To what extent is Amazon’s success based on their supply chain management?


Essay, 2019
21 Pages, Grade: B

Excerpt

Table of Contents

Introduction to Amazon:

Amazon’s supply chain and its impact:

Jeff Bezos’ Leadership and philosophy:

Economies of scale:

Amazon’s use of software:

Shifting of taxes:

Acquisitions:

Conclusion:

Bibliography:

Appendix 1:

To what extent is Amazon’s success based on their supply chain management?

Introduction to Amazon:

Amazon.com, Inc. is an American internet company which started as an online bookstore and was founded 24 years ago on July 5th 1994 by Jeff Bezos under the name Cadabra; the name was changed quickly in 1995 to its current name. The hugely successful tech giant, which was founded in a primitive garage in Seattle, now has a market cap of over US$1 trillion and is therefore the second most valuable public company in the world behind just Apple. It has even more impressive facts to offer such as being the largest Internet retailer in the world and second largest employer in the United states after Walmart or being the fastest company ever to reach $100billion in sales revenue within one year, taking only 20 years. At the end of 2018 Amazon had 647.500 employees, mainly thanks to its sprawling logistics network1, and in the second quartile of 2018 it reported an impressive net income of $2.5 billion with the revenue being $52.9 billion2 ; these numbers visualize the success of Amazon and indicate that they might even overcome their $177.8 billion worth of net sales of 2017 in 2018. It is also incredibly important to know that Amazon is not only the website amazon.com but consists of a lot of other (mostly internet) companies that include IMDb.com, alexa.com, audible.com, twitch.tv or Whole Foods Market which already indicates that their success is based on multiple factors rather than only supply chain management.

Amazon’s supply chain and its impact:

However, as Amazon has presumably the most sophisticated, most innovative and most efficient supply chain in the world it unquestionably plays a big role in terms of their success. But what is so special about it and what makes it so efficient? First of all, Amazon’s capital expenditures went from $6.7 billion in 2016 up to $10.1 billion in 2017 which resulted in an increase of almost 100% within one year in the amount of space Amazon owns which went from 7.2 million square feet in 2016 up to 14million in 20173 ; this number may seem lower than expected because most of Amazons space is rented and currently believed to be 209 million square feet with 41.5 million more in construction4. Amazon maximizes the usage of that space and the 797 facilities it carries by thoroughly considering the fourth P of the marketing mix “Place” and therefore placing their warehouses very strategically. Additionally, their operations management is using lean production in order to be as efficient as possible with the input of minimal resources. This means to place the warehouses as close as possible to main metropolitan areas, which represent local markets, as it enormously increases the efficiency of them. This is because being closer to the customer minimizes waste in terms cost and time needed for delivery, as long and difficult transportation is avoided. This good operations management of the supply chain is therefore a significant factor for Amazon’s success as it makes sure to maximize the profit margin. Apart of the location, the size of each warehouse is also very important and therefore calculated very carefully by highly specialized and trained employees in order to minimize unnecessary waste of resources, which again emphasizes Amazon’s focus on lean production. The size mostly depends on the demand in each specific area.

The most innovative part of their supply chain is undoubtedly the automation within the warehouses through robots. Amazon owns the company “Amazon Robotics” which was called “Kiva Systems” before they acquired them in 20125. The robots are able to pick and pack without any human assistance while being incredibly fast. Although there is no data available on how much money these robots save Amazon in the short term, they without a doubt greatly reduce Amazons costs in the long-term, by reducing the need for employees and therefore reducing the cost of human resources. However, the overall need of human resources increased for Amazon which can be seen from the annual rising number of employees.

Amazons number of employees:

Abbildung in dieser Leseprobe nicht enthalten7

Table 1. Source: Amazon’s annual reports7

According to Amazon Robotics chief technologist Tye Brady this is because the robots are simply enhancing human efficiencies rather than replacing them, which leads to the number of warehouse jobs not being reduced. The fact that Amazon implemented over 100.000 warehouse robots8 already and is thereby miles ahead of their major competitor Alibaba who is estimated to only have implemented a few thousand robots, indicates the huge significance of their supply chain management in terms of their success. As Amazon Robotics continues to innovate and improve its robots while being inside the network of the second most valuable company in the world, the lead is only to set to grow further.

This incredible supply chain management enables Amazon to deliver hundreds of thousands of products very cheaply and within a very short period of time to almost every place in the world. This ability, which is based on their logistics management, is arguably one of the biggest success factors for Amazon as for 65% of online shoppers I surveyed the shipping costs are of concern and for 44% fast shipping is important9. Amazon recognized this problem even in its early stages and was therefore able to perfect its supply chain which minimizes those problems and therefore maximizes the satisfaction of existing customers and maximizes the chances of attracting new customers.

