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CASE STUDY

INVENTORY MANAGEMENT
QUALITY ASSURANCE
STRATEGY MANAGEMENT
INVENTORY MANAGEMENT AT AMAZON.COM

NAME:
REGISTRATION NUMBER:
PROGRAM NAME:
SPECIALIZATION:

POST GRADUATE DIPLOMA IN BUSINESS


ADMINISTRATION
OPERATION MANAGEMENT

SUBMITTED TO
SYMBIOSIS CENTRE FOR DISTANCE LEARNING (SCDL)

Case Study 1:
1

INVENTORY MANAGEMENT

TELESYS VENTURES INC.


Objective:

The Case Study helps to understand the requirement of inventory management


The various constraints encountered during inventory management
The different approaches utilized to overcome the above said constraints
Evaluation of different proposed changes
Optimization and implementation of Solution
Measurement of Effectiveness of the changes.

Telesys Inc. is a leading manufacturer of Laptops & desktop in India. It imports Monitors from
China. Earlier the company was performing very well but now the situation has changed. There
is a reduction in the gross profit. There are various reasons like changing suppliers, complicated
customs procedures, entry of new competitors, the resurfacing of high sea piracy and economic
slowdown. On the other hand most of the company cash is blocked in inventory. This has led to a
situation of the cash crunch and Management is seeking for a mean to overcome from this
problem.
Lead time also fluctuates at around an average of 21 working days. To facilitate a desired service
level of 95% and avoiding lockout condition / late delivery penalty, company spends Rs 150000
per year in administering a perpetual review system (Fixed Quantity interval system).
To avoid the high monitoring costs for the perpetual system, Rohit, a young Industrial Engineer,
has proposed to change to a Periodic Review system (Fixed order Interval system). Without any
additional investment, Rohit found that administrative costs would drop by 75% approximately.
But management was in a dilemma whether to implement the proposed solution or not. The
review period for the system was one month.

A local supplier promises to deliver any order within 7 working days. It reduces the Order cost to
Rs 25000 per order, but the unit price increases by 2%.
The Information provided by purchase department is written below.
1. Per unit price for monitor is Rs.4200
2. Ordering & Shipping cost is Rs. 65000 per shipment.
3. Inventory holding costs are 20% p.a. of average inventory
4. Forecasted Daily demand is normally distributed and averages 100 units
2

5. The minimum Lot size ordered is 15,00


6. The maximum lot size per shipment is 40,00
7. As per company policy five days demand to be kept for safety stock.
The questions before management are:
Deciding appropriate amount of order for the monitors.
To procure from local vendor or kept outsourcing through China.
Solution:
Rohit checked for scientific inventory control method. The excess inventory is already eating up
the company liquidity. The expenses are in the form of raw material cost ,in process work
,finished goods ready to sale .It also include the expenses incurring to meet storage,
transportation, approximation for losses arising out of pilferage insurance and damages. He
wanted to minimise this cost (holding cost or carrying cost).
On the other hand, if he thoughts for opting very less or no inventory then company face lockout
situation. In that case with addition to late delivery Penalty Company may suffer from the
important order /customer losing and the company reputation is also on the stack in the market.
He analyses the requirement of inventory based on below written parameters:

Priority to customer
Effective Capital utilization
Economy in buying

The different methodology adopted is


(a) Fixed Order Quantity system.
(b) Fixed Order Interval System.
In each methodology again evaluation is done for both Local supplier and manufacturer (from
china) for the feasibility. The results are tabulated below after the calculations.
(A) FIXED ORDER QUANTITY SYSTEM WHEN SUPPLY IS FROM CHINA
D (Daily Demand) = 100 unit
S (Ordering & shipment cost IN Rs.) = 65000
C (Unit Cost in Rs.) = 4200
I (Average inventory holding cost) = 20% of average inventory investment
P (Annual consumption in units) =Daily demand x No. Of days in year
= 100 x 365
3

= 36500
Q (Economic Order Quantity in units) =Sqrt ((2 x S x P)/(C x I))
= 2377
Annual Total Cost: = Basic cost + Procurement cost + Carrying cost
Basic cost (Rs.) = Unit cost x Annual consumption
= 4200 x 3650 = 153300000
Procurement Cost (Rs.) = (Ordering cost per order x Annual consumption)
Ordered quantity
= (65000 x 36500)
2377
= 998223
Carrying Cost (Rs.) = (Inventory carrying cost in decimal x Unit cost x Order quantity)
2
= (0.2 x 4200 x 2377)
2
= 998223
Annual Total Cost (Rs.) =153300000 +998223 + 998223 =155296447
'm (minimum stock in units) = 5 day demand
= 5 x 100 = 500
L (Lead time in days) = 21
C (Daily consumption in units) = 100
Re-Order Level (Units) = m + LC
4

= 500+21 x 100
=2700
M (Maximum stock in Units) = minimum stock + economic order quantity
= 500+ 2377
= 2877
(A) FIXED ORDER QUANTITY SYSTEM WHEN SUPPLY IS FROM LOCAL
SUPPLIER
D (Daily Demand in Units) = 100
S (Ordering & shipment cost in Rs.) = 250000
C (Unit Cost in Rs.) = 4200 x 1.02 = 4284
I (Average inventory holding cost) = 20% of average inventory investment
P (Annual consumption in Units) =Daily demand x No. Of days in year
= 100 x 365
= 36500
Q (Economic Order Quantity in Units) =Sqrt ((2 x S x P)/(C x I))
= 1459

Annual Total Cost: = Basic cost + Procurement cost + Carrying cost


Basic cost (Rs.) = Unit cost x Annual consumption
= 4284 x 36500 = 156366000
Procurement Cost (Rs.) = (Ordering cost per order x Annual consumption)
Ordered quantity
5

= (250000 x 365000)
14595
= 625232
Carrying Cost (Rs.) = (Inventory carrying cost in decimal x Unit cost x Order quantity)
2
= (0.2 x 4284 x 14595)
2
= 625232
Annual Total Cost (Rs.) =156366000+ 625232+625232 =157616464
'm (minimum stock in units) = 5 day demand
= 5 x 100
= 500
L (Lead time in days) = 7
C (Daily consumption in units) = 100
R (Review time Days) = 30
Re-Order Level (Units) = m + LC
= 500+7 x 100
=1200
M (Maximum stock in Units) = minimum stock (Units) + economic order quantity\
= 500+ 1459
= 1959
(B) FIXED ORDER INTERVAL SYSTEM WHEN SUPPLY IS FROM CHINA
Review Period (Days) = 30
6

