MGT6A5: Managing the Global Supply-Chain Tutor: Alan Davis Assessment 1: Amazon.

coms Supply-Chain Analysis (Due: Friday March 15th 2013)

By Farah Nanji (S00301931) Word count: 1,500

Amazon, ranked 5th for its supply chain in the most recent Gartner Supply Chain Top 25 list, is a successful company that is looking to continuously improve. When analyzing Amazons supply chain, there are three of the seven principles of supply chain and two of the four pillars of excellence that strongly coincide with its strategy. This company should evaluate itself based on trends of three areas to help improve its supply chain; inventory turnover ratio, days payables outstanding, and net cash flows from operating activities. Amazon has a direct-to-consumer online and drop-shipment model, as a pure play internet retailer, Amazon has zero outlets which comes with many advantages (Amazon.com). This model allows Amazon to have millions of different inventories listed for sale without actually having it in inventory since a different manufacturer has it and ships it directly to the consumer. Amazon keeps the most popular inventories on hand, reducing the costs of investing in more capacity for inventory. Another advantage of this strategy is that Amazon receives the customers payment for a product before they have to pay their suppliers, giving them more cash to invest in the company and a high inventory turnover allowing them to maintain a competitive advantage over other retailers. The company does not need to incur the incremental cost of opening a new physical retail store to attract new consumers. The Amazon.com technology infrastructure and website functionality creates a personalized store front for each customer. This technical infrastructure requires a significant capital investment, but the marginal cost of presenting a storefront to a new customer is very small. (Porter, 1996) Amazons initial model relied heavily on a small number of partners. A Harvard Business Review Case (2001) notes that in Amazon.coms original supply chain model, 60% of orders were sourced from Ingram Books and the other 40% were sourced from other distributors and publishers. (Spector, 2002) Amazon began expanding its distribution network in order to prepare for the 1999 holiday season, opening five new distribution centres in order to reduce dependency on

book distributors and to more proactively manage logistics execution and customer service as well as improving margins. Amazons unique supply chain approach strays away from the typical legacy model, instead Homemade applications handle nearly every aspect of its supply chain: warehouse management, transportation management, inbound and outbound shipping, demand forecasts, inventory planning, and more (Bacheldore, 2000). These applications have greatly reduced the amount of human intervention in Amazons supply chain, greatly increasing its speed and efficiency in fulfilling orders. Processes in Amazons distribution centres vary by the product mix in the facility. Products that are easily sortable and conveyable are stored in highly automated facilities such as media products. Products that are large or have irregular dimensions are stored in less automated facilities. Industry experts have informed that Amazon operates a number of transportation hubs that they refer to as injection points which are located in heavily consumer concentrated areas. The purpose of this is to save on transportation costs. The process begins by consolidating orders in distribution centres and contracting less than truckload or truckload shippers to provide the long haul transportation from the DC to the transportation hub. Once in the hub, the inbound trailers are unloaded and packages are then sorted the orders out to smaller carrier partners such as UPS, Fedex etc. Amazon utilizes the capabilities of its supply chain partners to deliver orders directly to customers. These shipment methods bypass the internal distribution centre network. An example of this arrangement is an order for an item that Amazon does not have in stock in its distribution centres but that Ingram Books do have in stock. Amazon will route this order request to Ingram, which will pick up the order, pack it in an Amazon box and ship it to the customer. (Maltz et al., 2004) This process is seamless to the consumer, although Ingram is used as an example, many other distributors and wholesalers support Amazons drop shipment method.

In the above model, one can see that Amazon passes its information to each tier in the supply chain model. Physical products can then flow from any tier to the customer. Furthermore, partners in second and third tier replenish Amazons distribution centres with their inventory. As mentioned, Amazon utilizes technology innovation to differentiate itself on online customer experience. Innovations such as personalized recommendations, one click ordering, and search inside the book are all Amazon innovations. While acknowledging these front end innovations, the founder of Amazon (Jeffrey Bezos) recently noted that 90% of innovation has been to support back end supply chain integration and execution. (Kirkpatrick, 2004) Amazon has highly integrated customized software that supports their supply chain model and also uses this core technology expertise to continuously improve its supply chain execution. One of the reasons why Amazon has been so successful is its ability to customize its logistics network towards customers, which is the focus of the second principle of supply chains. The homemade apps Amazon created gives

