms. routes are calculated and produced using professional mapping that will ensure the

best overall mileage performance, allowing to reduce the transportation costs.

Less time spent on the road means less money spent on fuel. An optimized delivery route can help

saving companies 20% to 40% on fuel and drive time.

Algorithms used in software by route optimization has become the new personal assistant made

for drivers and companies in general to make the job a lot easier. Not to mention the customers

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will be much happier by receiving their deliveries in a short time., the best routing solutions allow

the companies even to make manual adjustments to the routes as they see fit even after they have

been optimized. But human knowledge is often added and used manually since algorithms can´t

sometimes consider all needs of humans in the exact way that they want. (Routific, 2021)

2. Improving the quality of service and respecting the "customer promise"

Happy and satisfied customer is every company’s ultimate goal.

Route optimization improves the customers experience, the customer always wants to know

where their products are, and the company would always want to know where their drivers are.

All customer constraints are integrated and considered when delivering. The software will strictly

respect all these constraints while leaving some adjustments for the planner for when planning.

 Delivery time

 Vehicle loading capacity.

 Web-site accessibility

 Equipment constraints

The planner will also be able to send the optimized route to his drivers and in return receive the

different execution statuses (delivery successfully made, on approach, not delivered, etc.) .... this

will allow the logistician to take the necessary measures very quickly in case of a negative impact

on a deliveries running, so delayed or missed ones are greatly reduced.

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Finally, the planner has the option from its transport software to send SMS or Email notifications

to its customers to inform them in real time of the exact arrival time of the drivers. This feature

will improve the service provided for customer but also avoid the no-show or possible absences

of the recipients. (Espatial, 2015)

3. Visualize Delivery Route

Many think using apps like google maps or weeze, is called route optimization but that’s wrong

In 2018, various studies considered that only 10% of companies with their own fleet distribution

activity were equipped with transport software or TMS (Transport Management Solution).

Since then, we have seen a real momentum towards a digitalization of the transport division of

companies and a strong growth in equipment of planning solutions and optimization of tours.

Using Route optimization software visualize delivery routes into a map, this way both of dispatchers

and drivers can see exactly where all the different stops are, who's going to which direction, and all

updates that are made based on traffic conditions.

Routes are updated directly when sudden circumstances appear, like traffic, accidents, weather

warnings, so on. Drivers are automatically notified of all updates happening in real-time so they

have no rush and know exactly what their plan B would be for that specific situation that they are

in this leads us directly to the next advantage of route optimization which is:

4. Reducing risks

Risk reduction is a major challenge in route optimization. Risk is often the most impactful variable

in the life of a company and the one that is the most difficult to assess.

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Thus, having a complete and reliable vision of its logistics makes it possible to react quickly in the

event of a problem, and above all, to anticipate as much as possible all risks.

The reduction of risks is therefore a key issue in the search for route optimization. This last one

prevent almost all kind of risks so no error can occur . so that the customer can eventually enjoy a

good experience while waiting to receive their products. And this will also help to avoid many

Situations between companies and their suppliers ,it even generates trust with other members of

the supply chain.

5. Pollution reduction and respect for the environment

Today, many companies equipped with a route optimization solution communicate about the

environmental gains associated with using such a solution.

The environmental performance of companies has become a major issue of our time. A route

optimization solution is, in essence, one of the main assets available to companies in this field.

Environmental protection does not cost a lot of money. With using route optimization, companies

always take the most efficient route as a result, besides the reduced fuel consumption and money

savings. they get to reduce pollution.

There are many routes optimization software that calculates efficient routes for the entire trip that

the driver muss to take to deliver certain products. Orders are optimally associated, and vehicles

are better used.

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6. Analysis of performance indicators and KPIs

During the route planning phase, the planner will be allowed to analyse the performance of all parts

of the optimized routes. these indicators or the key performance indicator (KPIs) will help the

operator in his decision-making. It will have a view of elements such as the total KM of each of the

tours, the driving times, all the delivery costs, the arrival times at each crossing point, etc...

In direct connection with the drivers mobile solution, the planner will also be able to control the

performance of his running tours. He will be able, from the optimization solution, to consult in real

time the advances / delays, the statuses of executions, etc . The possibility of being able to compare

the things that were planned with the things that were realized will allow it to refine its construction

of routes over time and therefor, guarantee the continuous improvement of the transport service

of the company. (Antsroute, 2020) (Mercuregate, 2020)

II. AMAZON USA Success story

History of amazon

Amazon is certainly the most frequently mentioned site when it comes to the Internet and

especially online commerce. This is due initially to its young CEO and founder, Jeff Bezos. A fan of

Star Trek and Internet, this Bankers Trust IT specialist at the age of 30 to set up his start-up in a

garage.

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This legends adventure begins, with the opening in 1995 of the online bookstore Amazon.com.