But the provision of Amazon Prime, which provides free-two-day shipping which then minimizes the aforementioned inconveniences of online shopping, creates a loss of $7billion per year due to shipping costs for Amazon even though they earn $2billion annually through subscriptions. This number is so enormously high because Amazon used to outsource all shipping to third parties like UPS and FedEx, but they recently reached a scale from which it is worth it to start insourcing10. The fact that Amazon stops to outsource shipping, created another strength of Amazon’s supply chain, as even though 82% of the sales on Amazon comprise of third party sellers, they are not dependent on third party logistics anymore and use their own delivery vehicles. This will in the long term surely decrease their loss on shipping, showing the importance of their supply chain management in terms of their success. They developed Amazon Flex which is an innovative solution to reduce the cost of the expensive “Last Mile” which describes the delivery from the last local distribution center to the customer. Amazon Flex is basically a form of workforce management. It gives people the possibility to sign up as a driver and deliver Amazon packages to make some extra money. An advantage apart of saving money because they do not have to outsource anymore is that Amazon can scale its capacity to match demand11, which saves them money which otherwise might have been spend on long term contracted drivers who aren’t necessarily needed.

However, considering that Amazon’s provision of the free-two-day shipping keeps their customers happy and loyal which is incredibly important in the e-commerce business and potentially gives them an advantage over their competitors, the loss of $7billion is worth it. In other words, the $7billion should be seen as an investment to increases customer loyalty and satisfaction. The importance of Amazon’s supply chain management in terms of their success is further emphasized by surveys of Amazon users which suggest that 85% of asked consumers say that free-shipping is why they buy from Amazon and 82% of Prime members would cancel their account if it wasn’t for the fast and cheap delivery12 ; the free-two-day shipping would surely not be possible without Amazon’s excellency in their logistics management.

Amazon is also using Kaizen as part of their general lean production as they are striving for continuous improvement, currently developing a system which is aimed to enable Amazon to use drones to deliver within 30minutes or less. But even though the development is already going on since over five years there are still a lot of problems to solve. Those include that the maximum flight range is currently only 15 miles per flight or the landing space which would currently disable deliveries to tight and urban areas, which is obviously where the main customer base of Amazon lives. However, this also shows the will to innovate and maximize efficiency which is so strongly anchored in Amazons culture and its employees due to Bezos’ incredible leadership.

Jeff Bezos’ Leadership and philosophy:

This leads me to the next massive contributor to Amazon’s success: Jeff Bezos’ Leadership and philosophy. His leadership includes multiple ideas, for example to work everyday like it is your first day in business or to operate with a sense of urgency like a hungry startup, which Bezos himself emphasized in the letter to his shareholders in 2016: “Day two is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1”13. But Bezos also led Amazon to its success by thinking long term right from the beginning as well as being prepared to fail for the sake of being innovative. He told investors that Amazon is going to be unprofitable for a long time but that that would be Amazons strategy and that there is a 70% chance of them losing all their money, so they should not invest unless they can afford to lose money14. With this statement he also expresses his attitude of acceptance of failure as he knew there was a high chance of failure and that all the investments could be lost; but he was willing to take that risk.

One of the most important and impactful attitudes of his was that he wanted to regret nothing which made him leave his financially secure life as a vice president of D.E. Shaw & Co (an investment firm) behind to become an entrepreneur and take the enormous risk of founding Amazon when the internet’s future was still uncertain. This attitude became evident during an interview with the Time magazine where he said: “I knew that if I didn’t try this, I would regret it. And that would be inescapable”15. Furthermore, he expressed the attitude of accepting (occasional) failure as the price of innovating in Amazons 2015 annual report as he wrote: “failure and invention are inseparable twins”16. Yet one has to be careful not to misinterpret his statement. He doesn’t mean that every innovation has to fail at some point but rather that in terms of research and development, the method of trial and error inevitably includes some failures until the right innovation is found and can be further developed.

This attitude of Jeff Bezos created a culture which encourages innovation and taking risks at Amazon, which definitely influences their decision making. A good example of such an innovational and risky decision would be that they decided to start opening up brick and mortar stores. An example of such a store would be their “ghost store” in Seattle, which has no cashiers. Technically people can just grab a product and walk out of the store without paying; but the customers do pay, as they will automatically be charged for the “purchased” products on their credit cards through their account in the Amazon Go App, which is identified through a QR-code when entering the store17. As there is no published financial data about these stores I cannot use specific financial tools to analyze how successful they are. However, these stores will probably be successful and another profitable source of money for Amazon even though there might be some imperfections. This is because the convenience of the store, Amazon’s trusted brand name, and the curiosity of the people will most likely attract customers to the store. Those will include customers from existing target market segments as well as new customers, who potentially are from a different demographic segmentation. This means that Amazon for example now also appeals to the generation of the baby boomers, who tend to prefer shopping in physical stores rather than shopping online. Overall, it can be said that the culture of innovation and taking risks, which is based on Jeff Bezos’ philosophy, helps Amazon to take over new markets and is therefore a very factor which hugely contributes to their success.