them the ability to discover, in seconds, the optimal distribution center to fulfill a customer order (Bacheldore, 2000). Since the applications integrate every part of the supply chain, it provides a very clear view both up and down Amazons supply chain, making it much easier to quickly decide how to fulfill each unique customer order. This supply chain system answers the questions of who will I (Amazon) use to deliver the good? From where? How fast can I do it? Amazon has also found a way to strategically manage their sourcing in order to share profits and reduce costs, which is the main focus of the fifth principle of supply chains. Instead of incurring all the costs of handling, packaging, shipping, etc., Amazon works together with multiple other vendors who have the ability to do those things for them. They all share the costs of the processes such as manufacturing, warehousing, and transportation, providing a greater opportunity for them all to profit. Amazon also made the choice to allow third parties to sell products on its website, with Amazon taking a commission of those items which are sold on their site. This decision has given them the ability to offer greater product variety and 30% of items sold on Amazon are sold by third parties (Amazon.com). This statistic shows how their choice has increased traffic on the website. The sixth principle of supply chains strongly correlates with Amazons application system. This system is a supply-chain wide technology that connects many different decision making levels providing for an essentially transparent supply chain process. The applications are able to communicate to the company in real-time which enables them to make faster decisions on a day-to-day basis (Bacheldore, 2000). The third pillar of excellence relates to the exact same thing. The reason this is one of the pillars is because having a seamless movement of information (Waller, 1999) leads to a more successful company. The application process shares information across the different functional groups of the supply chain in real time, allowing for faster, better informed supply chain decisions. Amazon also is concerned with the fourth pillar of excellence when it introduced a new customer metrics performance scorecard in 2008. This scorecard lets Amazon sellers see if theyre meeting Amazons selling standards and lets Amazon see

which sellers they should suspend in order to keep their order fulfillments at a high completion rate. Amazon should look at the trends of inventory turnover the past three years to evaluate their supply chain. Over the past three years inventory turns have remained relatively constant with the ratio being 11 in 2011, 11 in 2010, and 12 in 2009. Amazon should work on trying to increase this number by continuing to optimize their supply chain and make their processes more lean. It is also important to analyze the days payables outstanding trends when evaluating a supply chain. With the use of the balance sheet and income statement (Appendix B), the days payables outstanding ratios were found for 2008-2010. The DPO for 2008 was 88, 2009 was 108, and 2010 was 111. This trend shows that the DPO is increasing which bodes well for Amazon because it means theyre holding onto their cash longer, maximizing their potential for investment. The third trend to analyze is that of the net cash provided in operating activities. When referring to Appendix C, its noteworthy that there has been a significant increase in net cash over the past three years from operating activities. This trend is a good sign for Amazon, as its companys operations are resulting in a positive cash flow. (Vogelstein, 2003) Amazons unique supply chain strategy has provided it with the opportunity to continue to succeed. Its homemade application system is one of the main reasons why it is ranked 5th in the top 25 Supply Chain companies, and Amazons innovative supply chain model has strong correlations to some of the principles of supply chain and pillars of excellence necessary for supply chain optimization. When analyzing some of the performance metrics over the past three years, Amazon is continuing to grow and master its supply chain, looking to boost itself further up Gartners top 25 list.

Bibliography Bacheldore, B. (2000) "From Scratch: Amazon Keeps Supply Chain Close To Home New York: Harper Collins Kirkpatrick, D. (2004) Amazons Invisible Innovations. Fortune Magazine Maltz, A., Rabinovich E., & Sinha R. (2004) LOGISTICS: The Key to e-Retail Success. Supply Chain Management Review, 8 (3), 56-63 Porter, M. E. (2001) What is Strategy? Harvard Business Review, 74 (6), 61 Spector, R. (2002) Amazon.com Get Big Fast. New York: Harper Collins Vogelstein, F. (2003) Mighty Amazon. Fortune Magazine Waller, M., Johnson M., & Davis, T. (1999) Vendor Managed Inventory in the Retail Supply Chain. Journal of Business and Logistics, 20 (1), 183-203