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Supply Chain Management of Amazon.com

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Supply Chain Management of Amazon.com
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Netra Shetty
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Supply Chain Management of Amazon.com - December 29th, 2010

Supply Chain Management of Amazon.com : Amazon.com, Inc. (NASDAQ: AMZN) is a US-based multinational electronic commerce company. Headquartered in Seattle, Washington, it is America's largest online retailer, with nearly three times the Internet sales revenue of the runner up, Staples, Inc., as of January 2010.[3]

Jeff Bezos founded Amazon.com, Inc. in 1994 and launched it online in 1995. The company was originally named Cadabra, Inc., but the name was changed when it was discovered that people sometimes heard the name as "Cadaver". The name Amazon.com was chosen because the Amazon River is the largest river in the world, and so the name suggests large size, and also in part because it starts with "A" and therefore would show up near the beginning of alphabetical lists. Amazon.com started as an online bookstore, but soon diversified, selling DVDs, CDs, MP3 downloads, computer software, video games, electronics, apparel, furniture, food, and toys. Amazon has established separate websites in Canada, the United Kingdom, Germany, France, Italy, Japan, and China. It also provides international shipping to certain countries for some of its products.

Supply Chain and e-Supply Chain:
Structures, Strategies and Drivers

Supply Chain: Activities involved in fulfilling a customer request
Actors: Suppliers, Sub-Contractors, Manufacturers, Transporters, Warehouses, Retailers, Customers
Functions: Product, Development, Marketing, Procurement, Manufac-turing, Operations, Distribution, Finance, Customer Serv-ice
Objective: Maximize value generated through customer satisfaction

Decision Phases
1. Strategy (Design)
Locations, Capacity channel design, Warehouses, Manufacturing, Out-sourcing
2. Planning
Supply scheme, Inventory policy, Subcontracting
3. Operations
Allocation of individual orders to inventory or production, allocation to transportation routes, etc.

Process view of the Supply Chain
Cycle view
1. Customer Order Cycle
Customer arrival
Customer order entry
Customer order fulfilment
Customer order receiving
2. Replenishment Cycle
Retail order trigger
Retail order entry
Retail order fulfilment
Retail order receiving
3. Manufacturing Cycle
Order arrival
Production scheduling
Manufacturing and Shipping
4. Procurement Cycle
Supplier / Manufacturer interface

Push-Pull view of S.C.
Pull Process: Execution is initiated in response to a customer order (increased responsiveness)
Push Process: Execution is initiated in anticipation to a customer order (increased efficiency)
Push-Pull Boundary: Which processes are of each type
Push Systems MRP supported
Pull Systems Require fast information transmission and shar-ing

Matching of the company’s competitive strategy to supply chain strategy
Competitive Strategy: Define ways to satisfy customer require-ments through products and services
 Product Development Strategy
 Marketing and Sales Strategy
Supply Chain Strategy: Design strategy to achieve the right mix of efficiency and responsiveness
Products with high demand uncertainty (and usually high profit margins) require responsive supply chains. This usually occurs early in the life cycle of the product.
Products with low demand uncertainty (and usually low profit margins) require effective supply chains. This usually occurs late in the life cycle of a product.
Supply chains serving multiple products and multiple customer segments require the right balance between effectiveness and responsiveness.

Achieving strategic fit:
Matching S.C. to customer segment require-ments
Understanding the cus-tomer: Volumes, variety, response time, service level, price innovation rates

Understanding the supply chain: Responsiveness
 Response to wide range of quantities (excess capacity)
 Meet short lead time
 Handle a large variety of products
 Meet a high level service
 Economies of scale
 Low capacity (excess costs)
 Low cost transport

Supply chain Characteristics
Efficient Responsive
Primary goal Lowest cost Quick response to de-mand
Product design Max per. at min cost Modularity for postpone-ment of product differentiation
Pricing Lower margins price
prime customer drive High margins
Manufacturing strategy Lower costs through high utilization Capacity availability to meet unexpected demand
Inventory strat-egy Minimize inventory to lower cost Maintain buffer inventory to meet unexpected de-mand
Lead time Reduce but not at expense of cost Reduce aggressively even if costs are significant
Supplier strategy Select based on cost and quality Select based on speed, flexibility and quantity
Transportation Low cost models Responsive models

Intercompany view of the Supply Chain
Intercompany alliances:
1. Maximize supply’s surplus, and not maximize the profit of each segment because this is an internal account (Distribution of profits
2. Increases speed: Successful interface between stages  requires close cooperation, alliances, common investments, etc.


