As seen from 2014, Amazon.com is a no brainer of a business proposition. Today you can buy most things from Amazon.com – books, movies, health and beauty products, appliances, sporting goods…..online and the company will ship these purchases to your home the same day and often at little or no cost to you. The typical 2014 university student has grown up with the World Wide Web and eCommerce and takes these services for granted. For its part Amazon recorded revenues of $17.09 billion dollars in 2013 but for all that activity, the company did not yield a profit. According to its founder and CEO Jeffrey P. Bezos, Amazon strives to be the retailer of choice for all things and for all people globally. To this end, Amazon’s profit margins on most products are razor thin and its business practices regarding free shipping and generous return policies erode earnings. Still there is no question that Amazon.com is one of the darlings of the new millennium’s Internet economy and a trend-setting retailer in the era of online retailing. In contrast, Amazon’s early history was marked by startling losses and lots of red ink. Why was this so?
To understand Amazon’s origins, we must go back to 1994 when Bezos worked for the Shaw grocery store chain and read a study that predicted the Internet would explode in popularity. He figured that before long people would be making money selling over the Web. After considering any number of products to sell online, he settled on books, a standardized product already electronically cataloged, that could be easily managed through an automated supply chain system. Most notably, the typical book store typically managed an inventory of two to three thousand books whereas his imagined online service that would carry them all. In Bezo’s business model, he would disintermediate the retail process, eliminating stores and warehouses. Instead his customers would purchase their books from catalogs on his company’s Web site. Orders would be filled from a new kind of facility, a fulfillment center. In implementing this business model, Bezos quickly discovered that the only way to ensure a positive customer experience was for Amazon to operate their own fulfillment centers, controlling the transaction from start to finish.
All of this may sound quite straightforward today but Bezo and his backers were treading in totally unchartered waters in 1995. To compete in this space, Amazon.com required a huge infusion of capital. Those fulfillment centers cost about $50 million apiece. The first of these in Fernley Nevada housed three million books, CDs, toys, and housewares in a building a quarter-mile long by 200 yards wide. What distinguished this facility from the typical retail warehouse was that it was completely computerized. The associated business processes were largely automated and information intensive. Once customer orders were placed via Amazon.com’s Web site, the company’s information systems would send these orders to fulfillment center “pickers” who would in turn roam the shelves in a systematic manner assembling customer orders. Along the way, these information systems would capture detailed information on the time and steps involved in filling individual orders, worker error rates, the flow and turnover of inventory and of course associated cost of operations data. Amazon managers employ this information to squeeze every last drop of productivity out of their processes.
For example, as reported by Fred Vogelstein: …. by redesigning a bottleneck where workers transfer orders arriving in green plastic bins to a conveyor belt that automatically drops them into the appropriate chutes, Amazon has been able to increase the capacity of the Fernley warehouse by 40%. [In 2003], Amazon’s warehouses handle three times the volume they could in 1999, and in the past three years the cost of operating them has fallen from nearly 20% of Amazon’s revenues to less than 10% percent. The company doesn’t believe it will even have to think about building a new warehouse for another year. The warehouses are so efficient that Amazon turns over its inventory 20 times a year. Virtually every other retailer’s turnover rate is under 15. Indeed, one of the fastest-growing and most profitable parts of Amazon’s business today is its use of its supply chain management processes to service the eCommerce business needs of other retailers, such as Toys “R” Us and Target. All of this helps explain Bezos’s larger point, one he’s been making since he started Amazon but that people are only now starting to believe: “In the physical world it’s the old saw: location, location, location,” ….. “The three most important things for us are technology, technology, technology.” [But technology is actually the means by which Amazon manages its most valuable asset, its data. Data about products, data about customers, data about supply chain management, data about suppliers…….]
“There just aren’t other companies that let a consumer order two out of what are millions of products in a warehouse and then quickly and efficiently, at low cost, get those two things into a single box.”. But success was not a forgone conclusion. Amazon faced a lot of red ink in its first five years. Ultimately its devotion to data paid off. As its competitors disappeared from the scene, Amazon leveraged its data management capabilities to drive error out of operations, personalize the Web experience for its customers, and add value to its relations with suppliers by providing them with deep business intelligence concerning the public’s interest in their various products. To achieve these results, Amazon developed its own methods and built its own Web-enabled information systems from scratch. Fortunately, the company could take advantage of established supply-chain management (SCM) systems for the backend of the business. In the final analysis, it was Amazon’s dedication to collecting and using information to run its business, an effort spearheaded by the company’s Chief Technology Officer Werner Vogels and his MIS team that turned the enterprise profitable. Now that Amazon has mastered both the fulfillment side of eCommerce and the data and information management side of global business management, two major profit centers at Amazon that help feed its bottom line include: back-end fulfillment services for other global retailers and cloud computing services for the likes of iTunes and Netflix.
Courtney from Study Moose
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