Supply Chain Matters highlights Amazon CEO’s latest letter to shareholders outlining performance, operational and strategic business goals moving forward in 2023 and beyond.

 

Letter to Shareholders

Amazon CEO Andy Jassy penned his second letter to the company’s shareholders this weekThis year’s communication comes as this icon of online continues to respond to changing online markets and overall business performance

In the correspondence Jassy indicated: “Despite 2022 being one of the harder macroeconomic years in recent memory, and with some of our own operating challenges to boot, we still found a way to grow demand (on top of the unprecedented growth we experienced in the first half of the pandemic).

The first part of the letter places a lot of emphasis on the Amazon AWS Cloud services businesses which Jassy oversaw before becoming CEO. He indicated that if the company had not significantly invested in this unit in 2008-2009, Amazon would be a far different and likely less profitable company.

As Supply Chain Matters has frequently observed, considerable profits generated by the AWS unit helped to offset investments and operating expenses from the worldwide retail business unit.

Jassy acknowledged that over the past several months, the senior management team performed a deep analysis across the company, business by business, to address the question as to whether each business and initiative had the longer-term potential to drive sufficient revenue, operating income, free cash flow and returns on invested capital. That led to the decision to eliminate upwards of 27,000 corporate roles. The management committee further elected to mandate that employees in staff and leadership roles return to physical offices at a minimum of three days per week.

Cost Savings in Customer Fulfillment

For the Retail business unit and specifically supply chain customer fulfillment, Jassy pointed to in text bolding, several changes that would lead meaningful improvements in fulfillment costs and speed of delivery. Indicated was that over the last several months, every process path in fulfillment and transportation was scrutinized with scores of processes now redesigned resulting in productivity gains and added cost reductions. The result is described as moving from a national fulfillment network focused to a more regionalized fulfillment focus.

Included are structural changes around the organization of the U.S. fulfillment network, including organization and inventory management strategy.

Last year, we started rearchitecting our inventory placement strategy and leveraging our larger fulfillment center footprint to move from a national fulfillment network to a regionalized network model. We made significant internal changes (e.g., placement and logistics software, processes, physical operations) to create eight interconnected regions in smaller geographic areas. Each of these regions has a broad, relevant selection to operate in a largely self-sufficient way, while still being able to ship nationally when necessary. Some of the most meaningful and hard work came from optimizing the connections between this large amount of infrastructure. We also continue to improve our advanced machine learning algorithms to better predict what customers in various parts of the country will need so that we have the right inventory in the right regions at the right time.”

The results are described as more next day and same-day deliveries and anticipation of lower costs and healthier operating margins for the retail business.

Our Supply Chain Matters readers are likely cognizant that Amazon has always been driven by an obsession for wringing out added productivity and cost savings at every fulfillment process step, and thus this strategy move toward regionalized customer fulfillment is likely a very big deal.

Strategic Business Growth Priorities

In the investor communication, Jassy additionally outlined key strategic business growth priorities.

Amazon AWS

While the Amazon AWS business has achieved an $85 billion run rate, Jassy indicated that it remains critical to focus on what IT customers most value over the long haul. Acknowledged are short-term market headwinds as technology teams have become more cautious in overall spending given the uncertain economy. He stressed that the AWS business teams are spending much more time with customers helping them to optimize their tech deployment spending rates related to existing business priorities.

Other Strategic Business Priorities

Noted priorities in future growth areas included mentions of Amazon’s Advertising business with added investments in enabling advanced artificial intelligence algorithms to key in on what customers are likely to purchase.

Rather than cutting back, the International Stores business is cited as an ongoing growth segment with added opportunities for Australia, Brazil, India, Mexico, and various European and Middle East countries.

Beyond geographic expansion, the Grocery industry segment is indicated, quantified as an $800 billion market segment in the U.S. alone. Jassy points out that Amazon typically offers more than three million grocery items compared to a typical supermarket chain of 30,000 items on average. The strategy is to offer larger pack sizes, given the cost of serving an online channel. Continued investment in the Whole Foods chain is noted, but focused on a mass grocery market format yielding added profitability.

Amazon Business, which is generating roughly $35 billion in annual revenues among upwards of 6 million active business customers is mentioned as a segment where Amazon’s existing online fulfillment and logistics capabilities will continue to be positively positioned.

The leveraged use of Amazon assets to help merchants sell more effectively lends itself to the Buy with Prime program allowing third-party sellers to offer products on their own branded web sites to Amazon Prime buyers, with inventory storage, pick, pack and ship administered by Amazon assets.

Newer Focused Strategic Businesses

Final mention is made of new investments in primary Healthcare and prescription drug fulfillment services. The recent acquisition of One Medical is characterized as the stepping-stone to initial patient services, coupled with prescription drug services and the innovation of primary healthcare.

Kuiper is the umbrella for the creation of low-Earth orbit satellite system business to deliver Internet connectivity to areas around the world. Here, Amazon is reportedly partnering with three different partners for satellites launches: Jeff Bezos’s Blue Origin, United Launch Alliance, a joint venture of Boeing and Lockheed Martin, and Europe’s Arianespace. The targeted competitor is Elon Musk’s SpaceX company that provides similar type services.

A final mentioned area, and from our lens the likely to be the most controversial area, is Amazon’s intent to invest in all areas of Large Language Models and Generative AI, similar to that of ChatGPT. Jassy indicates that Amazon will continue to invest “substantially in these models across our consumer, seller, brand, and creator experiences.

This week features the Amazon AWS announcement of Bedrock Cloud services available to developers to enhance software applications with leveraged use of generative AI technology. This service offering will reportedly utilize language models not only from Amazon, but also start-ups A121 and Anthropic. According to a published report from business broadcasting network CNBC, the largest provider of Cloud infrastructure will not be content to leave a believed market growth area to Google and Microsoft alone. Jassy told the network in an interview:

Most companies want to use these large language models but the really good ones take billions of dollars to train and many years and most companies don’t want to go through that, So what they want to do is they want to work off of a foundational model that’s big and great already and then have the ability to customize it for their own purposes. And that’s what Bedrock is.”

According to the report, system integrators Pegasystems, Deloitte and Accenture are among the first users of this technology.

 

Summary Closing

In the letter closing, Jassy points to two statistics: “While we have a consumer business that’s $434B  in 2022, the vast majority of total market segment share in global retail still resides in physical stores (roughly 80%). And it’s a similar story for Global IT spending, where we have AWS revenue of $80B, with about 90% of Global IT spending still on-premises and yet to migrate to the cloud.”

That seems to be the basis of Amazon’s business strategies moving forward. One is added efficiencies and cost reduction across customer fulfillment operations while investing more in retail and service business expansion.

The other is continuing to disrupt, and drive added innovation within existing information technology services segment including generative artificial intelligence and large language system models. This latter is obviously the continued passion of Jassy himself.

Unstated but certainly in many external minds of consumers, competitors and regulators is continued global wide concerns related to whether Amazon is too big and too powerful in market dominance and control of individual consumer, supplier and business sales data.

The future as always, will present the actual story.

 

Bob Ferrari

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