Amazon Case Analysis

A case analysis on amazon’s Supply chain management INTRODUCTION Company Background Formerly known as Cadabra in 1994, Amazon (Amazon.com) is known as one of the world’s largest online retailer and a prominent cloud service provider. They engage in the retail sale of consumer products and subscriptions not just in North America but also internationally. Jeff Bezos, the founder of Amazon, started his company from his garage in Bellevue, Washington. He was initially a book seller, and during Amazon’s early operation, the business was able to ship books to 50 states in the U.S. and 48 other countries. This was made possible by the funding of Nick Hanauer’s investment of $40,000 and another from Tom Alburg with $100,000. From just selling books, Jeff Bezos continued to make changes and expand his business by adding new features, introducing movies and music to his company, and partnering with other companies to be sold in Amazon for a small commission. Currently, Amazon operates at their headquarters in Seattle, Washington with individual websites for software development centers, customer service centers and fulfillment centers in many locations around the world. It also operates in three segments, North America, International, and Amazon Web Services (AWS) which is a comprehensive, evolving cloud computing platform. The first AWS offerings were launched in 2006 to provide online services for websites and client-side applications. They are now able to sell electronics including Kindle, Fire tablets, Fire TVs, Rings, and Echo and other devices. Services also include Amazon Prime which is a membership program that provides free shipping of various items; access to streaming of movies and TV episodes; and other services. Mission & Vision Statement The mission statement of Amazon is “We strive to offer our customers the lowest possible prices, the best available selection, and the utmost convenience.”. With this, we can tell that Amazon strives to become cost-friendly for its customers. They wish to give the customers the best and high-quality products with minimal costs. Amazon made this possible to its customers by ensuring the global shipping rates are affordable as well as providing discounts and benefits through its membership program. They also wish to satisfy customers by being able to provide a wide variety of services and products. Lastly, Amazon, through its online systems, are able to give top convenience to its customers at the comfort of their own home. On the other hand, Amazon’s vision statement focusses on dominating at the global level while giving its customers worthwhile shopping experience. Corporate officers The key executives of Amazon are Jeffrey P. Bezos, Founder, Chairman, President, and CEO; Brain T. Olsavsky, Senior Vice President and CFO; Jeffery A. Wilke, Chief Executive officer of Worldwide Consumer; Mr. Andrew R. Jassy, Chief Executive Officer of Amazon Web Services Inc., and; Shelley L. Reynolds, Vice President, Worldwide Controller and Principal Accounting Officer. Corporate strategy Amazon makes use of a corporate strategy considered to be a concentric diversification. It is one of the different strategies adapted by organizations to attract new customers and increase appeal to present ones. This involves having to introduce new products or services to expand market share such as in the case of Amazon introducing grocery shopping options to their site called Amazon Go and Amazon’s Whole Foods, Amazon apparel that introduces clothing subscriptions, and Amazon Prime on top of the already operating Amazon Bookstores Amazon Prime that also offers discounts, timely deliveries, waiving of shipping fees, and giving out benefits to avoid state taxes, overall lowering the price further. This experience has helped in improving customer satisfaction. Amazon’s strategy also takes in to account the leveraging of technological capabilities for business success and following a cost leadership strategy aimed at offering the maximum value for its customers at the lowest price. This strategy is to build e-commerce competitive advantage through continuous improvement of information technology infrastructure. In relation, the company also has the strategic objective of heavily investing in research and development to optimize the performance of its IT resources. This strategy also allowed Amazon to minimize its price levels and in turn lower the prices for their products and services which is quite significant in their aim to appeal to their customers. This has helped Amazon stay in line with the fulfillment of their vision and mission statement. Amazon makes use of Big Data Analytics which is a tool used to map consumer behavior. This has brought Amazon the competitive advantage where it focus on technology, actualizing the benefits of economies of scale, and leveraging the efficiencies from the synergies between its external drivers and internal resources have been the cornerstones of its business model. What can be noticed from physical stores is that they do not post the price of the items along side them. As a matter of fact, the customers use their phones or a built-in kiosk in the stores so that they can know the price of the products. Amazon uses this to map out the browsing behavior of their customers. Despite the ongoing competition with Walmart and eBay, with their use of concentric diversification we can tell that Amazon focuses mainly on the customer satisfaction rather than the competitors. Amazon have outlined four principles that guide the company: customer obsession rather than competitor focus, passion for invention, commitment to operational excellence and long-term thinking. Their services focus on selection, price, and convenience. Supply Chain Structure Amazon’s Supply Chain involves the combination of multi-tier inventory management, superlative transportation, and a highly efficient use of Information Technology. Amazon’s distribution strategy also involves four components, these are warehousing, delivery, technology, and manufacturing. In warehousing, warehouses are placed near populated areas and inventory is spread among the to ensure supply can meet demand. Mini hubs are also found near smaller areas I order to provide