Management of Operations and Supply Chain

The purpose of this analysis is to provide an overview of Amazon.com’s stock management. Jeffrey Preston, the company’s creator, established it because the Internet has the potential to provide an enormous scope for online commerce (Henry, 24). Although the firm’s initial purpose was to act as an online bookstore, it has evolved dramatically to provide additional products in order to compete. The case considers the numerous products and features accessible on Amazon. The paper will also give the firm’s value propositions as well as the criteria used in the selection of strategic partners. The discussion further aims to provide an analysis of the various strategies that the firm takes in the management of its inventory to its distributors. The case thus intends to present some of the future challenges that the business is likely to experience soon.

Keywords: Amazon.com, the internet, bookstore, inventory management, warehouse management.

Introduction

Every organization has numerous activities that play a crucial role in determining the success of the firm. The activities entail the purchases, appropriate utilization of resources, and development. The various types of events play a crucial role in ensuring the success of an organization through increasing profits. However, gaining benefits necessitates that the firm ensures that it sets up both proper and integrated operational plans to facilitate the capability of the company in reaching the optimism of profit.

Amazon is amongst the fast online retail websites launched in the mid-90s. The company has received on numerous occasions numerous awards due to its ranking of the best shopping sites on the web besides its regard as a global model for the successful web retail (Carr, 97). A substantial aspect of its admiration is attributable to the outstanding customer service that it ensures that entail proper inventory management of the firm. On realization that there are a significant number of players in the industry, the company secured consolidation of its position amongst the best online shopping sites. However, there is the necessity for noting that the consolidation was not easy as it took numerous measures to ensure up rise in its profits besides the addition of several new products to the site. For instance, in 1999 the company assured addition of at least an item on its website every six weeks. Furthermore, the company resorted to strategic collaborations with several firms towards ensuring an increase of the product ranges available on its website.

Obtaining the products straight from the vendors rather than keeping its entire products in its warehouse was crucial in strengthening the client fulfillment network by the firm. The popularity of the company increased significantly due to its capability to ensure effectiveness in the shipment of the goods within the estimated time thus facilitating customer satisfaction, repeat business, and improvement of its market share. Additionally, Amazon exhibits uniqueness from its competitors by being amongst the first companies to adopt the collaborative filtering technology. The immediate business goal of the firm entails getting big fast that reflected in the driving force of the enterprise guiding it to its present growth.

Background note

The evident transformation in the way that individuals tend to perceive business and making of the purchases is attributable to the internet. The online consumers tend to depict convenience in buying the books over the web and having it taken to their doorstep in few days. The internet is attributable to the apparent decline in the need for individuals having to endure the traffic at the various shopping places and other negative attributes of real shopping that include crowding and the fight for the shopping spots. Despite the mail order systems and the high streets, still being relevant in making purchases their preference as means of making purchases is notably small. The internet revolution is attributable to the significant increase in the trend of choice for the long distance purchases amongst consumers due to the convenience of the approach. The strategy adopted by the online companies is attributable to the capability of the internet to decrease the significance of the geographical distance. Amazon ranks amongst the first companies to ensure exploration of some of the major benefits attributable to the web.

The paper intends to highlight the inventory management of Amazon.com that is crucial to its success and maintenance of the competitive edge. Preston launched the product on his realization of the potential of the internet in online trading. The apparent success of the firm is as well attributable to its diversity geographically and in the diverse selection of the merchandise by the business that ranges from videos, CDs, books, house wares, and online auctions. The global exposure of the firm is substantially attributable to the international websites that the firm hosts in France, Germany, Japan, and Britain. The first mover advantage associated with the company plays a crucial role in proving the firm successful. The marketing approach adopted by the company has also played a critical role in ensuring its success in the industry hence its competitive advantage over other internet retailers.

Definition and significance of operations management

Operations management refers to the administrative processes of any business aimed at facilitating generation of the highest level of efficiency through the assistance of the available resources in the business house (Xiang, 3). The activity plays a crucial role in the conversion of the material into both the labor and services in efficient ways towards the achievement of maximum profits by the firm.

The primary significance of the operations management entails facilitating utilization of the available resources towards facilitating earning of the optimal profits by the company. The organizations tend to necessitate maintenance of the processes in ways that ensure the conversion of the raw materials into finished goods is effectively done in the firm.

Fundamental elements of operations management (OM)

The OM tends to deal with the operational activities of the company. The activities entail the tasks such as management of the processes that result in the transformation of the raw materials into finished goods. The essential elements involve inputs that include the raw materials, outputs, and process. In the case of Amazon, the firm serves as a link between the manufacturers and the clients. The company through its websites allows the customers to view and select the items of their choice and make orders to which the firm will ensure delivery within the stipulated time. The clients have the liberty of choosing the mode of payment for their products.

