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VIDEO CASE 9-1 Amazon: Delivering the Goods ... Millions of Times Each Day!

"The new economy means that the balance of power has shifted toward the consumer," explains Jeff Bezos, CEO of Amazon.com, Inc. The global online retailer is a pioneer of fast, convenient, low-cost virtual shopping that has attracted millions of consumers. Of course, while Amazon has changed the way many people shop, the company still faces the traditional and daunting task of creating a seamless flow of deliveries to its customers-often millions of times each day!

THE COMPANY Bezos started Amazon.com with a simple idea: to use the Internet to transform book buying into the fastest, easiest, and most enjoyable shopping experience possible. The company was incorporated in 1994 and opened its virtual doors in July 1995. At the forefront of a huge growth of dot-com businesses, Amazon pursued a get-big-fast business strategy. Sales grew rapidly and Amazon began adding products and services other than books. In fact, Amazon soon set its goal on being the world's most customer-centric company, where customers can find and discover anything they might want to buy online!

Today Amazon claims to have the "Earth's Biggest Selection™" of products and services, including books, CDs, videos, toys and games, electronics, kitchenware, computers, free electronic greeting cards, and auctions. Other services allow customers to:

search for books, music and videos with any word from the title or any part of the artist's name,
browse hundreds of product categories, and
receive personalized recommendations, based on past purchases, through e-mail or when they log on.

These products and services have attracted millions of people in more than 220 countries and made Amazon.com, along with its international sites in the United Kingdom, Germany, Japan, and France, the leading online retailer.

Despite its incredible success with consumers and continuing growth in sales to more than $3 billion annually, Amazon.com found it difficult to be profitable. Many industry observers questioned the viability of online retailing and Amazon's business model. Then, Amazon shocked many people by announcing its first profit in the fourth quarter of 2001. There are a variety of explanations for the turnaround. Generally, Bezos suggests that "efficiencies allow for lower prices, spurring sales growth across the board, which can be handled by existing facilities without much additional cost." More specifically, the facilities Bezos is referring to are the elements of its supply chain-which are one of the most complex and expensive aspects of the company's business.

SUPPLY CHAIN AND LOGISTICS MANAGEMENT AT AMAZON.COM What happens after an order is submitted on Amazon's website but before it arrives at the customer's door? A lot! Amazon.com maintains seven huge distribution, or "fulfillment," centers where it keeps inventory of more than 2.7 million products. This is one of the key differences between Amazon.com and some of its competitors-it actually stocks products. So Amazon must manage the flow of products from its suppliers to its distribution centers and the flow of customer orders from the distribution centers to individuals' homes or offices.

The process begins with the suppliers. "Amazon's goal is to collaborate with our suppliers to increase efficiencies and improve inventory turnover," explains Jim Miller, vice president of supply chain at Amazon.com. "We want to bring to suppliers the kind of interactive relationship that has inspired customers to shop with us," he adds. For example, Amazon is using software to more accurately forecast purchasing patterns by region, which allows it to give its suppliers better information about delivery dates and volumes. Prior to the development of this software, 12 percent of incoming inventory was sent to the wrong location, leading to lost time and delayed orders. Now only 4 percent of the incoming inventory is mishandled.

At the same time, Amazon has been improving the part of the process that sorts the products into the individual orders. Jeffrey Wilke, Amazon's senior vice president of operations, says, "We spent the whole year really focused on increasing productivity." Again, technology has been essential. "The speed at which telecommunications networks allow us to pass information back and forth has enabled us to do the real-time work that we keep talking about. In the past it would have taken too long to get this many items through a system," explains Wilke. Once the order is in the system, computers ensure that all items are included in the box before it is taped and labeled. A network of trucks and regional postal hubs then conclude the process with delivery of the order.

The success of Amazon's logistics and supply chain management activities may be most evident during the year-end holiday shopping season. Amazon received orders for 37.9 million items between November 9 and December 21, including orders for 450,000 Harry Potter books and products, and orders for 36,000 items placed just before the holiday delivery deadline. Well over 99 percent of the orders were shipped and delivered on time!

AMAZON'S CHALLENGES Despite all of Amazon's recent improvements, logistics experts estimate that the company's distribution centers are operating at approximately 40 percent of their capacity. This situation suggests that Amazon must reduce its capacity or increase its sales.

Several sales growth options are possible. First, Amazon can continue to pursue growth through sales of books, CDs, and videos. Expanded lists of books, music, and movies from throughout the world and convenient selection services may appeal to current and potential customers. Second, Amazon can continue its expansion into new product and service categories. This approach would prevent Amazon from becoming a niche merchant of books, music, and movies, and position it as an online department store. Finally, Amazon can pursue a strategy of providing access to its existing operations to other retailers. For example, Amazon took over the Toys "" Us web site, adding it as a store on Amazon's site. Borders, Expedia, and Circuit City have begun similar partnerships.

Amazon.com has come a long way toward proving that online retailing can work. As the company strives to maintain profitability and continue its growth, its future success is likely to depend on the success of its logistics and supply chain management activities!

Questions

How do Amazon.com's logistics and supply chain management activities help the company create value for its customers?
What systems did Amazon develop to improve the flow of products from suppliers to Amazon distribution centers? What systems improved the flow of orders from the distribution centers to customers?
Why will logistics and supply chain management play an important role in the future success of Amazon.com?

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