Amazon.com Retail Product Segment

Amazon.com was founded in 1994 and launched online in 1995 by Jeff Bezos as an online book store but soon it diversified to product lines of DVD, music CD, video games , electronics etc. The company's logo is an arrow leading from A to Z, representing customer satisfaction( as it forms a smile) and an aim to have everything ( A to Z).

Though the company was born during the internet years yet its business plan was unusual in the sense that it did not expect profit in the first four to five years. When thedot-com bubbleburst, and many e-companies went out of business, Amazon survived, and, finally, turned its first profit in the fourth quarter of 2001: $5 million on revenues of more than $1 billion.

Amazon.com Retail Product Segment

The company's sales grew to $ 19.16 billion an increase of more than 29 percent over the previous year. Its first product line expansions were music and movies. As a result, the Media segment comprises a large percentage of Amazon.com overall revenues.

In 2008 the Media segment accounted for 58% of the overall global sales, down from 62% in 2007 and 66% in 2006. Within the U.S. the Media segment accounted for 52.3% of the net sales

In dollar terms, the Media segment generated $5.3 billion in revenue in 2008, compared to $ 4.6 billion in 2007.

It is estimated that Amazon.com gets 25% gross margins for books and media and 15% for electronics. Its year on year growth in 2008 for the media segment was 19% ,down from 27% in 2007. The Electronics segment grew at 44% compared to 51%in 2007.

Year on Year net sales growth

Positioning Against Competitors over Time

Amazon.com competes with online marketplaces, and mass merchandise retailers in the media segment. Amazon.com competes against the physical stores on selection, convenience, and customer experience while remaining price competitive.

Amazon.com offers a larger product selection, product reviews and personalized storefronts to customers, which no physical retailer can offer. Apart from the supply chain that supports the effective location and delivery of millions of stock keeping units (SKUs) without excess inventory costs, other factors such as accuracy, on-time delivery, cost-effective order fulfilment and transportation are key to the success of Amazon vis -a-vis its competitors

Amazon.com Supply Chain

Amazon.com has pioneered the supply chain management in the process of becoming the leader in internet retailing.

Amazon.com is able to deliver orders directly to customers from inventory that is not kept at its distribution centers through partnerships with distributors, publishers, manufacturers. This multi-tier supply chain helps Amazon.com to cut costs without defaulting in providing the product to the customer on time.

Orders are placed via the website, and so the customers expect a real-time promised delivery date. Finding the lowest cost solution is a difficult problem in real-time and so to improve the costs associated with suboptimal order sourcing decisions Amazon.com is currently sponsoring researches.

Amazon.com Fulfillment Costs as a Percentage of Revenue (2006-2008)

The order fulfilment costs includes costs for processing the order, allocating inventory, ordering from the internal or external supplier, scheduling the shipment, reporting order status and initiating shipment. The reduction in the fulfilment costs as a percentage of the net sales has been due to its continuous efforts to further strengthen the supply chain.

Here we will study the three different types of model Amazon.com has along with their supply chains.

  1. The direct seller model:
  2. In this model customers go to the Amazon.com website, search for products, and place orders. Here Amazon.com is responsible for all front-end customer relationships and back-end logistics . Once an order is placed, Amazon.com decides which internal distribution center or shipper should be responsible for shipping the order to the customer and coordinates the fulfillment of the order.

    When products are sourced from its internal distribution centers, Amazon.com picks, packs, and ships the order. When products are sourced from outside, such as a book distributor, the distributor packages the item in an Amazon.com box and delivers it to the customer .

    This model requires Amazon.com to maintain or purchase inventory for immediate selling. In this model, Amazon.com owns or purchases the inventory and executes the logistics of each order.

    The seller model also includes the Syndicated Stores program, which allows third-party companies to sell Amazon.com products through their websites. In this model, Amazon.com provides the technology, inventory, and logistics to deliver the order to the customer, and thus owns the customer service relationship, though initially the onus lies on the third party website.

