Amazon’s Supply Chain Strategy
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Amazon’s Supply Chain Strategy
Amazon Company is an American multinational online retailer specializing in selling various merchandise such as music, books, clothes, electronics, toys, movies, and many others. For over two decades, Amazon Company has grown from a garage operated enterprise selling books online into one of the largest internet-based enterprises in terms of revenue earned in the world (Mcfadden, 2019).
Amazon’s success is mainly attributed to four pillars, namely customer-focused practices, innovation, long-term planning, and operating brilliance. Operational excellence includes the systems and processes that make up the supply chain of the business. As Amazon Company has proven, employing the right strategy in the supply chain is one of the key pillars in an organization that can determine its success or failures.
Applying the right strategies in the supply chain can save the business both time and money, vital to running the business (Tabaka, 2015). Amazon’s move to use audacious supply chain strategies accompanied by innovative technologies has led to its rapid growth, which has led to the remodeling of the supply chains, leaving its competitors trying to catch up.
The Evolution of Supply Chain Models
The supply chain is a system that involves a company and its dealers to develop and distribute particular merchandise to the final consumer. Companies strive to establish supply chains to reduce costs, remain competitive, and to ensure a steady supply of products to their clients. The supply chain involves a series of activities and steps, such as manufacturing, transportation, and distribution. The supply chain network consists of many stakeholders that work hand in hand for the system to work effectively. The supply chain stakeholders include producers, vendors, retailers, transport companies, warehouses, and distribution centers (Kenton, 2020).
The supply chain systems and networks have experienced tremendous changes, especially in the last couple of decades, shifting from simple and easy to manage the supply chain to a more complex and complicated supply chain network. The changes in the supply chain models have also influenced the way companies and organizations strategize to meet the customers’ needs and keep up with the competition. The choice of supply chain model depends typically on the type of product or service produced by an enterprise since each organization has different needs.
Brick and Mortar
Brick and mortar refer to the traditional physical shop around the corner that offers face to face products and services; examples of the brick and mortar shops include the local grocery store and the local bank.
The brick and mortar shops use the oldest and most accessible form of supply chain model. The model involves a straight-line model that consists of the movement of goods from the manufacturer to the final consumer. For example, the product may move from the manufacturer to the warehouse, then to shipping, and ultimately to the ultimate consumer.
The brick and mortar enterprises are currently facing difficulty and stiff competition from online businesses such as Amazon and eBay that employ technology and innovation in its supply chain models, eliminating the need for physical stores.
Click and Mortar
As with the emergence of the digital space accompanied by its increase in popularity, the need for business to adapt to the trend led to the development of the click and mortar stores. Hence in definition, click and mortar is a type of business enterprise model where a business establishes online and offline operations, which is a physical store and a website or an app (Twin, 2019). The click and mortar combine both the online and physical experience in shopping. Click and mortar enable the customer to browse a product offline before buying online or viewing it online and buying offline. Alternatively, click and mortar empowers a consumer to buy online and pick the product on the offline store when he/she doesn’t want to wait long periods for delivery.
As a result of going online, click and mortar businesses have appreciated the need to step back and re-strategize their supply chain approach. Click and mortar business have changed its supply strategy of stockpiling their products in their various warehouses. The supply chain plan consists of stocking the high volume goods in the local stores, and the low volume products are stored centrally for the online market purchases. The low volume products include fashion items such as clothes and shoes that have high levels of uncertainties in terms of demand (Daspal). With online sales, the vendors and suppliers benefit from customer purchasing data hence enabling them to plan for prospective orders during the low seasons, high season, and holiday seasons.
The Online Store
Often termed as the new retail, the online store usually is a website that sells products and services, where an individual can view a product on the internet buy, pay and receive the product while sitting at home or office. The increased popularity of E-shopping has revolutionized the way we do shopping due to the several advantages that online shopping offers. Some of the benefits include, one can shop at the comfort of his own house without having to move, the online store is open 24 hours, and no need to stand in long lines, especially during the holidays (Sunitha & Ghanadhas, 2014). The new retail store employs the supremacy of digitization and massive data to create a new dynamic between the stakeholders that include producers, consumers, wholesalers, and the physical store. The online store majorly employs two models in the supply chain. One can either outsource logistics and insource inventory or do the reverse of insourcing logistics and outsourcing stock.
Amazon Supply Chain Model
Amazon’s founder Jeff Bezos did not discover the supply distribution network it has been existing way before time, the only thing he did was to come up with a strategy that all the other retailers were not able to spot, thus with the plan and technological innovations he single-handedly revolutionized the workings of the supply chain. Amazon’s supply chain strategy consists of warehousing, delivery, and technology that work hand in hand to provide fast, efficient, and reliable services.
