Amazon has spent billions of dollars on expanding its fulfillment capacity and developing its own parcel delivery network in recent years – to avoid a recurrence of the holiday shipping debacle in 2013, when bad weather delayed deliveries until after Christmas for some customers.
But now a new storm is here.
Labor shortages and supply chain constraints have emerged as the big bottlenecks this holiday season for Amazon and others in the industry. Just like previous vacations, Amazon opened its eyes to new realities and forced it to adapt, this high season will give the company its first real taste of what it will face in the years to come.
“The overriding challenge for the next 10-20 years will be labor, and the only available defense mechanism is for companies to spend more money to compete for these resources,” said Marc Wulfraat, president of MWPVL International, a Montreal-based supply chain. and logistics consulting firm that follows Amazon closely.
Amazon is far from alone in struggling with labor shortages, but it is unusual in its size, ambition and approach. The company has grown to nearly 1.5 million employees overall, mainly due to growth in its fulfillment network.
It does not include the more than 260,000 drivers who deliver packages in Amazon vans and uniforms as employees of independent companies in Amazon’s Delivery Service Partners (DSP) program. DSP drivers typically operate from Amazon Delivery Stations, which now number more than 800 globally.
The direct growth in employment also does not count the company’s citizen package brigade, the legions of concert workers who use their own vehicles to deliver through the Amazon Flex program.
COVID-19 accelerated the demand for online shopping and delivery and created lasting changes in consumer behavior. The question now is whether Amazon can continue to expand and maintain its workforce to meet its needs.
Billions in additional spending
Amazon got a taste of the challenges leading up to the holiday.
Labor shortages represented Amazon’s primary limitation in the three months ending Sept. 30, the company’s CFO Brian Olsavsky told reporters after Amazon’s profit for the period was well below expectations. In the past, the biggest constraints have been storage space and fulfillment capacity, Olsavsky said.
“As a result, warehouse location was often redirected to fulfillment centers that had the manpower to receive this product,” he said. “This resulted in less optimal location, leading to longer and more expensive transportation routes.”
Amazon has increased spending on wages and incentives to attract and retain workers in the tight labor market. The company also averts union challenges. Its average starting salary in the United States is now $ 18 / hour.
Rising labor costs, price inflation and supply chain challenges together added about $ 2 billion in third-quarter costs. Amazon expected these factors to add an additional $ 4 billion in additional costs in the fourth quarter.
All of this sets the stage for the first major test for Andy Jassy in his new role as Amazon CEO. In the company’s third-quarter earnings announcement, Jassy promised that Amazon will do “whatever it takes to minimize the impact on customers and sales partners this holiday season.”
“It’s going to be expensive for us in the short term, but it’s the right priority for our customers and partners,” he said.
Amazon has complicated matters for itself with automated HR systems that have struggled to keep up with its growth, leading to more than necessary layoffs in its workforce, as documented in stories by the New York Times. One of the biggest problems has been errors in its system for requesting and managing paid leave.
Jassy acknowledged these issues in an interview at the GeekWire Summit in October, when asked about examples of areas where the company could do better in its quest to be Earth’s best employer.
“During the pandemic, we had in our fulfillment centers a system and a process around that people could request short- and long-term leave, and the process just does not scale,” Jassy said. “We never expected to have a pandemic or to have such a demand, and it did not work the way we wanted it to work.”
Referring to the news reports on the issue, Jassy said that sometimes there are “exaggerations and anecdotal references that do not reflect the whole.”
However, he added, “there are lots we can continue to work on and that we will work on.”
Meanwhile, workforce issues are putting a new wrinkle into the holiday season for Amazon and others.
Long-term labor force trends
It’s not an easy business to begin with. The very seasonal nature of e-commerce requires that systems and facilities be designed for high top-to-average ratios, where demand increases in relatively small periods of time.
This represents “the biggest single challenge for meeting online consumer commerce,” said Wulfraat, logistics consultant at MWPVL International.
For example, he said, most Amazon fulfillment centers ship at least twice the number of units on a peak day, as they do on an average day. For others, peak days can yield five to six times more volume than average days.
“This means that the building design, material handling systems, staffing and transport delivery system must be developed to handle peak loads that typically occur over a 30-day time window,” Wulfraat explained.
The shortage of labor increases the challenge and gives retailers an additional incentive to spread Black Friday over a longer period of time to reduce peak volumes, he said. While the pandemic has exacerbated the shortage, long-term trends were already on the way this way as the aging population reduces the pool of warehouse labor.
Amazon, for its part, is “extremely dependent on an abundant supply of low-cost labor,” Wulfraat said.
When these workers are not available, he said, the company is “forced to respond by raising wages and offering perks and signing incentives that add billions of dollars of recurring expenses to the eternity of the company.”
Suddenly, it seems like the robots can’t get here fast enough. While the technology exists to further automate fulfillment and delivery, Wulfraat said, “it will not change this current landscape for a good while, if ever.”