Lead Time (Days) = 21


Average monthly consumption (Units) = 30 x 100 = 3000
(m) Minimum Stock =Safety Stock (Units) = 5 days demand
=5 x 100 = 500
(M) Maximum Stock = minimum stock +review time stock + Lead time stock
(R) Review Stock (Units) = 30 x 100 = 3000
(L) Lead Time Stock (Units) = 21 x 100 = 2100
(P) Stock at the time of review (Units) = 500
M=m+R+L
M = 500 +3000+2100 = 5600
Re Order quantity (Units) = Maximum stock Stock held at the time of review
= 5600-500 = 5100
Average Inventory (Units) =0.5 x (minimum stock + maximum stock)
= 0.5 x (500+5600) = 3050
Annual Inventory cost (Rs.) =0.2 x 3050 x 4200 = 2562000
Annual Ordering Cost (Rs.) = 150000
Annual Procurement cost (Rs.) = (0.25 x 65000 x 365)/30
= 197708
Annual Total Cost: = Basic cost + Procurement cost + Carrying cost
Annual Basic cost (Rs.) = Unit cost x Annual consumption
= Rs.4200 x 36500 = 15330000
Procurement Cost per review (Rs.) = 25 % of procurement cost
= 0.25 x 650000 = 16250
7

Annual procurement cost = (Procurement cost per review x No. of days in Year)
Review period
= (16250 x365)/30 =197708
Annual Ordering Cost (Rs.) = 150000
Total Annual Ordering & Procurement cost (Rs.) = 197708 + 150000 = 347708
Carrying Cost (Rs.) = Inventory carrying cost in decimal x Unit cost x Avg. Inventory
= (0.2 x 4200 x 3050) = 2562000
Annual Total Cost (Rs.) =153300000 +347708 + 25 62000=156209708
(B) FIXED ORDER INTERVAL SYSTEM WHEN SUPPLY IS FROM LOCAL
SUPPLIER
Review Period (Days) = 30
Lead Time (Days) = 7
Average monthly consumption (Units) = 30 x 100 = 3000
Minimum Stock =Safety Stock (Units) = 5 days demand
=5 x 100 = 500
Maximum Stock = minimum stock +review time stock + Lead time stock
M=m+R+L
(R) Review Stock (Units) = 30 x 100 = 3000
(L) Lead Time Stock (Units) = 7 x 100 = 700
(P) Stock at the time of first review (Units) = 500
M = 500 +3000+700 = 4200
Re Order quantity (Units) = Maximum stock Stock held at the time of interview
= 4200-500 = 3700
8

Average Inventory (Units) =0.5 x (minimum stock + maximum stock)


= 0.5 x (500+4200) = 2350
Administrative Cost per review (Rs.) = 25 % of initial cost
=0.25 x 25000 = 6250
Annual Administrative cost (Rs.) = (6250 x 365)/30 = 76042
Additional Monitoring cost (Rs.) = 150000
Annual Total Cost (Rs.) = Basic cost + Procurement cost + Carrying cost
Basic cost (Rs.) = Unit cost x Annual consumption
=.4284 x 36500 = 157616464
Annual Total ordering & Procurement Cost (Rs.) = 150000 + 76042 =226042
Carrying Cost (Rs.) = Inventory carrying cost in decimal x Unit cost x Avg. Inventory
= (0.2 x 4284 x 2350) = 2013480
Annual Total Cost =156366000+226042+2013480=158605522

FIXED ORDER QUANTITY SYSTEM


DESCRIPTION
CHINASUPPLIER
LOCAL SUPPLIER
Unit cost (Rs.)
4200
4284
Daily Demand (Units)
100
100
Annual Consumption (Units)
36500
36500
Ordering cost & Procurement 65000
25000
cost per order (Rs.)
Lead Time ( Days)
21
7
Lead time stock (Units)
2100
700
Minimum stock (Days)
5
5
9

Minimum stock (Units)


Economic Order Quantity
(Units)
Annual Basic cost (Rs.)
Annual Procurement cost (Rs.)
Annual carrying cost (Rs.)
Annual total cost (Rs)
Minimum stock (Rs)
Lead stock (Units)
Reorder level (units)
Maximum Stock (Units)

500
2377

500
1459

153300000
998223
998223
155296447
500
2100
2600
2877

156366000
625232
625232
157616464
500
700
1200
1959

FIXED ORDER INTERVAL SYSTEM


DESCRIPTION
CHINASUPPLIER
LOCAL SUPPLIER
Minimum stock (Units)
500
500
Review stock (Units)
3000
3000
Lead stock (Units)
2100
700
Stock at review (Units)
500
500
Minimum stock (Units)
5600
4200
Average Inventory (Units)
3050
2350
Reorder Quantity (Units)
5100
3700
Additional Monitoring cost
150000
150000
(Rs.)
Procurement cost per review
16250
6250
(Rs.)
Annual procurement cost (Rs.) 197708
76042
Total ordering & procurement 347708
226042
cost (Rs.)
Annual basic cost (Rs.)
153300000
156366000
carrying cost (Rs.)
2562000
2013480
Other cost (Rs.)
2909708
2239522
Annual total cost (Rs.)
156209708
158605522
On comparison of the Total annual cost Rohit present the procurement by Fixed Order
Quantity System from the china Supplier and Management approved the same.

10

Case Study: 2
QUALITY ASSURANCE
Objective:
Application of check sheet, brainstorming and flow chart usage in problem solving.
A reputed FMCG company of India was very much upset regarding the rejection of material at
customer end within the guarantee period. The company manufacturing operation is done by
vendors spearheaded in North India in Delhi & Himachal Pradesh. The Design, marketing &
11

servicing is taken care by company itself. The above said product, water heater, is a volumetric
and major profit shared part of particular strategic business unit.
The company Vice President called the Chief Manager QC Mumbai for the business review
meeting. In the meeting Regional sales manager, South raised the issue of rejection and
complained that he has lost a number of customers and large money is also blocked in the
payment due to the same reason. Next day, Mr. Mahesh instructed his Engineer (Mr. Vineet
Dhiman) to do the method study.
Mr. Vineet made the check sheet to gather the information regarding various elements of the
defective material returned from all over the branches in terms of branch, model, under
guarantee, problem. The compiled data is as follow.
Sr. No.
1
2
3
4
5
Total

Problem
Leakage form welding
Leakage from Apparatus
plate
Not operating
Body Damage
Others

Quantity
146
37

Commutative
146
183

Quantity
71.5%
18.1%

11
6
4

194
200
204
204

5.4%
2.94%
1.96%
100%

Table I: Defective Return data in FY 2005-06


The Process of making Tank for water heater starts from drawing the two identical half tanks
from Copper sheet circle, trunking the hole in one doom in flat portion, fitting the Cast iron ring
in cut-out part. Then two halves are put over each other and brazing with Oxy-acetylenes torch.
The tank is immediately put in the water for cooling. Then tank is fitted with apparatus plate and
checked for leakage by filling the water at pressure 6 kg/cm2.The tank which are passed in
leakage test assembled with other subassembly to make finish product.

