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Amazon Supply Chain Management

Introduction

Amazon is a giant retailer popular all over the world due to its powerful supply chain management (SCM). In 1994 Jeffrey P. Bezos decided to quit his job on Wall Street and start an internet enterprise out of his garage at the age of thirty. The founder wanted to establish some kind of an online retailer as he had been anticipating the vast development of e-commerce in the near future.

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However, Bezos was not sure what to sell on the marketplace, but after the market research, he stuck to books as they require simpler processes to supply, package, and deliver. Amazon evolved from a specialized marketplace selling books to a one-stop-shop offering a wide range of products starting from paperbacks to e-books to groceries. Nowadays, the company enjoys a cult following and has become the biggest internet-based retailer in terms of market capitalization and total sales.

According to Christopher (2016), the supply chain is a more complex concept than logistics, and its mission is to minimize total costs with the help of proper management. In the case of Amazon, prominent management played the most crucial role, especially since rivals replicated the supply chain model. In general, SCM is the large spectrum of activities designed to control, plan, and implement a flow of the product from manufacturing to end customer delivery in the most optimized way possible.

The Amazon supply chain management includes such stages as manufacturing, technology, delivery, and warehousing. Amazon uses advanced IT, a large-scale network of warehouses, multi-level management of inventory, and great logistics. All that makes the retailer’s supply chain one of the best in the world. This paper will deal with manufacturing, inventory, and delivery practices applied by Amazon in order to shed light on the reasons why they are so successful.

Manufacturing

Amazon started its operations as a typical intermediary that was buying books from publishers and then selling them to eager readers. The company soon started to add its own product lines under private labeling, including such products as toilet paper, probiotics, toothbrushes, and batteries, etc. The manufacturing strategy here may be summarized as an intention to introduce cheaper analogs of the more popular products in order to increase the company’s profits (Wells, Weinstock, Ellsworth, & Danskin, 2015).

For instance, when someone is looking for Huggies diapers on the website, the link with similar products made of private brands such as Mama Bear diapers will show up at the bottom. It can be seen as a threat for small producers who are working with Amazon because, with the help of sales data company collects and analyzes, it gets a powerful advantage over products.

However, Amazon remains a company that provides various manufacturers with a marketplace and regular need for supply. The majority of products currently presented in the marketplace, including books, clothing, electronics, toys, etc. are represented by white-labeled and other brands. Even though Amazon continually reduces a lot of external sellers, third-party sellers are still operating on the marketplace. Their number decreased because the company realized that it is cheaper and simultaneously more profitably to assemble its own lower-cost products. As a result, the e-tailer giant controls the whole product lifecycle from creation to end customer delivery, and this approach keeps everything under transparency and control.

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It is useful to focus on recent approaches taken by the retailer in the manufacturing process. Some of the recent tactics resemble the strategy of Alibaba, another giant online retailer, which is about gaining more control by getting closer to the manufacturer. With the help of the Vendor Flex program, Amazon can manage online retail logistics starting from the manufacturer’s facilities. For instance, the program was already applied between such popular companies as Procter & Gamble and Amazon several years ago.

Amazon can enter the facilities of P&G and establish here a shop needed for shipment and packaging of goods stored in the P&G warehouse. It is basically a win-win situation because the retailer does not need to erect a new warehouse, whereas the manufacturer decreases the logistics cost as P&G does not have to move products for shipping to the retailer’s warehouse. Vendor Flex delivers an opportunity for manufacturers to maintain more direct contact with users.

Moreover, Amazon is partnering with manufacturers representing other business areas such as electronics, clothing, and even food retailing. In 2007 the retailor started to test Amazon Fresh in Seattle what is a grocery delivery service (Johnson & Mark, 2018). One of the advantages this initiative had is that this “Amazon for groceries” has been partnering with local food vendors, manufacturers, and restaurants. It gives the retailer a chance to replicate the relationships with customers these sellers already had, while manufacturers ultimately save money on delivery.

