For the three months closing on June 30, Amazon reports its most profitable quarter yet:

Net sales increased 31% to $30.4 billion in the second quarter, compared with $23.2 billion in second quarter 2015. The favorable impact from year-over-year changes in foreign exchange rates throughout the quarter on net sales was $166 million. 

Operating income was $1.3 billion in the second quarter, compared with $464 million in second quarter 2015. 

Net income was $857 million in the second quarter, or $1.78 per diluted share, compared with $92 million, or $0.19 per diluted share, in second quarter 2015.

No matter what, a great result... especially given Amazon's keen bias toward investing in the future. But before you sell all your Macy's, Walmart, and Kroger stock, recognize that a big portion of this extraordinary abundance is due to Amazon Web Services, not online retailing.  According to Geekwire:

Amazon Web Services posted record revenue and operating income in the second quarter ended June 30, as the world’s largest cloud-services organization continued to buoy the broader company. AWS accounted for the largest share yet of Amazon’s net sales: 9.5 percent. It also accounted for fully 56 percent of Amazon’s operating income.

Still, Amazon's domestic online retail sales improved a not-shabby 30 percent. Sales outside the US were up 28 percent for the quarter.  This was before July's Prime Day.

Walmart will not report its second quarter until mid-August, but to give you a sense of Amazon oranges to Walmart apricots, here is Walmart's first quarter results:

• Total revenue was $115.9 billion. On a constant currency basis, total revenue was $119.4 billion, an increase of 4.0%. 
• Walmart U.S. delivered positive comp sales for the seventh consecutive quarter, up 1.0%, driven by the sixth consecutive quarter of positive traffic, up 1.5%.
• Net sales at Walmart International reached $28.1 billion. Excluding currency, net sales were $31.6 billion, an increase of 4.3%, and operating income increased 22%. Globally, on a constant currency basis, e-commerce sales and GMV increased 7.0% and 7.5%, respectively. 
• Operating cash flow was $6.2 billion and free cash flow was $4.0 billion, both higher than last year due to solid operating performance and improved working capital management. 
• Consolidated operating income declined 7.1%, as planned investments in people and technology, as well as currency exchange rate fluctuations impacted results. Excluding currency, operating income decreased by 4.6%. 

As a matter of retail sales, Walmart remains the much larger entity: it's non-domestic sales alone nearly equal Amazon's global aggregate. Every year since 2009 Walmart has had net sales of over $400 billion (chart above).  The 2015 total was $482.2. But the smaller, newer Amazon is growing much faster... and the bright young thing often claims our attention as more mature looks and behavior does not. Hence the market value of Amazon exceeds that of Walmart.

Another leading indicator of supply chain rocking-and-rolling: UPS second-quarter results highlight the current over-capacity in freight and clamoring demand for delivery.

The Wall Street Journal reports:

United Parcel Service Inc. reported lower than expected earnings in its Supply Chain and Freight segment Friday. Revenue increased by more than 13% to $2.5 billion in part from the acquisition of Coyote Logistics, but profit dropped more than 7% from $207 million to $192 million in what executives said is a soft freight shipping market...

Meanwhile, on the delivery-side of the business, Reuters reports:

UPS revenue at its core U.S. domestic package business rose 2.4 percent on the year to just over $9 billion. Lower fuel costs and technology improvements helped UPS cut costs by 0.2 percent per package in the second quarter. [The UPS international package segment grew 11 percent (PJP)] Like other package delivery companies, UPS has benefited from a rapid rise in ecommerce, but has also struggled to bring down the extra costs associated with making stops at individual residential addresses rather than at businesses.

 Especially on the domestic side, some of the UPS good news is an echo of Amazon's good news.

According to Fortune:

Amazon spent $3.36 billion on shipping costs over the quarter, up 44% from the same quarter last year. The company has been looking to take over parts of the shipping process over the past year, leasing trucks, planes, and even considering drones to build its own shipping network. If Amazon is able to build this shipping network, it could rely less on the multinational shipping giants, such as UPS and FedEx, and potentially avoid some of the costs provided by these companies.