[...]


1 MSN. (2019). Amazon Is The Biggest Employer in Tech. [online] Available at: https://www.msn.com/en-us/money/news/amazon-is-the-biggest-employer-in-tech/ar-BBTDfb6 [Accessed 5 Mar. 2019].

2 Owens, J. (2018). Amazon earnings explode to record thanks to surprising e-commerce profit, stock gains. [online] MarketWatch. Available at: https://www.marketwatch.com/story/amazon-earnings-explode-to-record-thanks-to-surprising-e-commerce-profit-stock-gains-2018-07-26 [Accessed 7 Oct. 2018].

3 Kim, E. (2017). Amazon doubled the amount of space it owns in 2017. [online] CNBC. Available at: https://www.cnbc.com/2018/02/02/amazon-doubled-the-amount-of-space-it-owns-in-2017.html [Accessed 10 Nov. 2018].

4 Mwpvl.com. (2018). Amazon Distribution Network Strategy | MWPVL International. [online] Available at: http://www.mwpvl.com/html/amazon_com.html [Accessed 10 Nov. 2018].

5 The Balance Small Business. (2018). How Amazon Is Changing Supply Chain Management. [online] Available at: https://www.thebalancesmb.com/how-amazon-is-changing-supply-chain-management-4155324 [Accessed 10 Nov. 2018].

6 *Number not taken from annual report but from the following website* MSN. (2019). Amazon Is The Biggest Employer in Tech. [online] Available at: https://www.msn.com/en-us/money/news/amazon-is-the-biggest-employer-in-tech/ar-BBTDfb6 [Accessed 5 Mar. 2019].

7 Amazon.com, Inc. - IR. (n.d.). Annual reports, proxies and shareholder letters | Amazon.com, Inc. - IR. [online] Available at: https://ir.aboutamazon.com/annual-reports?c=97664&p=irol-reportsannual [Accessed 18 Jan. 2019].

8 Brown, A. (2018). Amazon now has more than 100,000 warehouse robots on its payroll. [online] Mail Online. Available at: https://www.dailymail.co.uk/sciencetech/article-5808319/Amazon-100-000-warehouse-robots-company-insists-replace-humans.html [Accessed 5 Mar. 2019].

9 See Appendix 1

10 Medium. (2018). How Amazon Will Dominate the Supply Chain – Member Feature Stories – Medium. [online] Available at: https://medium.com/s/story/how-amazon-will-dominate-the-supply-chain-6727936d3ffc [Accessed 10 Nov. 2018].

11 Medium. (2018) ibid.

12 Gofisher.net. (2018). Understanding Amazon’s Success Factors | Fisher. [online] Available at: https://gofisher.net/blogs/understanding-amazon’s-success-factors [Accessed 7 Oct. 2018].

13 Ir.aboutamazon.com. (2016). [online] Available at: https://ir.aboutamazon.com/static-files/e01cc6e7-73df-4860-bd3d-95d366f29e57 [Accessed 4 Mar. 2019].

14 Inc.com. (2018). 4 Success Lessons From Amazon's Jeff Bezos. [online] Available at: https://www.inc.com/marla-tabaka/4-success-lessons-from-jeff-bezos.html [Accessed 7 Oct. 2018].

15 Inc.com. (2018). ibid.

16 Ir.aboutamazon.com. (2015). [online] Available at: https://ir.aboutamazon.com/static-files/fdf51af3-79e0-4b3c-9868-19aa75aa0306 [Accessed 4 Mar. 2019].

17 Metz, R. (2018). Amazon’s cashier-less Seattle grocery store is opening to the public. [online] MIT Technology Review. Available at: https://www.technologyreview.com/s/610006/amazons-checkout-free-grocery-store-is-opening-to-the-public/ [Accessed 4 Mar. 2019].

Excerpt out of 21 pages

Details

Title
To what extent is Amazon’s success based on their supply chain management?
Grade
B
Author
Year
2019
Pages
21
Catalog Number
V505452
ISBN (eBook)
9783346059703
Language
English
Tags
Extended Essay, International Baccalaureate, Business and Management, Amazon, supply chain
Quote paper
Moritz Puhrsch (Author), 2019, To what extent is Amazon’s success based on their supply chain management?, Munich, GRIN Verlag, https://www.grin.com/document/505452

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