The manufacturing stage of SCM has some ideas which find resemblance in such core values of Saint Leo University as the “community” and “responsible stewardship.” In terms of community Amazon strive to establish as more lean supply chain as possible by setting up close interdependent relations based on mutual respect and trust. For the second value, Amazon fosters the most optimized use of resources to fulfill both their own and manufacturers’ goals. In general, the retailer used to be between the manufacturer and customers, but now it intervenes deeper into the world of manufacturers.

Inventory/Warehouse

As it comes from the goal of the company, which is to sell as much as possible, Amazon’s warehousing strategy becomes the most important part of its supply chain management. The main goal is to set an elaborate system of inventories that provides anytime and everywhere access for the products presented on a marketplace. Amazon has a great infrastructure of warehouses, as they commonly located near large population regions, while small ones also situated near smaller towns in order to develop the experience of customers who live far from megapolises. The well-shaped logistics network and communications help to transfer needed products from one place to another in a short period and in the most feasible way.

Now it is time to look at how Amazon has been establishing its inventory system, which currently reaches 493 warehouses worldwide. Amazon started to build the distribution network by opening two fulfillment centers in Delaware and Seattle in 1994 (Johnson & Mark, 2018). The center in Seattle was very similar to inventories other retailers had back then, as all operations, such as picking, receiving, packaging, etc. were done manually by the staff.

The U.S Postal Service was used by the company to deliver orders to the customers within one to seven days. There was a notable enlargement of the warehouse system in 1999, as the company established its first fulfillment centers in Europe and opened five more inventories in the US. Two European fulfillment centers were placed in Bad Hersfeld and Regensburg (Germany) and another one in Marston Gate (UK). It took six more years for Amazon to be ready for further expansion in 2005.

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Fulfilled by Amazon (FBA) is a service that was launched by the company in 2006, offering third-party sellers the ability to manage their fulfillment process. The inventory storage of third-party sellers, together with customer service, could be outsourced to Amazon, or they could maintain their own inventory in order to ship to Amazon customers. This approach allows the retailer to outsource a part of inventory costs and simultaneously enrich its product offering. According to Onal, Zhang, and Das (2019), 54% of Amazon’s sales are represented by FBA, which allows the retailer to expand in its size.

In general, Amazon’s network of facilities includes delivery stations, outbound sortation centers, Prime Hubs, and fulfillment centers. Typically products which arrived from supplier start the flow of distribution system in one of the company’s sortation centers before reaching fulfillment centers. The fulfillment center serves as the main warehouses of the company. Then products can be directed in three directions: handed to UPS or FedEx for customer delivery, transferred to an outbound sortation center where USPS gets them for further delivery.

A third option is when packages sorted by ZIP codes travel from outbound sortation centers to a delivery hub. This delivery station is designed to allow Amazon Flex drivers and local curriers to perform an end-customer delivery. The inventory stage of SCM is ruled by the similar principle of excellence stated by Saint Leo University, as Amazon focuses on the constant development of warehouse infrastructure in order to commit to their vision, mission, and goals.

Delivery

One of the strongest advantages the Amazon supply chain strategy has over its rivals is the abundance of delivery ways the company offers to the customers. In general, customers can choose from such main options: standard shipping, Prime Now option, the free, two-day deliveries, etc. The short time of delivery is an advantage, but the game-changer is a number of delivery options. The company deploys different strategies ranging from traditional to high-tech ones to provide customers with desirable time and place requirements.

Those strategies include collaboration with existing logistic companies as UPS, FedEx, DHL, Amazon-branded delivery service, delivery by cars, bikes, and even drones. This diverse variety allows Amazon to transfer orders to the end customer in a faster and more feasible way to everywhere in the world (Kumar, Eidem & Perdomo, 2012). The company used to grant the free standard delivery to customers whose order costs 35 US dollars or more, but since 2014 the e-tailer expanded free delivery on light and small goods under eight ounces.

