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SCM - Amazon Case

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by

John Hansel

on 26 August 2013

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Transcript of SCM - Amazon Case

EDN
In USA
In Europe
In India
Shweta Nichani // Malavika Shiva // Prakriti Priya // John Hansel
Early Beginnings ...
- Founded in July 1995 - Initially a pure online book retailer with a selection of 1 million titles

- Quickly increased its selection to 2.5 million titles to become the “Earth’s Biggest Bookstore”

- Procurement strategy: Hold modest inventories and rely on wholesalers to build its online book catalogue and source its vast selection.

- Inventory turns high – 70 turns per year in 1996
Expansion
Capacity expansion: 50,000 to 285,000 sq ft
- A 70% expansion of the Seattle DC
- Launch of a second DC in Delaware
- Enabled the company to decrease lead times

Increased product variety:
- Added titles, Expanded product lines
- Reduced promised delivery times

Back office software:
- Development to support back-office logistics.
Fulfillment Infrastructure
Distribution Centers:
- How many & where

- Supplier and customer locations, Inbound and outbound freight rates, Warehousing expenses, Labor

- Additional factors ( tax rates, employment levels and the availability of distribution facilities)

Product holding pattern:
- Mostly, each DC held full array of products

- Wide range of product characteristics
- regional vs nation wide demand
- seasonal (ex- toys) vs uniform demand
Fulfillment Infrastructure
Equipment at the DCs:
- “Pick-to-light” system - employed lights to show
workers which items to pick sequentially and
how many.

- Radio-frequency technology - directing via handheld devices

- Voice technology - computers verbally communicate with workers

- Maintain “pick profiles” for fast-selling items

Key Metrics:
- To measure worker performance

- Number of items picked per hour, Replacement rate, Inventory accuracy, Number of hours from order confirmation to shipment, Cost per unit shipped.
Optimizations
Streamlining processes:
- Usage of Six Sigma DMAIC


- Simulate holiday season conditions:
- to identify bottlenecks
- "Flow manager" position

- Reconfigure DC layout: easier to locate sort and ship
(ex: frequently ordered items placed together, bestseller section)

- Aim to achieve a more continuous flow
Receive -> Picking -> Sorting -> Packing -> Shipping areas

- Additional storage leased during holiday season
Optimizations
Inventory management:
- Products at the right place, in the right amount and at the right time

- Refined the forecast software to anticipate seasonal and regional demands

- Established buying rules to better allocate volumes among wholesalers and direct vendors

- Integrating with suppliers systems

- “cascading” buying rules

- Wholesalers “drop shiping” orders
Optimizations
Delivery:
- “Postal injection” or “zoneskipping”

Other initiatives:
- Reduced its headcount by 15% – eliminating 1,300 jobs

- Consolidated operations
- closed two DCs (in Georgia and Seattle)
- closed Seattle call center

- Discount sales

- Free shipping
- on all orders over $99 in November 2001
- on all orders over $49 in June 2002
- on all orders over $25 in August 2002.
Beginnings ...
- Entered Europe in 1998 - UK & Germany

- largest online markets and the largest markets for books in Europe

- 2,000+ publishing houses

- Acquired Bookpages.co.uk in the United Kingdom and Telebuch.de in Germany

- Started Amazon.co.uk and Amazon.de

- 1.4 million UK titles plus 200,000 US titles - UK site; 335,000 German titles plus 374,000 US titles -German site.

- Duplicated US “Get Big Fast” strategy: added products

- In 1999: leading online bookseller, one million active customers
Key Challenges
- Cultural differences among Countries targeted

- International e-commerce success-better selection, more convenience, and better service

- European market-Aggregate of regional markets

- Comply with their legal and cultural norms
Key Factors
Maintain dedicated web sites for each of the three countries
- Similar functionality
- Unique language, editorial content and items
- 24 hours-a-day customer centers

Address selling regulations
- Germany and France- Fixed book list price, No discounts
- On-invoice purchasing price
- Comply with law & competitive offering-Introduced free shipping in 2001
- Promotional activities-clearance sales on slow moving

Payment options
- Credit card options - 38% of Europeans
- Alternatives – checks for French, postal orders for the Germans cu
- Cost - Major software customization , New processes
Procurement
- US strategy - could not be replicated in Europe - Different supplier market factors