Warehousing
Warehousing in the supply chain refers to storing goods as they await delivery to the final consumer. A huge chunk of Amazon’s achievements is owed to its professional storage strategies, which easily warrants merchandise accessibility from everywhere in the world. Hence the warehouses are advantageously positioned near large urban centers and populace hubs with stock distributed among them to ensure that demand can be met with supply. On top, there are mini warehouses dotted all over the small geographical areas to supplement the significant warehouses. The warehouses are divided into storage areas, and robotically operated to enable easier retrieval of products for delivery (Johnson, 2020).
Delivery
The delivery unit of amazon is what probably sets it apart from the rest of its competitors. Amazon provides a wide range of delivery options from the more traditional methods to sophisticated delivery options. Some of the delivery options include the free delivery, prime two-day delivery, and the prime now option (Johnson, 2020). The company has also been one of the first few companies to employ innovative ideas such as drones to make deliveries. Other methods include the use of bikes, trucks, and delivery vans. With all the options on the table, the customer can acquire his/her delivery faster, more relaxed, and more efficiently.
Technology
One of Amazon’s core strategies in its supply chain management is the approval of the technology. Amazon employs uncountable computerization and robotics machinery in picking, packing, stacking, and storing inventory (Johnson, 2020). The amazon prime’s launch that seeks to deploy drones in the delivery process shows its dedication to technology use. When all these elements combine, they create a system that is efficient with fast delivery and enables the company to cut down on costs, thus releasing funds for other logistical and supply chain needs.
Amazon’s Supply Chain Strategies
Inventory Strategies
Unlike some of its competitors who stockpile products on the local store, Amazon’s strategy in managing inventory was to reduce its inventory and focused more on service delivery by offering quality products through establishing a relationship with the manufacturers and suppliers and by developing a distribution network infrastructure to provide its clients with a quality product that is fast delivered directly from the company.
Another strategy that Amazon employed is outsourcing some of its products through third parties, and this move enables amazon to cut operational costs for it to focus on service delivery. For example, in books, it’s impossible to store all the books in the world in a local store; hence outsourcing enables the customer to access the book wherever he/she is.
Amazon inventory strategy also encompasses selling of competitors’ products on its platform, giving amazon an advantage on two fronts. Amazon can sustain its competitive advantage and maintain its customer relationship. Amazon can control its competitors in its platform by providing its customers with the ability to compare the pricing on the products, hence giving it control in determining what its customers view.
Logistics Strategies
Outsourcing Supply Chain Model
Outsourcing is the process of contracting the most convenient third party service provider; hence it involves the transfer of some operational activities from a company to an external provider who accounts for the outcome of the agreed task. Outsourcing is usually done when the company believes the subcontracted company is more suitable for efficiently completing the given task. Amazon, since its inception into the global scene and still currently conducts most of his operations through outsourcing, especially in the logistics sector. Amazon has partnered with third-party Logistics Company’s such as DHL and FedEx to take advantage of its vast distribution network to make its deliveries.
Insourcing supply chain model
Insourcing is the process of using the internal structures of an enterprise in performing specific tasks. Amazon quickly realizes the importance of insourcing, especially in logistics, as it loses more money in outsourcing. To curtail the over-dependency on third-party transport services, Amazon is developing its own logistics system by forming a partnership with air transport companies to lease aircraft to build its fleet. Amazon is increasingly seeking to shift its strategy of outsourcing. This has been witnessed through its massive investment in logistics and transportation services through the purchase of delivery trucks and drones (Longman, 2020). The shift will enable Amazon to meet its customers’ demands on timely delivery through the same day and next-day delivery options of its prime members.
Relationship between Supply Chain and Corporate Strategies and Market Needs of the Business
Change in Corporate Strategies
It is vital for the corporate strategies and the supply chain strategy to link seamlessly to the same goals and objectives of the business. But it’s important to differentiate the company’s strategy from its supply chain strategy to be able to grasp their connection. The supply chain policy outlines how the supply chain ought to work to have a competing edge. The corporate strategy involves exercising control over the firm’s fundamental competencies to obtain a high degree of goal or objective. In summary, the business tactic encompasses the general bearing of a business, while the business strategy includes the firm’s unique processes to meet the specific goals and objectives (Castiglia, 2017). Hence, for an organization to achieve its goals and purpose, a change in the supply chain should consequently trigger the corporates’ restructuring strategy to match the change in the supply chain.
Market Needs of the Business
When the market desires of a business changes, it creates complexities in the supply chain hence the need to revise the supply chain strategies—the market needs of business changes according to the shift in taste and preferences of the target market. The change in market needs creates a scenario in which there is a need for heavy customization of the products to meet the different customers’ market needs. Hence when the changes in supply chain changes it creates a corresponding shift in the needs of the business; thus, the smooth operations market needs of a business need to be in line with the changes in the supply chain.
Operational Steps Involved in the Restructuring Process
Managing Inventory
Amazon has restructured the way it manages inventory through working with third-party vendors, small businesses, and entrepreneurs. The various sellers have two options while conducting business with amazon. The first option the sellers can sell their product through amazon by shipping their stock to Amazon’s storerooms, and Amazon takes care of the shipping. Through the other option, sellers can sell their products via Amazon platforms and ship the products themselves to the consumer (Rao, 2016).
