Analysis of Amazon’s Supply Chain Management Practices

Analysis

To start with, Amazon’s SCM has a strategic fit with its competitive strategy of being the retailer of choice for its customers. The combination of multi-tier inventory management, superlative transportation, and highly efficient use of IT (Information Technology), and its wide network of warehouses are all geared towards aligning its SCM with its competitive strategy.

The next aspect is related to its outsourcing of its inventory management. Amazon outsources the storage and distribution of products that are not frequently purchased nor ordered for immediate delivery as well as products where the costs of storing them exceed the marginal returns on their sales.

On the other hand, Amazon stocks the frequently purchased and ordered items in its own warehouses so that it can be responsive to the customer needs as well as not compromise on the delivery times and the lead times. In other words, by segregating its inventory, Amazon is able to be responsive to the customers as well as cut costs or cut slack where it is needed (Kotler, 2012, 65).

Amazon divides its customer segments and follows a price differentiation strategy. The various forms of delivery are one day delivery, free super saver delivery, first class delivery, and prime customers delivery.

For all these segments, Amazon offers the customers an option of paying more for faster delivery or retains the traditional lead-time. Coupled with the inventory outsourcing, the customer segmentation into price-differentiated customers offers the company a nimbleness and agility in the market that changes with dynamic fluctuations in demand.

A key aspect of Amazon’s SCM is that it has evolved over the years in response to its growth in the market. For instance, Amazon started off as a bookstore, which acts as an intermediary between the buyers and the sellers and does not stock any product of its own.

Gradually, this gave way to holding some items in its own warehouses and at the present, Amazon follows a push-pull strategy wherein the inventory is held in a push strategy and the shipment of the orders is done in a pull strategy. Of course, even now, Amazon follows pure pull strategies for items that it does not stock.

Any discussion on Amazon’s SCM is incomplete without an analysis of its multi-tier inventory system. The first tier is the aggregation in the distribution centers, which ensures that Amazon holds fewer inventories and responds to demand in a dynamic manner.

The next tier is comprised of the partner distribution centers and the wholesalers wherein whenever an ordered product is not available in its own distribution centers; Amazon can rely on its partners and wholesalers to supply the customer with the required product. Further, through the use of sophisticated and real time IT, Amazon is able to leverage efficiencies in its distribution.

The third tier is comprised of the networks of third party sellers, publishers, vendors, and manufacturers who ensure that Amazon acts as an intermediary that fulfills orders from customers by linking them to this tier.

Recommendations

The previous section has analyzed Amazon’s SCM in a detailed and comprehensive manner. By focusing on the five themes in which the analysis proceeded, we were able to identify the areas that Amazon does well in its SCM. However, there are components and aspects of the SCM of Amazon where improvements can be made. This section identifies those areas and proposes some recommendations that Amazon can follow and implement to make its SCM world class and be a source of sustainable competitive advantage.

  1. First, Amazon relies to a great extent on courier companies such as FedEx and UPS. In recent years, Amazons’ brand image has taken a hit because of the unreliability of the last mile connectivity or the last part of the SCM that is visible to the end consumer.

    In other words, while the other components of the SCM seem to be efficient and complementing and supplementing each other, the part of the SCM where the customer interacts has been found to be deficient. Therefore, Amazon can setup its own transportation and actualize superior last mile delivery by creating its own fleet of delivery vehicles and personnel.

  2. The second recommendation has to do with the aspect of “bullwhip”. This means that Amazon can integrate its SCM better and move from a cooperation model with its suppliers to a coordination mode. This would entail a sharing of information between all its partners and suppliers using the latest technology.

    Further, this recommendation also entails creation of a unified IT system that can involve all the suppliers and the stakeholders in its SCM and not Amazon alone. This would call for substantial investment as well as a new business model where Amazon does not operate in isolation but instead brings together all the elements and the components of the supply chain under one umbrella.

  3. The third and final recommendation has to do with unifying its supply chain less than one gigantic IT system so that there is greater visibility on each component of the supply chain as well as more accountability and transparency in the process. As mentioned elsewhere, Amazon outsources some functions and this leads to accountability issues. Therefore, in line with the central theme of this article, Amazon should integrate its entire supply chain from end to end in one single IT system so that bottlenecks can be identified and suitably acted upon.

As it expands its global footprint, it needs a single source of truth (to use the industry jargon) wherein it can have visibility right from procurement to end customer delivery. This would also ensure that its problems with last mile delivery are sorted out and customers as well as suppliers along with the employees are linked together in a real time system.


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