    Amazon.com then pays a percentage of each sale to the store that provided a link to Amazon.com on its website. Borders, , HMV, Virgin, WaldenBooks, and Waterstones are some of the examples of syndicated stores .

    For example , a customer goes to www.borders.com, browses for a book, and places an order. This order is placed on Amazon.com inventory and it's technology then determines which facility or drop shipper will deliver the same to the customer.

  3. As an intermediary:
  4. This programme initiated in 2000, is also called the Amazon Marketplace and Merchants@ programs allow third-party companies to list their products on Amazon.com's website. Individual sellers and smaller companies are served by Marketplace while Merchants@ services larger businesses.

    Here Amazon.com acts a virtual trading company, whose sole job is to connect buyers and sellers that otherwise would not have had the ability to benefit from one another. In this arrangement Amazon.com is responsible for the front-end customer relationship and technology, not the inventory, fulfillment and delivery services.

    In cases where Amazon.com is not responsible for fulfillment, the orders are send to the Merchant or Marketplace member responsible for fulfillment and they then pick, pack, and ship the order to the customer.

    Here, Amazon.com does not have a high degree of control over the supply chain delivery service that each partner provides but due to very low incremental variable fulfillment costs , the incremental cost of each sale for Amazon.com is close to zero.

  5. Amazon.com as e-Commerce Provider :
  6. Amazon.com is widely recognized for its innovative site design and unique experience it provides to its customers. Recently, Amazon.com has begun to leverage its technological expertise to provide the technical infrastructure, site design, and web storefront experience for companies on their websites.

    In this model retailers maintain their brand and website customer ownership, while Amazon.com is responsible for the fulfillment network. Amazon.com designed and operates the website for Target, Inc. Target maintains control over merchandising decisions, and maintains the ownership of Target inventory that is stored in Amazon.com's distribution centers.

    Thus, Amazon.com provides the technical and operations infrastructure to execute the order fulfillment process. It is thus responsible for sourcing the order from the appropriate distribution centers and delivering the order to customers.

    There are several benefits associated with the third-party sales on Amazon.com. Business benefits include a higher margin for each unit sold and the ability to offer nearly unlimited selection of products without carrying extensive inventory. In this model the third-party seller network creates a supply chain wherein inventory is replaced by information.

    Therefore, Amazon.com creates a supply chain where sellers can offer their products to buyers at no fulfillment cost to Amazon.com. As a result, these transactions offer a much higher margin than revenue that requires Amazon.com to physically process an order. This keeps inventory costs in control and this is the reason that Amazon.com has higher than average inventory turns for the retail industry.

    However there are concerns regarding third-party sales because of potential cannibalization of Amazon.com's product offerings and its lack of control over the supply chain .

    Amazon.com provides transparent pricing for products available for sale on its website. When one browses for a book online, the website returns the information regarding product availability and the price from Amazon.com as the seller, as well as the prices from third parties.In some cases, the third-parties offer the same products at lower prices . In such a case, Amazon.com is assisting customers in finding products from different sellers to substitute for their own offerings.

    Supply chain control is also a concern for Amazon.com while utilizing third-party sellers. It is known for its superior customer service. Though the third-party sellers are responsible for the order fulfillment process in the intermediary model. However, Amazon.com owns the customer relationship and any issues related with poor supply chain execution are attributed to Amazon.com.

Supply Chain Network

Retail outlets : Since Amazon.com is a pure internet retailer, it has zero retail outlets. All sales are generated through the website. Thus there is no infrastructure cost for opening a new retail store . Also, since there are no physical retail stores Amazon.com has to keep inventory only at its distributor centers.

Apart from its distributor centers the inventory is carried by its partners and wholesalers. As a result of this Amazon.com is able to maintain a competitive advantage over retailers in inventory turnover in spite of offering a much wider selection of inventory.

Distribution Centers : Amazon.com operates leased distribution centers at 11 locations in the United States , eight across Europe and six across Asia. The eleven locations in the United States account for a total of 17,294,000 square feet (Amazon.com 2008 10-K Form).

These facilities are large generally in the range of 500,000 to 600,000 square feet per facility. Most of these distribution centers are located close to airports to reduce transportation costs.

