Operations Management Group assignment

Case Title: Amazon.com's European Distribution

Strategy

Submitted by Group 11:

Name Roll No. Division
Pulkit Kumar 42246 Marketing B
Shrivastava
Sagar Jog 42334 Marketing B
Shambhavi Kumar 42348 Marketing B
Shubham Manocha 42285 Marketing B
Soura 42293 Marketing B
Bandyopadhyay
Tanmay Porwal 42308 Marketing B
Q1. What is Amazon’s core distribution strategy? Describe how Amazon's distribution system
strategy in the US evolved from the company's inception and how is it unique from its
competitors.
Answer 1:
Distribution strategy:
Amazons core distribution strategy revolves around its Distribution centres and their distribution
optimisation via their software. Amazon aimed to keep inventory as low as possible to improve
customer delivery time and get higher discounts. Amazon extended to several DC's, they used their
software to find the best strategic locations in terms of customer proximity, freight rates, warehouse
cost, labour cost, etc. Amazon rapidly up their distribution capacity and offered a huge range of
merchandise. Amazon's operation team decided to employ the latest technologies in its
warehouses/DC's such as pick-to-light, radio frequency technology, voice technology for verbal
communications, pick profiles to maintain the fastest-selling items.

Evolution of amazon's distribution strategy in the US:

• Initially, amazon used to rely on wholesalers to build its online catalogue. Amazon used to store
2.5 million titles but stocked only 2000 titles in their stockyard. Other titles were sourced only after
the receipt of customer purchase.
• As Amazon grew, its sales volume increased and amazon opened direct accounts from publishers
to cut middle man margins to receive better discounts.
After an order confirmation was received, Amazon used to source the titles from publishers/whole
sellers. Amazon employees use to pack and ship the orders to customers to complete the order within
4 to 7 business days.
• In 1996, 1997 with sales growing quickly, amazon increased the capacity of its distribution centres
and opened new distribution centres strategically close to its customer base. This enabled Amazon to
decrease order fulfilment lead times and lessen its dependence on its main suppliers.
• Amazon used its same procurement model to expand its business into Music, Audio and Video
stores.
• In 1999, Amazon started expanding heavily to employ its "get big fast" approach. They used
software to identify locations of their new DC's based on several factors like supplier and customer
locations, inbound and outbound freight rates, warehousing expenses, labour, etc. Amazon spends
$3.2 million to increase its capacity to distribute nearly one million packages a day.
• Amazon decided to upgrade its offerings to a range of merchandise and Each amazon DC would
handle the full array of items instead of having specialised DC's.
• To attain a high level of productivity and efficiency, amazon employed several latest technologies
in their DC's like pick-to-light, radio frequency technology, voice technology for verbal
communications, pick profiles to maintain the fastest-selling items. To maintain such levels of
productivity amazon developed Key metrics like worker performance, number of items picked per
hour, free replacement rate, inventory accuracy, number of hours from order confirmation to
shipment, and cost per unit shipped to measure performance which was shared with individual
workers.
• As Jeff Wilke came to amazon, he employed tools like six sigma DMAIC (Define, Measure,
Analyse, Improve, and Control) reviews to reduce variation and defects in the distribution process.
• Amazon created a Flow Manager position to reconfigure DC layouts to make it easier to locate,
sort and ship customer orders.
• Amazon shifted its focus to Inventory management to decrease "inventory carrying cost" and
prevent "split payments". They refined their software to forecast customer demand to optimise
inventory holdings. Amazon also established buying rules to improve allocation among wholesalers
and direct vendors.
• Amazon integrated its suppliers’ management systems with its inventory, warehouse and
transportation systems. Amazon also introduced “available-to-promise” capabilities to its customers
this allowed Amazon to display an accurate time frame for a customer’s order to ship on its website.
• Amazon also developed a “postal injection” method, in which full truckloads of orders are taken
from its DC's to major cities bypassing postal service's hubs which reduces shipping costs and
shipping time.
Q2.What unique initiatives were launched to streamline processes and achieve Operational
Excellence at Amazon.

Answer 2:

The unique initiatives that were launched to streamline processes and achieve operational excellence
are as discussed below.

 Wilke’s taught the US DC’s staff to use 6 Sigma DMAIC (Define, Measure, Analyze,
Improve, and Control) reviews as a tool for defect reduction. This helped him reduce the
defects to a significantly low level which increased the overall productivity of the unit.

 He encouraged DC staff to simulate holiday season conditions. The example given in the
case is that during non-holiday periods a DC closes 15 out of the 20 doors available for
supplier truck deliveries or use only part of the available facilities that is available to simulate
high-pressure holiday conditions
The experience gained from such small changes enabled Amazon to identify process
bottlenecks and achieve a more continuous flow across the Receive, Picking, Sorting, Packing
and Shipping areas.

 Wilke focused on inventory optimization in the fulfillment network. Having products at the
right place, in the right amount and at the right time decreased Amazon’s inventory carrying
costs significantly and prevented the company from making split shipments. A reduction on
such marginal costs helped him restrict his revenue to leak on low optimization issues.

