Dive Brief:
- Amazon recently completed a shift from a national fulfillment network to a regionalized model to reduce costs and boost delivery speeds, CEO Andy Jassy said in a letter to shareholders published Thursday.
- The complexity of Amazon's nationwide network grew as it expanded its warehouse footprint to meet pandemic-driven demand. The company has addressed this challenge by overhauling its inventory placement strategy and positioning goods closer to end customers.
- "We made significant internal changes (e.g. placement and logistics software, processes, physical operations) to create eight interconnected regions in smaller geographic areas," Jassy said. "Each of these regions has broad, relevant selection to operate in a largely self-sufficient way, while still being able to ship nationally when necessary."
Dive Insight:
Amazon doubled the size of its fulfillment network in roughly two years as the pandemic turbocharged e-commerce activity, but the path to maximizing efficiency between all of its new distribution nodes has been longer.
As customer demand cooled off in 2022, the company nixed plans for dozens of warehouses and trimmed its workforce to reduce operating costs. Amazon also shifted its Air network operations to a hub-centric model seen at FedEx and UPS, according to a report from the Chaddick Institute for Metropolitan Development.
"Over the last several months, we’ve scrutinized every process path in our fulfillment centers and transportation network and redesigned scores of processes and mechanisms, resulting in steady productivity gains and cost reductions over the last few quarters," Jassy said.
Under its previous national distribution model, Amazon would have to ship an ordered product from other parts of the country if a local fulfillment center didn't have it in stock. This increased the company's cost to fulfill the order while lengthening delivery times.
With its regionalized fulfillment model now in place, Amazon is looking to ramp up its next-day and same-day delivery activity. Jassy said the company is on pace to have its fastest delivery speeds for Prime members ever in 2023.
"Shorter travel distances mean lower cost to serve, less impact on the environment, and customers getting their orders faster," he said.
The inefficiencies of the national model explains the challenges Amazon has seen over the past year, RMW Commerce Consulting founder and CEO Rick Watson said in a LinkedIn post.
"They rebalanced their entire inventory footprint and developed and adopted a new supply chain operating model," Watson said. "That's quite a job."