It should be mentioned that traditional delivery options are used by other competitors as well, so some peculiar ideas had to be implemented in order to get a comparative advantage in delivery. Amazon launched a game-changing delivery strategy envisaged in the Amazon Prime service back in 2005. As it is seen from the name, this service was presented as an elite package of offers for members, who had to pay an annual fee. For this membership fee, customers were granted two-day delivery on a large number of different products.

The launching of a two-day shipment could explain the preeminence of Amazon in the online retail market. Many competitors have successfully replicated this strategy catching up the leader. Then the giant retailer stirred up the industry by employing Amazon Prime Now service, which offers a one-hour shipment. The company’s same-day or one-hour delivery becomes a reality because of the company’s development of its own logistics (Wells et al., 2015). Amazon is aware that third-party logistics can lengthen and hinder the process of shipment.

Moreover, the location of all Amazon’s facilities is properly designed and situated to make not only storage and transportation easier but also the end delivery. For example, the retailer introduced Sunday and Saturday shipments via USPS in 2013, which required more sortation centers (Johnson & Mark, 2018).

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Those facilities are a quarter size of warehouses and used in order to sort boxes by zip codes. Sortation centers are very essential for the company because they enable same-day-delivery, shift control of end-user delivery to US retailor giant from parcel companies, and reduce shipping costs. Another approach that helps to accomplish the last-mile strategy is Amazon Flex, which is a delivery service resembling the Uber taxi system. It uses workers who drive cars during the shifts they choose and use a special mobile app to transfer packages.

Nevertheless, such new services as Prime Air have the potential to replace Flex drivers in the future, especially in delivering lightweight products. Amazon has been tested the drones, which will be used in a full-scale fast delivery, but the Federal Aviation Administration approval is needed. The reality seems quite distant, but the initiative to use drones for thirty-minute delivery windows reflects Amazon’s hunger for innovation. Another option is Amazon Locker can be experienced by customers who want to find their package in special self-service lockers with a panel for access codes, usually situated in shopping malls.

The most feasible and fast delivery is, of course, streaming and digital downloads. It is the most efficient part of the company’s supply chain, as apps work on every platform, and the company presented its own devices such as Fire TV (2014), Fire tablets (2011), and the Kindle reader. Despite the fact that digital delivery is free, it still influences the decision of costumers whether to sign up or not for a Prime membership. Such membership encompasses digital bonuses and free rapid shipment of physical packages with the intention to entice customers to the supply chain.

Conclusion

To conclude, the history of Amazon’s development provided the world with a handout on how to manage the supply chain in a proper way. This case proves that the supply chain brings many advantages for the company as total cost reduction and faster processing of orders. Amazon applied a push-pull strategy for its supply chain. The company strategically places its warehouses in order to be ready for the demand they forecasted for a particular region in advance, which is a sign of push strategy.

Nevertheless, the retailer practices an order-by-order fulfillment method when it comes to the sale of third-party’s goods, which is a pure pull strategy. One of the most important features of Amazon’s management is that it continually invests money in innovations, which in the future will expand their activities to a more high-tech intensive such as drone delivery.

References

Christopher, M. (2016). Logistics & supply chain management (5th ed.). London, UK: Pearson UK. FT Publishing International.

Johnson, P.F., & Mark, K. (2018). Amazon.com: Supply Chain Management. London, Canada: Ivey Publishing.

Kumar, S., Eidem, J., & Perdomo, D. (2012). Clash of the e‐commerce titans: A new paradigm for consumer purchase process improvement. International Journal of Productivity and Performance Management, 61(7), pp. 805-830.

Onal, S., Zhang, J., & Das, S. (2019). Fulfillment time performance of online retailers – an empirical analysis. International Journal of Retail & Distribution Management 47(5), pp. 493-510.

Wells, J. R., Weinstock, B., Ellsworth, G., & Danskin, G. (2015). Amazon. Harvard Business School.

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