Amazon Company Supply Chain Management Practices

Introduction

This paper entails a case study analysis of Amazon.com. The paper assesses how the firm has implemented the concept of inventory management.

Glossary

1. Inventory outsourcing – according to Chhajed and Lowe (2008, p. 81), ‘in this strategy, a firm outsources some of its operational activities to a third party and concentrates on its core competencies.’
2. Fulfillment centers – these include the distribution centers developed by organizations to meet the customers’ demands. The fulfillment centers stock different product categories, hence improving an organization’s capacity to meet its customers’ orders.
3. Drop-shipment model – in this supply chain technique, a particular organization acts as a link or an agent between the consumer and the manufacturer. Under this model, the agent does not stock the product that the customer demands, but rather orders from the manufacturer on behalf of the client.

Timeline

Amazon has achieved several milestones since its inception as illustrated by the timeline below.

• 1994- Foundation of Amazon
• 1995- Amazon begins operations by selling books.
• 1996- Renting of a 93,000 square-foot warehouse at Dawson, South Seattle
• 1997-Amazon goes public by issuing shares at $ 18 per share. The firm also established a second warehouse at New Castle, Delaware.
• 1998-Addition of music in the firm’s product portfolio and expansion into Europe by launching online stores in the UK and Germany
• 2001- Implementation of a downsizing strategy by laying-off 1,300 employees; the firm teams up with a well-established bookstore, Borders.com.
• 2002- Launching of web-development services
• 2003- The firm turns around from a $ 149.1 million loss in 2002 and achieves 1^st full-year profit of $35.3 million.
• 2004- Expansion into China by acquiring Joyo.com for $75 million
• 2005-Closure of Tacoma offices
• 2006- Acquisition of Shopbop.com
• 2007- Launching of a grocery delivery service, AmazonFresh
• 2008- Filing of a lawsuit against the legislature on the enactment of the sales tax on product shipment to clients in different states
• 2009-Amazon pays $ 51 million as a settlement of a legal dispute with Toys R Us for the violation of a business partnership agreement.
• 2010-Amazon stops selling McMillan books due to a dispute associated with the pricing of e-books
• 2011- Introduction of an online video-streaming service to compete with Netflix. The firm also launches a tablet, Kindle Fire, to compete with Apple.
• 2012 -The firm removes 5,000 titles from its Kindle store due to a dispute.
• 2013- Establishment of eight fulfillment centers in Germany, France, Italy, and China.
• 2014- The firm successfully establishes 131 distribution centers.

Inventory management summary

Amazon success since its inception has arisen from effective inventory management. One of the aspects that Amazon founder considered entails warehousing. Sople (2009) affirms that warehousing is strongly correlated with effective inventory management. Kappauf, Lauterbach and Koch (2011, p.128) further emphasize that integrating ‘warehouse management with inventory management is of central importance for mapping of goods receipt and issue processes’. The firm invested approximately $50 million in constructing a single warehouse in the US. The firm raised the capital from the stock market by issuing $2 billion in bonds. The concept of warehousing has played a fundamental role in improving Amazon’s distribution efficiency. The firm has achieved this goal by establishing fulfillment centers in different parts of the US.

Amazon has computerized its inventory management system, which makes it’s efficient to the flow of products in and out of the warehouse. Computerization of its inventory management has played a remarkable role in improving Amazon’s effectiveness in meeting customers’ product demands. This goal has been achieved through the synchronization of product bar codes between the warehouse and the ordering system through the website. Over the years, Amazon has developed expertise concerning e-commerce.

The organization’s effectiveness concerning inventory management has further been enhanced through the integration of the concept of inventory outsourcing. Amazon outsources some of its services from firms that have developed adequate expertise concerning specific inventory management operations. Through this approach, Amazon has contained the cost of its operation. Additionally, inventory outsourcing has improved Amazon’s resource allocation ability, hence coping with resource constraints. Subsequently, Amazon undertakes value addition in its supply chain management (Jaber 2009).

