A case study of Amazon on its supply chain management

INTRODUCTION
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 Amazons supply chain, recommendations and barriers to implement will be
discussed.

Company background
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 earths 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 Amazons networks of distribution centers. 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 centers 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, eBay 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 Amazons 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

Strategic fits
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 Amazons
supply chain successful.

Inventory outsourcing
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).

Push-pull strategy
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.

Inventory segmentation
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).
Amazons 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 Amazons 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 Amazons supply chain configuration now and future

Transportation
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.
Order sourcing
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 Amazons 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)

Transportation
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).

Technology
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 deliver
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 customers address. However, this innovation has not allowed to use nowadays.
The fastest possible will be around 2015 (BBC 2013).

RECOMMENDATIONS

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 writers 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).

CONCLUSION
Supply chain management plays a crucial role on Amazons successful. The companys
primary goal is to offer one stop service that customers can find everything on Amazons
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