Bezos then found the brilliant idea to ask internet users to write the reviews of the books

themselves, promoting at little cost the loyalty of internet users.

Since AMAZON has not been limited to books alone. Jeff Bezos attacked CDs, videos, DVDs,

greeting cards, he explained that he wanted to offer internet users a new way of shopping, and

offer the widest possible range of products. then he decides to partner with other online

merchants, as it was difficult for him to do everything.

The sale of books, CDs and videos generated a profit of $10 million. With 22.5 million customers in

more than 160 countries, with all its employees in the United States, its branches in Germany, Great

Britain France. Amazon remains essential.

Amazon's rapid growth led it in less than two years later to go public in 1997. The company's shares

were initially valued at $18/share. If a person had invested $1,000 in Amazon right after that it

would have been more than $236,000 today

With a market capitalization of more than $260 billion in 2015, Amazon is the most valuable

retailer in the world, even ahead of the American supermarket giant Walmart.

Currently, Amazon is the best search engine to sell products in the world. And the latest industry

figures prove that this is true. The year before, Amazon owner Jeff Bezos entered the TOP three

of the world's richest people with a total income of $72.8 billion.

There are now over 15 million American visitors per month to the site in the United States.

(L.Brandt, Richard, 2011))

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Different logistics services of AMAZON USA

Logistics is the real keystone of Amazon's differentiation from its competitors. For the same product

purchased on an e-commerce site, Amazon is for the most part very competitive in terms of its

prices and delivery times. These strengths, combined with a good reputation for after sales , place

Amazon in the favourite spot for customers choice.

Amazon has a lot of programs adjusted for customers satisfactory such as Amazon Prime, this

program allows them to benefit from free shipping and this within 24 hours.

This advantage goes also on Amazon's other key figure, which are the merchants. Amazon

highlights those offering express deliveries.

This logistics is also a real gateway for Amazon to more varied activities. As a main purpose, Amazon

wants to make the customer or the e-merchant always more captive and therefore more profitable.

For this, Amazon has drawn a a whole different service for its customers. (Sumner-Rivers,

Roger,2015)

First, customers who have chosen to become a beneficiary of the Amazon Premium card have two

advantages and not the least, free shipping, and express delivery time. But to this is added a

multitude of diverse and varied services which are:

 A cloud service to store photos in unlimited.

 A book rental service for Kindle.

 An unlimited video-on-demand service, competing with platforms like Netflix.

 An on-demand audio streaming service, competing with Deezer or Spotify.

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 Preferential offers for students

Thanks to logistics, Amazon is not only looking to differentiate itself, but the company also uses it

as a gateway to new services.

Amazon is now working to move products close to the buyer before they have even made their

purchase decision, based on their big data predictive analytics.

Amazon became capable to optimize the entire supply chain and reduce delivery time and identifies

the providers that are best able to meet customer demand and location, reducing delivery times

and costs.

Amazon use a huge, sophisticated tools that contributes to the quick and efficient delivery of

customer’s order, the technologies that enable them to do so are constantly evolving. To get

products to consumers, Amazon is constantly exploring new methods, from robotic systems for

distribution, to the development of aerial vehicles or drones, capable of dropping the package in

front of the customers door.

Amazon's supply chain is a staggering achievement when it comes to retail logistics. The Bezos

machine continuously optimizes all the links in the chain to fulfill their promise of customer

satisfaction and their goal of becoming the favourite retailer in America and beyond.

In fact, this goal is also one of the main drivers of the continuous development of the Amazon

supply chain. While the retail giant has reacted to growth, it has never failed to invest in the

expansion of services to support this growth and fuel more.

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Here is how this great strategy works, combining a warehousing network, tiered inventory

management, and supreme transportation, all supported by the latest technology as well as smart

manufacturing and pricing strategies. (Supply chain 247, 2020)

Order preparation: distribution centres

Everything starts in Amazon's distribution centers, where products arrive in semi-trailers, then are

placed on treadmills before they’re shifted to the sutomer’s address. This process starts as soon as

the order is made. Stored randomly with millions of other products which makes it possible for the

customer to have a various items on hand . then the items get sent quickly to the product collection

managers using robotic units which moves products stocks fluently to the warehouse. Along the

way, the computer system tracks its progress, and weighs the package to check the accuracy of

the order. Then it get tagged and placed, in a trailer depending on the delivery method, location

and delivery times chosen.

On the road: trucks

Truck drivers , which carry more than 2,000 packages per trip, carry orders from distribution centres

to sorting centres, where packages are then categorized by zones and delivery dates. Amazon also

work with besides its own drivers Amazon work also with many famous transportations such as

DHL, FedEx or Chronopost.

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Air: Amazon Prime Aircraft

Amazon Airplanes take off from more than 20 airports in the United States. In these planes, the

packages travel in metal containers called Loading Units, each capable of holding hundreds of

packages. Each airplane can carry at least 30 containers.

