AMAZON.

COMS INVENTORY MANAGEMENT

Services Operations Management Case Study

21-02-2012

ABOUT AMAZON.COM

First online shopping site launched in 1995 Since its inception has been consistently ranked as one of the best retail sites The Forrester Power Rankings in 2000,ranked Amazon as the best online shopping site. 22.3 million registered users on its site by the end of 2002. By 2003, it became the biggest book, music & video retailer on the internet. First e-commerce site to use collaborative filtering technology.

21-02-2012

Amazon owes large part of its popularity to its excellent customer service, which was due to exemplary inventory management. To increase revenue & beat competitors, it added several new products to its site(once in every six weeks) Entered into strategic alliance with several companies to increase the range of products available on its site. It strengthened its Customer Fulfillment Network by obtaining products directly from the distributors rather than stocking all the goods in its warehouse. Was popular among customers for shipping goods within the estimated times leading to satisfied customers, improved market share & repeat business.
21-02-2012 3

BACKGROUND
Started in 1995, by Jeffrey Preston Bezos, who recognized the massive potential of the internet & decide to cash on it. Bezos conducted a study on different items that could be sold on internet & offered low price Wanted to give a perfect name to its venture that began with A, so named Amazon.com after the river Amazon.

21-02-2012 4

VALUE PROPOSITION
1.

Four-fold value proposition:

Convenience Open 24 x 7, minimum download time, email notifications.

Selection Millions of items (100 times that of a typical physical store), excerpts of books, advanced search options. Price Huge discounts, 8-10% lesser than physical stores.

2.

3.

4.

Customer Service Shipped within a week, reviews, suggestions, personal information storage, order tracking, GiftClick.
21-02-2012 5

STRATEGIC ALLIANCE

For rapid and cost-effective expansion Main criteria used was customer service. In 1998-99, spent $160 mn on acquiring 17 to 49 percent stake in various online retailers. (For ex: Greenlight.com, Gear.com, Della.com, Pets.com, Drugstore.com, HomeGrocer.com) By 2000, these investments were valued at $900 mn to $1.5 bn. Three main advantages:

Increased range of products and services. Increased revenues - marketing fees from partners. Increased market valuation due to the stakes in various companies.
21-02-2012 6

INNOVATIVE INVENTORY OUTSOURCING

2001 decision to outsource inventory management. Stocked only popular items , rest all outsourced. Acted as a trans-shipment centre In August Alliance with Ingram Micro Inc. the drop shipment model for computer store at Amazon.com

21-02-2012 7

Plan to extend this model to all categories but proved ineffective since 35% of orders were a combination of different product categories. Introduced competitors products and used items on their website. Gave more avenues to its customers for verifying prices and also experimenting with untried products at less prices. Handled orders for Borders, Target, Circuit city, & Toys R Us.

21-02-2012

By 2003 their volumes tripled and cost of operating dropped to 10% from 20% Inventory turnover was 20 times compared to average of 15 time for other retailers Reduced shipping charges and provided free shipping for orders of more than two products. They also had to carry only 15 days inventory as compared to 160 days for other traditional retailers.

21-02-2012 9

FUTURE CHALLENGES

Amazon struggled to make profits due to

Variable

costs incurred by multiple delivery attempts & reverse logistics Theft & Damage to goods left at customers doorstep-frustrated customers

Made improvements in DCs for Storing large inventory economically

Inventory
Late

at wrong places

1990s:12% & 2002: 4%

10

21-02-2012

Amazon tightened its operations to ensure not to miss any customer orders Reduced time to ship goods out of warehouses Managed to ship out more goods/employee Logistics experts opine that Amazon Warehouses are working at <40% capacity Amazon should either reduce the number of warehouses or increase sales.

21-02-2012 11

CASE DISCUSSION QUESTIONS

Q1. Managing inventory is one of the most important tasks of a retailing company. If there are no enough goods on stock some of the customers might be disappointed. Stocking too many will reduce profit margins. Do you think Amazon.com adopted the right strategy while trying to manage its inventory? Was it successful in its task?

21-02-2012

12

Amazon.com adopted the right strategy while trying to manage its inventory.
Efficient

Inventory Management Reduced inventories while raising offerings. Decided to buy books, CDs etc from publishers Upgraded software helped inventory accommodation as per demand in different region. Outsourced non-routine activities
21-02-2012 13

Amazon was successful in the task

Recorded

first profit in 2001, fourth quarter after 7 years of deficit.

21-02-2012

14

Q2. 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 the key area of business?

21-02-2012

15

Amazon had taken the right decision in outsourcing the key area of business.
Could

concentrate on core activities Reduced redundant inventory Increased inventory turnover Increased working capital Reduced shipping charges If cost of holding>cost of outsourcing, its better to outsource
16

21-02-2012

Q3. In 2001, while Amazon was still struggling to make a profit, it decided to sell the products of competing retailers on its site, along with its own products. Do you think Amazon took the right decision in selling others products on its site or should it have concentrated on promoting its own products?

21-02-2012

17

Amazon earned same profit selling on commission as selling on retail Company need not advertise its low prices as customers could verify prices

21-02-2012

18

21-02-2012

Q&A

19

21-02-2012

THANK YOU
20