AMAZON. COM’S INVENTORY MANAGEMENT

Overview

LAUNCH PRODUCT & FEATURES OFFERED VALUE PROPOSITIONS STRATEGIC ALLIANCES INVENTORY MANAGEMENT INNOVATIVE INVENTORY OUTSOURCING FUTURE CHALLENGES

1995- Launch of Amazon.com (Online Shopping Site)

Timely shipment satisfied customers improved market share repeat business

Background

First e-commerce site to use collaborative filtering technology

Business Goal: ‘GET BIG FAST”

JEFFREY PRESTON BEZOS, CEO, AMAZON.COM

Graduated in Electrical Engineering and Computer Science in 1986

Idea: Impact of the internet on online shopping

Criteria: Market Size, Price Setting, Range of Choice

Started venture in Seattle with a vision to create a ‘VIRTUAL BOOKSTORE’

Journey

Amazon.com- Amazon of the book selling world

Immediate priorities: arrange for funds and build necessary software

PRODUCTS LAUNCH DATE

Books July 1995

Music June 1998

DVD/Video November 1998

Auctions March 1999

Electronics July 1999

Toys July 1999

Zshops October 1999

Home Improvement November 1999

Software November 1999

Video Games November 1999

1st MONTH OF OPERATIONSAmazon shipped books to 45 different countries

WITHIN FEW YEARS

Several new e-ventures were introduced and were threat to Amazon

COUNTER ACTION

Amazon was ranked among the top 20 internet sites in 1998

‘When you think of web shopping, you think of Amazon first.’ - An analyst

Amazon was ranked as ‘The best online shopping site’ in

2000 by The Forrester Power Rankings

By the end of 2002, Amazon had 22.3 million registered users on its site

By 2003, Amazon became the biggest book, music and video retailer on

internet and offered more than 4.7 million books, videos, music CDs, DVDs, computer games etc

Highlights

Value Proposition

SELECTION

PRICE

CUSTOMER SERVICE

CONVENIENCE

Minimum download time Selection from wide product range Had inventory of millions of items Book lovers can post/read reviews on the site Book search option- by author, subject, title or publication 40% discount on selected feature books, 30% on hard covers and 20% on paperbacks Shipment within one week Notification to customers via emails Secured online payment gateway

‘Amazon had earned a great reputation for its excellent customer service. It delivered all the goods within the estimated time, mailed the

customers about their latest books of interest and invited customer reviews on the site, thus developing a strong relationship with its

customers.’

COMPANY NATURE OF BUSINESS

Ashford.com Online retailing of luxury and premium products

Audible Internet delivered spoken audio for PC based listening

Della.com Online service for gift, gift advice

Drugstore.com Online retail and information source for health, beauty, wellness, personal care and pharmacy

Gear.com Online source for brand name sporting goods at discount prices

Greenlight.com Online auto purchasing in partnership with local dealership

Kozmo.com Online one hour delivery serve for entertainment and convenience products

HomeGrocer.com Online grocer shopping and home delivery service

Living.com Online retailing of home products and services

NextCard, Inc Online issuer of consumer credit cards

Pets.com Online source for pet products, information and services

Strategic AlliancesAmazon’s Partners

1. Increased range of products and services to its customers

2. Increased revenue in the form of marketing fees from its partners

3. Amazon’s stake in these companies increased its market valuation

Advantages

Amazon tried to promote each of its partners by sending emails to its customers and by including their marketing materials in the shipments made to the customers

Question 1

Managing inventory is one of the most important tasks of a retailing company. If there are not enough

goods in stock some of the customers might be disappointed. Stocking too many will reduce the

profit margins. Do you think Amazon.com adopted the right strategy while trying to manage its

inventory? Was it successful in its task?