Land Transportation: Delivery Service Providers for Amazon

Amazon uses Delivery Providers to deliver a large volume of orders to their destination. These

partners recruit and train their own teams of drivers, and work with varying numbers. For its part,

Amazon provides all the necessary tools and provides continuous training and support. (Li,Jun-

tao,2016).

Application of the concepts to the case

Why did we choose Amazon?

In 1994, Amazon was launched with big dreams and faltering steps in its beginnings. The beginning

was difficult in nature, as it is with the rest of the big commercial innovations. The beginnings of

Amazon coincided with the spread of the Internet at homes in the United States and the spread

of the culture of buying and doing business online. Amazon has grown up now with its

accumulated experience, expertise, and business relationships with its suppliers, and the great

loyalty it has garnered from its customers. (Wells, Danskin, & Ellsworth, 2018)

Amazon succeeded to be the global octopus in e-commerce around the world, with revenues of

more than 107 billion dollars in 2015, and a huge customer base that made it the biggest

ecommerce website in the United States, and far ahead of its closest competitors. According to a

report issued by Comscore in July 2016, the number of monthly visitors to Amazon has reached

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183 million. eBay comes second with 107 million, and Wal-Mart third with 101 million. However,

Amazon is like other companies that operate in this sector. It is constantly facing the dilemma of

logistical support and its growing costs year after year. (Lai, Liu, & Xiao, 2018)

There is nothing better than delivering the idea via a realistic example that shows the experience.

There is no company around the world that can simulate its experience and transfer it like Amazon

in the field of e-commerce, for several reasons. Amazon is the oldest company that worked in this

field, it has a huge annual sales volume, and it has a vast geographical spread.

All these reasons made the company a fertile environment for all the difficulties faced by novices

in this field in various settings. The most important thing is the historical review of the data.

Therefore, when a case study is made, the longer the period is, the more accurate the results are.

It's not that easy!

Unfortunately, a website and a bank account are not all that an e-commerce company needs. The

matter is not that easy, but the phenomenon looks easy and cheap, for many reasons. For instance,

there is no need to rent shops in important and vital locations, as is the case in traditional stores.

There are no labor costs, licenses, etc. However, it is much more complicated in reality. (Li & Fan,

2014)

Logistical support is a monetary cancerous tumor

Shipping, storage, and logistical support costs have become like a cancerous tumor that is growing

over time. The cost increases and does not decrease, not because the means are not developed,

but because e-commerce is based on the principle of proliferation and permanent expansion and

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the rule of (no limits) to the geography of the place. Geographical expansion does not come for

free, but it comes at a cost, which is prohibitive. According to official Amazon reports, the total

cost to the company for shipping, delivery, and logistical support services during 2006 was $884

million. As for the revenues, it obtained in return $567 million, through shipping fees that the

customer pays, including the value of membership in its services such as Amazon Prime. This brings

Amazon's net cost of shipping and logistical support to $317 million during 2006. This shows clearly

that the value that the customers pay for delivery does not cover the basic costs of shipping and

logistical support, undertaken by the company. The real dilemma comes when we take a historical

view of the size of this cost for the period from 2006 to 2016, as we find the following. (Wells,

Danskin , & Ellsworth, 2018)

In 2007, the net costs incurred by Amazon for logistical support and freight services were $434

million, in 2008 it was $630 million, and in 2009 it was $849 million. It took a steady growth during

these years until it reached 5 billion dollars in 2015. This is because the total cost in 2015

amounted to $11.55 billion, while the revenues that the company got in return for this service was

$6.55 billion. This makes the net cost of shipping services and logistical support approximately 5

billion dollars. (Wells, Danskin , & Ellsworth, 2018)

During the period from 2006 to 2015, the average growth of the net cost of Amazon logistical

support and shipping services was approximately 37% annual growth rate. This is a high

percentage in the long run, which means that the continuation of this growth in costs will either

threaten the chances of survival of the company in the future or further erode the net profit

margin of the company. On one hand, Amazon has the ability to coexist and find an alternative

under these circumstances. On the other hand, small companies around the world that have

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started in this area will suffer greatly from these costs and must be aware of the size of this risk

and that it is a point that needs a lot of work to develop. (Wells, Danskin , & Ellsworth, 2018)

What does the customer want?

This can be reduced to wanting the contradictions, and to bring the two opposites together! The

customer wants the service provider to deliver the order quickly and at the cheapest possible price.

It is an impossible equation so far in the world of e-commerce. As is known to Amazon customers,

the company offers several options, like others, in delivery. The shorter the period, the higher the

delivery price, for the cost associated with this speed. (Li & Fan, 2014)

According to a survey conducted by McKinsey in 2016, included 4,700 customers in China,

Germany and America, about why the customer chooses one of the delivery options available to

him when buying online. 70% of them answered that they choose the delivery time that is the

least expensive for them. While only 23% chose the same-day delivery option. In the same poll,

27% of them answered that they cannot purchase online food and the like due to the long delivery

time. The percentage was 26% for medicines and 20% for games and books. (Lai, Liu, & Xiao, 2018)

We find that customers tend to choose the cheapest way of delivery, even if the period is a little

longer. In certain sections, such as with the daily needs that are available in the supermarket, they

do not prefer to buy them online because of the long delivery time.