costumer service to those that do not live in megapolises. In terms of its inventory, Amazon heavily depends on outsourcing. Regarding this, Amazon had decided to outsource only some part of its inventory for the purpose of reducing risks and optimize services. The products with the highest demand are the ones that are being managed in-house while other products are to be delivered by distributors on demand. With their use of multi-tier inventory, they are also able to keep track of inventory, systems, and operations in real-time. Amazon divides their inventory into three segments. First is the Amazon’s distribution center, next is the wholesaler and partner DCs, and lastly, the publishers or manufacturers, vendors, and third-party sellers. If you are a third-party seller selling in the Amazon marketplace, you are given two fulfillment options. One is the Fulfillment by Amazon (FBA) which allows sellers to simply let Amazon handle all the listing-keeping your product in their inventory, shipping, and other customer services. The other option is to sell your own products at your own fulfillment. In the delivery of products, Amazon divides its customers into different segments that follows the price differentiation strategy. These segments are one-day delivery, free super saver delivery, first class delivery and Prime customers delivery. These segments offer customers to choose an option of paying higher for faster deliveries or remain at a traditional lead time. Users of Amazon can now receive their orders within hours through Prime shipping. Amazon uses Amazon-branded trucks and delivery vans as mode of transportation as well as drones for Prime Air users that land in your backyard. Some other third-party delivery companies such as FedEx and UPS are also part of their distribution channel. As for the technology, warehouses are manned with Amazon robots as well as the said drones in delivery. With this, they are able to cut costs as well as resolve the problem with issues regarding Amazon’s unsuitable working environment. For the manufacturing, despite being an intermediary for third party seller, they are also able to produce their own product and with that, decided to procure on their own. This allowed them to cut down on cost. The products they manufacture themselves are offered as branded lines ranging from household goods to pet goods. Another part of the Amazon’s Supply Chain Management Structure is the use of the push-pull strategy. This strategy talks about how the products are pushed towards the customer (push strategy) and how customers are pulled towards a product (pull strategy). On the case of Amazon, they use the push strategy on the inventory-by putting warehouses closer to the customers-while shipment of orders is done in a pull strategy- by selling products from the thirdparty sellers. ANALYTICAL TOOLS A. SWOT Analysis A.1 Strengths  Amazon has the competitive advantage against other eCommerce when it comes to their use in technology and leveraging in Information Technology. They make use of drones in their delivery which allows them to distribute orders in as early as 30 minutes. This helped them vamp up on the customer experience.  Amazon has about 1,400 Kiva robots in their three distribution centers, this allowed them to cut further costs and this lay back on product prices as well as improve productivity and warehouse efficiency. Not only that but they were able to address public critic against unfavorable working environments as well as long commute of warehouse employees to and from their distribution centers.  Using their superior logistics and distribution system, they were able to fulfill customer demands and this has resulted to a competitive advantage against eCommerce. In terms of product returns, because of the systems in Amazon, processing returns as well as the actual return can just take up to 30-days whereas other eCommerce such as Walmart, one of its leading competitors can take as much as 90-days to process.  Amazon have a low-cost structure. In 2019, this let them earn a whopping $195.009 billion in revenues which is quite more than revenues made of by other online retailers combined based on their financial reports and Digital Commerce 360, a data that showed U.S’s eCommerce Growth Rate. The reason behind this success was because of the low-cost structure of Amazon along with its wide range of selection and the number of thirdparty sellers they have. A.2 Weaknesses  A part of Amazon’s strategy to increase customer appeal, they offered free shipping to help cut costs on the customer’s part. But as Amazon increases its frequency to give such privilege, they may also risk losing margins. Distribution and transportation can be costly and with no profit outweighing it, this might affect the company’s financial performance. Amazon Prime lets customers enjoy the free shipping fee for an annual fee of just $79. Because of the privilege, a survey of 300-Amazon customers by the Consumer Intelligence Research Partners shows that Amazon Prime users buy more than 50% more frequently than non-Amazon Prime users. This data also showed that shipping expenses incurred by these Prime users have far exceeded the annual subscription fee. This indicates that the more Prime users Amazon has, the more money they lose. This  becomes a factor in the Supply Chain Management because supply chain’s aim is to become cost-effective. Amazon may be too dependent on external delivery companies such as FedEx and UPS. If in case these courier companies become unreliable, the Supply Chain Management of Amazon, specifically in the distribution of the products may become affected. This means that despite how flawless or superior the inventory strategy and other parts of their Supply Chain is, if the end receiver of the chain is deficient then it will still affect the overall chain and even create an unlikeable effect on customer satisfaction. A.3 Opportunities  Because of the ongoing pandemic, customer’s engagement has significantly increased. This gives Amazon the chance to welcome in new customers. A survey by Engine found that people are spending an average of 10-30% more online. This includes Grocery eCommerce that had increase sales on the second week of March because a lot of people have opted for buying goods online that are no longer available in their local grocery stores.  