Logistics and Supply Chain Management

Case Study - Amazon

Team: Siddhant Masson Latika Sharma Olga Zehe
25.06.2013

Narendra Ganesh Sajiv Sukumar Rachit Jain

Logistics and Supply Chain Management

Dr Umesh Bahadur
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Agenda
Introduction SC and distribution system in the US Current Distribution in Europe Expansion in Europe Way foward

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Tremendous growth
Introduction

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The History of Amazon

Introduction

Build a place where people can find and discover anything they want to buy online and endeavor to offer customers the lowest possible prices.

Jeff Bezos
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The History of Amazon

Introduction

1995: founded by Jeff Bezos 1995: launch of amazon.com

1997: stock market launch 1998: market entry in Europe 2003: first profit 2013: launch of amazon.in

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Company Facts I
Introduction

Vision: Customer: Employees:

Be the most customer-centric company Consumers, sellers, enterprises and content creators > 65.000

Annual Report 2011

Net sales Net income

$ 48.7 B $ 0.63 B

Free CF

$ 2.1 B

Source: amazon services Europe presentaion, 2012

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Company Facts II
Introduction 164 Million active sales accounts

> 100.000 Amazon Web Service users

> 2 Million active seller accounts

Source: amazon services Europe presentaion, 2012

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Evolution of Amazons Supply Chain and Distribution Systems in the US

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Initial Setup
Evolution of Amazons Supply Chain and Distribution Systems in the US

Procurement & Distribution Strategy

Hold modest inventories

Had a single Distribution Center in Seattle Stocked only 5% of its orders, while it offered 2.5 mn titles These were high demand items Order fulfillment = 2-3 days

Rely on wholesalers (Ingram, Baker & Taylor)

Sourced rest on as-needed basis upon receipt of customer order Wholesaler to DC lead time = 2-3 days Order fulfillment = 4-7 days

HIGH INVENTORY TURNs 70 turns per year in 1996

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Exponential Growth & Challenges

Evolution of Amazons Supply Chain and Distribution Systems in the US

In 1996 and 1997 Amazon grew quickly

Found difficult to support increased traffic and sales while maintaining its outstanding service levels

Expanded Seattle DC capacity by 70%

Increased number of titles held in DCs from 2,000 to 200,000

Launched second DC at Delaware

But with growing competition and ever increasing traffic needed a transformation

Get Big Fast Strategy

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Establishing Amazon.com
Evolution of Amazons Supply Chain and Distribution Systems in the US

Initial setup
Pure online book retailer Procurement strategy

Get big fast - Strategy

New product lines added at fast pace Procurement strategy

Hold modest inventory Rely on wholesalers

Direct accounts with publishers

One small warehouse in

Seattle Order fulfillment: 4-7 days

8 warehouses throughout the US higher stocks

Ensured fast delivery times

Inventory turn: 10

Inventory turn: 70
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GET BIG FAST STRATEGY

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Distribution center expansion

Evolution of Amazons Supply Chain and Distribution Systems in the US

How many DCs to build? Where to locate these DCs?

Used Network modeling to identify optimal number and locations of DCs
Key considerations 1) Supplier locations 2) Customer locations 3) Inbound & outbound freight rates 4) Warehousing expenses 5) Labor costs 6) Tax rates 7) Employment levels 8) Availability of suitable distribution facilities to lease

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Specialized or All products DCs

Evolution of Amazons Supply Chain and Distribution Systems in the US

What product types should the new DCs carry?

Large variety of products (Barbeque grills to CDs) High variability regional and seasonal demands Different storage requirements About 35% orders included multiple items

Each DC would handle full array of items

Amazon decided to go against specialized distribution facilities for different product categories
This was based on transportation costs, time to deliver and cost of dealing with multiple items
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Warehousing and Order Fulfillment

Evolution of Amazons Supply Chain and Distribution Systems in the US

Picking with pick-by-light system, radio-frequency technology

and voice technology

Pick profiles and pick lists Metrics to measure worker performance

Number of items picked/hr Free replacement rate

Inventory accuracy etc.

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Revenue vs. Net income

Evolution of Amazons Supply Chain and Distribution Systems in the US

3000

2500
2000 1500 1000 500 0 -500 -1000 -1500 Revenue Net income

1997

1998

1999

2000

-2000
Higher Capital expenses due to DC expansion and higher fulfillment costs
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Cost reduction initiatives

Evolution of Amazons Supply Chain and Distribution Systems in the US

Use of Six Sigma (DMAIC)

Identification of bottlenecks Redesign of major distribution processes Reconfiguration of DC layout reduce picking times Additional storage capacity for holiday season by leasing facilities

Improved customer demand forecasting software Integration of suppliers management systems with Amazons inventory, warehouse and transportation system Option of drop shipment for single-item orders always look for the most efficient, effective fulfillment method for each order
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Initiatives to gain profitability

Evolution of Amazons Supply Chain and Distribution Systems in the US

Postal injection/Zone skipping: Orders are delivered to major

cities bypassing the postal services sorting hubs

+ +

Elimination of process steps Reduction of shipping costs by 5 to 17%

Closing of 2 DCs + 1 call center Free shipment for orders over 25 dollar Third-party seller transactions (ToysRUs, PET.com, etc.)