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Amazon is in trouble

Amazon, as an e-commerce giant, seeks to expand as much as it can in providing its services. This

expansion helps it with two main goals. The first is to reduce costs and increase profit margins.

Large companies usually resort to such a method when some sectors have high-profit margins and

other sectors have low-profit margins. The high-profit sectors partially compensate for what the

company loses from the less profitable sectors. Therefore, the company can continue to provide

these services and develop them in the future. (Welch, 2015)

The second goal is that the diversification of services makes the process complementary between

the various sectors of the company. This makes the customer increase his purchase operations

and remain for the longest possible period in the company. Therefore, we notice that Amazon has

expanded from providing online sales services for various goods to providing movie and music

services and cloud storage services. It also manufactures "Kindle" tablet reading devices and the

new voice command device "Echo". In addition, it offers new services such as "Prime Express

Delivery" that delivers within one or two days, and "Amazon Prime Now" that delivers within two

hours. Amazon has extended its influence over sales in electronics, clothing, and various

household needs. However, there is a new sector that Amazon wants to enter strongly, because

of its magnitude and its daily need. It is the retail sector and supermarkets, specifically in food.

(Wells, Danskin , & Ellsworth, 2018)

According to a recent report from Cowen & Company, the volume of Amazon sales in America for

the year 2016 in this sector amounted to nearly $9 billion. This amount may seem high, but it is

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very small when compared to the volume of sales of the nutrition sector in America as a whole. It

reached approximately $795 billion, of which online sales were $33 billion, and Amazon obtained

$9 billion only of that amount. In 2021, Amazon seeks to raise its share to $23 billion of the total

expected sales of this sector in America. This sector will be $903 billion, $70 billion of which will

be the share of online sales in total. (Lai, Liu, & Xiao, 2018)

Now, here is the dilemma. How can Amazon increase its share in this sector in particular, while

satisfying the customer’s desire to deliver orders quickly, and at the same time controlling shipping

costs that have grown steadily annually?

Is "Amazon Go" the savior?

Amazon Go is a very creative idea in term of route optimization, as it depends on bringing the

fresh food outlets near the customers. It is all about spreading a huge number of small but smart

supermarkets all over the country, that sell only fresh food. Many of these supermarkets work

24/7. When Amazon announced this service, it caused a buzz in global news, and was considered

a new innovation in the world of shopping. It is no secret for the customer to be annoyed by

waiting in the accounting queues during frequent shopping in the supermarket. Amazon tries to

increase its market share in this sector, by controlling the growing shipping costs and the

reluctance of customers to buy online in this sector, specifically because of the long delivery time.

(Cheng, 2019)

Amazon chose this time for the customer to come to its store, instead of coming to his door as

usual. It used advanced and modern techniques to calculate invoices automatically and ensured

for the customer not to wait even for one minute, which could encourage customers to shop with

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them instead of traditional stores. If Amazon succeeds, it means that it has largely eliminated the

shipping cost and its associated high-cost logistical support, which might increase its profit margins.

(Tillman, 2021)

Is this idea new? Certainly not. In Britain, specifically in the giant retailer Tesco, they have the same

idea, in a more innovative way, and a lower material cost than the Amazon method. Tesco offers

a free service to its customers by placing a shelf at the entrance to the store for self-accounting

devices. Customers can perform the process directly by themselves, without waiting in the

accounting queue. This wireless device is like a small-sized barcode scanner that the customer can

carry with him while touring the store. All he has to do is to scan the barcode on the box cover

before putting it in the basket. At the end of the shopping tour, this device will have collected its

final bill. Now the customer must insert his bank card into the same device and pay online. (Nott,

2020)

It is an easy and inexpensive technology for Tesco, compared to the advanced technology provided

by Amazon, which is definitely much more expensive. The problem with Tesco is that it did not

adequately market this technology. Actually, this small device completely canceled the waiting

queues and the shopping process became much easier. (Nott, 2020)

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Buy online and go to receive the order

Collection points is another creative idea that Amazon adopted, in terms of route optimization, as

it saves much of the delivery costs and times. Now the problems of trying to curb the steady

growth in costs and the endeavor to deliver the orders as soon as possible are quite clear.

Therefore, another idea arose in this field, which to order online and choose a specific point to go

to and receive the order. These points are usually iron boxes in general stores or in big malls. The

customer gets the box number and a password to open the box and receive the order. According

to a recent poll conducted in April 2015 by Blackhawk Engagement Solutions, 45% of respondents

had performed such an operation within the past six months. This percentage is not very

encouraging to expand in such an option. However, companies usually activate this option as a

compromise between the customer's desire to get the order quickly and the companies' desire to

reduce costs. (Wells, Danskin, & Ellsworth, 2018)

Does the good infrastructure necessarily help in cost reduction?