Start

Process 1

Copper sheet Circle

Draw a Half Tank


12

Process 2

Process 3

Cutting of hole in one half

Fitting of Cast Iron Pig


Process 4

Brazing of Two Half


Process 5

Process 6

Process 7

Process 8

Process 9

Cooling in water tub


Fitting of Apparatus Plate

Leaking Test

Is Test
is
passe
d

No

Yes
Process 10

Complete Assy.
13

END

After compiling the result from check sheet the major problem found was leakage from brazing.
Its Share is 71.5%.
Mr. Vineet, at the vendor place conducted brainstorming meeting. In the session major cause
come up and then listed down for future reference.
1. Brazing rod is of poor Quality or not suitable for particular application
2. The process of Brazing is not appropriate
3. The vendor is interested in fast production and hence fast operation cast a thin layer of
brazing.
Mr. Vineet checked for each cause to determine the potential effect one by one.

14

The first cause state that brazing rod is of poor quality. The currently using material has 6 %
phosphorous content. The suggested material is brazing rod with 2% silver composition. It is 30
% costlier than earlier used one.
Ten water heaters were manufactured using the silver brazing rod and installed in coastal area for
testing. The result was collected after one month. It was found that three of the heaters started
leaking from the brazing.
For the second cause, the close monitoring of process revealed that before brazing no
oil/dirt/grease was removed from the surface.
Practically before brazing there should be no any oil/grease over the surface as this would create
the problem in adhesion of two metals. In manufacturing process before brazing fifty tanks were
thoroughly cleaned then brazed using old Phosphorous rod, with aceton to remove the oil/dirt.
The cooling of joined halves carried out in normal air rather than cooling in the water (as it was
done previously practiced) because immediate cooling affects the brazing strength. During the
pressure testing there was improvement in the outcome. As earlier, in a lot of fifty there used to
be five to seven rejections during leakage testing. But implementation of the before said two
processes (Precleaning and cooling in air) reduced the rejection to half of the previous rejection.
For the third cause, time and motion study of brazing process was done to find the discrepancy in
observed time and standard time. The comparison of this report with earlier report showed no
abnormal variation.
In actual practice after usage of water heater in coastal areas the leakage starts at brazing. This is
mainly due to the high salt concentration in the water. This salt after evaporation of water comes
in directly contact with brazing material and start deteriorating it. A new interlocking mechanism
was developed so as to minimize the water contact with brazing material. Again, ten samples
were made with new interlocking system and installed in coastal areas.
After one month of continues operation no leakage was observed in any of the samples.
The recommended solution suggested to the management is as follow.
1. Incorporation of new interlocking Technique.
2. Precleaning of copper halves before brazing with acetone.
3. Cooling of Brazed tank in Air
The revised process of manufacturing is also presented. The Highlighted process is added as part
of the improvement and to provide Quality assurance rather than Quality control.

15

Case Study: 3
STRATEGY MANAGEMENT
DELTACOM GmBH
Objective: The case study helps to understand the perception & application of strategy
formulation.
The company is established in Germany and it is into the business of IT solution provider to
various customers all over the globe. Recently in Chine, the company has participated in the
International Bidding and awarded the contract. The company has made huge effort to get the
order as it was very competitive, financially as well as from Technical specification point of
view.

16

The project duration is within the range of 7 to 10 years and it also outlay larger chunk of money.
So after winning the contract, management called for Executive level meeting in Berlin for
overall framework. The agenda of the meeting distributed to them was to decide upon the
formulation & evaluation of various strategies to be adopted for the project.
The major participants of projects are enlisted below.
(1)
(2)
(3)
(4)

Exclusive Partner
Integrated Partner
Project Solution seeker
Body Shopper

A.
B.
C.
D.
E.
F.
G.
H.

PARTNERS SEGMENTATION
BUSINESS DIMENSION FOR DIFFERENT CUSTOMER
VALUE PROPOSITION FOR DIFFERENT CUSTOMERS
BUNDLE OF COMPETENCES ANALYSIS
MISSION OF BUSINESS
STRATEGIC TEST
SCOPE OF TRANSFORMATION
STRATEGIC AGENDA

PROCESS OF FORMULATION OF STRATEGY

SLI

TCS

BP

CUSTOMER SEGMENTATION & VALUE PROPOSITION


17

THE BUNDLE OF COMPETENCES

MISSION OF BUSINESS

INNOVATION

OPERATIONAL EXCELLENCE

CUSTOMER TARGETING

AGGREGATE/GRANULAR METRICS
EXPERIMENTATION AND FEEDBACK

FINANCIAL EVALUATION & MATCHING


STRATEGY

LEGENDS :->
TCS ---- TOTAL CUSTOMER SOLUTION
BP BEST PRODUCT
SLI SYSTEM LOCK IN
(A) Partner Segmentation
Tier 1: Exclusive Partner
Japan based organisations provides outsourcing of IBM mainframe applications
Opportunity for customer lock-in
Joint Venture with IBM, the main source of Mainframe developer
18

Existing customers: GE Japan, JBCC, and AIG


Tier 2: Strategic/Integrated Partner
Long term symbiotic partnership with high value added
Existing customers: GE China, GE US, Kawasaki and Unisys.
Tier 3: Project Solution Seekers
Full project ownership and solution delivery responsibility without established (but potential)
for long-term client relationship
Existing customer: Toyota, Honda, US prospects, Dept. of Transportation China
Tier 4: Body Shoppers
Transactional relationship to provide supplemental staff without much end client relationship
Existing customers: IBM
DELTACOM GmBH has to choose the partner for project operation in Chins. Every
business Partner has some strength & weakness in terms of their competency in different
field. So the Company made the business dimension & value proposition analysis for each
partners. So the cost comparison, Timely delivery as well as Quality of operation can be
judged on the same platform.

