Amazon has spent billions of dollars in recent years expanding its fulfillment capacity and developing its own package delivery network – seeking to avoid a repeat of the 2013 holiday shipping debacle, when bad weather hit some customers. For delayed delivery until after Christmas.
But now a new storm has come here.
Labor shortages and supply-chain constraints have emerged as major bottlenecks for Amazon and others in the industry this holiday season. Forcing it to adjust to as many new realities as past holidays have opened Amazon’s eyes, this peak season will give the company its first real taste of what it will face in years to come.
“The biggest challenge for the next 10-20 years will be labor, and the only defense mechanism available is for companies to spend more money competing for these resources,” said Mark Wolfratt, president of MWPVL International, a Montreal-based supply chain and logistics consulting company that closely tracks Amazon.
The Amazon is not alone in grappling with labor shortages, but it is unusual in its size, ambition, and outlook. The company has skyrocketed to approximately 1.5 million employees overall, largely due to growth in its fulfillment network.
does not include More than 260,000 drivers delivering packages in Amazon-branded vansand as employees of independent companies in Amazon’s Delivery Service Partners (DSP) program. DSP drivers typically operate from Amazon delivery stations, which now number over 800 globally.
Direct employment growth also doesn’t count the company’s civilian package brigade, legions of gig workers who use their own vehicles to make deliveries through the Amazon Flex program.
COVID-19 accelerated demand for online shopping and delivery and led to permanent changes in consumer behaviour. 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 preview of the challenges in building the holiday.
Labor shortages represented Amazon’s primary constraint in the three months ended September 30, with the company’s chief financial officer, Brian Olsavsky, telling reporters that Amazon’s profits for the period fell well short of expectations. In the past, the biggest constraints have been storage space and fulfillment capacity, Olsavsky said.
“As a result, inventory placement was often redirected to fulfillment centers that had the labor to obtain this product,” he said. “This resulted in less-optimal placement, which leads to longer and more expensive transportation routes.”
Amazon is increasing spending on wages and incentives to attract and retain workers in the tight labor market. The company is also facing union challenges. Its Average starting salary in the US is now $18/hour,
Rising labor spending, price inflation and supply chain challenges drove nearly $2 billion in costs in the third quarter. Amazon expects these factors to add $4 billion in additional costs in the fourth quarter.
It all adds up to the first major test for Andy Jesse in his new role as Amazon CEO. In Company’s third quarter earnings releaseOf course, Jassi pledged that Amazon “will do whatever it takes to minimize the impact on customers and sales partners this holiday season.”
“This will be costly for us in the short term, but it is the right priority for our customers and partners,” he said.
Amazon has complicated matters for itself with automated HR systems struggling to keep pace with its growth, which is churning out more churn than necessary in its workforce, As documented in New York Times stories, one of the biggest issues has been Errors in its system for requesting and handling paid leaves,
Jesse acknowledged these issues in an interview at GeekWire Summit in October, when he was asked for examples of areas where the company could do better in its quest to be Earth’s best employer.
“During the pandemic, in our fulfillment centers, we had a system and a process for people to be able to request short- and long-term leave, and that process just wasn’t massive,” Jassi said. “We never expected there to be a pandemic, or demand like that, and it didn’t work out the way we wanted it to work.”
Pointing to news reports on the issue, Jassi said that sometimes there are “exaggerations and anecdotal references that do not reflect the whole.”
However, he added, “there is a lot we can continue to work on, and that we will work on.”
Meanwhile, workforce issues are putting a new wrinkle on the holiday season for Amazon and others.
long term workforce trends
It is not an easy business to start. The highly seasonal nature of e-commerce requires systems and facilities for high peak-to-average ratios, with increased demand for relatively short windows of time.
This represents “the biggest challenge of fulfillment for consumer shopping online”, said Wolfratt, Logistics Consultant at MWPVL International.
For example, he said, most Amazon fulfillment centers ship at least two times more units than on an average day. For others, busy days can bring in five to six times more volume than average days.
“This means that building design, materials management systems, staffing and transportation delivery systems need to be developed to handle peaks that typically occur over a 30-day time window,” Wolfratt explained.
Labor shortages are adding to the challenge, he said, giving retailers additional incentives to spread Black Friday over a longer period to reduce peak volumes. While the pandemic has exacerbated shortages, long-term trends were already headed this way, as an aging population depletes the pool of warehouse labor.
Amazon, for its part, is “highly dependent on an abundant supply of low-cost labor,” Wolfratt said.
When these employees aren’t available, he said, the company is forced to “sign up incentives by raising wages and offering fringe benefits, which permanently add to billions of dollars of recurring expenses for the business.” ”
Suddenly, it seems, the robots can’t get here fast enough. While technology exists to further automate fulfillment and delivery, Wulfraat said, “it will not change this current landscape for a good while, if ever.”