- Europe: Relies on large number of small vendors unlike in the US

- Had to establish relationship with 100s of suppliers

- Large order cycle time with suppliers (typically Five days)

- Low EDI penetration in Europe, Vendors still used email/fax
Delivery
- Used National postal service carriers

- Excellent coverage & Fast deliveries

- Suited Amazon's Fast Delivery Model

- Customers used to fast delivery due to proximity of DCs

- However, Not a reliable cross-border logistics service

- Cross border Customer Experience: Delays or lost shipments
Organization of European Subsidiaries

- Ran in a decentralized independent manner

- Every subsidiary owned and operated a dedicated warehouse

- Each had dedicated operations
(ex: each had their own purchasing
department)
The Problem ...
Is running 3 decentralized independent DCs the most optimal way to operate ?

Could there be an integrated European Distribution Network (EDN) ?
Possible Benefits of EDN
- Significantly expand product selection

- Facilitate global sourcing

- Reduce risk of a DC failure

- Strategically locate the products

- Could select appropriate DC to fulfill order

- In case of expansion - EDN will be useful
EDN Implementation Options
Option 1 "Backup EDN":
- Hold inventory in all 3 DCs
- EDN functions as backup in case of disruption in a DC

Option 2 "Selective Share":
- Selectively share inventory to reduce inventory costs
- ex: a product category like consumer electronics could be based out of UK DC

Option 3 "Full Integration":
- Inventories physically mixed
- Optimized based on demand, inventory and transport costs
Option 1 "Backup EDN"
Pros
- Will address DC failure risk

- Simplest to implement

Cons
- No cost benefits of integrated inventory management

- No expansion of product selection

- Duplication of functions will continue
Option 2 "Selective Share"
Option 3 "Full Integration"
Recommendation
Should DCs be dissociated from country websites?
- Yes, will significantly boost product selection and deliver benefits of integrated inventory
- Go for the "Fully Integrated EDN" Approach

Should Amazon keep the French DC?
- Yes, lower lead times and more importantly for future expansion

If Amazon expanded into other European countries, should it fulfill these orders from an existing DC or should Amazon consider a new location for a new DC or hub?
- Case by case call ( depending on market size, lead time achievable & at what cost )
Case for EDN
Level of Integration
HIGH
LOW
It's crowded ...
But growing ...
Beginnings
E-Commerce in India
Possible supply chain issues*
- High logistics costs

- Physical infrastructure - a bottleneck?

- Demand side: High churn/low loyalty

- Supply side: Higher unpredictability

- Low technology usage by suppliers

- Cash flow: Payment modes
* SOURCE - News articles & association publications
Supply Chain Issues
High logistics costs
- Logistic cost is 13% of India’s GDP
( 11% in Europe and 9% in the U.S.)
- Transportation -> 39%
- Warehousing -> 24%

Physical infrastructure - a bottleneck?
- Weak infrastructure facilities in the country
- Delivery outside tier one and two cities a concern
- Tracking technology developing but not comparable with US/Europe ( GPS etc )
Supply Chain Issues
Demand side: High churn/low loyalty
- e-Commerce consumers in India exhibit low loyalty often switching to where the best deals are
- Even players with relatively strong brands (ex - flipkart) report churn as a significant problem

Supply side: Higher unpredictability
- Fragmented supplier network
- Higher unpredictability
- Current players complain of having to maintain high inventory levels
Supply Chain Issues

Low technology usage from the suppliers
- Technology implementation on the supplier end is relatively lower
- Poor information flow could be a significant issue

Cash flow: Payment modes
- Cash on delivery is an expected feature in India
- CoD gives rises to its own complications
- Lower card usage
Thank You
Pros
- Some cost benefits can be gained due to strategic positioning of certain product categories


Cons
- Could increase lead time for the "selective share" products

- Duplication of functions will continue
Pros
- All benefits of Integrated inventory management

- Most "expansion friendly" option

Cons
- Could increase lead time significantly

- Integration issues/costs ( IT, processes )

- Most difficult to implement - complex
- Entered in June, 2013 as amazon.in
- Earlier attempt with junglee.com (marketplace)
- Amazon.in currently sells books, digital media and consumer electronics
Drop-ship
Postal sorting
DC
City
Peek into Amazon Warehouse
- Example of "fulfilled by amazon"
Full transcript