A case study of Amazon on its supply chain management
A case study of Amazon on its supply chain management
Every company has their own supply chain in order to sort or produce goods. However, the company needs to manage supply chain to maximize its highest benefits. By having effective supply chain management, the company can ensure that the right product or service will be available at the time to the right place and at the right price (Kamal 2007). Amazon is one of the companies that have best supply chain practices in order to respond high level of responsiveness for the customers. Thereby, this paper explains about Amazon Company, analysis of Amazon’s supply chain, recommendations and barriers to implement will be discussed.
Amazon is an American commerce company based in Seattle, Washington, USA. The company used to be only a bookstore, but now it diversified into difference type of products. The goal of Amazon is to provide one stop shop experience where the customer can find everything on Amazon as earth’s biggest selection (Warman 2012). Amazon operates as a pure internet retailers that does not have retail store at all while the delivery will be done through Amazon’s networks of distribution centres. This operation makes the company is able to provide wider range of goods and lower cost of products with high quality. Moreover, it is also increase customer satisfaction as it supports customer convenience.
An effective supply chain strategy makes the company is able to respond high level of responsiveness. Amazon balances between cost of distributions and level of services by having the efficient distribution centres and multi-tier inventory networks.
However, there is a competition from substitution brands that provided the same service as Amazon, which are eBay and Walmart. Currently, eฺBay is pushing shipping fee to the seller in order to reduce cost for the buyers while Walmart introduced free shipping to the customers but buyers have to pick up the item at the store (Amazon strategies 2010).
ANALYSIS OF AMAZON SUPPLY CHAIN
Most of the companies need successful supply chain management to create sustainable competitive advantages. There are various benefits from having an effective supply chain management such as inventory reduction, delivery service improvement and shorter product life cycles (Fawcett et al 2008). This part provides the scenario of Amazon’s supply chain strategy, how Amazon manages in wider context, factors influencing its supply chain, and strategic and operational implications will be evaluated.
Supply chain strategy of Amazon
According to Chopra and Meindl (2007), supply chain strategy and competitive strategy should have aligned goals. Amazon has identified their customers as highly responsiveness. In order to respond with high uncertainty demand and availability of products, the four main components drive the outcome of Amazon are having several distribution centres as a storage facilities, multi-tier inventory management, highly efficiency transportation and implement information systems to provide real time information within its supply chain. All of these factors explain how both strategies of Amazon are fit together and that makes Amazon’s supply chain successful.
The advantage of outsourcing is to help the company to focus on its core activities and cost savings (Bucki N.D.). Amazon is one of the companies that need to gain those benefits from inventory outsourcing. However, there is another side of outsourcing deals as well. Chandra (2008) argued that the company should not outsource even it was not their core activities when the demand level is increasing. The company is able to optimize the service if the stock is owned and managed efficiently. So Amazon decided to outsource only some part of its inventory in order to mitigate risks and optimize services. The products that are frequently purchased or popular were keeping and managing in-house while other products are stocked by distributors. The products will be shipped after Amazon has requested. The company acted as a trans-shipment centre (ICMR India 2003). It was a right decision for Amazon and the company is able to reduce the cost of holding large amount of inventory while the customer service is better as it shipped faster. Managing the supply chain with its wider context and organization context
Price differentiated customers
Dispatch and delivery options were used to divide customers into each category based on responsiveness because difference customers need difference service levels and difference prices. Amazon has provided many types of deliveries in difference costs such as free super saver delivery, one-day delivery, First-class delivery and etc (Amazon 2013). Each type of delivery reflects how fast the delivery is. It means if the customer needs very high responsiveness, get the products by tomorrow, the buyers are willing to pay more. So Amazon divided customer segments to match with its distribution systems and inventory strategy in order to control cost and service level. The company also received increased flexibility (Duran et al 2006). Moreover, there is a membership programme called Amazon prime. It provides unlimited one-day delivery for one year and it costs 49GBP. Once the buyers are member of prime, buyers will get discount if the buyers want to get express or evening delivery. The members will also able to borrow kindle books for free (Amazon prime 2013).