Some people believe that the above-mentioned difficulties and growth in costs of shipping and

logistical support are due to global sales and the fact that the infrastructure is developed in

America, which means that the costs will be lower too. In fact, there is no direct relationship

between infrastructure development and cost reduction. According to official Amazon reports, its

sales in North America in 2006 reached $6 billion, while sales outside North America reached $5

billion. Sales within North America continued to grow more than Amazon's operations in the rest

of the countries until it reached $64 billion in North America in 2015, compared to $50 billion in

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the rest of the countries. It is quite noticeable that with the increase in the company's sales volume

in North America over these years, the cost of logistical support has not decreased. In addition,

the global Amazon spread is largely in countries that have a great development in infrastructures

such as Britain and European countries. This denies the idea that the level of infrastructure that is

qualified for such stores in these countries is a major reason for reducing costs. It also reinforces

the idea that logistical support itself, in its current global status, is an expensive process and needs

more new innovations and thinking outside the box to reduce its costs. (Yu, Wang, Zhongb, &

Huang, 2016)

Thinking outside of the box

Nowadays, many companies are thinking of other economic and creative solutions. They attempt

to use robots in delivery, or to use drones as well, which are similar to the aircrafts that are used

to carry modern digital cameras. However, the field is still open to any modern innovations that

can reduce costs. The company that can access these innovations quickly and obtain patents for

them, will be the leading company in this field. These innovations will enable the company to

provide these services exclusively and allow other companies to use them for money, which will

put the company many steps ahead of its competitors.

Amazon announces its delivery robot

There is no doubt that, robots can help in route optimization and reduce costs and delivery times.

Amazon has entered the game of product delivery using robots with a new delivery robot called

Amazon Scout. Amazon is the latest company to try this type of automated delivery solutions, after

some major companies such as Domino Pizza and PepsiCo International. The robot runs on six

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wheels and is powered by an electric battery, moving at the normal walking speed of a normal

man. Cheap sensors and advances in artificial intelligence have made this type of robot relatively

easy to make. Therefore, when the robot makes a mistake, the stakes are relatively small, unlike

in self-driving cars. (Scott, 2019)

Using drones in delivery is no longer a dream

The idea of using drones in delivery, among many other things, proved to be quite promising in

many countries. Although their use in delivery is still limited, it will increase over time and, this

field will witness major improvements in the future. Drones will contribute to improving the

standard of living, saving lives, reducing traffic congestion and pollution, saving money, and

speeding up order delivery services. For example, drones are currently used in Tanzania to deliver

essential medical supplies on a daily basis. The same thing is happening in Switzerland and other

countries. However, this service is not limited to remote or hard-to-reach areas. (Makoye, 2021)

Amazon is working to seriously test the feasibility of this technology. In the same context, "Wing",

a subsidiary of the "Alphabet" holding company to which Google is also affiliated, is working to

test drone ordering technology in Australia. At the same time, Japan is currently studying the

possibility of easing restrictions on the use of drones in delivery, in order to be used more

efficiently. (Staff, 2018)

The food delivery sector is one of the sectors that could witness a major transformation. The

Chinese government has given approval to a company in Shanghai, to use drones in food delivery.

This reduced delivery time to just 20 minutes, which is a huge achievement, considering the

enormous amount of congestion that Shanghai is experiencing. (Deng, 2018)

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Traditional delivery methods face many obstacles such as suffocating traffic congestion,

bifurcation of roads and streets, and traffic lights, which make the delivery process difficult. Drones

do not face such congestion, and they can deliver things from one place to another within the city

faster, even if they only use the pre-approved air routes. In addition, drone delivery will reduce

the number of vehicles on the roads, which will lead to less traffic congestion, and thus reduce

pollution. (Deng, 2018)

Drones are already being used to deliver fast food orders in Iceland. In Dubai, the Costa restaurant

chain has begun carrying out some tests in order to use this service to deliver drinks to customers.

The idea of delivering food by drones from restaurants directly to homes maybe a fantasy for now

at least. However, they may be used to deliver orders to certain points in the city, then the delivery

agent delivers the order to the customer, using a motorcycle or a car. (Ross, 2018)

According to the McKinsey Report, the value of drone use has increased from $40 million in 2012

to $1 billion in 2017 in the United States alone. Goldman Sachs expects the value of drones to

reach $100 billion by 2020, especially as companies and governments increasingly accept this

technology globally.