They can expand global footprint and to developing countries such as India who have not yet matured to online selling. Allowing themselves to penetrate the market of developing would not only bring them more competitors but also widen their customer portfolio and increase margins. A.4 Threats  Amazon’s cost structure has become easily prone to imitation. The emergence of Walmart and eBay which are some of the biggest competitors of Amazon allowed them to become the second in the top leading eCommerce in the market. Upon introducing free shipping to its customers, Walmart and eBay have also done the same. There are also new entrants to the market that may copy Amazon’s cost structure.  The increase in transportation costs may affect Amazon largely considering that they are reliant on courier companies and since they offer free shipping, they would have to bear of the costs and effectively lose profits. B. Michael Porter’s Five Forces Analysis B.1 Threat of new entrants The threat of new entrants is low. According to a statistical data from Statista, online user penetration in eCommerce had increased by 35.5% as of 2020 and is said to increase more by 46.5% by 2024. Despite this increase, it would take them a lot of investment, time, and effort to o against such a big company like Amazon. It would also require intensive strategies in warehousing, distribution, logistics, and marketing. Although this may not be the case for everyone in the eCommerce, Amazon has had a long start and with its continues improvements, new entrants may have a hard time competing against the company. B.2 Threat of Substitute Products The threat of substitutes for Amazon is high. Walmart, eBay, Alibaba.com and other online retailers have little differences in in product variation. Amazon also does not sell anything unique. They sell books, electronics, household goods-all of which other online retailers also offer to the market. Because of this, they can be threatened by several substitutes. An example would be with their delivering services call 2-prie. Walmart have also adapted such tactic, there is also the sale of electronics which Alibaba.com specializes in. B.3 Bargaining power of buyers Amazon’s buyers have a high bargaining power. A part of Amazon’s mission statement is to bring customer satisfaction by giving a wide variety of selection and convenience. They make sure that products are delivered with less lead time as well as handle any returns safe and sound. They have also introduced many products for the buyers to choose from as well as avail free shipping which cuts costs on the buyer’s point of view. Other than this, because of the high increase of online retailers in the market, buyers may have a lot to choose from, even if it is not from Amazon. Let us also consider the fat that Amazon does not offer anything unique so buyers can opt for another retailer. Thus, the buyers’ bargaining power is high against Amazon. B.4 Bargaining power of suppliers The bargaining power of suppliers against Amazon is low. Amazon lays out several regulations that third-party sellers must follow thus garnering the upper hand amongst its suppliers. Because Amazon is such a big company, these suppliers does not have any power to influence the product prices in Amazon, but they should always be ready when Amazon needs supplies, especially when demands rise. Other than this, since the bargaining power of buyers are high, the power of suppliers may be low since the buyers have many other products-including suppliers- to choose from. B.5 Intensity of Rivalry The rivalry in the eCommerce world is high. It is also said that number of players in the recent years has increased and continues to increase. Most online retail stores now offer similar products and services such as free shipping and 2-day deliveries, both of which is practiced by Amazon and Walmart, the top two most competitive online retailers in the world. There are also online retailers that specifically have target products such as electronics like Alibaba.com who is also a competitor of Amazon. And considering that Amazon also have electronics in their markets, they may have the lower- hand in competing against a company that specializes on that certain product. There is also the existence of local retailers that can offer similar products at a lower price. PROBLEM IDEATION Statement of the Problem On the of issues of Amazon is the bullwhip effect. Bullwhip effect is a phenomenon in the supply chain that describes how small fluctuations in demand at the retail level can cause larger fluctuations in demand at the wholesale, distributor, manufacturer, and raw material supplier levels. This usually happens when a retailer has become overly reactive to the demand that it causes a domino effect on the supply chain. This may also be the effect of having little coordination with the different levels of the supply chain. Another problem with Amazon is that they have become too dependent on courier companies to cut back on transportation costs. This has become a problem because Amazon has been gaining negative feedbacks because there are times when FedEx and UPS become inefficient in delivery such as delays in deliveries when the demand is high. This is one of the problems Amazon must face in their supply chain. To emphasize, no matter how perfect or flawless the inventory and technology system they have, if the distribution to its customers is being complicated then it may affect profit margins in the long run. Considering that it is also Amazon’s mission to provide the best customer service, this may affect public opinion on them. Causes and Indicators of the Problem Bullwhip effect usually begins when there is little coordination in the supply chain. This can also be brought by the excess focus of a company on customer demand. Other factors may also include forecasting based on insufficient information, lack of communication, lead-time issues, and less optimal decisions made on the supply chain. In the case of Amazon, yes, they do focus too much on customer satisfaction and demand but the reason behind why they are facing such phenomenon is because there is lack