Supply chain Drivers
Benefits Smoothing Supply-Demand uncertainties
Economies of scale
(Start up costs, Transport fixed costs)
Costs Capital cost
Operational costs

Inventory types
By uncertainty type 1. Cycle Inventory: designed to meet economies of scale
2. Safety Inventory: designed to meet uncertainties
(marginal analysis)
By supply chain stage Raw materials
Process inventory
Ready product inventory cost increase
Inventory cost = Inventory volume  Time

Substitute inventory for information: More accurate and timely in-formation reduces inventory requirements
Substitute inventory for capacity: Capacity increases flexibility and reduces inventory re-quirements
Substitute inventory for speed: Speed reduces lead times and result in more accurate fore-casting
Inventory increases responsiveness at a cost

Transportation Modes (air, truck, sea, rail)
In House or Outsource
Transportation speed makes a positive contribution to responsiveness and can be increased at a cost

Facilities - Capacity
Location of factories, warehouses, retail outlets
Focuses factories vs factories near distribution cen-tres
Increased capacity adds to flexibility and responsiveness at a cost

 Accurate forecasting
 Coordination between stages of S.C.
 Fast cycles
 Inventory reduction
 Lost sales reduction
 Markdowns reduction

Enabling Technologies
 Internet
 SCM software

Supply chain Obstacles
 Increasing variety of products
 Decreasing product life cycles
 Increasingly demanding customers
 Fragmentation of supply chain ownership
 Globalization
 Difficulty in executing new strategies

Relationship between service/cost performance and
number of warehouse locations

 Increasing the number of warehousing facilities in a logistics network generally improves customer service, because additional stocking loca-tions reduce average delivery times to customers. However, more ware-houses increase warehousing and inventory costs. Warehousing costs increase because there are more overhead and fixed costs to absorb. Inventory costs increase because a greater number of warehouses means more safety stock inventory must held system-wide to provide a specified level of customer service.
 In contrast, transportation costs decrease as the number of facilities is increased over some range. Rather than shipping smaller quantities direct from points of supply (eg. Plants) to customers, warehouses serve as product mixing centers that allow larger, consolidated shipments between supply points and warehouses. This transportation cost advantage becomes diminished, however, if too many warehouses are present because the shipment sizes between supply points and warehouses decrease to the point that there is little shipment consolidation advantage over direct shipments to customers.

Figure below outlines some of the trade-offs network modeling can address when integrating manufacturing and distribution within a comprehensive network design. Manufacturing costs frequently decrease as manufacturing is concentrated in fewer facilities – a result of economies of scale and more revenue generated per dollar spent on manufacturing infrastructure and overhead. However, more modern, flexible-manufacturing technology may diminish or even eliminate the benefits of this traditional axiom in certain industries.
Relationship between cost performance, factory focus
and number of plant locations

Alliances are important in effective supply chain management. The main issues concerning alliances are the following:
 Extendedness
 Operational Information Exchange
 Operating Controls
 Sharing of Benefits and Burdens
 Planning
 Compatible Corporate Cultures (Trust)

The investment necessary in time, personnel, equipment to establish an interface among channel members cannot be returned over a short period in most cases.
Thus, members usually enter into contracts or have an understanding of a long-term relationship if they are involved in a partnership relationship.
Operational Information Exchange
Information systems must be connected, which means having compatible equipment and software.
Operating Controls
Channel members want to monitor other members’ information systems to be aware of product flows and any potential supply problems.
Sharing of Benefits and Burdens
There is an expectation that channel members will share both benefits and burdens. If only the channel captain, or the strongest one in the channel, reaps the rewards, the other members will be constantly looking for alternative relationships. Certainly, the relationships should be reviewed periodically against other alternatives, but without sharing of benefits and burdens, the ties will be particularly tenuous and uncomfortable.
Considerable planning is needed to integrate the mem-bers of the supply chain, or two partners.
Compatible Corporate Cultures (Trust)
Finally, there is chemistry between partners and/or among supply chain members. Corporate cultures should be compatible among the parties involved for the partnership to work.

