Amazons Distribution Strategy

mazon.com (Amazon) was one of the first online

shopping sites launched in 1995. Since its inception, it has been consistently ranked as one of the best retail sites on the Internet and is regarded as the universal model for successful Internet retailing. In March 1998, Amazon was ranked among the top 20 Internet sites in almost all the major market surveys. According to an analyst, When you think of Web shopping, you think of Amazon first.3 The Forrester PowerRankings,4 in 2000, ranked Amazon as the best online shopping site. Amazon owed a large part of its popularity to its excellent customer service, which was due to its exemplary inventory management. Amazon realized that there were a lot of players in the e-tailing industry, and therefore, it needed to consolidate its position as one of the best online shopping sites. Accordingly, it took several measures. In order to increase its revenue, it added several new products to its site. In 1999, on an average, it added a new product on its site once in every six weeks. It entered into strategic alliances with several companies to increase the range of products available on its site. Later, it strengthened its Customer Fulfillment Network by obtaining products directly from the distributors rather than stocking all the goods in its warehouse. Amazon was popular among its customers for shipping the goods within the estimated time, leading to satisfied customers, improved market share and repeat business. By the end of 2002, Amazon had 22.3 million registered users on its site. By 2003, Amazon became the biggest book, music and video retailer on the Internet and offered more than 4.7 million books, videos, music CDs, DVDs, computer games and other products. When Bezos started his venture, he aimed at hassle-free operations. He wanted to offer his customers a wide selection of books, but did not want to spend time and money on opening stores and warehouses and in dealing with the inventory. He, however, realized that the only way to satisfy customers and at the same time make sure that Amazon enjoyed the benefits of time and cost efficiency was to maintain its own warehouse. Building warehouses and operating them was a very tough decision for Bezos. Each warehouse cost him around $50 mn and in order to get the money, Amazon issued $2 bn as bonds. In 1999, Amazon added six warehouses in Fernley, Nevada; Coffeyville, Kansas; Campbellsville, Kentucky; Lexington, Kentucky; McDonough, Georgia; and Grand Forks, North Dakota. On the whole, Amazon had ten warehouses. Most of these warehouses were set up in states with little or no sales tax. In the same year, Amazon increased its worldwide warehousing capacity from 300,000 square feet to over five million square feet. Since Amazon ordered books and other products from the warehouses only after the customers had agreed to buy them, the return rate was only 0.25% compared to the return

rate of 30% in many segments of the online retail industry. Amazons warehouses which were a quarter mile long and 200 yards wide stored millions of books, CDs, toys and hardware. They were very well maintained and completely computerized. In fact, the number of lines of code used by Amazons warehouses was the same as the number used by its Website. Whenever a customer placed an order, a series of automated events followed which made inventory management easier. When a customer ordered a book from Amazon, his invoice mentioned the title of the book followed by the barcode. This was a code of numbers such 3-4-5 which indicated the books location in the warehouse. Computers sent signals to the workers wireless receivers telling them which items had to be picked off the shelves. The workers decided the order in which the items had to be picked and then verified the weight of each product. The items taken from the shelves were placed in large green crate which contained the orders from different customers. When the crates got filled, they were placed on conveyer belts and sent to a central point. Here the bar codes were matched with the order numbers to find out who would receive each item. Each customers orders were placed in a separate cardboard box. Different wrappers were used to cover gift items. Most of the orders were shipped either through the United States Postal Service or through the United States Parcel Service which were located close to Amazons warehouses. Amazon had developed proprietary software and had trained some of its personnel to get books which were out-of-print or to get products that were hard-to-find, using the software. The software sent orders (which the company could not cater to) to special orders groups18 for speedy delivery. In the holiday season of 1999, Amazon was determined not to disappoint any customer who visited its site for his holiday shopping. Accordingly, Bezos decided to stock the stores with every possible item that customers were likely to buy. Right from the latest novel to the chartbuster movie of the season, he wanted everything to be stored to ensure that none of the customers logged out of the site, disappointed. Although the strategy adopted by him was appreciated, Bezos had to face a lot of problems too while trying to manage his large inventory. Bezos realized the importance of managing inventory in his company. He knew that a large number of goods piled on the shelves would reduce the profit margins as piled up goods represented unutilized cash which could be used elsewhere in his business. However, if fewer goods were stocked, it meant that some of the customers were bound to be disappointed. In order to overcome this tedious task of inventory management, the company decided to do things differently in the holiday season of 2000. Amazon managed to reduce the size of its inventories even as the company offered more products on its site. This was made possible by managing the warehouses efficiently. Amazon made careful decisions about which products to buy and where to buy

