Amazon Tweaks Logistics Strategy to Streamline Operations

Out with the old, in with the new! 🎉

Amazon is reportedly shutting down some of its older warehouses and retiring a few Boeing 767s in its air fleet as part of a larger effort to lower costs while improving each stage of the company’s fulfillment process.

As previously reported, Amazon nearly doubled its fulfillment network to meet the heightened customer demand during the pandemic. The company spent 30% of its $60-billion capital investment on distribution and 25% on transportation, accounting for more than half of its total capital investments.

However, by early 2022, eCommerce demand began to decline as consumers cut back on online spending and returned to in-store shopping. This has resulted in excess capacity that contributed to Amazon’s $3.8B profit loss in Q1 and another $2B in Q2.

Amazon CEO Andy Jassy remains confident about the future of the retail giant’s logistics arm stating:

“Today, as we’re no longer chasing physical or staffing capacity, our teams are squarely focused on improving productivity and cost efficiencies throughout our fulfillment network,” 

“This may take some time, particularly as we work through ongoing inflationary and supply chain pressures, but we see encouraging progress on a number of customer experience dimensions, including delivery speed performance as we’re now approaching levels not seen since the months immediately preceding the pandemic in early 2020,” Jassy added.

Amazon Attempts to Rightsize its Fulfillment Empire

To reduce operational costs and capital expenditures, Amazon is trimming down its warehouse footprint across the US. 

A report from MWPL International shows that, as of September 2022, Amazon has closed over 20 logistics centers and canceled or postponed the openings of 50 more sites. Most of these sites were delivery stations, where associates sorted orders by ZIP code and then dispatched them to customers via couriers.

Sites that are shutting down are either being subleased or having their operations consolidated into a nearby facility to lower outbound transportation expense. 

Facility closures might have also led to fewer third-party delivery partners this year. In 2021, Amazon added 670 delivery service partners in the US, but now it plans on curbing the network’s growth by 33%, just adding 451 partners in 2022.

With fewer recruits, however, the company will be able to focus on improving the quality of service that their partners provide, which could mean faster delivery times.

Aside from Amazon’s shrinking warehouse network, the growth of its air cargo fleet has also slowed in recent months.

Research from DePaul University shows that Amazon Air’s total flight activity only increased by 3.8% from August 2021 to March 2022, 10.5% lower than the daily flights recorded during the previous six months. This move makes sense from a financial and operational perspective, given that there are now fewer facilities to supply inventory to and fewer packages to move through its delivery network as demand declines.

“The natural business reaction to that is to pause, because your margin for error in an environment of complexity and increasing costs shrinks, and the cost of a mistake rises,”Jason Tolliver of Cushman & Wakefield said.

However, more streamlined operations don’t always result in greater customer satisfaction, especially for people who have come to expect same-day or two-day delivery.

For example, consolidating last-mile delivery stations into other facilities (usually located in the middle of highly populated sites) to cut costs might lead to longer delivery times for customers on the outskirts of metropolitan areas.

And because there are fewer delivery stations, it could even lead to more orders not delivered directly to customers’ homes, forcing them to step out of their house to pick up their parcel from a designated drop-off point. This defeats Amazon’s speedy port-to-porch delivery promise, which made the company almost as good as UPS and FedEx.

With Amazon scaling back its warehouse footprint and air deliveries this year, are we more likely to order from other sites that offer instant deliveries even if that means paying for shipping? Or, are we more likely to have to wait longer than 1 to 2 days? 🤔

It appears that Amazon is not only trying to rein in logistics spending, but also control customers’ same-day shipping expectations in an attempt to keep costs low. 

Customers within metropolitan areas will still likely receive their orders within hours, but those outside of city centers might have to wait longer than a day or two. But this could all be temporary, as Amazon is still trying to return to “a healthy level of profitability” after inflation and supply chain challenges took a huge chunk out of its Q1-Q2 2022 earnings.

Amazon Has Bigger Plans for 2023 

Although it seems that Amazon remains on track with its rightsizing plans, Wall Street Journal recently reported that the eComm giant is looking to add three new mega-warehouses in the US.

These include:

• A five-story, 3.1 million-square foot distribution center in Niagara, New York
• A five-story, 3.8 million-square foot warehouse in Loveland, Colorado
• A five-story 4.1 million-square foot mega-facility in Ontario, California 

In a press statement, an Amazon rep said, “While we’re closing some of our older sites, we’re also enhancing some of our facilities and we continue to open new sites as well.” MWPVL estimates that Amazon will open 250 more distribution centers in 2022.

Aside from building these mega warehouses, Amazon has also acquired Cloostermans, a Belgian machinery and robotics manufacturer, to automate aspects of its fulfillment operations, such as moving heavy pallets and packaging products for delivery.

And just last month, Amazon hired Hawaiian Airlines to fly 10 Airbus A330 cargo planes for its air network in 2023. The converted freighters will replace the older Boeing 767s.

“These A330-300s will not only be the first of their kind in our fleet, they’ll also be the newest, largest aircraft for Amazon Air, allowing us to deliver more customer packages with each flight,” Director of Amazon Global Air Fleet Philippe Karam said in an Airbus press release.

The widebody jets are slightly larger than Boeing 767s and have a high volumetric payload capability that makes them ideal for carrying large amounts of packages in express delivery networks. 

For improved overnight operations across the US, Amazon launched a new air hub facility at the Cincinnati/Northern Kentucky International Airport. The facility can handle 44 flights daily, a 71% increase from March, according to researchers at DePaul University. It also operates similar to UPS, FedEX, and DHL with its synchronized scheduling and fast aircraft-to-aircraft transfers to ensure same-day deliveries in Kentucky, Indiana, and Ohio.

A few weeks back, we have reported that Amazon’s doubling down on its logistics expansion plans to possibly provide support for its new low-cost logistics service called Amazon Warehousing and Distribution (AWD) and its Buy with Prime program.

In 2023, AWD won’t just serve Amazon fulfillment centers, but it’s also expected to replenish inventory to non-Amazon locations, including to fulfill brick-and-mortar stores. 

So, once these new mega warehouses and freighters are fully operational, both Amazon and non-Amazon sellers can expect a significant improvement to transit times.

DePaul University researchers estimate that sellers who ship via Amazon Air from Cincinnati and have the goods ready for shipment by noon could have those packages delivered by next day to 25 largest US metropolitan regions. And they could also have the packages delivered by sometime the next day to approximately 95% of the mainland’s population. 

Clearly, with these expansion plans for 2023, Amazon’s not only looking to please shoppers with a better delivery promise, but also to make Prime a more attractive logistics option for sellers, a crucial move amid increasing competition.

• In April, Shopify acquired Deliverr to bolster its own fulfillment network, i.e., offer 1 to 2-day delivery.
• In May, CNBC reported that Flexport is on track for $5B in revenue, positioning itself as a new top player in the logistics space.
• In October, the Financial Times released a scoop uncovering TikTok’s eComm expansion plans in the US.