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AMAZON.COM in Europe

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Launching Amazon in the UK and Germany

Entered Europe in 1998 targeting Germany and UK

Represented the Largest Online market in Europe Largest market for books in Europe

Acquired leading online book retailer in each country

Bookpages.co.uk & Telebuch.de

Get Big Fast Strategy Started incorporating a wider variety of Products

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Launching Amazon in France

No acquisition Built Amazon France from scratch

Building a database containing all the products to be displayed on the website

Setting up accounts with the publisher & distributers Setting up French Warehouse

Faced tough competition from the existing players in France UK + Germany + France + Japan International segment of Amazon

Internatonal Sales grew 74% in 2001 21% of the total sales of Amazon
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Challenges in Europe
Amazon decided to maintain three dedicated websites for each of
the Customer bases

Addressed the selling regulations in each country

Germany & France Book list prices were fixed and could not be discounted by retailers

To maintain competitive pricing despite selling regulations Introduced free shipping in 2001

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Challenges in Europe
Amazon provided local preferable payment alternatives to Credit Cards

Checks for French Customers Postal Order for German Customers

Could not replicate the US procurement strategy in Germany & France due to different supplier market factors

France: No wholesaler in Media Germany: Single Wholesaler in Books & Media EDI penetration was low Had to establish relationships with hundreds of publishers & distributors

Amazon relied on National postal service providers

Excellent coverage for the domestic coverage Unreliable cross-border logistics service

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Organization Of Amazon European Subsidiaries

Independent subsidiaries run in a decentralized manner

Headed by Country Manager UK: Marston Gate Logistics Park Chosen due to low cost Germany: Hersfelg Chosen due to central location

UK & Germany DCs are automated whereas the French DC in manual

Amazon embarked on a major cost-cutting & restructuring effort to reach profitability

Consolidate functions in Amazons European subsidiaries

Customer Service Operations transferred from Netherlands to existing centers in UK & Germany Unify the Marketing & Branding functions of the three subsidiaries at the European level to build the Amazon Brand
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2001: Enter Tom Taylor

Director of European Supply Chain Operations Standardization & Synergies among operation processes across Europe

Defining & Implementing comparable metrics like Vendor Lead time, Fulfillment rate

Major Performance Changes

Raised proportion of high velocity items in stock Created & Implemented Vendor scorecards Improved the accuracy of forecasting tools Reduced supplier lead times Decreased Customer order backlogs
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Issues
Supply Chain Type

DC type

Customer type

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Assessing the EDN opportunity

Significantly expand product selection of current sites through fulfillment from

other DCs

Facilitate Global sourcing from lowest cost vendors Reduce the risk of relying on a single DC to serve a large base of customers

The existing DCS could be used as supply centers for expansion into other
European nations

Centralized purchases leading to volume discounts

Link different sites to a single EDC

Questions facing Tom Taylor

Keep the three existing DCs to fulfill customer orders Keep two DCs Northern & Southern Europe

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Potential Roadblocks
Immediate impact on Transportation would most likely be reduction in
delivery service levels

Amazon in France & Germany uses the postal service which delivers within one day even with the standard shipping option owing to proximity of local DCs

With the implementation of the EDN cross border use on the national postal
services will not be effective

Even though Amazon may be planning to extract volume discounts suppliers of some products like media are very concentrated

Eg. Sony Germany and Sony France would carry out separate negotiations

In case of a Central DC in Germany What if both the supplier and the customer are in UK?

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Approaches under EDN

Continue with the current strategy of holding inventory in all 3 DCs with the EDN as a
back-up

This could lead to lower transport costs owing to local transportation Higher inventory holding costs

Selectively share Inventory among European sites to reduce Inventory holding costs

This could lead to higher transport costs Could also lead to higher delivery time

The European Operations can be integrated fully with the three sites inventory physically mixed based on demand patterns and inventory & transportation costs

Could lead to higher delivery time Will require a relook of the entire network Can be achieved through the use of Network optimization tools

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Current Distribution Centers in Europe

http://www.mwpvl.com/html/amazon_com.html
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Thank you!
The Amazon Network

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