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Amazon has revamped its US operation, shifting from a centralised network to a regional set-up, with eight regions taking care of virtually all traffic within their range.
The new model is supposed to accelerate deliveries and reduce costs, although excess inventory could dent the cost equation.
Equipped with a broad selection of inventory, these regions are supposedly largely self-sufficient, but they can also ship items nationally when necessary.
The shift means goods travel shorter distances. Previously, Amazon had to ship a product from another part of the country if a local fulfilment centre didn’t have the item in stock, which meant longer distances and extended delivery times at elevated costs.
“Shorter travel distances mean lower cost to serve, less impact on the environment, and customers getting their orders faster,” said Amazon CEO Andy Jassy, adding that it put the company on track to ramp up its next-day and same-day deliveries.
To deliver more goods through its regional networks, Amazon has to position more inventory there. Inevitably this means higher inventory levels than in a national network, where more goods are held at central hubs.
“It will be interesting to see how the cost of inventory will develop for Amazon. Obviously transport costs come down in a regional set-up, but higher inventory cost can offset that,” commented John Haber, chief strategy officer of Transportation Insight.
He thought Amazon would be bound to leverage its experience in inventory placement and the technology it had applied in this arena.
The new set-up is the result of changes in processes and physical operations, as well as in placement and logistics software, according to Mr Jassy.
“Over the last several months, we’ve scrutinised every process path in our fulfilment centres and transport network and redesigned scores of processes and mechanisms, resulting in steady productivity gains and cost reductions over the last few quarters,” he said.
The push to a regional model runs counter to the developments at FedEx and UPS, however, noted Mr Haber. A former UPS employee, he recalled how the integrator went from 11 operational regions and more than 40 districts to just two regions and a much smaller number of district offices. FedEx is now centralising its operations by uniting its various divisions into one national network.
“The difference between Amazon and FedEx and UPS is that Amazon’s fulfilment business is so much bigger,” he said.
Does the switch to a regional model undermine Amazon’s ability to position itself as a third-party carrier? Mr Haber said: “It creates some uncertainty on its national aspirations to compete with FedEx and UPS.”
Before the pandemic, Amazon’s moves to draw third-party traffic into its networks were essentially on a regional level, he pointed out.
“I think regional providers should be paying close attention to what Amazon is doing.”
Another question is how the regional strategy is going to affect shippers. While they should benefit from faster deliveries and reduced transport costs, they will likely have to position more inventory across Amazon’s network. Moreover, they will likely have to deal with more split shipments. Mr Haber sees a distinct possibility of this.
“It is going to create more shipments. There is no way around that,” he said.
Shippers and competitors will be watching closely how Amazon’s revamped operation plays out over the coming weeks.
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