How Amazon's Supply Chain Management Strategy Works Challenges with Solutions | SCM Case Study

Introduction

Introduction

The traditional supply chain for retailers such as Walmart, Target, and Tesco was driven by the retailer's orders placed with suppliers. Deciding what to place on shelves was a significant task, especially for a store that has more than one hundred thousand different items. A buyer would normally set the assortment plan from quarter to quarter based on the changes in customer demand due to seasonal events. In order to clear out inventory and make room for new products for the next season, retailers used a variety of approaches, including price discounts or markdowns.

It was estimated that end-of-season markdowns and discounting cost U.S. fashion retailers an average of 30 percent of revenues. Since the 1990s, retailers had partially offloaded the responsibility for category management to category captains, who are key supplier partners with the capabilities to analyze, review, and plan the assortment recommendations for major product categories.

Evolution of Amazon's Supply Chain

In 1994, Amazon's distribution network started with two warehouses in Seattle and Delaware, called fulfillment centers. By 1999, the company opened five more fulfillment centers as well as its first European fulfillment centers. In 2006, Amazon created FBA (Fulfillment by Amazon), a service that managed the fulfillment process for its third-party sellers.

To further expand its fulfillment capabilities, Amazon launched Project Dragon Boat in 2013 to facilitate the movement of goods from China and India to Amazon DC's in the United States and the United Kingdom. Late deliveries cost Amazon millions of dollars in refunds, motivating them to build their own last mile delivery network.

In 2016, Amazon created a venture named Global Supply Chain by Amazon, targeting all logistics services, including trucking, freight forwarding, and customer delivery. According to Amazon, this would be a revolutionary system that would automate the entire international supply chain and eliminate much of the legacy waste associated with document handling and freight booking.

Amazon's Supply Chain Flow

The typical flow for goods through Amazon's distribution system is as follows: Products from overseas arrive at one of Amazon's inbound sortation centers before being sent to a fulfillment center. These centers are warehouses where products are stored, picked, and shipped. In an effort to control logistics costs, Amazon invested heavily in warehouse automation, acquiring Kiva Systems in 2012 and renaming it Amazon Robotics.

Amazon started building its truck fleet in 2015 to take increased control over shipments to and between its fulfillment centers and sortation centers. By July 2017, Amazon was leasing 40 cargo planes as part of its logistics network. These steps are strategically aligned with Amazon's competitive strategy of being the retailer of choice for its customers.

Inventory Management and Customer Segmentation

Amazon's strategy differs from traditional retailers who purchase goods in bulk. Amazon controls the shipment of goods across the entire supply chain, including procurement, shipment to DCs, and final customer delivery. Amazon has first-party, second-party, and third-party sellers. In 2017, more than half of the units sold on Amazon's site were from third-party sellers.

Amazon divides its customer segments and follows a price differentiation strategy with various forms of delivery: one-day delivery, free super saver delivery, first-class delivery, and Prime customers delivery. This segmentation offers Amazon a nimbleness and agility in response to dynamic fluctuations in demand.

Multi-Tier Inventory System

Amazon's multi-tier inventory system comprises three tiers:

1. First Tier: Aggregation in the distribution centers, allowing Amazon to hold fewer inventories and respond dynamically to demand.
2. Second Tier: Partner distribution centers and wholesalers, where Amazon can rely on partners and wholesalers to supply the customer with the required product if it is not available in its own distribution centers.
3. Third Tier: Networks of third-party sellers, publishers, vendors, and manufacturers who ensure that Amazon acts as an intermediary fulfilling orders from customers by linking them to this tier.

Market Share and Future Prospects

By 2018, Amazon was both a retailer of merchandise and digital content, operating a chain of grocery stores and book stores with more than 300 million customers worldwide. It contributed about four percent of total U.S. retail sales, and its market share of the e-commerce segment was estimated to be approximately 43 percent. In comparison, its two closest competitors, eBay and Walmart, had 7.4 percent and 4.3 percent of the U.S. e-commerce market, respectively.

Amazon was continually exploring new products, services, and markets. It was also using new technologies and logistics models to reduce supply chain costs and improve customer service.

Conclusion

Amazon's supply chain has evolved over the years in response to its growth. What started as a small bookstore has now transformed into a vast and complex supply chain network that is highly efficient and dynamically responsive to market demands.

Keywords

• Amazon Supply Chain
• Distribution Centers
• Fulfillment Centers
• Global Supply Chain
• Logistics Networks
• Warehouse Automation
• Multi-Tier Inventory System
• Customer Segmentation
• Competitive Strategy

FAQ

Q: What was the traditional supply chain model for retailers like Walmart and Target? A: Traditional retailers drove their supply chains based on orders placed with suppliers. They used various approaches to manage inventory, including price discounts and markdowns, and partnered with category captains for category management.

Q: How has Amazon's fulfillment network evolved since its inception? A: Amazon started with two warehouses in 1994 and gradually expanded to multiple fulfillment centers globally. They introduced FBA in 2006, launched Project Dragon Boat in 2013, and created their own last mile delivery network in 2016.

Q: What differentiates Amazon's supply chain strategy from traditional retailers? A: Unlike traditional retailers, Amazon controls the shipment of goods across the entire supply chain, has a multi-tier inventory system, and segments customers into different delivery service levels based on price differentiation.

Q: What is the role of warehouse automation in Amazon's supply chain? A: Amazon invested heavily in warehouse automation by acquiring Kiva Systems, later named Amazon Robotics. This investment helps Amazon control logistics costs and improve fulfillment efficiency.

Q: How does Amazon's multi-tier inventory system work? A: Amazon's multi-tier inventory system includes aggregation in its distribution centers, partner distribution centers and wholesalers, and networks of third-party sellers and vendors, ensuring dynamic and efficient fulfillment of customer orders.