The organization’s efficiency concerning inventory management has further been promoted by the adoption of the drop-shipment model. This aspect has contributed significantly to cost minimization by reducing the inventory-related costs. The drop shipment model has played a fundamental role in improving the Amazon’s ability to adhere to its product diversification strategy. The model has improved the capacity to maximize profitability potential. McGrath (2009, p.67) argues that under this model, ‘one does not have to risk any money buying products until the merchandise sells and the payment is received’. The firm’s ability to implement the concept of the drop-shipment model has arisen from partnerships with product manufacturers.

Improvement of Amazon inventory management

Amazon Incorporation is focused on maximizing the cost of its operation. One of the most important concepts that the firm’s management team should consider entails inventory control techniques. These techniques will enable the organization to attain cost minimization. Consequently, the firm needs to integrate effective cost minimization models in its inventory management. One of the approaches that the firm should consider entails the Economic Order Quantity Model [EOQ]. Khan and Jain (2007, p.8) define EOQ as ‘the level of inventory order that minimizes the total cost associated with inventory management’. This cost is comprised of the set-up costs, ordering costs, acquisition costs, and the carrying cost. Amazon Incorporation should consider different EOQ approaches in integrating the EOQ model. These approaches include the trial and error approach and the simple mathematical approach.

Under the EOQ model, it is assumed that an organization knows the annual consumption rate of a particular inventory. Moreover, the model assumes that the demand for a particular product is steady (Curwin & Slater 2008). By adopting the EOQ model, Amazon will be in a position to make effective inventory management decisions. For example, the organization will be in a position to analyze the volume of inventory to hold, the amount to order, and the most effective time to place an order. Thus, the organization will manage the volume of the single items that it deals with. The model further assumes that the lead-time is zero, which translates into minimal delays in receiving inventory from distributors (Chhajed & Lowe 2008). In a bid to implement the EOQ model, Amazon should select the most optimal order quantity that will lead to the minimization of inventory cost and time (Andre & Riopel 2005). However, Amazon must integrate the concept of safety stock to deal with possible emergencies. Adopting the EOQ model will also improve inventory management due to the ability to computerize the inventory management process. Thus, the organization will track changes in inventory levels automatically. Therefore, the model will enable Amazon to order products that will translate into minimal administrative costs.

SWOT analysis

Amazon has developed an adequate competitive advantage by focusing on the development of the internal organizational environment. The SWOT analysis below illustrates Amazon’s internal and external business environment.

Strengths

1. Cost leadership strategy – the firm has recognized the importance of cost minimization in its quest to optimize its performance. The firm has implemented the cost leadership strategy by integrating diverse strategic management models such as the EOQ inventory control model.
2. Customer Relationship Management – Amazon has developed a global reputation, which has arisen from the investment in customer relationship management. Consequently, the firm has been in a position to develop a strong-level store loyalty across the world. The firm has adopted the concept of e-CRM by incorporating information communication technology. This approach has improved the organization’s capacity to offer customers personalized customer service. Additionally, the concept of e-CRM has played a fundamental role in understanding customer behavior.
3. Product diversification – the organization has integrated the concept of product diversification through the adoption of effective inventory management strategies such as the drop-shipment model. This model has enabled the firm to meet the customers’ diverse product needs. In its diversification strategy, the firm is extensively committed to quality.
4. Strategic alliance – the firm has integrated the concept of the strategic alliance as its growth model. Its strong financial strength has enabled the firm to undertake the strategic alliance successfully. Its partnership with different companies has enabled the organization to enter different market segments. Some of the online retailers that Amazon has partnered with include HomGrocer.com, Drugstore.com, Pets.com, Greenlight.com, Della.com, Ashford.com, Gear.com and Living.com.
5. Efficient distribution – the firm has established an extensive distribution logistics network by establishing distribution centers in different parts of the US.