Besides this Amazon.com also takes warehouses abandoned by large companies on a lease, as they are usually offered at a lesser rate than the prevailing market price.

In its initial model Amazon.com relied heavily on a small number of partners. 60% of its orders were sourced from Ingram Book Distributors.

Amazon.com's first distribution center in Seattle, WA only stocked bestsellers.

The reason that Amazon.com shifted to internal distribution was because that it wanted to reduce its dependency on book distributors, manage logistics and customer service in a better way, and improve margins .

Amazon.com follows different processes in its distribution centers depending on the product mix in the facility. Products that can be sorted easily and are conveyable are stored in highly automated facilities. Books fall into this category as they are relatively small, have small variation in dimensions, and hence can easily be transported on conveyors and sorted by people or equipment. Other products that are large or have irregular dimensions have to be stored in less automated facilities.

Transportation Hubs: Amazon.com operates a number of transportation hubs that they refer to as "Injection Points". Injection point locations are located in heavily customer concentrated areas in order to save transportation costs.

The orders are consolidated in distribution centers and thereafter less than truckload (LTL) or truckload (TL) shippers are used to provide the long-haul transportation from the Distribution center to the transportation hub.

Once the cargo is in the hub, the inbound trailers are unloaded and the packages are then sorted out to smaller carrier partners like United Parcel Service (UPS) or the United States Postal Service (USPS)

The overall transportation costs are lower due to less expensive unit mile costs for LTL and TL carriers as compared to UPS and USPS. LTL or TL transportation is used for the long-haul and parcel carriers are used for "last-mile" delivery.

Drop Ship Locations: In order to deliver orders directly to customers Amazon.com utilizes the capabilities of its supply chain partners. These shipments bypass the Amazon.com internal distribution center network.

If there is an order for an item that Amazon.com does not have in stock in its distribution centers, but is available in Ingram Book Distributors Amazon.com will route this order request to Ingram, which will pick the order, pack it in an Amazon.com box, and ship it to the customer. The third-party sellers can also be considered drop shippers.

Inventory Model

Amazon.com follows a three tier inventory network.

The first tier within its supply chain network is the Amazon.com distribution center network. The inventory is aggregated in the distribution centers, which enables Amazon.com to carry less overall inventory than physical retailers in order to support customers.

Because of inventory aggregation there is an improved ability to respond to fluctuations in geographic demand and also there is a high service level support with a lower level of safety stock.

The second-tier is composed of wholesaler and partner Distribution centres . This tier includes drop shippers such as Ingram Book Distributors, and other book distributors. If Amazon.com is unable to fulfill the item from its Distribution centres , its IT systems looks into the inventories of its partners to determine which party to assign the order to.

This prevents the customer from experiencing a stock-out for an item that Amazon.com carries but currently does not have in its own stock. The added advantage is that it also allows Amazon to offer items that it does not sell directly through its inventory.

The third-tier consists of the publishers, manufacturers, vendors, and third-party sellers . These parties further enable Amazon.com to offer the unlimited selection that they offer.

Also, the products sourced from these entities enable Amazon.com to avoid distributor mark-ups and over dependency on distributors.

In this model the IT system of Amazon.com plays a very important role. The IT system passes information to each tier in the supply chain model. Furthermore, partners in second and third tier replenish the distribution centers of Amazon.com with their inventory.

Replenishment and Distribution Processes

Replenishment Processes:

Amazon.com replenishes its distribution center through large book distributors such as Ingram Book Distributors, Baker and Taylor, as well as other smaller book distributors. Publishers also replenish products to its distribution centers.

In order to forecast the demand for each product that it stores in its distribution center inventory Amazon.com utilizes a Sales and Operations (S&OP) planning process. It keeps track of its inventory in real-time using warehouse receipts and shipments. Based on the forecast purchase orders are placed to the suppliers

Distribution Process:

The distribution process is initiated when a customer orders from the Amazon.com

website or its affiliate website. Its IT system then determines the distribution center to ship the item from or whether to ship the item from a drop shipper. This decision is determined by the availability of the product and the goal to minimize the transportation costs in fulfillment costs.