Capacity
The online grocery store has witnessed an up rise in demand as the number has more than tripled; this has forced Amazon to restructure its services to build capacity for the market. Amazon is adjusting its store hours to create particular periods for its online groceries. Amazon has expanded its grocery pick up stations from 80 stores to more than 150 stores (Soper, 2020). To increase its capacity in logistics, amazon outsourced third-party Logistics Company’s such as DHL to be able to meet its global demand. Just as in logistics, when it came to increasing its capacity in terms of inventory, Amazon restructured its strategy by allowing third-party sellers into its platform and even further allowing its competitors to sell under its platform.
Problems and Challenges and Prescribe a Solution for Improvement
Though Amazon has established dominance in the online retail market through its various innovative strategies, like every other enterprise still faces a lot of challenges, the modern supply chain is dynamic in nature and consist of a complex model that keeps evolving and hence any organization must strive to meet the new demands and supply chain challenges that may come with it. Some of the challenges faced include increased costs, meeting consumer demands, and running out of stock.
Increased Costs throughout the Supply Chain
Like every sector, amazon’s supply chain faces the challenge of increased costs of operations. The major contributors to the rising costs in the supply chain include the increasing cost of fuel that causes a consequent rise in the cost of transportation either by road, sea, or air. For example, in Amazon’s global distribution expenditure was fifteen times greater in 2018 compared to 2009 (Bowles, 2019). Other areas that drive costs in the supply chain include the cost of new technologies, increased labor wages, government regulations, and a rise in commodity prices.
Possible Solutions
The rise in operations costs in the supply chain may dig into the profit margins of the company. It may result in the collapse of the supply chain and subsequent business failure, hence the need for better and improved management practices. One of the solutions in curtailing the rise in costs especially in the transportation sector of the supply chain is technology, by adopting such the Transport Management Systems (TMS) the company will be able to track the areas that are creating wastage and hence be able to come up with solutions before the current problem burgess into unprecedented levels.
Challenges in Meeting Consumer Demands
One of the significant challenges in satisfying consumer wants and expectations, especially for a company such as Amazon that has set the bar so high. Hence with raised expectations, one wrong move could be catastrophic that competitors might be lurking to exploit. Consumer demands are dynamic as they keep changing now and then since each consumer has different needs and desires. Consumer demands are fueled by the need for improved speedy delivery, quality products, goods compliant with the existing regulations, and environmentally friendly products.
Possible Solutions
One of the possible solutions in meeting customer demands is establishing proper customer care services. Through the customer care service, the consumer can air their grievances about products and enable the company to identify the areas that need concern or addressing. On quality control, the company can establish a review section where a product’s performance is reviewed. The move would enable the company to deal with third-party partners who sell substandard goods. The company could create a department of quality control that inspects the products to ensure they have observed the set environmentally friendly standards on environmentally friendly products.
Running Out of Stock
Amazon customers are accustomed to convenience, and in the event of a product running out of stock may lead to a slump in revenue and possible loss of customers. Amazon’s competitors may take the opportunity to close the gap as while customers purchase the product from the rivals, they may experience better services and hence migrate to their platform. Unlike the physical store where the customer might come back another day, the customer almost immediately goes to another online store in the online space.
Possible Solutions
One possible solution in preventing a scenario where the company runs out of stock is through employing an automated mechanism to monitor the sales velocity. The sales rate system determines and tracks the number of units vended in a specific period in terms of days, weeks, months, and years. Another possible solution lies in the factoring in of holidays and high seasons. During the high seasons and holidays, the company should anticipate the rise in demand associated with the seasons and stock enough piles to counter the problems associated with the running out of stock.
Conclusion
Much of amazon’s success can be solely accredited to its highly effective and efficient supply chain management. The retail sector has witnessed a tremendous change over the decades from brick and mortar stores to click and mortar stores to ultimately the online store, thus as the retail store experienced changes, so was the supply chain as it shifted from simple supply chains to more sophisticated distribution systems. In line with the changes, Amazon is in constant development of innovative and customer-centered approaches that emphasize on customer satisfaction. Amazon is progressively becoming a logistics enterprise through the sale of third-party vendors. Its plans to cut delivery time to the same day delivery by using drones are set to be a game-changer in the industry.
Amazon has realized the need for insourcing capabilities and has already set in motion plans to develop its own logistics network to combat the over-reliance on third-party logistic companies by purchasing its fleet of planes, trucks, vans, and even drones. With its logistics network, Amazon is seeking to cement its number one status by offering fast deliveries for its Prime members such as the day to next day deliveries.
Amazon has demonstrated the need for ecommerce enterprises to achieve its organizational goals and strategies; it must integrate its supply chain strategies with its corporate strategy and market needs.
References
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