Amazon’s growth has skyrocketed throughout the pandemic, doubling the size of its operations and nearly doubling its workforce over a two-year period. While some of Amazon’s fulfillment network hires during the quarter covered employee absences amid the omicron variant surge, the company quickly transitioned from being understaffed to being overstaffed, resulting in lower productivity, reports Supply Chain Dive (April 29, 2022).
“Capacity decisions are made years in advance, and we made conscious decisions in 2020 and early 2021 to not let space be a constraint on our business,” said Amazon’s CFO. “During the pandemic, we were facing not only unprecedented demand, but also extended lead times on new capacity, and we built towards the high end of a very volatile demand outlook. ”
The tide has turned, however, as consumers have slowed their e-commerce spending activity in recent months. Net sales at Amazon’s online stores dropped 3% last quarter, while Amazon’s fulfillment expenses jumped nearly 23%. UPS, which counts Amazon as its largest customer, reported an unexpected drop in home delivery volume as March e-commerce sales saw their weakest gain in more than three years.
Amazon aims to rightsize its massive fulfillment network in response to demand now falling back to pre-pandemic levels. But this process won’t happen overnight. It will take several quarters for Amazon to grow into the current capacity it has built out. In July, the company was focused squarely on adding capacity to meet the current high customer demand. Three months later, labor was the company’s primary capacity constraint, creating $4 billion in added costs. In early February, omicron added to Amazon’s staffing challenges.
“We hired more people and then found ourselves overstaffed when the omicron variant subsided rather quickly, at least from our standpoint in warehouses,” said the CFO. “So, the issue has switched from disruption to productivity losses to overcapacity on labor.”
One issue that has been present throughout the past year is inflation, specifically for transportation costs and wages. The war in Ukraine has amplified inflationary pressures as fuel costs have climbed, and Amazon is looking for ways to offset the higher prices. This year, it hiked the price of its U.S. Prime membership and introduced its first fuel and inflation surcharge for sellers using its fulfillment services.
Classroom discussion questions:
- Summarize Amazon’s capacity issues and their genesis.
- Which of the 6 tactics for matching capacity to demand listed in Supplement 7 of your Heizer/Render/Munson text might Amazon apply?