in integration in their supply chain, specifically in their inventory strategy. We have mentioned before that Amazon makes use of multi-tier inventory. There have been instances where the different tiers of inventory lack in real time changing of information. Even though Amazon uses high quality Information Technology, problems like these are not avoidable. That is why Amazon continues to improve their systems. As for the usage of courier companies, Amazon opted for their services because it is cost effective and more efficient. This is a result of Amazon’s dedication to reduce its costs in operation and in turn reduce the overall product price. Part of their supply chain network is to use small carrier partners like UPS to ship goods from their small transportation hubs in high demand areas with the same purpose of cutting back on transportation costs. Reports have shown that more 50% of Amazon’s delivery services were done by FedEx and UPS. Impact of the Problem Bullwhip effect can be costly. Excess inventory can result in wastes when the customer demand is not increased. On the other hand, having too little inventory can cause unfulfilled and unavailable products. They can be detrimental to customer satisfaction and overall experience. Insufficient inventory also has effect on lead time of deliveries. Businesses use safety stock as a buffer against demand fluctuations. However, safety stock is not a solution to the bullwhip effect, but it provides enough product to fill orders until more arrives from suppliers. It can lessen the effect’s symptoms, as it is used as a safeguard for costly variables in supply chain management. Another is the problem with courier services. Just as we mentioned before, because Amazon relies too much in inefficient courier companies, this has caused negative reputation for Amazon. The prolonged lead-time of the products especially when the demand is high has decreased customer satisfaction. RECOMENDATION Alternatives A. On Bullwhip Effect Amazon may choose to improve on supply chain communication and collaboration. This would let them align all functions of the supply chain network. When there is better communication, response to demand changes is also improved and thus reduce excessive or insufficient inventory. Although disadvantage would be the need to change in software when the current technology used is insufficient to provide real time communication Another step that amazon may take is to use better forecasting and visibility tools. This enables the company to be more accurate in demand forecasts. Although it may be costly and that forecasts are not 100% reliable and demands ca change over time, this may help them in better understanding customer behavior. Amazon may also opt for exploring demand-driven approach to supply chain management. This makes use of all the alternatives used above. It also helps the company gain insight in supply chain occurrences and provides a more coordinated holistic approach. Disadvantages may include timeliness in terms of deciding the right strategy to be used. They can also set up stock reserves if in case there is insufficient B. On Courier Inefficiency Amazon may start building its own shipping and logistics network and become more independent in distribution. Although it will be costly at first and timely in setting up the whole system, it will hopefully become more cost efficient in the long run as well as provide a much better customer experience. Amazon may also wish to retain their current distribution strategy. But it is better to switch to another courier service besides FedEx to reduce negative feedbacks. UPS and USPS are known for better shipping services, especially with UPS that is cheaper. Although the risks remain, UPS, USPS and other courier companies cannot guarantee a perfect distribution system to Amazon and its users. Recommended Strategy Amazon’s bullwhip effect, just like any other companies, is unavoidable. But what we can do is to lessen the possible damage it can do. The first thing hey should do is to not overlook the bullwhip effect. Despite the intensity of technology Amazon has, just as mentioned earlier, it can never be prevented. Another is that they should look at demand-driven strategies which incorporates all other alternatives such as improved communication and coordination as well as looking into forecasting as secondary basis for inventory sourcing. With regards to the courier inefficiency, it is best that Amazon expand on the Amazonbranded shipping rather that rely to much on third party companies. This may be costly at its first implementation, but the benefit will outweigh its cost in the long run, preventing more casualties and improving customer service. Not only that but it also will give the company a better connection with the customers and reduce barriers. Implementation To implement the said recommendations, it will take Amazon some time, effort, and high investments. Building up shipping networks as well as outsource materials for building the Amazon-branded trucks or ships may take a lot of funding and time. It will also take a lot of evaluation. The use of private fleets may or may not have guarantee to go as successful as any other risks. These risks are what Amazon must prepare for especially in changing their old ways. Amazon is also huge for having the best Information technology, so building new forecasting systems will probably be an easy job for them. And besides, even now, they continue to improve their systems. CONCLUSION Amazon is best known for their effective and cost-friendly Supply Chain Management; it plays a crucial role on the company’s success. Thus, it is only best that Amazon continues to work on improving their system to provide better service to their customers in-line with their mission and vison. But with these, it is also important that they do not compromise their profit like with what happened with their free-shipping service. Just like any other Supply Chains, it is crucial that they nurture communication and coordination in all their structures especially with their partners. It is supply chain management’s aim to become efficient and cost-effective, after all and any changes to this system will greatly affect Amazon’s operations.