According to a report prepared by Deutsche Bank, Amazon is expected to invest massively in

automating delivery operations as it represents a valuable opportunity to reduce its costs of the

last stage of the shipping process by up to 80 percent. However, there are still some issues that

must be resolved for drones to be widely used. For example, drone flight paths must be defined

in line with regulations and laws. There are more than 50 member states at the Joint Authorities

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for Rulemaking on Unmanned Systems (JARUS). They are 50 governments with future visions, and

they seek to identify the best practices for operating drones commercially.

Amazon Prime Air

There is no doubt that, drones can also help in route optimization and reduce costs and delivery

times. In 2020, the US authorities gave Amazon approval to use drones for delivering orders.

Amazon revealed that the US Federal Aviation Administration agreed to its program for the use of

drones, based on the safety factors presented by the company, describing the decision as an

important step forward. However, the widespread use of this technology is still a long way off.

(Palmer, 2020)

Amazon currently has what is called the Part 135 Air Carrier and Operator Certification, which

must be obtained before starting drone delivery services. The company stated that it verified more

than 500 safety and efficiency processes, as part of its application for certification. This approval

will bring the American company closer to achieving its ambitious goal, which is to use drones to

deliver orders within 30 minutes. (Levin, 2020)

Amazon CEO Jeff Bezos announced the program for the first time in December 2013. Amazon

conducted its first drone delivery in Britain in December 2016. Since then, the company has seen

slow progress towards achieving its goal. In June 2019, Jeff Bezos said that the company plans to

deliver by drones within months, but that has not started yet.

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Result
The logistics industry has gone through three stages of development, namely, traditional

production and sales logistics, traditional warehousing and transportation, and modern logistics.

(Xu, Ling; Shang , Jin-cheng; Wang, Yu-mei;, p. 146) Modern logistics plays a significant part in

advance of urban economy due to escalation in industry. It is formed by the integration of various

functions such as transportation, packaging, loading and unloading, handling, consignment,

warehousing, distribution processing, distribution, returns processing and information processing.

(Xu, Ling; Shang , Jin-cheng; Wang, Yu-mei;, 2005) Technology plays a vital part in modern logistics

to communicate information in real time and to accelerate the delivery process. It helps in storing,

analysing data, interpreting, and finding an effective and cost-efficient method for the overall

logistical processes. There are goals for logistics distribution. These are to achieve “7R”, namely:

right product, right quantity, right time, right location, right condition, right customer, and right

cost. (Zhang, Haifei; Ge, Hongwei; Yang, Jinlong; Tong, Yubing;, 2021)

To make modern logistics effective and efficient, route optimization is a key factor in an

ecommerce giant such as Amazon. Effective route optimization helps companies to maximize

completed package deliveries while introducing many conditions such as driver schedules,

available time, total stops, fulfillment estimates, and legal requirements. (OptimoRoute, 2021)

Delivering routing is about locating the most economical route for many different variables rather

than finding the shortest path from point A to point B. (OptimoRoute, 2021) In traditional economy,

delivery route were planned manually and were not cost effective and time consuming. In modern

economy, delivery routes are mostly planned with route optimization software for instance rabbit

in case of Amazon. This software improves routes for better efficiency and cost-effectiveness. It

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lowers the operational cost, fuel, and driver salary significantly. With modern route optimization

software, dispatchers or managers can save daily planning time and emphasis on developing

business or cultivating customer experience.

After the launch of the third-party sales platform Amazon Marketplace in 1999, Amazon is working

hard to solve logistics and delivery issues, especially, because the company was overwhelmed by

orders and consumers did not receiver orders on time during peak hours. (Zhu, 2018) During these

times, the cost of outsourcing transportation was also very high. Therefore, in the third year after

Amazon was established, it started its own fulfilment and delivery centers. These different centers

shipped 4,444 different types of products to improve efficiency and reduce costs. Moreover,

Amazon bought Kiva robot and combined it with its warehouse technology in 2012. It helped

amazon to improve its supply chain and reduce warehousing costs. It is estimated that Kiva robots

had cut operating expenses by 20%. (Zhu, 2018)

Amazon has different delivery services, such as Amazon Prime, Fulfillment by Amazon, and Prime

Air drone. In 2005, amazon launched the Amazon Prime service, which allows users to appreciate

two days of free delivery during the membership period, regardless of quantity or weight. It also

introduced, Fulfillment by Amazon (FBA) in 2007. (Zhu, 2018)This fulfillment platform is open to

third-part suppliers, and its inventory is integrated to Amazon’s global logistics network to charge

for pickup, packaging, and delivery services. This service covers 185 countries and regions. In 2013,

it launched the first-generation Prime Air drone. To use this service, the customer’s package

needed to weigh less than 5 pounds which is delivered within 30 minutes. (Zhu, 2018)

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In the United States alone, Amazon Logistics shipped 1.9 billion packages in 2019, a 155 percent

increase over the previous year as shown in Figure 1. (Statista, 2020) Moreover, as shown in figure

2, it has reported over 53.7 billion U.S. dollars in revenue worldwide. (SJ Consulting Group, 2020)

These secondary data provide information that there is an enormous opportunities for e-

commerce giant Amazon to lower cost, increase efficiency, adapt to the present and predict the

future with the benefit of route optimization. Hence, increasing the revenues and customer

satisfaction simultaneously.