(B) Business Dimension for Tier 1 -Exclusive Partner


Products
Services
Customer
Channels
End Users
Complementors
Unique
Competencies

Critical partner to client providing highly integrated, customer specific,


high-value added turnkey solutions for legacy mainframe applications in
Japanese market
24x7 Maintenance of mission-critical mainframe legacy. Application
extension through analysis, design and development of new, integrated
modules.
Japanese Corporations in Financial Services, Insurance, etc.
Industries.
Direct, Referrals from highly satisfied existing clients
Japanese Corporations, Japanese Government organizations.
IBM (as an h/2 and s/2 partner), existing clients, Accenture.
1. Combination of deep knowledge of mainframe applications.
2. High level of Quality combined with all the other cost advantage
available to Chinese companies.
19

(B) Business Dimension for Tier 2 -Strategic /Integrated Partner


Customer Dimension
Products
Services

Customer
Channels
End Users
Complementors
Unique Competencies

Description
Long-term relationship with client to provide customized and
integrated solutions across multiple business units
T&M and Fixed price application development across multiphase
projects
Joint application development enabled through deep
understanding of client culture and methodology
Dedicated retained teams as extension of clients IT
Organization
GE US, GE China, Kawasaki, Unisys
Direct
N/A
Other GE partners, IBM, other software partners, Accenture
1. One of 12 exclusive outsourcing vendors or GE
2. Six-Sigma quality combined with Chinas cost advantage

(B) Business Dimension for Tier 3 -Project Solution seeker


Customer Dimension
Products
Services
Customer
Channels
End Users
Complementors
Unique Competencies

Description
Individual project solutions without committed long-term
relationship
T&M and Fixed price application development of discrete
Projects
Toyota, Honda, Department of Transportation China, US
Prospects
Direct
Consulting partners such as IBM
Strategic partners such as GE
N/A
Other GE partners, IBM, other software partners, Accenture
1. One of 12 exclusive outsourcing vendors or GE
2. Six-Sigma/CMM level-5 quality combined with Chinas
cost advantage
20

(B) Business Dimension for Tier 4-Body Shoppers


Customer Dimension
Products
Services
Customer
Channels
End Users
Complementors
Unique Competencies

Description
Individual resources to supplement existing project teams and
fill skills gaps(transactional)
T&M and retained resources for fixed time durations
Provide specific technology development skills on projects
IBM Japan, NEC
Direct
Consulting partners such as IBM
Corporation
N/A
1. Consulting partnerships
2. Technology skill differentiation

(C) Value Proposition for Tier 1 -Exclusive Partner


Value Proposition Element
Experiences
Value Delivery Systems

Value Appropriation

Description
Seamless extension of Client team with integrated culture,
skilled technologists with deep understanding of clients
business.
Dedicated client-focused team immersed in all aspects of
clients culture
Network integration to seamlessly extend client
environment
Open communication of all relevant information on both
sides
Executive sponsor, CEO oversight, an full corporate reach
CMM and Six-Sigma delivery methodologies for delivery
Value added reselling of hardware and software for onestop shopping
Value gained by customer: Superior ROI, improved timeto market, Security, Resource stability
21

Value gained by Deltacom: Exclusive long-term


relationship, higher margins, predictable revenue
Value shared by both: Shared IP, shared learning, shared
risk
C) Value Proposition for Tier 2 -Strategic /Integrated Partner
Value Proposition Element
Experiences

Description
Integrated teams of skilled technologists with deep
understanding of clients business
Value Delivery Systems
Dedicated client-focused teams fully trained in clients
methodologies
Joint development plans
Cross-training and periodic two-way knowledge transfer
Business Relationship Manager, CEO oversight and full
corporate reach
Value Appropriation
Value gained by customer: Superior ROI, improved timeto-market, Security, Resource stability, Shared risk,
Continuous improvement
Value gained by DMK: Access to client network as sales
channel, credibility, learning
Value shared by both: Co-development of shared standards
and processes
(C) Value Proposition for Tier 3 -Project Solution seeker
Value Proposition Element
Experiences
Value Delivery Systems

Value Appropriation

Description
End-end-end delivery of a project with high quality and
competitive price
Structured processes and teams with high quality of
performance Ability to quickly ramp-up on clients
business and culture
Process for seamless transition at end of project
Dedicated project team manager with executive oversight
Value gained by customer: Experimentation , learning,
flexibility, reduced time-to-market, high quality, ROI
Value shared by both: Shared learning in business domain
and new technology

(C) Value Proposition for Tier 4 -Body Shoppers

22

Value Proposition Element


Experiences
Value Delivery Systems
Value Appropriation

Description
Supplement team with individual resources and fill gaps with
skill expertise
Strong bench that can be tapped on demand
Mix of skills and expertise
Value gained by customer: Resources of demand and skills
on demand
Value shared by both: Exchange of skills

(D) Bundle of competencies analysis

Systems Lock-In

Dominant Exchange
Exclusive Channel
Customer Integration
Total customer solution

Low Cost
Differentiation

Horizontal Breadth
23

Redefining Experience

Sr. No.

Description

Current Situation

Desired Situation

System Lock In

No Specific competency that


create industry standard by the
company.

Low Cost

Wage differential with


reference to US, Europe,
Japan & India.

Company has to set


competency skills for
capturing the future market.
Chinese wages are very low.

Availability of Large pool of


skill in that Area.

Dominant Exchange

Exclusive
Channel

Experience Leveraging
workloads & resource
profitability.
No Specific competency
that create strong bondage
creation

Customer
Integration

Horizontal
Breath

Mainframe & new language


expertise. Multiple industry
Verticals
System development, testing
& maintenance

Redefining

It acts as barrier to the exit of


customer as highly tacit
knowledge acquired about
customer process through
long interaction also

Dedicated Team, Experience in It also allow the expertise


Outsourcing
transferable to other function
Joint venture with IBM

Expertise in managing in
sudden change in demand and
supply profitability

Company should develop


strong coordination expertise
with Tier 1 specialist in China.
One of few firms with low cost It is required to barrier the
mainframe expertise.
entry of new competitors.
High Switching cost for fully
integrated clients.

A large pool of computer


science graduate for long term

Processes & expertise at end


to end projects

Due to this Company is able


to integrate some of
technologies of IBM with
their own application
It strengthens the financial &
insurance segment but slow
development in other areas.
Architecture & consulting
expertise is a new challenge
Its provides very cost
24

Experience
8

Differentiations

Japanese speaking personnel,


IBM mainframe expertise
CMM5 Level of operation,
Six sigma approach for all
Functions

controlled atmosphere for


operation
The firm has to recruit local
person that can speak & are
familiar with the social &
business manner of China.
It is necessary to maintain the
quality level of project & to
eliminate chance of any
redraft.

(E) Mission
Become the #1 provider of Business Process Outsourcing and IT Services in China:

Analyzing, designing, developing, deploying, and maintaining software systems and


solutions.

Delivering the highest quality of service and unparalleled value

Integrating seamlessly with complementary local service providers

Servicing large and mid-sized corporations, government departments and nonprofit


organizations
Through experienced, passionate and hard-working associates driven to provide
outstanding service

Focusing first on China, Japan and US and expanding next into Europe and
Latin American markets.