The bullwhip effect
Fluctuations in orders increase as we move up the supply chain from retailers to manufacturers. This increases costs and re-duces profitability.
Obstacles to coordination
Incentive obstacles
Information processing obstacles
Operational obstacles
Pricing obstacles
Behavioural obstacles
Actions to improve coordination
Aligning goals and incentives
Improving information accuracy
Improving operational performance
Designing pricing strategies to stabilize orders
Building partnerships and trust

Performance improvement stages
1st stage Improve in-house performance
2nd stage Consider relationships with supply chain partners
3rd stage Optimize the operations of the extended enterprise
(optimal facilities setting, optimal stock levels, delayed differentiation, mass customization, accurate response)
Cost reduction is not always appropriate if it hurts responsive-ness.

Performance measures and variables
Measures and variables used depend on the desirable characteristics of the supply chain (mix between effectiveness and responsiveness).
Traditional measures
Inventory measures Inventory turns, inventory costs, inventory levels
Time Product development time, time to market, time to break even, lead times
Quality Partners’ contribution to continuous improvement, percentage of defects
Traditional measures focus mainly on cost con-siderations
Less traditional measures
Customer focus
Customer satisfaction
Information practices
Information about workflow practices and inte-grated production planning
Partner selection criteria (non-cost)

Performance measures
Depending on the type of the supply chain (effectiveness vs. responsiveness)
Traditional measures Lead times, inventory levels, service levels
focus: cost reduction
Modern measures The extent of supplier or customer involvement in product design
The importance of non-price factors in partner selection
The establishment of long term partnerships with suppliers and customers
A firm’s ability to capture and use information

Open e-markets Reduce prices and increase product variety
Transaction cost of order placement and fulfilment is reduced
Used to make occasional transactions when short-ages occur in the supply chain or in capacity: quick information regarding availability and spot prices. An auction facilitates a one time transaction
Tight links (through networks and alliances) Tight-links result in greater speed and certainty and they are used for regular and steady transactions through long-term relationships

Revenue Impact of e-Business
 Offering direct sales to customers
 Provide 24-hour service from any location
 Aggregate information from various sources
 Provide personalization and customization of information
 Speed up time to market
 Implement flexible pricing
 Allow price and service discrimination
 Facilitate efficient funds transfer
Cost Impact of e-Business
 Reducing product handling with a shorter supply chain
 Postponing product differentiation until after an order is placed
 Decreasing delivery cost and time with downloadable prod-ucts
 Reducing facility and processing cost
 Decreasing inventory costs through centralization
 Improving supply chain coordination through information sharing
Potential Cost Disadvantage
 Increased transportation cost through aggregation
 Increased handling cost if customer participation is re-duced
 Large initial investment in information infrastructure

1. Proper mix with “bricks”: Physical network necessary
2. Suitable pricing to reflect costs
3. Optimize distribution systems to handle “parcels” not “pallets”
4. Efficient handling of return: increased returns in e-ordering

1. Dell Supply Chain

Dell has fewer stages in the S.C. Greater part of the S.C. operates in “pull mode”.
Comments on the characteristics follow:
Type of products More
Product introduction Faster
Response time Longer (products not immediately available)
Stages Fewer: increased profit margin through cost reduction
Payments e-funds transfer: faster pay-in
slower pay-out
negative working
(matter of negotiation with partners)
Inventory Lower: Through aggregation and delayed dif-ferentiation
Facilities costs Lower: Fewer facilities (mainly retail outlets)
Transport costs Increased: Distribution on a personal basis (whose cost is it?)
However Transport cost small fraction of price and cost
24-hour service More customers, revenue enhancement
Price More flexible: Price revisions depending on stocks

2. Amazon Supply Chain

Product range Greater
Facilities cost Lower (no retail infrastructure)
Transport and Dis-tribution cost Higher distribution cost
Significant part of the total price/cost
24-hour service
Delivery Longer
Processing cost Higher
Amazon does not charge for certain services that are significant part of total cost. Low prices result in high revenues but fail to recover costs.

Last edited by bhautik.kawa; July 18th, 2016 at 08:51 PM..
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Re: Supply Chain Management of Amazon.com - June 18th, 2015

Supply chain management is effective and highly credible. In fact they have dominated the market because of their supply chain management indirectly. They have launched one campaign "24 hour delivery". In that, they have promised their consumer to deliver the ordered product within 24 hours that means they have high access to their supply chain department so, that they can deliver the product and time and because of that campaign they have uplifted their target audience confidence and trust.
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