Amazon (AMZN 3.89%) spent more than $84 billion fulfilling orders in 2022. It hopes getting packages to customers' doors won't cost it as much in 2023.
After quickly doubling the footprint of its fulfillment network in two years and rapidly expanding its transportation network, Amazon saw its fulfillment expense more than double from 2019 to 2022.
CEO Andy Jassy talked about the cost of fulfillment in his annual letter to shareholders. Here are three ways the company is aiming to improve its biggest operating expense.
1. Warehouse-level and transportation efficiencies
With the rapid expansion of the fulfillment and transportation networks, Amazon saw a stark decline in its productivity and efficiency in each warehouse or truck. It started taking action to improve processes and mechanisms midyear last year, but there's still room to improve. The cost structure of its fulfillment network remains above pre-pandemic levels as of the end of the fourth quarter.
CFO Brian Olsavsky told analysts that the fourth quarter may only bring modest improvements in efficiency, and the goal is to improve quickly in 2023. While it outperformed its expectations in productivity gains in its transportation network in the fourth quarter, the fulfillment network merely met its low expectations. Still, trucks no longer leaving distribution centers half-full is a big plus.
As the company improves the operations at each individual warehouse, sortation center, and distribution center, investors should see better leverage of the fixed costs Amazon signed up for in 2020 and 2021.
NASDAQ: AMZN
Key Data Points
2. Network efficiencies
Amazon recently completely reorganized its fulfillment network to take advantage of the density of the network in the United States. The move should help reduce the average distance an item has to travel to a customer's door, which in turn lowers the cost of fulfillment.
Amazon used to operate one big nationwide network, shipping items across the country to fill inventory needs in one warehouse. As the network footprint doubled, the complexity of shipping items from one warehouse to another grew exponentially, increasing costs and shipping times.
The company switched to a regional model, taking advantage of the increased density of the network. It operates eight regions in the country, which can operate mostly independently. But Amazon's still capable of shipping items from one region to a customer in another region in cases where its inventory in that region is insufficient.
Lower costs and faster shipping is a recipe for happy customers and happy investors.
3. Artificial intelligence
Amazon has long relied on artificial intelligence (AI) to improve the efficiency of its warehouses and overall network.
Amazon uses algorithms to determine how a robot will move around its warehouses and the order of items for workers to pick. It also has algorithms it uses to predict the likelihood of needing to access the same items in the near future.
The problem Amazon is most focused on solving with AI is managing inventory across its fulfillment network. Jassy said it's continuing to improve its machine learning algorithms to predict what customers in different parts of the county will order. Then it can put inventory in the right place at the right time, improving efficiencies.
Better algorithms can ensure the supply chain and fulfillment network operate as efficiently as possible. Not only that, but it ensures customers remain happy by keeping the items in stock when there's a rush of orders in a region and they need their orders quickly.
Improved operating efficiency should bolster Amazon
Amazon's $84 billion fulfillment expense is absolutely massive. Even a 5% improvement in operating efficiency in fulfillment would translate into billions in additional operating income. That could have a massive impact on Amazon's earnings per share, which have come under pressure since the start of 2022. But there's good reason for investors to remain optimistic this year.