(F) TRANSFORMATION REQUIRED


25

Sr. No.

Scope

Now

Future

Customer Scope

Primarily large corporations,


Government departments of China

End-User Scope

Large Corporations, Government


departments in China

Channel Scope

Direct, Joint Venture

Complementor
Scope

Hardware and software product


companies

Geographical
Scope

Japan and China with limited


presence in the U.S.

Service Scope

Lower end of software services value


chain: Application development,
system integration, system
conversation , maintenance & support

Product Scope

Technology base such as J2EE


framework, Microsoft.NET
framework, etc. for rapid code
development

Expand to include Service


providers at the high-end of
the software services value
chain.
Expand to include midsized corporations, State
and Federal government
departments, nonprofit
Organization
Exclusive offshore service
delivery partner-ships that
allow white labelling of
Deltacom services
Business Consulting, IT
Strategy/Architecture
consulting firms
U.S. and U.K. expand into
countries where language of
business is non-English and
where cost of IT services is
higher than China. (Indian
firms do not have language
advantage while China
based firms have significant
cost advantage.)
Integrated service that
captures the entire value
chain through strong
collaboration with
Complementors at the highend of the software
service value chain
1. Horizontal Application
frameworks such as Portal
toolkits, Content
Management toolkits, etc.
2. Solutions frameworks
such as wealth management
solutions for financial
services, employee portals
as HR solutions, etc. that
leverage competencies
/expertise of strategic and
exclusive

Unique
Competencies

1. High maturity in Software


development process
2. Six-Sigma certified project and
operations managers

1. Ability to build teams


that can integrate to other
service organizations
2. Develop professional
26

3. Low cost of China based


Delivery

relationships with other


culture.
3. Develop technical
knowledge of specific
domain

G) Strategic Agenda: Quality Tests


Sr. No.
1

Dimension
Comprehensiveness

Stretch

Monitoring and control

Motivation

Vulnerability

Description
The agenda extends across all of functions
services, geographies and market segments
including geographies including customers,
end users, channels and Complementors.
Performance /measures for each thrust provide
achievable but stretched goals for the
organization.
Milestones established throughout the process
allow for continuous monitoring and change
in strategy if and as required.
The mission combined with clear strategic
thrust energizes the organization with a
common set of goals and flexibility to
innovate and grow.
No material vulnerabilities have been
identified at this time. Aligning execution with
this strategic agenda time will be critical to the
success of Delta Brake

(H) Strategic Agenda


Sr. No.

Strategic Thrust

Invest in people Train


VP HR
& motivate. Hire
outstanding talent.
VP Operation
Develop strong design
capabilities.
Expand delivery & CEO
customer
support
centre
throughout
china

CEO

Work with exclusive

VP Sales

Primary
Responsibility

CEO ,VP Marketing

Secondary
responsibility
CFO
VP Sales , VP HR, VP
Marketing

27

partners for rapid


response & operation
Develop engagement
program of Deltacom
team for better
understanding of
Chinese culture for
easy flow of work
Strengthen the
relationship with
the IBM for better
understanding
& solution of
customer needs.

VP Operation
VP HR

VP Operation

CEO

CFO

VP Operation

Case Study: 4
Inventory Management at Amazon.com
Amazon has grown admirably from its initial beginnings as a small online bookseller to a giant
superstore company. During this process of rapid growth, it has incurred significant losses and it
becomes more expose to a greater competition and threats. Cutting costs and achieving
profitability remain Amazons greatest challenges. However, there are key factors such as a
strong brand, providing customers with outstanding value and a superior shopping experience,
massive sales volume and realizing economies of scale which contribute a lot to the success of
this company.
Founded as Cadabra.com by Jeff Bezos in 1994, Amazon.com was launched in 1995. It is an
American electronic commerce company based in Seattle, Washington. It is one of the first major
companies to sell goods over the Internet and one of the most recognized and respected online
businesses. It has become the number one online retailer by steadily building its reputation and
brand, beginning its operation in July of 1995.
Moreover, it has expanded from its existing business of selling books to selling a wide variety of
products such as DVDs, music CDs, computer software, video games, electronics, apparel,
furniture, food and more (Wikipedia 2006). Similarly, Amazon aside from its domestically
shared market also set up four other separate online stores in the United Kingdom, France and
Japan, thus shipping globally on selected products.
28

Analysis

Swot Analysis
Strengths:
1. Customer Relationship Management (CRM) and Information Technology (IT) support
Amazon's business strategy. The company carefully records data on customer buyer
behavior. This enables them to offer to individual specific items, or bundles of items,
based upon preferences demonstrated through purchases or items visited.
2. Amazon is a huge global brand. It is recognizable for two main reasons. It was one of the
original dotcoms, and over the last decade it has developed a customer base of around 30
million people. It was an early exploiter of online technologies for e-commerce, which
made it one of the first online retailers. It has built on nits early successes with books, and
now has product categories that include electronics, toys and games, DIY and more.
3. Product diversification from books and CD/DVD markets has provided additional
customers in other product areas and indicates strategic movement to grow the business
through new customer bases
4. Strong distribution channel
5. Negative cash cycle
6. Low prices

Weakness:
1. Amazon are dependent on external delivery companies to carry out the delivery function
of the interface with the customer which can lead to uncontrollable service level
problems and potential cost increases in line with the wider transportation industry such
as rising fuel and increased vehicle taxation. If these costs are not absorbed they are
passed back to the consumer both with potential negative effects.
2. As Amazon adds new categories to its business, it risks damaging its brand. Amazon is
the number one retailer for books; diversification may lead to losses and decrease in
brand value.

29

3. The company may at some point need to reconsider its strategy of offering free shipping
to customers. It is a fair strategy since one could visit a more local retailer, and pay no
costs. However the shipping costs could be up to $500m, and such a high figure would
undoubtedly erode profits.
4. No region based sites.

Opportunities:
1. Online retailing is still not matured in India, it can tap the market.
2. There are also opportunities for Amazon to build collaborations with the public sector.
For example the company announced a deal with the British Library, London, in 2004.
The benefit is that customers can search for rare or antique books. The library's
catalogue of published works is now on the Amazon website, meaning it has details of
more than 2.5m books on the site.
3. Growth of internet users in the next five years, predominantly in the international market.