Amazon has started with pull systems. There is no inventory, no warehouse and no overhead. The company acts as a middleman who taking the orders and it will be filled by Ingram book group (Simchi-levi et al 2007). When the time has passed, the growth of the company has forced Amazon to hold some inventory in order to respond customer needs by having several distribution centres. So the strategy has changed to push-pull. The inventory is hold using a push strategy while orders are shipped using a pull strategy. The decoupling point of Amazon is distribution centres. However, some of slow items are still used pure pull strategy as there is no inventory. By having several distribution centres, the holding cost for Amazon is increased as well.
The inventory network of Amazon is multi-tier inventory management. This will help the company plans and offers real time optimization service that allows Amazon to have minimal amount of inventory needs to achieve its service level (One network N.D.). By having this network, Amazon is able to offer nearly unlimited selection. Nonetheless, the problem is each tier treats separately while not concerns about inventory of another echelon. Then bullwhip effect occurs which is inventory holding higher in each tier because there is no sharing information across the tier (Lee 2003).
Amazon’s multi-tier inventory is composed of three tiers. The first tier is Amazon distribution centre. The inventory will be aggregated in distribution centres, which enables the company to hold fewer inventories. The second tier is wholesaler and partner DCs. If the products are not available from Amazon’s DC, the company will use IT systems to search for this product in partner inventories in order to assign which party will be responsible for this order. By doing this, the customer service will be high as there is no stock out experiences. Lastly, publishers, manufacturers, vendors and third-party sellers are included in third tiers. All these parties help the company to fulfill unlimited selection of goods offer in Amazon (Chiles and Dau 2005).
Factors influencing Amazon’s supply chain configuration now and future
Amazon provided many choices of delivery to balance cost of transportation and level of service. The company does not have large scale to contact full truckload. So the company provides free shipping in order to achieve longer lead-time of transportation. This will help company able to reduce cost and achieve economy of scale (Robinson 2010). However, the company is provided highly responsiveness options as well, which is cost company a lot. Even though the customers are willing to pay higher price to get the products faster, it should not cost anything from Amazon but it is not like that. Amazon cannot utilize its highest benefits of its transportation systems. That is why the company needs to design its supply chain networks to minimize the costs.
The challenge of Amazon is to make decision which internal warehouse or external partnership should be the one who responsible for this customer order. Once the order has been places via website, customer is expected to get products on time. Finding the lowest solution in short period of time is the hardest things when there are many items located in difference places and it needs to deliver in single delivery. So, the company decided to implement technology such as warehouse management systems to get real time and single view of inventory for effective sourcing (RedPrairie N.D.).
Evaluate strategic and operational implications
Supply chain network
Amazon operates eight distribution centres within United Kingdom (UK), which are Rugeley, Hemel Hempstead, Marston gate, Doncaster, Petreborough, Dunfermline, Gourock and Swansea. Locations are selected base on distance to markets, Close to transportation mode such as Motorway and main rail link, Airport and river (Amazon Location 2013). According to Melendez (2013), several DC would help the company provides quicker deliver, lower transportation costs and easy access.
Furthermore, sometimes transportation hubs, also known as injection points, were used to reduce the cost of transportation in high customer demand areas. The products will be shipped from DC to transportation hubs with full truckload. Then the inbound trucks will be unloaded the packages and load into outbound trucks which runs by a smaller carrier partners such as UPS, DPD and Hermes (Amazon Carriers 2013; Chiles and Dau 2005).
Moreover, Amazon adopted drop shipment approach. The order will be picked, packed in Amazon package and delivered by supply chain partners, which are manufacturer, wholesaler and third parties. By doing this, the company is able to survive from its huge losses but it caused negative effects as well. It is about 33 percent of Amazon’s single orders are multiple products. Nonetheless, it needs to pool specific goods from difference location and ships the collective goods as one delivery, which takes time and causes a delay that leads to customer dissatisfied. (Pilai and Dutta 2004)
The most difficult factor of transportation is to gain efficiency due to large numbers of small order from customers, so the company cannot gain advantage of the scale at all. Amazon used transportation hub to reduce the cost of transportation. The hub is acted as a cross docking to transfer goods to last-mile delivery. Amazon will aggregate the demand and ship it to transit hub together in order to achieve less than truckload or full truckload. Nevertheless, it needs to accumulate in term of region zone. So it takes longer time to complete this strategy. Hence, the company has introduced difference delivery option such as free super saver delivery in order to get longer lead times/ available to promise day. By doing this, Amazon is able to achieve economy of scale which is lower its cost and the customer satisfaction stays on acceptable level. However, sometimes goods are not available to the customer on time because the time spent on accumulate took longer than it should be and when the demand is high (Amazon 2013; Chiles and Dau 2005; Robinson 2010; Barzeski 2009).