Processing of goods within the legal and ethical limits

The consideration of the moral and juridical aspects of the products is crucial for the success of any organization. The various legal issues tend to affect the market environment in numerous aspects that entail fair-trading, environmental effects, and employee distortion. The ethical issues mainly concern the publication regarding some of the facts that include political issues likely to result in certain critical conditions (Yawar and Stefan, 621). Furthermore, there are religious issues that tend to present massive social and political effects on the services of a firm in a particular area hence the necessity for their consideration.

Role of OM in achievement of strategic objectives

Establishment of the departmental budget acts as the fundamental connection between strategic planning and OM. The strategy plans play a crucial role in the creation of the resources based on the projected revenues and thus facilitates the capability of the operational planners to provide precise ideas, which are essential in testing the success of the strategic plan. The policy plans are critical in outlining the objectives of the firm besides facilitating identification of the approaches that are effective in the achievement of the various objectives. In the case of Amazon.com, the company ensured success in reduction of its costs through the creation of a direct link between the manufacturers and the clients hence reducing the costs associated with holding the goods in their warehouses. Additionally, the approach ensures the credibility of the products that they deliver to customers through delivery of the latest products in good condition hence limiting the chances of counterfeit goods.

Value proposition

Amazon ensured the adoption of the four-fold value proposition that is crucial in indicating its primacies in the development of the web retail center. The four aspects that the company focuses on entail convenience, customer service, price, and selection. The convenience of the online platform arises from its opening for services all the time. The design of the website ensured the focus on minimizing the download time. Furthermore, the site provides that it offer the users other facilities that include email-notification, reviews, references from previous searches and product recommendation. Additionally, the site guarantees the visitors a broad range of products from which they can select the products of their choices. The inventory of Amazon is several millions of items that exceed the offerings of the regular physical stores.

Strategic alliances

Amazon resorted to collaborating with other firms as a way of ensuring rapid expansion and cost effectiveness. The development of the partnerships depended on the levels of client services that the companies provide. The company for instance resorted to the acquisition of numerous online retailers that saw the firm spend more than $160 million.

Inventory management

The objective of Preston while starting Amazon was ensuring the provision of hassle free services. He intended to focus on the delivery of the full selection of books without spending both money and time in opening up stores and warehouses besides dealing with the costs associated with the inventory (Flood, 881). However, he later realized that the satisfaction of clients is achievable while at the same time ensuring that the company gained from the benefits associated with both the cost and time of the maintenance of its warehouse. Establishment of the warehouses was a tough decision for Preston at the time. Every storage cost around $50 million and obtaining the finances necessitated that he issues bonds valued at $2 billion. The firm eventually established the warehouses in some of the states with minimal or no tax rates. The company ensured a significant increase in its warehousing capacity. The fact that Amazon mainly ordered the books and other goods from the stores after the agreement of the clients to purchase them implied a significantly low return rate of about 0.25% on comparison to 30% return rate in the various section of the online retail sector.

Amazon’s store was several yards long and served as the storage for a broad range of products that included the toys, millions of books, CDs, and other hardware. The firm ensured efficient maintenance of the products besides complete computerization to facilitate their identification. The company provided that the number of lines of codes on its warehouses were similar to those on its website as a way of ensuring effectiveness in the location of items during sales. The customer’s orders thus became easier to locate using the various codes assigned to the products through a series of automated events that facilitated the inventory management of the firm. The orders on the website of the company usually compose of the barcodes and other codes effective in the identification of the location of the items in the store. The computers send the signals to the worker’s wireless receiver of the workers informing them the things that should be picked from the shelves. The staffs then decide on the order in which to select the items thus verify their weights of every product.

The firm ensures placement of the selected products on green crates unique for the placement of the orders from the clients. When the containers fill up their transfer to the central point occurs vial the conveyor belts. At the central points, the workers march the barcodes with the order numbers as a way of identifying the target recipient of every product. On sorting the products, the company ships them to the various locations after their packaging and sealing. The company mainly ships the products via either the American Postal service or the United States parcel service depending on the one that is near to the client. The company in 1999 decided on avoiding the disappointment of customers on the various products that they ordered from the firm. Preston thus decided on stocking the business with every possible item that he felt the clients would show interest in purchasing. Despite the appreciation of the approach by numerous individuals and factions, the firm faced numerous challenges.