4. E-commerce expansion in Asia and the Pacific

Threats:
1. Increasing transportation costs will directly impact delivery charges to customers - as
these costs are not absorbed into the direct business but paid to a third party it is assumed
these will be directly passed onto the consumer which can have a negative impact to
brand perception from the consumer viewpoint.
2. Competition will increase due to the low barriers to entry in the market: offline
companies are coming online
3. Low economic performance of world economy
4. The products that Amazon sells tend to be bought as gifts, especially at Christmas. This
means that there is an element of seasonality to the business. However, by trading in
overseas markets in different cultures such seasonality may not be enduring.
5. Hackers problem

Industrial Analysis
30

Five forces model which was proposed by Michael Porter, provides a robust and time-tested
framework for analyzing any industry, reflected in the strength of the five forces (industry
competitors, potential entrants, and threat of substitutes, power of buyers and power of
suppliers). The collective strength of the five forces determines the ultimate profit potential in an
industry.
Barriers to Entry
Threat of entry is considered medium to low. Being the first mover in online bookstore industry,
Amazon would be the best example of what amateur firms would be faced. The factor that
separates Amazon from the inexperienced firms is its 8-year capital intensive and continuous
upgrade of services through acquisitions and alliances, nurturing the commission-based associate
websites, and endless technology development and innovation. Imitating such would also
require relationship building which is difficult when relationship is already established by the
first mover, or in the case of untapped technology partners, requires significant capital and
strategic plan proposals to move the other party. In both cases, known industry players would be
the benchmark requiring the deal a considerable amount of time and money impractical for the
new player.
The book retail industry has very high barriers to entry. The capital requirements necessary to
establish a bricks and mortar bookstore would be virtually impossible for a newcomer.
Consumers know the big name players. High product awareness and large marketing budgets
make it very difficult for new entrants to enter into this industry.
Inter firm Rivalry
Competitive rivalry is medium to high. There are numerous industry players; however, they can
be considered niche (eBay) and overly diversified (Yahoo!) competitors of a diversified industry
firm like Amazon. As a result, a head-to-head competition exists against Barneys (who is backed
by retail stores) and Price line (who has the highest employee per revenue contribution in the
industry) created strategic group together with Amazon. Adding the flame of intensified rivalry
is the high fixed and storage costs of the industry since firms needed to stock inventory in their
warehouses for ready delivery of an order. Competitors also have little product differentiation,
except for auctioned product maybe and other exclusive rights of players to sell suppliers
products, making customer switching costs low.
Looking at the entire book retail industry, competition is quite diverse. A consumer could
purchase books from a bricks and mortar store, which could be a large chain, a non-book retail
store, or a small independent store. A consumer could also choose to buy their books on-line.
With the onset of Internet bookstores, price is even more of a factor in consumer book
purchasing.
Buyer power
31

Buyer power is higher when buyers have more choices. Businesses are forced to add value to
their products and services to get loyalty. Many loyalty programs include excellent services that
customers demand on-line. Customers want to solve their problems and many times they are
more successful on-line than on-phone. Also, we see internet savvy businesses springing up
offering more valuable goods and services at lower costs. Now with the advent of eBay, many
people are assuming roles as drop shippers. Individuals can have a thriving business selling
goods of larger companies without having to carry inventory.
Supplier power
Supplier power is higher when buyers have fewer choices from whom to buy. As mentioned
earlier, drop shipping has increased the amount of suppliers available. All an individual has to do
is form an agreement to sell products for the company. The company takes care of all the
logistics. The same is true of associates programs that amazon.com and google.com offer.
Associates allow a webmaster to earn money by recommending products from others. This
increases supplier offerings.
Threat of substitute
Threat of substitute products or services is high when there are many product alternatives. This is
different than having many suppliers. Examples of alternatives are exchanging brand names,
substituting credit card capabilities, and looking at better values from cheaper sources. The
internet allows this with the "global economy". We can substitute product by purchasing from
companies overseas where labor, services and products are cheaper, but of comparable quality.

Online Marketing
Competition today in the online retail business is fierce, and Amazon.com has some of the
toughest competition in the World. Among the most prominent competition are Barnes & Noble
and Time Warner publishing which although is new to the scene, has an abundance of capital to
back its venture into the online retail book business. "Independent bookstores are rapidly
disappearing amid the dominance of superstores such as Borders and Barnes & Noble.. As
recent as five years ago, there were over 5,500 independent bookstores in the United States.
Presently, there are only approximately 3,300 according to a Book Industry Study Group Inc.
report.

Online marketing domains


The four major online marketing domains are shown in figure given below
Targeted to
consumers

32

Targeted
to
businesse
Initiated
by
business
Initiated by
consumers

Business to consumer (B2C)


It is selling goods and services to final consumers. Todays consumers can buy almost anything
online from- clothing, kitchen gadgets and airline tickets to computers and cars. According to
the Associated Chambers of Commerce and Industry of India (Assocham), Delhi e-shoppers
Population was 20 percent in 2006-07, in Mumbai it was 24 percent with maximum e-shopping
taking place in electronic gadgets, apparel and design purchases, railways, and air and movie
tickets. As more and more people find their way onto the web.
The population of online consumers is becoming more main stream and diverse. The web now
offers marketers a palette of different kind of consumers seeking different kinds of consumers
seeking different kinds of online experience. Internet consumers differ from traditional offline
consumers in their approaches in buying and in their response in marketing. In the internet
exchange process customers initiate and control the contact. Consumers compare prices, visits
different sites and then do purchasing.
This type is used by many online companies like- Amazon.com, GAP.
Business to

B2C

B2B

B2B marketers
(business to
(business to
sites, e-mail,
Consumer)
business)
catalogue, online
C2C
C2B
networks, and
resources to
(consumer to
(consumer to
business
Consumer
business)
current
effectively and obtain buying efficiencies and better prices.

Business (B2B)
use B2b web
online product
trading
other online
reach new
customers, serve
customers more

33

Most major B2B marketers now offer product information, customer purchasing and customer
support services online. For example- corporate buyers can visit sun Microsystems web site
(www.sun.com), select detailed descriptions of suns products and solutions request sales and
service information. Another example is of CISCO it takes 80% of its order online.
Consumer to Consumers (C2C)
Much consumer to consumer online marketing and communication occurs on the web between
interested parties over a wide range of products and subjects. In some cases the internet provider
the internet provides an excellent means by which consumers can buy or exchange goods or
information directly with one another. For example- Amazon.com auctions, e-bay.
Consumers to Business (C2B)
The final online marketing domain is consumer to business online marketing. With the help of
internet consumers find it easier to communicate with the companies. Most companies now
invite prospects and customers to send in suggestions and questions via company websites.
Beyond this rather than waiting for invitation consumers can search out sellers on the web learn
about their offers, initiate purchase and give feedback.
Types of online marketing
Companies of all types are now marketing online. Two types of online marketers are there:1. Click only companies
2. Click and mortar companies

Click only companies


Click only companies come in many shapes and sizes. They include e -tailors, dot- comes that
sell products and services directly to final buyers via the internet. Examples- Amazon.com. The
click only companies also include search engines and portals such as yahoo and Google, which
started as search engines and later added services such as news, weather forecast, stock reports,
entertainment etc. The hype surrounding such click-only web business reached astronomical
levels during the dot-com gold rush of the late 1990s, when avid investors drove dot-com stock
prices to dizzying heights. However the investing frenzies collapsed in the year2000, and many
high- flying, overvalued dot coms came crashing back to the earth.
Click and- mortar companies
As the internet grew established bricks- and-mortar companies realized that to compete
effectively with online competitors they had to online themselves. Thus, many one-time brick34

and mortar companies are now prospering as click-and-mortar companies. For example-office
depots more than 1,000 office- supply superstores rack up annual sales of $13.5 billion in more
than 23 countries but you might be surprised to learn that office depots fastest recent growth has
come not from its traditional brick-and mortar channels ,but from the internet.