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Amazons Distribution Strategy

them from. The company then had to decide which of the distribution centers it would send its product to and then know how to receive and track the product once it was in the warehouse. Amazon also decided to buy its books, CDs, videos etc. directly from the publishers instead of buying them from the distributors. Amazon maintained a good relationship with its vendors so that it could extract best deals from them. The company spent huge amounts on its infrastructure and technology between 1997 and 2000. In order to manage the inventory, Amazon refined its software. The new software helped the company accommodate inventory as per the demand in different regions. For example, Amazon used its information to rearrange its warehouses in Delaware, Kansas, Kentucky, Nevada and North Dakota. It tried to place products, like CDs and CD players which were generally purchased together, at one point. Amazon also tried to reduce its split shipmentsthe orders for multiple items from different warehouses. This step considerably reduced the inventory levels. Amazon used the software to estimate customer demand at a particular place, which considerably reduced the risk of buying too few or too many goods. Amazon also tried to cut down its expenses. It decided to outsource some of its routine activities so that it could concentrate better on its core activities. It partnered with other companies for shipping the inventory. So, while the partners shipped the items, Amazon leveraged on its e-commerce expertise. It revamped the layout of its warehouses making it easier for the company to locate and sort customer orders. By doing this, it managed to save all the expenses related to filling and shipping orders. Improved inventory management helped Amazon record its first ever profit in the fourth quarter of 2001. After accumulating a deficit of $2.86 bn in the seven years since its launch in 1995, Amazon recorded a net profit of $5 mn in the fourth quarter of 2001. This profit was mainly attributed to its ability to reduce costs in stocking and shipping goods. Amazon had a sales record of $1.1 bn in the fourth quarter of 2001 which was a 15% increase over the sales recorded during the same period the previous year ($972 mn). In 2002, Amazon recorded sales of $ 3.93 bn which was 26% higher than the sales of 2001 ($3.12 bn). In early 2001, Amazon decided to outsource its inventory management though it knew that it was a huge risk. When Amazon managed its own inventory, it had earned the reputation of providing superior customer service, which was its biggest strength. Now, the company wanted to concentrate on its main activities and outsource inventory management in order to earn more profits. However, Amazon was apprehensive that this move would damage the hard-earned reputation of the company. Nevertheless, it decided to go ahead with the decision to outsource its inventory. Amazon did not stock every item offered on its site. It stocked only those items that were popular and frequently purchased. If a book that was not too popular was ordered, Amazon requested that item from its distributor who then shipped it to the company. In the company, the items were unpacked and then shipped to the respective customers. So, Amazon basically acted as a transshipment center and ensured that the entire process of shipping from the distributor to the customer was done very efficiently. Some of the main distributors to 1 2 Amazon included Ingram Micro and Cell Star. Cell Star handled cell phone sales while Ingram Micro, a whole sale distributor, handled computers and books. Amazon had external distributors for most of its products except the bestsellers. In August 2001, Amazon entered into an agreement with Ingram Micro Inc., the largest wholesale dealer of electronic goods and supply chain management services to provide logistics and order-fulfillment services for desktops, laptops and other computer related accessories at the computer store at Amazon.com. Ingram Micro was also the distributor for Amazons electronic store. Said Carl Gish, Vice President of electronics at Amazon.com, Ingram Micro shares our customer obsession, and they have deep expertise in the highly complex skill of distributing computers and related products. We know they will provide timely and accurate delivery of orders that customers enjoy and expect from Amazon.com.21 Commented Kevin Murai, president, Ingram Micro, The customized fulfillment services we are providing to Amazon.coms computer store will minimize the number of touches to the product, while ensuring a seamless shopping experience for Amazons customers from start to finish.22 He added that Ingram Micro had the strategic expertise to maximize operating efficiencies, streamline supply chain logistics and reduce inventory costs. Its faster to ship to customers this way, Amazon spokesman Bill Curry said. We also dont have to receive it into the warehouse, put it on a shelf, take it off the shelf, put it in a box, and send it to the customer.23 Amazon planned to extend the dropshipment model to all other categories, too. However, there was a major disadvantage with this model. If the customers ordered only a single item at a time, the drop-shipment model was extremely helpful. But if a single order had several items such as a book stocked by Ingram and a game stocked by Amazon, then the following procedure was adopted: Ingram sent the book to Amazon, Amazon added the game and then forwarded the whole box to the customer. This reduced the overall efficiency of the process. Since almost 35% of orders placed at Amazon were from different product categories, the drop-shipment model was not very effective.

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The largest global wholesale provider of technology products. The worlds leading global provider of innovative, value-enhancing logistics.

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Amazons Distribution Strategy

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