The challenges led to Preston realizing the significance of the adoption of effective inventory management approach in the firm and thus decided on reducing the sizes of his inventories. The reduction of the inventories was achievable through the efficient administration of the warehouses. The company decided on making effective decisions on the products to buy and the companies from which to make the purchases. The decision on the efficient management of its distribution channels also proved crucial for the organization in the management of its inventory. The company thus shifted from buying the books, CDs, and videos from the distributors to acquiring them directly from the publishers. The company as well decided on upgrading its software and divided the shipments.

Amazon further focused on cutting down its expenses in various ways. One of the approaches adopted by the firm in reducing the costs and ensuring effective management of its inventory entail outsourcing of some of its routine activities to facilitate its concentration on the core activities. The company as well assured effective collaborating with other firms for shipping the inventory. The partnerships provided that while the partners embarked on sending the stock, Amazon concentrated on the e-commerce experience. Revamping of the layout of its stores facilitated the company’s ability to sort and locate the customers. The firm thus ensured success in cutting down some of the expenses associated with filing and shipping orders. Improvement of the inventory management played a crucial role in assisting the company in making huge profits.

Inventory outsourcing

Outsourcing implies to the process of giving the subcontractors some of the services that include product design or manufacturing. The motivation for subcontracting the various tasks to the third party companies entail the fact that it results in significant reduction of the costs besides facilitating the efficient use of the available time, energy and costs towards the competencies of a particular segment of the business. Subcontracting also plays a crucial role in ensuring the efficient use of the available resources that may include land, capital, labor, and technology. Outsourcing of the services plays a major role in facilitating the division of labor.

However, there is the necessity for noting that outsourcing in the field of information technology tends to have varied meanings. The first definition entails commissioning the development of a particular application to another organization that in most cases involve a firm that focuses on the development of such types of applications. The other definition implies hiring the service of another firm towards facilitating management of the segments of the services whose provision would be possible by an IT unit of the firm. The second aspect, therefore, does not entail creation of new applications.

Drop shipment models

The Drop shipping is a supply administration approach that involves the retailer-avoiding keeping of the goods in stock but instead, focuses on transferring the delivery and customer details to either the manufacturers or wholesalers that engage in the direct shipment of the goods to the customers (Cheong, Taesu, et al, 195). Similar to every retail business, the retailers usually make profits on the existing differences between the wholesales and the retail prices. Amazon decided on outsourcing its stock in 2001 despite their knowledge of the huge risks that the approach is associated with (Yu, Yubing, et al., 95). The risk arose from the fact that during the time of management of its inventory, the firm gained the reputation of the provision of superior customer services hence its strength.

The decision involved Amazon stocking selected products that included the items that are fast moving and accessible. The firm, therefore, did not stock every item listed on its website. The company ensured that in the event a client orders a book that it does not offer then it requests the book from its distributors. The company then on reception of the items unpacks them then ships them to the respective clients. The firm, therefore, acted more of as a shipment point and guaranteed that whole load process from the distributors to the clients occurred efficiently.

Some of the leading suppliers of Amazon include the Cell Star and Ingram Micro. While Cell star handled the sale of the mobile phones, Ingram Micro-focused on facilitating the sale of the computers and the books. Amazon ensured partnership with most of the external distributors for the majority of its products that enhanced the effectiveness of the firm in the delivery of services to its clients. The drop shipment model proved successful hence the decision by Amazon to extend it to other categories as well. The disadvantage associated with the approach was that the clients ordered only single items at a time. However, in the vent of multiple items, the distributor first delivered the product to Amazon, and the company combined the products for delivery as a single package. The fact that about 35% of the orders placed at Amazon were of varying groups resulted in the drop delivery being ineffective.

Preston decided on adopting the idea that entailed the inclusion of the products from the competing sellers and some of used property on the website. The decision resulted in the firm earing almost the same profits on sales on commission as it earned on retails. The merit of the feature is that it creates the provision for the customers to compare prices of the Amazon products against those offered by the competitors. The company thus eliminated the need for low advertising prices of its products to attract the clients. The firm ensured the expansion of the capacity of its warehouse such that it could comfortably handle thrice the volume it used to feel in 199 with a notable decrease in the cost of operating the stores. Furthermore, the company decided on slashing down its shipping charges as a way of ensuring attraction of the customers. The clients that go to the site were therefore welcomed with pop-up windows announcing the decision of the firm on the provision of free shipping to those that made purchases of two or more items of any combination from the various stores of the company. Additionally, the firm resorted to making a significant reduction of the shipping charges for its products.

Despite the expenses of the company being significantly higher in the marketing of its goods and services as a way of expanding its market share, the firm ensured efficient leveraging of the spent amounts due to the low capital costs. For instance, the physical bookstores that have a broad range of books need to make sure that they stock up to 160 days’ worth of inventories.