 Wilke achieved all the above by restructuring the software used to forecast customer
demand which in turn would help him anticipate seasonal and regional demands, thus
reducing the risk of buying too much or too little merchandise.

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

 Integrated its suppliers’ management systems with its own inventory, warehouse and
transportation systems. This is a great step taken forward to optimize and streamline the
process.

 Implemented a set of “cascading” buying rules to determine which supplier offered the best
price and delivery options for each item Amazon ordered.

 In parallel, Wilke’s team considered other options to avoid holding inventory

By partnering with other companies, with Amazon handling order fulfillment in exchange for
fees and a percentage of sales.

Thus, these are broadly the ways in which Amazon streamlined the process to achieve
operational excellence.
Q3. What were the specific challenges faced by the Company in Europe? Describe how Amazon
reconfigured its distribution network in light of expected growth, products proliferation, and
geographical expansion in Europe.
Answer 3:

Challenges in Europe:
1. Unlike US where were Amazon was serving only one country, in Europe Amazon
had to serve different cultures while providing better selection, more convenience and
better service.
2. Sales: Selling regulations in each country was different. Retailers could not discount
book list prices in Germany and France. Also, in France, retailers could not sell items
at a lower price than their on-invoice purchasing price.
3. Payment options: Apart from UK and France, in other countries less than 50% of the
people used credit cards for online purchase and overall less than 38% Europeans
used a card.
4. Procurement strategy: Unlike US, France had no wholesalers in media and
Germany had only single retailer for books and media each.
5. Information Exchange: European publishers and distributors relied on email and fax
instead on Electronic Data Interchange due to which Amazon did not receive
confirmation of order fulfilment until the product physically reached the distribution
centre.
6. Logistics: While the National postal carriers were efficient within a country, cross-
border logistics were often delayed, or the shipments were lost in transit. This did not
help Amazon in decreasing its shipping cost or increasing its shipping standards.
Challenges specific to France:
1. Amazon did not acquire an online bookseller in France and built the site from scratch.
2. Building a database of the products that had to be displayed on the website.
3. Setting up accounts with numerous publishers and wholesalers.
4. Setting up the French warehouse.
5. Competition from existing established competitors like Fnac.com, Alapage.com and
BOL.
Solutions:
1. Amazon served Europe as different regional markets and operated in compliance to
their traditional value chain to local needs. Each country was decentralized and
operated independently with its own country manager.
2. Dedicated websites for each country was set up. Curated content was displayed for
customer as per the country.
3. 24 hours customer support in the native language of the country was set-up.
4. Introduced free shipping in 2001. Provided clearance sales on slow moving book
inventory in compliance with local government laws.
5. Payment problem was resolved by customizing the existing software and through new
processes. However, significant cost was incurred due to this.
6. To resolve procurement issue, Amazon partnered with numerous publishers and
distributors but the lead time for the product to reach Amazon increased to 5 days due
to this.
4. What Key Metrics were developed by Amazon to maintain high level of Quality and
Productivity in its distribution Centres. Comment, Analyse and Interpret the same.
Answer 4:
Amazon planned to develop and expand the Distribution Centres to meet the appreciable service
levels and to support the increased customer demands.
The DC capacity increased from 50000 to 285000 square feet and launched the second ever DC in
Delaware in 1999. This helped in reducing order fulfilment time and the order delivery time for
Amazon’s customers everywhere.
In the course of time till the year 1999, the number of DCs increased significantly over USA.
However, with increase in the number of DCs, it was very important for Amazon to maintain the
quality and productivity.
Amazon developed the following Key Metrics for its quality and production maintenance:

 The Operations Team decided to make use of latest technologies in the DCs. Each Dc was
equipped with technology which put out lights sequentially to show the workers which item
to pick up and how much to pick.
 Radio Technology and Voice technology was used by the workers to communicate with each
other and to direct other workers to the location of the warehouse.
 The most important thing developed by Amazon to maintain high level of Quality and
Productivity in its DCs was the Performance Measure.
 Amazon started measuring worker performance on the basis of the work done by the worker.
 It started keeping a track of the number of items picked by a worker in an hour and number of
items packed.
 It started recording the accuracy and efficiency of the inventory on a daily basis to get an
overview about the number of orders placed and picked and packed for the day.
 It started to record the total duration that is the number of hours from order confirmation to
shipment and the cost per unit shipped.
 Free replacement rate is another key metric that Amazon developed to maintain the Quality.
 This particular performance information was shared with each worker so that he could know
his work done each day and could continue if he was doing well or improve his performance
depending on the record.

To maintain the productivity, during a non-holiday period, a DC would shut 15 of the 20 doors
available for supplier deliveries to pretend holiday season conditions. This enabled Amazon to
identify process congestion and smoothened the processes including receiving, picking, sorting,
packing and shipping areas.
This led to the creation of new position namely “Flow Manager” in each and every DC to supervise
and redesign the above processes which would make it easier to locate, sort and ship customer orders.