Given the kind of growth that Amazon seeks -- even needs -- I expect shipping costs will continue to expand regardless of internal options deployed over the next three-to-five years (or more).  Building up internal shipping capacity could actually magnify these costs in the near term.

Which in a potentially paradoxical manner, unveils a fundamental strength of that once sexy, still handsome player from Bentonville. The Walmart supply chain is already forward deployed. Instead of delivery, it can focus on pick-up... preserving its advantage in less expensive distribution modalities and shifting the extraordinary expense of last mile fulfillment to consumers themselves.

In the right hands with the right concepts, this is not just a cost (price) advantage, but could also become a speed, customization, and cross-selling advantage.

The Sacramento Bee reports:

The U.S. Postal Service plans to continue delivering groceries to homes in the Sacramento area and expand its experimental business model to more markets.   

Speaking to the success of the initial testing, Patton said, “The volume of deliveries is steadily growing and our on-time performance is more than 90 percent.” 

In partnership with AmazonFresh, the delivery service has the Postal Service’s fleet delivering fresh groceries and prepackaged goods to customers in 38 experimental ZIP codes, including metropolitan areas such as Sacramento, Los Angeles, San Diego and New York City.   

Meiko Patton, Sacramento region Postal Service spokeswoman, said the market test has been operating in Sacramento since mid-March 2016.   

Deliveries can be made to ZIP codes as far north as the Chico area, west to Vacaville, east to Pollock Pines and south to Fresno,

A survey of 257 carriers and owner-operators by DAT Solutions finds:

Most drivers spend 3 to 4 hours waiting to get loaded or unloaded... Of the carriers surveyed, 54% of them said that they wait between 3 to 5 hours every time they're at a shipper’s dock. Another 9% said that they wait more than 5 hours on average.

More detail from DCVelocity 

Bloomberg and others are reporting that UPS will test "standard" Saturday home delivery:

The initial test markets include Atlanta, Philadelphia and Los Angeles, according to a person briefed on the company’s plans. The service is expected to start this summer. 

While its Teamsters-represented drivers typically work Monday through Friday, UPS’s contract with the union lets it evaluate new services without violating work rules, Gaut said. A spokesman for the Teamsters’ package division, which represents UPS workers, declined to comment on the Saturday tests.

The Atlanta-based shipper is remaking its worldwide network to accommodate online shopping while watching potential competitors move into its industry, including courier services now pitching same-day delivery. U.S. e-commerce sales totaled $343 billion last year, according to consulting firm AlixPartners, and had a compound annual growth rate of 17 percent from 2000 through 2015.

UPS -- and others -- are working to determine what sort of dense demand is necessary to support the extra expense associated with this sort of expanded service.  When can what be delivered to where and still turn a profit?

On June 28 the Securities and Exchange Commission, "proposed a new rule that would require registered investment advisers to adopt and implement written business continuity and transition plans. The proposed rule is designed to ensure that investment advisers have plans in place to address operational and other risks related to a significant disruption in the adviser’s operations in order to minimize client and investor harm."

The rule has nothing directly to do with supply chains.  I link it here mostly as another example of the increasing attention that is being given to risk and resilience.  The proposed rule specifically notes:

It is critical for investment advisers to focus on resiliency so that they can continue to provide services to their clients when events impact the availability of systems, facilities, and staff. The ability to recover such systems, including third-party vendor provided platforms and services, and business operations in a timeframe that meets business requirements is important to mitigating the consequences of disruptive events.

The proposed rule gives particular attention to each of the following five elements:

• maintenance of critical operations and systems, and the protection, backup, and recovery of data; 
• pre-arranged alternate physical location(s) of facilities and/or employees;
• communications with clients, employees, service providers, and regulators;
• identification and assessment of third-party services critical to the operation;
• plan of transition that accounts for the possible winding down of the business or the transition of the business to others in the event the adviser is unable to continue providing services. 