Innovative inventory sourcing

The company decided on outsourcing of its inventory management despite the knowledge on the idea having huge risks. During the time of its administration of the inventory, the firm was capable of earning a reputation for providing superior customer services that served as the strengths of the company. However, the decision arose out of the need by the company to channel its competencies to other segments of the online retailing while at the same time maximizing profits through reducing the costs associated with the management of the inventory. At first, the administration of the firm exhibited apprehensiveness that the decision would result in significant damaging of its reputation. The company eventually decided on proceeding with the idea of outsourcing its inventory. Outsourcing the stock ensured that the firm act as a trans-shipment center thus always focusing on ensuing that the delivery of the various products from the distributors to the clients occurred in efficient ways.

Competition between Amazon and other firms

Amazon ensures the adoption of a stock management strategy that best fits its competitive nature of being the retailer of choice to the consumers. The company guarantees the approval of the multi-tier inventory management, efficient use of technology and superlative transportation that ensures its competitive advantage (Ioana, Alexandra, et al, 119). Furthermore, the broad alignment of its warehouses plays a crucial role in ensuring that the firm is geared towards arrangements of its SCM with its competitive strategy.

Another approach that provides maintenance of competitive advantage entails outsourcing of the inventory management. Outsourcing ensures that the firm reduces some of the unnecessary costs associated with the administration of the stored goods. The firm thus limits its storage of some of the inventory whose purchase or ordering is immediate. The company thus embraces an approach that ensures stocking of the frequently bought and ordered products in its warehouses to ensure responsiveness to the needs of the customers besides reducing the chances of compromising the products during delivery. Through segregation of its inventory, Amazon is capable of ensuring responsiveness to the clients besides cutting costs significantly where necessary.

Additionally, Amazon guarantees the division of its customer segments besides the focus on following particular price differentiation strategies. The various forms of delivery that the firm offer includes prime customer, first class, free super saver, and one-day deliveries. For these segments, the company ensures that it provides the clients with the option of paying more for faster deliveries or ensures retention of the typical lead-time. The customer segmentation coupled with the client’s segregation into price-differentiated customers, the firm tends to provide agility and nimbleness in the market that tends to shift with the dynamic fluctuations in demand.

The first aspect of Amazon’s SCM entails the fact that the firm has ensured significant evolution over the years as evident in the growth of its markets. For instance, at first, the company commenced as a bookstore acting as the intermediary between the clients and the distributors. The company eventually evolved into a company capable of holding its products in the various warehouses. Presently the company ensures retention of its competitive advantage through the adoption of the push-pull strategy. The approach entails maintaining the inventory in the push strategy while the shipment of the orders assumes the form of pull strategy. For the items that the firm does not stock, it ensures pull approach.

Additionally, the company provides maintenance of the competitive advantage through embracing the multi-tier inventory system. The first tier entails aggregation in the distributed centers that ensures the company holds fewer stocks while providing the response to the demands in a dynamic manner. The following layer involves partner distribution centers and the wholesalers whereby the firm relies on the collaborating organizations in the acquisition of some of the products that are not present in its stores. Amazon, therefore, tends to depend on the partners in the supplying to the clients some of the products not available in its stores. The use of the seemingly sophisticated and real-time IT plays a crucial role in ensuring that the firm is capable of leveraging efficiencies in its distribution.

On the other hand, the third tier tends to comprise of the networks of the third party sellers, manufacturers, vendors, and publishers who ensure that Amazon serves as an intermediary that fulfills the orders from its clients through the provision of a link to the members of the third tier. Despite the presence of numerous competitors in the online retail industry, Amazon still maintains a competitive edge while focusing on the expansion of its market share at the same time. One of the key practices attributable to the success of Amazon in the industry entails reliance on innovative approaches to meeting the needs of the clients while at the same time ensuring efficiency of its services. The company is capable of ensuring the adoption of innovative approaches to the supply chain management towards enhancing efficiency to the extent of meeting the needs of numerous clients simultaneously while maintaining the affordability of its services on comparison to the prices offered by competitors (Türkay, Metin, et al., 3). One of the important innovative approach that presents both the competitive challenge and opportunity on the horizon entails quick delivery.

Delivery

The two-day delivery option embraced by numerous other online retail companies seems outdated. Amazon resorted to the launching of the Amazon Prime, which is an annual membership that guarantees its members of free two-day shipping on numerous items. The launch of the membership option played a critical role in ensuring the dominance of Amazon in the online retail industry. However, with time other companies started to embrace similar approach by offering free two-day shipping. The competition resulted in the introduction of Amazon Prime Now that guarantees the delivery within an hour for the members.