Discussion
As modern logistics are using a complex form of logistics, it is currently dependent heavily on its

driver for last mile delivery. Driver wages and fuel costs alone account for 59.8% of the total

operating cost per mile in many industries. (OptimoRoute, 2021) Since, it is a crucial part of

delivery and massive share of the operating cost, optimizing route efficiently can save Amazon

huge amount.

Amazon drivers visit hundreds (or even thousands) of destinations or customers so, manually

planning a route is an inefficient and time-consuming solution, which is a classical approach. Since,

there are areas that need to be considered such as efficiency, scalability, accuracy, flexibility, and

robustness. The main objective of route optimization is to maximize revenue per drive and reduce

costs, scale your delivery team without extra dispatch or planning resources, improves customer

satisfaction, distributes workloads more effectively and improves employee retention and enables

you to replan quickly.

The secondary data related to package delivery and revenue that was previously discussed in result

section implies that amazon logistics costs are rising in parallel. As seen in the chart in Figure: 3,

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Amazon’s shipping and fulfilment costs have risen dramatically over the last decade, with overall

logistics costs more than 20 times between 2009 and 2019. (Richter, 2020). In 2019 alone,

company’s transportation costs reached 37.9 billion U.S. dollar and fulfillment costs (i.e., the cost

of operations and staff fulfillment centres) added 40.2 billion U.S. dollar to gigantic logistics

expenses. Since 2009, Amazon’s revenue has multiplied by more than 10 times, but this is not

enough to counterbalance the increase in logistics costs. (Richter, 2020) In 2009, transportation

and distribution costs represented 15.6 percent of net sales. By 2019, this proportion has

increased to 27.9 percent. (Richter, 2020) Certainly, it is due to Amazon building their own

warehouses and providing services such as Amazon Prime, Fulfillment by Amazon, and Amazon

drone delivery which has skyrocketed the logistics costs. In addition, customer satisfaction level

for amazon is declining slightly higher than previous years. From year 2000 to 2018 customer

satisfaction level was between the score of 88 to 82 measured according to American Customer

Satisfaction Index (ACSI). (Coppola, 2021) However, from 2019 till 2020, the graph shows it has

falling trend. It has fallen from score of 83 to 79. (Coppola, 2021) This decline seem to be

temporary due to COVID-19 pandemic since, large number of consumers have shifted their

purchasing behaviour from retail store to online store. Furthermore, it seems that Amazon is

struggling to equalize with the demand.

There are different computer science problems that arises while trying to optimize route for

instance travelling salesman problem, vehicle routing problem and in certain cases vehicle routing

problem with drones.

The travelling salesman problem discuss about the methods to find the shortest path between

different number of cities and returning to the original destination for a single salesman (in case

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of Amazon single delivery truck and different customer delivery locations). (Pedram Ataee) These

problems are solved with dynamic programming, simulated annealing, and 2-opt. However, this

can only solve the problem if there was only one vehicle for delivery. In case of Amazon, delivery

drivers need to make thousand of deliveries. So, this problem is only valid in case of single delivery

truck.

The second computer science problem is called Vehicle Routing Problem. It is used under

constraint conditions, to find out the optimal routing route for delivery from one or more initial

points to many cities or customer sites in different locations. (Zhang, Haifei; Ge, Hongwei; Yang,

Jinlong; Tong, Yubing;, 2021) The main objective of this problem is to find a route that result in

minimum total cost. It is a combination of one or more factors such as: Road, customer point,

depot, vehicle, transportation arrangement requirements and objectives to minimize the total

transportation costs. (Zhang, Haifei; Ge, Hongwei; Yang, Jinlong; Tong, Yubing;, 2021) There are

nine different vehicle routing problems. These are:

1. Capacitate Vehicle Routing Problem, CVRP

Capacitate Vehicle Routing Problem not only consider the location of the warehouse and

the customers’ but also the customer’s demand, number of vehicles and maximum load is

considered. In this case vehicle distribution route is designed to satisfy all customers

keeping the transportation cost minimum.

2. Vehicle Routing Problem with Time Window, VRPTW

Vehicle Routing Problem with Time Window is mostly suitable for solving problems that

has time constrains such as amazon next day delivery or even two hours delivery. In this

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case, for earliest and latest time of service is set for each demand and the vehicle should

start serving customer within this time frame.

3. Split Delivery Vehicle Routing Problem, SDVRP

In split vehicle routing problems, it is discussed about splitting the demand of customers

to more the one vehicle.