Weaknesses

1. Free shipping – the free shipping model adopted by the firm can negatively affect its profitability due to changes in the business environment such as an increase in the cost of fuel.
2. Online presence – the firm has extensively invested in online presence. Thus, it depends on the outsourced firms to undertake product delivery. This aspect presents a major weakness in the firm’s operation due to the lack of adequate control in the firm’s operation.

Opportunities

1. Physical presence – the organization can improve its global reach by establishing physical stores in different countries. This strategy will improve the organization’s market presence.
2. Online payment system- the development in ICT around the world presents a perfect opportunity for the firm to enter the international market. The rate of Internet usage has increased substantially in different countries especially in Asia and Pacific regions. Therefore, implementing ICT will play a fundamental role in developing a strong global reputation. Furthermore, the firm will be in a position to reach a large number of customers who are adopting technology in their purchasing process.
3. Strategic alliance – the firm should consider partnering with well-established institutions such as universities in marketing its products such as books. This move will enable the organization to sustain a steady demand for its products.

Threats

1. Competition – the firm’s market dominance might be affected by an increase in the intensity of competition. Some of the major competitors to Amazon include Overstock.com, e-Bay, and Barnes & Noble. Furthermore, different companies are adopting the concept of online marketing to gain a high competitive edge.
2. Online security – the increase in the rate of online crime presents a major threat to the firm’s quest to develop a global reputation. The firm should integrate effective online security technologies to enhance customer trust and continued usage.
3. High transportation cost – changes in fuel prices might erode the organization’s profit due to the high cost of products, which are passed on to the final consumers.

The role of quantitative models in assisting Amazon to improve its profitability

Using the quantitative model such as the EOQ model will play a critical role in promoting the organization’s profit maximization. For example, the EOQ model will enable the organization to determine the re-order point. The re-order point is determined by multiplying the average daily inventory usage by the lead-time. Brandenburg (2012, p.9) affirms that the EOQ technique ‘determines the size of an order to acquire inventory to minimize the carrying and ordering cost’.

The quantitative models can also enable Amazon to do determine the amount of inventory to hold under probabilistic demand conditions. Thus, the organization can be in a position to determine the optimal stock to carry despite the prevailing market demand. The firm can achieve this goal by integrating the single-period inventory model. Apart from the deterministic conditions, the quantitative model will also enable Amazon to manage changes in demand by undertaking the incremental analysis. Anderson et al. (2011, p.476) affirm that incremental analysis ‘addresses how much to order by comparing the cost or loss of ordering one additional unit with the cost or loss of not ordering one additional unit’. This aspect shows that the firm will be in a position to undertake a cost-benefit analysis.

Conclusion

The above analysis shows that investment in inventory management aspects has enabled Amazon to minimize the cost of operation. Consequently, the firm has maximized its profitability. Inventory management has enabled the firm to minimize the cost of holding inventory.

Reference List

Anderson, A, Sweeney, D, Williams, T & Camm, J 2011, An introduction to management science; quantitative approaches to decision making, Cengage Learning, New York.

Andre, L & Riopel, D 2005, Logistics systems; design and optimization, Springer Science, New York.

Brandenburg, M 2012, Quantitative models for value-based supply chain management, Springer Berlin, Berlin.

Chhajed, D & Lowe, T 2008, Building intuition; insights from basic operations management models and principles, Springer Science & Business Media, Chicago.

Curwin, J & Slater, R 2008, Quantitative methods for business decisions, South-Western Cengage Learning, London.

Jaber, M 2009, Inventory management; non-classical views, CRC Press, New Jersey.

Kappauf, J, Koch, M & Lauterbach, B 2011, Logistics core operations with SAP; inventory management, warehousing, transportation, Springer Berlin, Berlin.

Khan, M & Jain, P 2007, Management accounting; text, problems and cases, Tata McGraw-Hill, New Delhi.

McGrath, S 2009, Three weeks to e-Bay profits; go from beginner to successful seller in less than a month, Sterling Publishing Company Incorporation, New York.

Slope, E 2009, Logistics management, Pearson Education, New Delhi.