Drop shippers pack items in Amazon.com packaging and then deliver it directly to customers. The distribution centers can ship items directly to the customers or through transportation hubs.

Intra-Distribution Center Profiling and Processes

Warehouse profiling involves data gathering and analysis in order to understand the best methods for warehouse layout design. Warehouse profiling is covered before process design to ensure that the appropriate processes are being utilized . It ensures that the initiatives aim to make improvements upon the proper process rather optimizing an inherently suboptimal process.

Its distribution centers are segmented into reserve storage locations and forward pick storage locations. The forward pick storage locations are referred to as prime storage. Pickers select product from prime storage locations so as to fulfill orders while the replenishments are performed from reserve storage to prime storage.

The prime locations have library bins, case flow bins, and pallet bins. Library bins are similar to bookshelves. Case flow bins are locations that are used to store cases of smaller, faster moving items.

Pallet bins are traditional pallet storage locations associated with warehouse environments.

"Days of cover" and "velocity to bin type" mapping is used to assign products to these locations. Days of cover is a term used to explain the amount of inventory to store in the prime inventory in order to meet the inventory demands over a specified number of days.

Amazon.com uses a min/max replenishment system where the products are replenished from reserve when the inventory drops below the min days of cover level. The min days of cover serves as safety stock while the max days of cover includes the cycle stock of a given product.

The Items are assigned to a particular bin type based on the forecasted velocity. SKU velocity is defined as how much cubic volume moves through the distribution center over a specified time period.

SKUs with a cubic volume of 0-1000m^3 are assigned to the library bins. SKUs with a volume of 1000-2000m^ 3 are assigned to the case flow bins while Items with a demand over 2000m^3 are stored in pallet storage.

This is done so that there is a balance of space utilization criteria, replenishment costs, and picking efficiencies. It is easier to pick a highly demanded product from library bins than case storage due to less picker travel. However, if the demand requires multiple daily replenishments , then case storage may be a better option.

Transportation

Amazon.com relies heavily on small parcel carrier partners to deliver orders to customers. In traditional retail environment, large retail chains such as Wal-Mart take advantage of scale through their private fleet of trucks.

The large and highly distributed customer base and the small number of units per order makes gaining transportation efficiencies difficult in the internet retail model.

Amazon.com has several transportation hubs located throughout the US which are called "injection points". These hubs serve as cross docking facilities and help save costs by transferring packages from lower cost long-haul carriers to the last-mile delivery partners.

The orders are sourced based on their proximity to the customer location . Orders are aggregated and released in batches .

By aggregating their orders going to a specific location, it can contract LTL or TL carriers to provide long-haul transportation from the DC'S to the transportation hub.

On reaching the transportation hub, the packages are routed to the appropriate parcel carrier.

Technological Innovations- the way ahead

Innovations such as personalized recommendations, one-click ordering, and search inside the book comprise the virtual store experience for the customers.

Amazon.com uses technology to support supplier collaboration and order sourcing by linking to Ingram's systems to see its inventory levels when it needs to decide whether to use Ingram to drop ship an order to a customer or not.

Currently, when a customer browses and orders from Amazon.com, the website integrates with its order sourcing engine to determine which warehouse should ship the order.

This decision occurs in real-time and is aimed at minimizing the transportation costs associated .However, research is being conducted that shows a significant cost savings with re-evaluating the sourcing decision to minimize the number of packages shipped within a window of one or two days.

As Amazon.com grows, its scale is being leveraged to generate buying power to negotiate discounts with the suppliers . Facilities such as Amazon.com free shipping and reduced price shipping initiatives are offered to customers.

These services provide reduced cost to the customers if they are willing to accept longer delivery lead times.These service windows provide an opportunity to Amazon.com to perform more proactive supply chain planning for the purpose of fulfillment and transportation.

The increased service window may even allow Amazon.com to reduce its safety stock levels thereby enabling it to potentially flow product through the facilities without having to hold inventory in the future.

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