Inventory management
When Bezos started his venture, he aimed at hassle free operations. He wanted to offer his
customers a wide selection of books, but did not want to spend time and money on opening
stores and warehouses and in dealing with the inventory. He however realized that the only way
to satisfy customers and at the same time make sure that Amazon enjoyed the benefits of time
and cost efficiency was to maintain its own warehouse. Building warehouses and operating them
was a very tough decision for Bezos. Each warehouse cost him around $ 50 million and in order
to get the money, Amazon issued $ 2 billion as bonds.

In 1999, Amazon added six warehouses in Fernley, Nevada, Coffeyville, Kansas, Campbellsville/
Kentucky, Lexington, Kentucky, McDonough, Georgia and Grand Forks, North Dakota. On the
whole Amazon had ten warehouses. In the same year Amazon increased its worldwide
warehousing capacity from 300,000 square feet to over five million square feet. Since Amazon
ordered books and other products from warehouses only after the customers had agreed to buy
them the return rate was only 0.25 percent compared to the return rate of 30 percent in many
segments of the online retail industry.

Amazons warehouses which was a quarter-mile long yards wide stored millions of books, CDs,
toys and hardware. They were very well maintained and completely computerized. In fact the
number of lines of code used by Amazons warehouses was the same as the number used by its
website. Whenever a customer placed an order a series of automated events followed which
made inventory management easier.
When a customer ordered a book from Amazon his invoice mentioned the title of the book
followed by a barcode. This was a code of numbers such as 6-5-4 which indicated the books
location in the warehouse. Computers sent signals to the workers wireless receivers telling those
items had to be picked off the shelves. The workers decided the order in which the items had to
be picked and then verified the weight of each product.
These products were kept in a green crate which contained orders of different customers, when
this got filled they were placed on conveyor belt and sent to central point. Here the barcodes
were matched with the order numbers to find out who would receive each item. Then they were
35

packed and parceled. Most of the orders were shipped either through the United States postal
service or United States parcel service whichever is located nearer.

In the holiday season of 1999, Amazon was determined not to disappoint any customer who
visited its site for his holiday shopping. Accordingly Bezos decided to stock the stores with every
possible item that customers were likely to buy. Although this strategy was appreciated but
Bezos faced a lot of problems.

It was then Bezos realized the importance of Inventory Management and decided to reduce the
size of inventories, this was made possible by managing the warehouses efficiently. Amazon
made careful decisions about which products to buy from where. Then the company decided to
manage distributing channels. An important decision was taken was buying of books, CDs
videos etc. directly from publishers rather than from distributors. They upgraded the software
and also tried split shipments.

Amazon also tried to cut down its expenses. It decided to outsource some of its routine activities
so that it could concentrate better on its core activities. It partnered with other companies for
shipping the inventory. So, while the partners shipped the items, Amazon leveraged on its ecommerce expertise. It revamped the layout of its warehouses making it easier for the company
to locate and sort customers. By doing this it managed to save all the expenses related to filling
and shipping orders. Improved inventory management helped Amazon to get net profit of $ 5
million in the fourth quarter of 2001 after accumulating a deficit of $2.86 billion in seven years
since its launch in 1995.
Inventory outsourcing

Outsourcing is subcontracting a service such as product design or manufacturing, to a third-party


company. The decision to outsource is often made in the interest of lowering cost or making
better use of time and energy costs, redirecting or conserving energy directed at the competencies
of a particular business, or to make more efficient use of land, labor, capital, (information)
technology and resources. Outsourcing became part of the business lexicon during the 1980s. It
is essentially a division of labour. Outsourcing in the information technology field has two
meanings. One is to commission the development of an application to another organization,
usually a company that specializes in the development of this type of application. The other is to
hire the services of another company to manage all or parts of the services that otherwise would
36

be rendered by an IT unit of the organization. The latter concept might not include development
of new applications.
Drop shipment model
Drop shipping is a supply chain management technique in which the retailer does not keep goods
in stock, but instead transfers customer orders and shipment details to either the manufacturer or
a wholesaler, who then ships the goods directly to the customer. As in all retail businesses, the
retailers make their profit on the difference between the wholesale and retail price.
In 2001 Amazon decided to outsource its inventory though it knew that it was a huge risk. When
Amazon managed its own inventory it had earned the reputation of providing superior customer
service, which was its biggest strength.
Amazon did not stock every offered on its site. It stocked only those items that were popular and
frequently purchased. If a book that is not so popular is ordered Amazon requested that item
from its distributor who then shipped it to the company. In the company, the items the items were
unpacked and then shipped to the respective customers. So basically, Amazon acted as a transshipment centre and ensured that the entire process of shipping from the distributor to customer
was done very efficiently.
The main distributors of Amazon included Ingram Micro and Cell Star handled cell phone sales
while Ingram Micro, a whole sale distributor, handled computers and books. Amazon had
external distributors for most of its products except the bestsellers. Further Amazon entered into
contract with Ingram Micro Inc. for distribution of desktops, laptops and other computer
accessories. Drop shipment model was very successful so Amazon decided to extend this model
to all categories too. The major disadvantage of this model was if the customers ordered only a
single item at a time the drop shipment model was extremely helpful, but if a single ordered had
several items such as a book stocked by Ingram and a game stocked by Amazon, then the
following procedure was adopted: Ingram sent book to Amazon, Amazon added the game then
forwarded the whole box to the customer. Since almost 35 percent of orders placed at Amazon
were of different categories the drop shipment model was not very effective.
In 2001, Bezos came up with the idea of including the products of competing retailers and some
used items on their website. Amazon earned almost the same profit selling on commission as it
earned on retail. An advantage of this feature was customers could now verify the prices of
Amazons products vis a vis those of other retailers. So the company did not need to advertise its
low price.
By 2003Amazon, s warehouse could handle thrice the volume they used to handle in 1999, while
the cost of operating them decreased from 20 percent of Amazons revenue to less than 10
percent. In 2003 Amazon decided to slash down its shipping charges. Customers who visited the
site were greeted with a pop up window announcing the companys decision to provide free
37

shipping for those who bought two or more items in any combination from the sites books,
music, or video stores. The company also decided to reduce shipping charges.
Though Amazon spent millions of rupees in marketing in order to get new customers it managed
to leverage the amount spent because of its lower capital costs. Generally physical bookstores
having a wide range of books needed to stock about 160 days worth of inventory. The
distributors and publishers had to be paid 45-90 days after the books were bought from them, in
this way Amazon used to get a months of interest free money.