The introduction of the separate mobile app ensured that the clients are capable of organizing for the making of the deliveries during specific hours of the day. In the select markets, the clients are capable of ordering for the groceries and take-outs from the local restaurants thus making the firm a direct competitor for the delivery of services that include Instacart and Favor. Despite the limitation of Prime Now due to its availability in select cities, there is evidence of its growth in size and availability since its launch.

Drones

The news on the launch of the drone-based delivery system is another potential decision likely to result in maintenance of competitive advantage by Amazon. The project intends to ensure delivery of the packages to the clients living within a 10-mile radius of the Amazon fulfillment center to facilitate their reception of their packages in less than half an hour. The drone-based delivery system tends to have a high potential for the distribution of the packages efficiently. Even through the Prime Air is still in the development stage and still faces regulatory hurdles, the public debut are expected in 2017.

Manufacturing of products

Amazon further ensures that it stands out amongst its competitors through exploration of other segments of the market. The firm does not limit its role to the retail and distribution, but it also engages in the manufacture of some of the products that it sells. Presently the company ranks amongst the other manufacturing giants. Besides ensuring, the sale of the products less costly than those offered by competitors, the production process provides significant reduction in the production costs as well. The primary line of goods that the firm manufactures entails the dog poop bags, batteries, Bluetooth speakers amongst other numerous products.

Embracing of the innovation and technological advancements plays a crucial role in affirming the competitive position of Amazon amongst its potential competitors. The firm ensures that it embraces some of the change that seems out of grasp for the possible competitors of smaller scale and without the adequate resources comparable to Amazon. Amazon ensures that it takes crucial steps towards ensuring improvement and shortening of the delivery times through subverting the seemingly traditional 3PL models and ensuring adequate investment in the technologies entail drones and automation of the warehouses. The drone and same day deliveries seem challenging for the potential competitors to adopt towards keeping up with the competition.

The figure 1 below illustrates how Amazon compares amongst its competitors by their stock performance.

Source: (CSIMarket.com, 1)

The results indicate that the firm is experiencing rapid evolution and is intensely competitive. The current and potential competitors of Amazon include the physical-world retailers, publishers, producers of their products, manufacturers, and the distributors. Other competitors include the online e-commerce and electronic commerce sites that include the sellers and distributors of the digital contents. The media firms, comparison shopping websites and the web portals also present substantial competition to the enterprise. The principle competitive factors that ensure success of the business in the guarantee the success of the company in the industry entails price, selection, and convenience which arise from the reliable and fast fulfillment of the firm.

The additional competitive factors that contribute to the success of the organization entail speed, quality, and reliability of the services and tools offered by the company. Despite the fact that the success of Amazon attributable to the adoption of the practical approaches for management of its inventory, the constantly changing nature of the market necessitates consideration of the various weaknesses and strengths of Amazon.

SWOT Analysis

Amazon ensures the adoption of effective Customer Relationship Management and the IT support. The company provides effective monitoring of some of the crucial data that entails the clients’ purchasing behavior. Monitoring such information plays a major role in facilitating the capability of the firm in the provision of the individual specific items based on the information on the preferences evident from the purchase behavior and the elements that most clients visit (Chen, Daniel Q., et al, 4).

Strengths

Amazon boasts of popularity attributable to two main factors that include its originality amongst the first online retail firms. The company experiences a significant growth in its customer base annually. The fact that the company is amongst the first online retailers due to its earlier exploration of the potential of the e-commerce contributed significantly to the success of the firm and retention of the competitive edge in the industry. The company ensured that it builds on its earlier success with the books to adopt the production of various product categories that includes the toys, games and other products. Furthermore, the product diversification evident in Amazon from the CD/DVD markets and books to the provision of services to the clients in the various market segments plays a crucial role in the indication of the strategic movement towards ensuring the growth of the firm through exploration of the new customer bases. The firm has a notably high distribution channel besides making the goods available to the clients at significantly low prices.

Weaknesses

Despite the notable success of the enterprise, the company tends to exhibit some flaws that entail the fact that it tends to depend more on the outside delivery firms. The dependence on the outside distribution companies in the execution of its delivery functions tends to result in the unmanageable service level issues and the potential increase in costs associated with the large transportation industry that includes the increased vehicle taxation and rising fuel prices. Failure to absorb such costs by the firm results in their passing back to the consumers, which result in potential adverse effects. The addition of the new categories to Amazon’s brand results in the potential risk of destroying its brand. Amazon serves as the premier retailer of the