4. Dynamic Vehicle Routing Problem, DVRP

In addition to vehicle path, problem related to dynamic factors such as customer demand,

traffic conditions, weather conditions, personnel, vehicles and so on that causes problem

while optimizing routes are considered in dynamic vehicle routing problem.

5. Vehicle Routing Problem with Stochastic Demand, VRPSD

For a sequence of customers with arbitrary demand, routes need to plan to make vehicle

pass through each customer sites under conditions such as demand of goods, quantity of

delivery and so on. The main objective of Vehicle Routing Problem with Stochastic Demand

is to find the shortest distance, reduce cost, minimize the time travelled and so on.

6. Vehicle Routing Problem with Simultaneous Delivery Pickup, VRPSDP

Vehicle Routing Problem with Simultaneous Delivery Pickup is based on:

i. Pickup and Maximum distance length

In this case, all vehicle starts from main warehouse, deliver packages to customer,

and returns to the main warehouse. In this case, driving distance of the vehicle is

considered.

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ii. Pickup and Time limit

In this case, vehicle must return to the warehouse within the maximum travel time

after finishing the delivery.

7. Open Vehicle Routing Problem, OVRP

When there is no need to return to the original depot it is known as open vehicle routing

problem.

8. Green Vehicle Routing Problem, GVRP

With green vehicle routing problem goals such as energy conservation and carbon dioxide

emission reduction can be achieved. It requires considerable outline and planning of

freight point and distribution centers.

9. Multi-Trip Vehicle Routing Problem, MTVRP

In multi-trip vehicle routing problem, vehicle perform multiple trips.

These nine classifications of vehicle routing problem are the extensions of the basic vehicle routing

problems. It helps to reduce transportation costs.

Finally, Vehicle Routing Problem with Drones uses transportation vehicles with drones to

distribute packages to customers. In this case, drones are taken from and picked up by the trucks

at the depot or any of the customer sites. In this case, the aim is to minimize the maximum

duration of the routes. (Xingyin wang, Stefan Poikonen & Bruce Golden, 2016)

Additionally, Amazon is working with Massachusetts Institute of Technology to launch a

competition in which participants are given task to create a route-planning algorithm that should

consider the knowledge learned from the delivery driver. The idea is that drivers gradually

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understand their delivery routes and start to find out where they can park, places with poor traffic

conditions and other factors that are not considered by traditional optimization models for route

planning. In this competition, participants will receive historical delivery data from Amazon,

including location, package size, travel time, and distance between locations. According to the

Massachusetts Institute of Technology announcement, there will also be more than 400 driver-

determined route traces, which encode the driver’s proprietary technology. (Leonard, 2021)

Recommendations
It was found out that, Amazon is currently using Rabbit for route optimization. Even though there

is not enough detail related to this route optimization software used by Amazon. Most common

problem faced by route optimization software are computer science problems named Vehicle

Routing Problem and Vehicle Routing Problem with Drones for delivering packages used by

Fulfillment by Amazon and Prime Air Drones. Furthermore, the progress with drones is currently

in highlight after Amazon received certificate for drone delivery in 2020. The idea of launching

drone was started in 2012 by Amazon and still under research.

There are different algorithms that can be used to solve route optimization problems. These are

the mathematical formulas that can solve vehicle routing problems. They are designed to increase

efficiency by reducing cost or total time. There are different algorithms that can be used to solve

these problems. Mainly Vehicle routing Problem algorithms are divided into two parts. Exact

algorithm and Heuristic algorithms.

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Exact algorithms are further divided into four approaches:

i. Branch and bound approach

ii. Cutting planes approach

iii. Network flow approach

iv. Dynamic programming approach

Heuristic algorithms are divided into three types:

i. Construct heuristic

ii. Improved heuristics

iii. Sub-heuristic

These three heuristics are further divided into algorithm such as Ant colony algorithm, neural

network algorithm, Particle Swarm optimization, Simulated annealing algorithm, Genetic

algorithm, Tabu search algorithm and so on. Each algorithm has its own interpretation and

explanation of how the route optimization problems should be approached and solved. However,

the main purpose of using these different algorithms is to make proper change according to the

required parameters that help Amazon to cut their costs and delivery their packages within time

frame.

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Tables & Figures

Figure 1 Number of packages delivered by Amazon Logistics in the United States in 2018 and 2019

(in billion packages) * (Statista, 2020)

Figure 2 Revenue of Amazon Logistics worldwide from 2017 to 2019 (in billion U.S. dollars) (SJ

Consulting Group, 2020)

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Figure 3 Amazon's Escalating Logistics Costs (Richter, 2020)

Figure 4 U.S. customer satisfaction with Amazon.com from 2000 to 2020 (Coppola, 2021)

40
Statement of Authorship

I hereby declare that I am the sole author of this essay and that I have not used any sources other

than those listed in the bibliography and identified as references. I further declare that I have not

submitted this essay to any other lecturer in order to obtain a grade in other modules.

Soest, 04.06.2021

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