Amazon Case Study
Abstract
Following the increase in competition in both the global and local marketplaces for almost every product, one can easily observe a consequent increase of different products in the market which lead to short product life cycles. This scenario has therefore made it for retail firms to find better ways of managing their supply chain processes in order to have better control of their supply and demand aspects of their respective product portfolios (León-Peña, 2008)
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However, it is crucial to note that the advancement in information technology has brought about new trends and changes in determining demand and supply forecasts. Experts in the field have been able to succesfuly identify some of the best practices which have been developed and maintained by leading retailing companies in this frontier. In order for a firm to realize future improvements to its supply chain management, it is important to come up with an effective information system which is operated and maintained by a team of highly qualified professionals (León-Peña, 2008). By developing the supply chain of a given firm so as to be in line with the current trends in the business environment, the firm will be able to benefit from any new developments in the same market and consequently, it will be able to manage their inventory effectively in line with the demand and supply trends of the changing market.
Introduction
Supply chain management also referred to as supply chain integration can be simply defined as the process of managing the movements of goods and/or services from the manufactures/suppliers to the buyers. Its functions include demand forecasting, warehouse management, sourcing, procurement among others (León-Peña, 2008). The following is a case study about Amazon.com and an in depth analysis of its supply chain management.
In 2007, publishers in America sold approximately $40 billion in books showing a stable annual increase of about 3% over the last decade (The Wharton School of the University of Pennsylvania, 2007). A big percentage of this revenue was due to 3 major book retailers: Amazon.com, Barnes & Noble, and the Borders Group. While Barnes & Noble, and the Borders Group sold books from physical/brick and mortar warehouses, Amazon.com sold only through the internet, making it the subject of my case study.
From sales of as low as $0.5 in 1995 when it became operational, Amazon.com has grown tremendously in a decade surpassing both Barnes & Noble, and the Borders Group in terms of total book revenues. Despite popular belief, Amazon.com was not the first ever Internet book retailer and it shipped its first book in 1995 and the company did not go public until 1997(The Wharton School of the University of Pennsylvania, 2007).
Amazon’s day to day operation revolved around “sell all, carry few” business idea. In its first annual letter to shareholders written by the founder, Jeffery Bezos in 1997, he said “our store would now occupy six football fields” (The Wharton School of the University of Pennsylvania, 2007), and since the start, Amazon.com offered over one million book titles but roughly 2000 of these titles were actually stocked at their first, single warehouse located in Seattle, Washington. The un-stocked book titles were sourced either through: drop-shipping fulfilment- this is where the firm would simply carry forward customers orders to the specific publishers or book wholesalers who would in turn ship the books to the customers. Under the second arrangement, the company would order the needed titles immediately from the wholesalers or publishers then repackage the books and ship them to the specific customers. Since publishers were less equipped to ship books as quickly as needed, Amazon.com mostly worked with wholesalers (The Wharton School of the University of Pennsylvania, 2007).
At first, Amazon.com acquired 60% of its books from Ingram, a book wholesaler. The stockless model enabled the company to attain outstanding inventory turnover and consequently, the company experienced a pretty good cash conversion cycle. Furthermore, only 1-2% of the customers returned the purchased books. In contrast, bricks-and-mortar booksellers faced much higher return rates ranging from 10-30% (The Wharton School of the University of Pennsylvania, 2007).
Factors that led Amazon to place their first warehouse in Seattle included the close proximity to the Ingram warehouse in Oregon, a large pool of IT professionals, a small tax burden and the ability to ship books the same day they were ordered to the East coast. Amazon opened a second warehouse in Delaware in 1997, this site was also chosen due to the small tax burden and also a desire to save costs of transportation to the East coast which is densely populated. Both of these facilities were mostly operated manually apart from box wrapping which was automated. This involved employees walking round the facility with carts and picking individual orders from the shelves (The Wharton School of the University of Pennsylvania, 2007).
Simultaneously, the company noted that the publishers and wholesalers were unable to keep up with the quick availing of books on demand and hence the decision to take a larger part of order fulfilment works by stocking 200,000 titles in inventory. This move led to the company’s heavy investment in technology including a software that kept track of each book’s location and directed the picker to this specific location since one book would be moved around the warehouse over time (The Wharton School of the University of Pennsylvania, 2007).
In the beginning of 1998, Amazon.com decided to expand its book retailing
success into other products such as the Amazon.com music store and countries including Germany and the UK.
Over the years, Amazon.com strived to improve their inventory management through various initiatives including: Software upgrades to improve prediction in spikes in local demand. Secondly, procedures for determining the when to order from publishers Vs wholesalers was improved and thirdly, Amazon was able to quote on its official website times for shipping different products, that is, if the item was stocked in one of its warehouses, then the time quote was 24 hrs and the rest were quoted 2-3 days. Lastly, Amazon installed sophisticated algorithms which compared availability of books and prices across multiple vendors and settled on the best possible solution (The Wharton School of the University of Pennsylvania, 2007).
By 2005, Amazon.com had developed a very advanced global supply chain which was directed by its vice president of Worldwide Supply Chain Operations, Gang Yu, and which was based on the rigorous analysis of data using research techniques. In 2006, Amazon rolled out the “Fulfillment by Amazon” program which allowed sellers independent of Amazon to physically ship their goods to Amazon’s warehouses and Amazon would in turn ship them to the specific customers.
Throughout 2007, the mix in sales continued to soar toward other non-media items and also non-U.S. sales which were forecasted to account for about 50% of Amazon’s overall sales. Furthermore, Amazon continued to offer more items of different varieties that were virtually impossible for traditional brick and mortar establishments to stock. As a result, these factors made inventory management very complex and made a contribution to its reduction in turnover and increased technological costs, this was reflected in its 2006 net income which fell by 47% (from $359 million to $190 million), however, revenues kept on growing rapidly(The Wharton School of the University of Pennsylvania, 2007)
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References
The Wharton School of the University of Pennsylvania, (2007). Online Book Retailing: Operational Strategies. Retrieved from http://cachon-terwiesch.net/3e/sample_cases/OnlineBookRetailing_OperationalStrategies.pdf
. León-Peña J. R., (2008) eBusiness and the Supply Chain Management.