As Amazon does not have a storefront, so it needs to provide the perfect visual store experience to compensate the touch of products. The company utilizes from its own technology innovations to differentiate itself from other e-commerce. The innovation includes A9 and one click ordering. The former aspect is a subsidiary company, which provides product search engines and search inside the books whereas the latter aspect is used to speed up ordering process, and introduce product recommendations, which determine customer interest from previous purchases (A9 2013; Curtis 2013).
Amazon also needs an innovation to support back-end supply chain integration and execution. The company have advance warehouse management systems to support order sourcing, labour management, load balancing, process alternative and supplier collaboration. All these factors make an efficient process to support multi-tier inventory of Amazon (Chiles and Dau 2005). Besides, Amazon has been critiqued about unbearable working conditions, mandatory overtime and using human as a robot which is pushing workers to physical limit. Employees within its DC walked more than 15 miles a day to look for products and every move has checked by computers. Therefore, the company decided to use Kiva robot to deliver shelves stocked with merchandise to DC workers instead of workers to walk around and find products. There are 1,400 kiva robots in three DC. By having these robots, Amazon can improve productivity and reduce cost up to 50 percent annually in area of warehouse efficiencies (Soper 2011; Kaiser 2013). Nevertheless, this robot costs Amazon large amount of money. It is more cost effective if Amazon just hires human workers. Is it worthwhile to invest for? Wagstaff (2012) argued that the benefit of this investment for Amazon is outweighed. The company will have better publicity, improve reputation about ethical and avoid lawsuits.
In addition, Amazon also launched prime air, also known as drones, which is able to delivery goods to customers within 30 minutes after buyers place the orders. The process of prime air starts from packages pass on a conveyor belt and drone will lift it off with the package and go straight to customer’s address. However, this innovation has not allowed to use nowadays. The fastest possible will be around 2015 (BBC 2013).
The problem is Amazon depends on courier such as UPS and FedEx too much in order to reduce the cost of transportation and make it efficient. Recently, this courier causes negative reputation for Amazon that cannot deliver the products on time when the demand is high and the customer satisfaction is decreased (Jayakumar 2013). Hence, the company should run its transportation with their private fleet in last-mile delivery because responsiveness is a crucial factor for Amazon. According to Hirsch (2010), the benefits from using private fleet is not only better customer service and greater visibility but also hold 100 % control of driver for safety, enhance branding and no driver shortage during high season/demand. Besides, private fleet will become a true competitive differentiate point as it is a connection point to customers (Schulz 2010).
Furthermore, bullwhip effect is another issues. This issue happened because there is lacking of integration along the supply chain. The current stage of Amazon and its supply chain partner is cooperation. So the company should raise the relationship to be coordination with its suppliers or become the best scenario which is collaboration. Besides, all companies along supply chain should share their information and communication in order to reduce barriers, reduce excess inventory and enhance business synergy (Cao and Zhang 2010).
BARRIERS TO IMPLEMENT RECOMMENDATIONS
As the writer’s recommendations, the obstacle to implement this suggestion are fluctuate demand and highly investment. Because of demand uncertainty, the company cannot know for sure what exactly amount of goods must be deliver for this area in this month. So the private fleet might not worth the cost of investment. Moreover, there is highly investment on private fleet. The cost of truck is expensive but it can be lease instead of buy to reduce the cost of maintenance as well. The cost of workers and training are another factors. The company needs to train driver to drive with manner. Lastly, the company needs to check on mile-drive and fuel every day in order to prevent fraud which takes time a lot. When the problem happened, the driver might have an excuse not to responsible for the problem. So many companies have decided to install GPS to track each driver but it costs large amount of money as well (Lynch 2007; Liccardi 2013).
Supply chain management plays a crucial role on Amazon’s successful. The company’s primary goal is to offer one stop service that customers can find everything on Amazon’s website and it will deliver it to buyer place within a promise time. In order to do this, the company needs to have cooperated with partner to do multi-tier inventory systems to provide nearly unlimited goods. Moreover, it needs an effective distribution networks to deliver merchandise to the customer on time. All of these are reflect the main strategy of Amazon to provide high responsiveness to the customers.