While considerably different in context, attention to each of these elements aimed at financial advisers would also enhance the resilience of supply chains.

Consistent with the SEC culture of investor transparency, the rule also proposes to make the business continuity plan substantially available to the public.

The proposed SEC rule can be found here.

Demand for industrial space is sharply increasing in most US urban areas and supply is not keeping up.

“The good economy and the change in distribution logistics has led to an increased demand,” said Jeffrey Havsy, CBRE’s chief economist in the Americas. “Now it’s more about having the right products near the customer, and that means more points of distribution rather than a single point of distribution.”

For example, in the ecommerce hot zone of greater Los Angeles CBRE reports that vacancy rates for warehouse-like space is at an all time low of 1.1 percent. Nearly forty percent of all new space under construction is pre-leased.

Part of the problem with supply meeting demand relates to construction capacity -- including available and appropriate real-estate close in to dense and affluent residential areas. '

A related CBRE report concludes, "The supply chain is where real estate and logistics intersect and companies are rethinking how and where to strategically locate their distribution and fulfillment facilities."

Original is a bit larger

A helpful distillation of unfolding reality from a much longer piece in today's Wall Street Journal:

The transformation of US retail malls, "highlights the way e-commerce has fractured retail logistics, with demand to deliver truckloads of goods to outlets giving way to more nimble distribution of lighter loads to smaller storefronts and distribution centers. The challenge for shipping providers is making those sorts of deliveries with the efficiency that comes with bigger loads for big clients."

Implicit in efficiency, but worth making explicit: And at a sustainable financial margin.

Decentralization and diversification of retail networks should produce a more resilient system than the hub-and-spoke model that has often been the goal (if not the operating reality) for the last generation.  At least this seems likely where there is sufficient demand volume to achieve sustainable revenue on thin margins.

One example: Reston Town Center in wealthy Fairfax County, Virginia. See map and store directory above. (I apologize for the fuzzy quality, it is the best I could find.)This is a major retail destination -- sans any Department Store.  Consider the proportion of restaurants and entertainment compared to other retail.  Busy, busy, busy.  According to the property manager, RTC has "Four million square feet of office space has a remarkable vacancy rate of less than one percent. Plus, its office space rents for $20 more per square foot than office developments only blocks away."  The retail mix is key to this success.  This mix reflects demand-pull of affluent residents.

Where population or cash (or both) are less abundant, it seems to me we are likely to see increasing supply network centralization and "optimization" (less diversity), in order to justify any investment of capital.

Tomorrow -- July 12 -- starts a now five day "celebration" of Amazon's Prime Day.  This is the company's effort to create online buzz and buying behavior analogous to the offline Black Friday start of the Christmas buying season... loosely associated with Amazon's founding date.

Once again joining the party -- with all the enthusiasm of a jealous, older half-sibling -- Walmart has announced its own set of Prime Day benefits.

Basically it's the oldest of marketing ploys, offering -- or at least implying -- deep discounts to drive traffic and thereby generate market interest, a predisposition to consume, and set the stage for purchases beyond the discounted items.  Offer a turkey for $5 and depend on customers to buy the rest of their Thanksgiving menu while they are in the store.

Prime Day discounts are only available to those who have paid a $99 annual subscription that guarantees two-day shipping for no additional cost... yet another tool for prompting a predisposition to purchase.  (The more I buy, the more I justify that subscription expense. Human psychology is predictable, but not always "rational" in the usual academic meaning of the term.)

According to Amazon and Money Magazine, last year's first stab at Prime Day exceeded expectations:

Eighteen percent more orders placed worldwide on its "Prime Day" than on last year's (2014) Black Friday, which was the biggest ever. 

The online retailer also said it got more new Prime subscribers for the Wednesday sale than any other day in the company's 20-year history. 