Have a clear understanding of customer’s delivery needs Coordinate with wholesale suppliers and independent

producers to make available to customers both current and the soon to be released books

Provide two day delivery on most orders Allow customers to query the status of their purchases

and track their own shipments Align, supply and delivery to other functions such as

marketing, sales and customer services

Objectives of Amazon’s Supply Chain Management

Jeff aimed at ‘hassle-free operations’, customer satisfaction, time and cost efficiency Building warehouse cost was around $ 50 million and to finance this Amazon issued $ 2 billion as bonds In 1999, Amazon added 6 warehouses (10 in total) in Nevada, Kansas, Kentucky, Georgia and North Dakota It increased its warehousing capacity from 3,00,000 sq ft to 5 million sq ft The return rate was only 0.25% compared to the return rate of 30% in many segments of the online retail industry Excellent use of technology – coding, computer signals etc Systematic Procedure Developed proprietary software In 1999, adopted the strategy to store all possible product range

In 2000, Amazon managed to reduce the size of its inventories because of efficiently managing the warehouse Careful decision about ‘product’, ‘supplier’ & ‘distribution centre’ i.e. ‘which product to buy’, ‘from where’ & ‘which centre it would send its product to’ Decided to buy its books, CDs, videos etc from publishers Maintained good relationships with vendor Huge investment in infrastructure (revamped the layout of its warehouse) and technology (refining its software helped in demand forecasting) Aimed at cutting down expenses via outsourcing some of the routine activities Partnered with other companies for shipping the inventory

Recorded its first profit of $ 5 million in fourth quarter of 2001 (deficit of $2.86 billion in the 7years since its launch)

Sale record: $ 1.1 billion in Q4, 2001

$ 3.12 billion in 2001

$ 3.93 billion in 2002 Key reasons: Ability to reduce costs in stocking and

shipping goods

Result

Question 2

When it managed its own inventory, Amazon earned the reputation of providing superior customer service. Despite this it decided to outsource

inventory management. Do you think Amazon had taken the right decision in outsourcing this key area

of its business?

In early 2001, Amazon decided to outsource its inventory management with a reason to earn more profits

Keeping a stock of frequently purchased/ popular items Acted as a trans-shipment centre between distributor to the customer Main Distributors:

Ingram Micro – whole sale distributor, handled books & computer

Cell Star – handled cell phone sales In August 2001, Amazon entered into an agreement with Ingram

Micro Inc (largest wholesale dealer of electronic goods & SCM services) to provide logistics & order fulfillment services for desktops, laptops etc at computer store at Amazon.com. The aim was to maximize operating efficiencies, streamline supply chain logistics and reduce inventory costs

The ‘Drop-shipment Model’ was not very effective

Question 3

In 2001, while Amazon was still struggling to make a profit, it decided to shell the products of

competing retailer on its site, along with its own products. Do you think Amazon took the right decision in selling others’ product on its site or

should it have concentrated on promoting its own products?

In 2001, Amazon decided to include products of competing retailers and some used items on their website.

Advantage :- Customer could now verify the prices of Amazon’s product vis-à-vis those of other retailers.

Reduces the cost of advertisement of there low pricing of products as customers can compare now.

In 2003, Amazon handled the orders for Borders, Target, Circuit City, Toys “R” Us.

Amazon only handled the net orders, the companies handled the inventory.

Services proved to be immensely profitable for Amazon.

‘Customers who buy used 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 ,they have never tried’.

“This Let Them Experiment”.

In 2003, Amazon’s warehouses could handle thrice the volume they used to handle in 1999.

Cost of operating then decreased from 20% of Amazon’ revenues to less than 10%.

Inventory efficiency :- inventory turnover which got 20 times a year while for most other retailer it was below 15.

In 2003, Amazon decided to slash its shipping charges.

Amazon needed to stock only 15 days worth of inventory and was paid for its sales immediately by credit card.

Profitable changes after implementing it

Need to look at the profit prospective and should aim to make it more.

Return of products by the customer was one of the challenge to be faced.

Several incidents of thefts and product damage were reported as the shipping goods were at times left at the customer’s doorstep.

Should save the profits of inventory from Reverse Logistics and Multiple Delivery.

Need to place the inventory perfect to avoid the delayed orders and lost time. 12 % of their inventory was stored at wrong places.

Management of warehouses were required as they were too much in numbers and sales were little less as compared to no. of houses.

Future Challenges

Thank You