Conclusion
Amazon has grown admirably from its initial beginnings as a small online bookseller to a giant
superstore company. During this process of rapid growth, it has incurred significant losses and it
becomes more expose to a greater competition and threats. Cutting costs and achieving
profitability remain Amazons greatest challenges. However, there are key factors such as a
strong brand, providing customers with outstanding value and a superior shopping experience,
massive sales volume and realizing economies of scale which contribute a lot to the success of
this company. These factors and the people around the company help Amazon.com to face the
threats pose by other online bookstores. Essentially, the company should aim to maintain its
gross margins in its existing business and in future product lines such as music CDs and videos.
In order to do this, Amazon.com should develop strategic partnerships with all of its main
suppliers
Although online shopping has become popular over the years, Amazon had to struggle to make
profits. One of the reasons was variable costs incurred by multiple delivery attempts and reverse
logistics- the return of products by the customers. Despite all difficulties Amazon maintained its
large inventory in a very efficient way. In the late 90s, 12% of the inventory at Amazon was
stored at wrong places leading to delayed orders and lost time; by 2002 this was reduced to 4
percent because of better software and storage facilities.
Despite all measures that Amazon took to manage its inventory more efficiently, logistics experts
still opinioned that Amazons warehouses were working less than 40 percent capacity. According
to experts Amazon should either reduce the number of warehouses or increase their sales. With
so much of competition and problems one thing is for sure that Amazon is truly an example of
how to manage inventories effectively.

38

Issues

Question 1
Amazon planned to do things differently for the 2000 holiday season. What were the reasons that
led to the revamping of inventory management methods? How was inventory made more
effective at Amazon?
Answer
In the holiday season of 1999, Amazon was determined not to disappoint any customer who
visited its site for holiday shopping. So, Bezos decided to stock the stores with every possible
item that customers were likely to buy. Right from the latest novel to the chartbuster movie of the
season, he wanted everything to be stored to ensure that none of the customers logged out of the
site, disappointed. In 1999, Amazon added six warehouses. On the whole Amazon had ten
warehouses. Although the strategy adopted by him was appreciated Bezos had to face a lot of
problems too while trying to manage his large inventory.
Building warehouses and operating them was a very tough decision for Bezos. Each warehouse
cost him around $50 million. Amazons warehouses were a quarter-mile long and 200 yards
wide stored millions of books. Bezos realized the importance of managing inventory in his
company. He knew that a large number of piled up goods represented unutilized cash which
could be used elsewhere in his business. However if fewer goods were stocked, it meant that
some of the customers were bound to be disappointed. In order to overcome this tedious task of
inventory management, the company decided to do things differently in the holiday season of
2000.
Amazon managed to reduce the size of inventories even as the company offered more products
on its site. This was made possible by managing the warehouse efficiently. Amazon made careful
decisions about which the products to buy and where to buy them from. The company then had
to decide which of the distribution centre it would send its products to and then know how to
receive and track the product once it was in the warehouse. Amazon also decided to by its books,
CDs , videos etc directly from the publishers instead of buying them from distributors. Amazon
also maintained a good relationship with its vendors so that it could extract best deal from them.
In order to the inventory, Amazon refined its software. The new software helped the company
accommodate inventory as per the demand in different regions.
Amazon also tried to cut down its expenses. It decided to outsource some of its routine activities
so that it could concentrate better on its core activities. It partnered with other companies for
shipping the inventory. So while the partners shipped the items, Amazon leveraged on its ecommerce expertise. It revamped the layout of its warehouses making it easier for the company
39

to locate and sort customer orders. By doing this, it managed to save all expenses related to
filling and shipping orders.
Improved inventory management helped Amazon record its first ever profits in the fourth quarter
of 2001. After accumulating a deficit of $5 millions in the fourth quarter of 2001. This profit
was mainly attributed to its ability to reduce costs in stocking and shipping goods. Amazon had
sales record 0f $1.1 billion in the fourth quarter of 2001 which was a 15% increases over the
sales recorded during the same period the previous year. In 2002 Amazon recorded sales of $3.93
billion which was 26% higher than the sales of 2001($ 3.12billion).

Question 2
Why was Amazon apprehensive about outsourcing inventory management? Do you think it was
a wise on its part to go ahead with its decision to outsource inventory management? Also
comment on the companys idea of selling other retailers products on Amazon.com.
Answer
Amazon was apprehensive about outsourcing inventory management because maintaining large
inventories for satisfying all customers was a costly affair; moreover a huge amount of capital
was locked in the form of inventory which can be used for other purpose such as increasing
distribution channel. Outsourcing inventory was a risky affair as when Amazon managed its own
inventory; it had earned the reputation of providing superior customer service, which was its
biggest strength.
According to our point of view it was a right decision to outsource inventory as maintaining a
huge inventory was harming Amazon. Maintaining inventory at the cost of profit cutting was not
a good decision. As we can see in the case Amazon did not fully outsourced the inventories it
keeps things which were popular. It was a very good way to cut down its expenses and
concentrate on core activities. For outsourcing it used drop- shipping model, though it faced a lot
of problems like reverse logistics and multiple delivery then also it was profitable.
The idea of selling other retailers products on Amazon.com was very profitable according to
case. When in early 2001, Bezos came up with the idea of including the products of competing
retailers and some used items on their websites. Amazon earned almost the same profit selling on
commission as it earned selling on retail. An advantage of these features was that the customer
could now verify the prices of Amazons products vis--vis those of the other retailers. So the
company did not need to advertise its low prices. Said Bezos, giving people the choice to buy
new and used side by side is the good for the customers. Give them the choice. They are not
going to hurt themselves with that choice. The data we have tell us that customers who buy used
40

books from us go on to buy more new books than they have ever bought before. They may not
want to plunk down $25 for a brand new author theyve never tried. This lets them experiments.
By 2003, Amazon only handled the net orders, the companies handled the inventory. This service
proved to be immensely profitable for Amazon.

41