"Customers ordered 34.4 million items across Prime-eligible countries, breaking all Black Friday records with 398 items ordered per second," Amazon said. "Prime Day was also a great savings day -- members globally saved millions on deals. Customers ordered hundreds of thousands of Amazon devices -- making it the largest device sales day ever worldwide."

With all of this organized around the promise of "free" shipping, the supply chain implications are enormous.

Karl Siebrecht argues that the only effective way of competing with Amazon is to reconceive -- and more to the point, re-build -- distribution networks to focus on satisfying customer demand as the primus inter pares of goals. This often involves decentralization and diversification: reversing mainstream thinking of the last thirty-some years.

UPDATE:  Amazon says Prime Day purchases were up sixty percent over last year. AdAge reports that several other retailers saw same day online traffic triple or more.

Honeywell is a Fortune 100 company founded in 1927, its current form is the product of a late 20th Century acquisition by Allied-Signal, itself a 1985 merger of firms with roots reaching back to the late 19th Century.  

Honeywell usually has annual operating revenue of more or less $40 billion and a healthy profit margin.  A going concern for sure.

Automation and Control Systems (ACS) is one of three Honeywell Strategic Business Units and is an increasingly prominent player in supply chain visualization and management tools.  According to DC Velocity, Honeywell:

will acquire material handling automation provider Intelligrated Systems Inc. from its private equity owner for $1.5 billion, triggering a second wave of consolidation in the material-handling sector just two weeks after rival systems integrator Dematic Corp. was sold.

With the two largest U.S.-based material handling suppliers trading hands within a month, the changes show a rush by automation providers to stay ahead of fast-growing demand for e-commerce and home delivery. 

Germany's Kion Group AG acquired Atlanta-based systems integrator Dematic Corp. for $2.1 billion on June 21, in a effort to extend its core businesses of forklifts beyond basic warehouse technology into the broader world of logistics systems integration...

Intelligrated's warehouse execution system (WES) software and order fulfillment technologies will complement Honeywell's product lines in mobile computers, scanning and auto-identification, and voice automation technology, the Morris Plains, N.J.-based industrial and technology giant said in its statement.

In the 1920's and 30's Honeywell became a major company -- and a household brand -- by innovation and  development of thermostats.  For the first time environmental signals were effectively processed to automatically direct the output of heating systems.  The company is now putting together systems to gather and apply pull-signals to automatically manage the output of supply chains.

In terms of digital pull-signals, does it surprise that, according to Market Watch, Starbucks "had $1.2 billion loaded onto Starbucks cards and the Starbucks mobile app as of the first quarter of 2016?"

The Starbucks figure exceeds the deposits at many financial institutions, including California Republic Bancorp ($1.01 billion), Mercantile Bank Corp. ($680 million) and Discover Financial Services ($470 million).

It shouldn't have, but it surprised me.

Amazon is starting to offer its own line of private label groceries.  According to CNET:

The e-commerce giant has quietly launched its first-ever private-label foods on its website, now selling Happy Belly coffee and Mama Bear baby food. A company spokesperson confirmed that both products are made by Amazon and went on sale in the past few days. The products are only available to Amazon Prime members in the US.

Certainly these are just baby steps into the huge private label marketplace, but it signals strategic intention.

The move comes at the same time that Walmart is doubling down on a program directly competitive with Amazon Prime.  According to the company:

A free 30-day trial of ShippingPass, which gives you unlimited two-day shipping. If you already have ShippingPass, there’s also good news -- we’re going to give you an extra month for free, so look out for an email. ShippingPass is about half the price of similar programs out there at just $49 a year

Amazon's "similar program" is priced at $99 per year.  In the spirit of the Fourth of July holiday, Walmart is inviting customers to declare independence from "others". Worth remembering the Declaration of Independence was adopted in 1776.  The War of Independence ended in 1783.  In 1812 the Brits occupied Washington DC and set fire to the White House.

And don't neglect Kroger's Checklist program.  If Amazon is King George, maybe Walmart is Benjamin Franklin and Kroger is Sam Adams.

We're still in the early years of the revolution.