Amazon Case Review

Team Synergy: Jacqueline Lorenzetti, Kris Riegle, Riz Ul Haque, Kevin Saar, Kevin Weaver

iMBA561
Company History
Amazon, founded in 1995 was designed to transform the book buying industry by

offering fast, easy, and enjoyable online shopping. What started as a pure online book retailer

quickly evolved into the “Earth’s Biggest Bookstore”, surpassing sales of brick and mortar

competitors. In 1998, product lines were expanded to include music, DVD and video stores.

Today, the company offers everything from books to garden tools.

The company’s initial business plan was unique. Jeff Bezos, founder of Amazon, did not

project a profit for four to five years. This "slow" growth caused stockholder concerns that the

company was not reaching profitability fast enough (Wiki, 2011). However, the strategic

planning paid off and the company’s total revenue increased from $15.7M in 1996 to $3,932.9M

in 2002.

Distribution Strategies
Amazon initially opted to hold modest inventories and rely on wholesalers and publishers

to source its extensive selection. Once the products arrived, Amazon employees would pick and

pack the order and send it to the customer. Customer orders were typically fulfilled in 4-7 days.

Over the course of the next few years, Amazon’s number of worldwide active customers

grew from 180 in 1996 to 6,200 in 1998. The capacity of its distribution centers grew from

50,000 to 285,000 square feet by expanding its Seattle location and opening a new center in

Delaware to better service East coast customers. Additionally, back office logistic software was

added to keep pace with the expansion.

In late 1998, additional product lines led Amazon to consult with outside experts to adapt

its supply chain. By 1999, five additional distribution centers offering 3.2 million square feet of

distribution capability were added. And, since 35 percent of orders contained multiple items,

each of the distribution centers handled the full selection of products. To accomplish this, all

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were upgraded with the latest materials-handling technologies. Key service metrics were also

put in place to maintain high levels of quality and productivity. By the end of the 1999 holiday

season, Amazon delivered 99 percent of its orders in time for Christmas. However, its fourth

quarter operating expenses were $323 million of $676 million in revenues.

In 2000, Jeff Wilke was hired as Amazon’s VP of Operations to streamline processes by

reducing variation and defects through Six Sigma DMAIC. This led to a reduction in employee

errors and minimized bottlenecks during peak order periods. Wilke also focused on inventory

optimization by refining software for each product category, establishing buyer rules, and

integrating supplier management systems. Additionally, the company began allowing drop

shipping from wholesalers directly to its customers, reducing the delivery time to only 2-3 days.

European Operations
In 1998, Amazon entered the international market by acquiring leading online book

retailers in the United Kingdom and Germany. Both European countries were considered having

the largest markets for books and online business potential. By 1999, Amazon was the leading

online bookseller in the United Kingdom and Germany. This success led to additional product

offerings on both sites. In 2000, Amazon entered the French market by building its site from

scratch. Unlike the United Kingdom and Germany, France had established online competitors.

Although the international operations were producing a significant amount of revenue,

challenges relating to cultural differences quickly evolved. This resulted in significant changes

to Amazon’s traditional value chain. Regional legal and cultural specifications were adapted and

a dedicated 24-hours-a-day customer center was staffed with native speaking representatives.

Also in 2001, to comply with varying price laws and regulations, Amazon introduced free

shipping and held government approved clearance sales. Local preferences were also considered

with payment options and soon checks and postal offers were accepted.

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 In addition to cultural changes, Amazon needed to adapt its procurement strategy. France

had no media wholesalers and Germany offered only one wholesaler for books and one for

video. The United Kingdom’s sourcing was similar to the United States. Relationships were

built with hundreds of publishers and distributors and Electronic Data Interchange (EDI) was

used to communicate with U.S. suppliers. Fortunately, the national postage service carriers in

Europe were able to fulfill Amazon’s fast delivery model and offered several option for next or 2

day delivery. However, local postal carriers did not provide reliable cross-border logistics which

led to delays or missing shipments.

To accommodate these changes, each of the European subsidiaries operated in a

decentralized and independent manner. Each country had a country manager focused on

identifying and managing the local experience while fulfilling its orders in its centrally located

distribution center.

In 2001, corporate wide cost cutting led to consolidation of international functions.

Customer call centers from different regions were combined. Marketing and branding between

the three European countries were unified to create an identical set of values. Also, a European

Operations Director position was established to manage the European distribution centers, supply

chain operations, EDI, operations excellence, capacity engineering, and transportation. By 2002,

International revenues accounted for 35 percent of Amazon’s total revenues. The company soon

began evaluating opportunities to expand in other international locations as well as increase the

number of product offerings available outside the United States. Tom Taylor was promoted

from the U.S. Eastern Operations Director to the Director of European Supply Chain Operations.

International Opportunities
Operational standards and synergies between the three countries became a top focus for

Taylor. He relied on his prior U.S. knowledge of systems and processes and had the full support

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of Amazon’s IT department in Seattle and the newly formed European Supply Chain Operations

group. Within the first year, Taylor identified and implemented comparable metrics such as

vender lead time and fulfillment rate which resulted in improving the accuracy forecasts,

reducing supplier lead time, and decreasing customer order backlogs.

Next, Taylor needed to determine the changes needed sustain its growth in Europe. Key

decisions included analyzing whether the European markets should replicate the broad array of

product lines and Marketplace activities Amazon offered in the US and determine if there were

additional opportunities to be coordinated or consolidated. Also, if Amazon continued to expand

into other European countries, they would need to have a European distribution network where

the location of inventory could be strategically rather than geographically determined. This is an

issue for Amazon should they invest in an EDN? The opportunity Amazon was faced with was

in the design of the EDN should the distribution centers be independent and be allowed to fulfill

other country orders by drop shipments, combined into2 DC’s that serve north European and

South European customers, or all 3 sites linked to a centralized distribution center. There was

also the issue of transportation nationally within the 3 countries and pan-European transportation

was also an issue with expansion in Europe. Another problem with the EDN dealt with the

function of the DC’s in it whether inventory could be held in all 3 DCs with the EDN primarily

as a backup in case of a disaster, or would DC’s selectively share inventory to reduce inventory

holding costs or could the EDN be integrated fully with sites having mixed inventories based on

demand patterns, inventory and transportation costs. Another issue that Amazon had to deal with

is the fact that over two-thirds of UK orders are delivered to customers south of the Marston

Gate DC which negates the need for a French DC.

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Recommendations
Amazon should go with the EDN since it could expand product selection at current sites through

fulfillment from other DC’s and also its procurement department could centralize its purchasing

and extract higher volume discounts from vendors. Since each DC has failed once historically

the EDN would reduce the risks associated with a single DC serving a large base of customers.

An EDN will also balance the load across DCs and ease expansion into other European countries

utilizing existing DCs. With an EDN Amazon can select the appropriate DC to fulfill a customer

order. If we look at the 3 different possible designs for the EDN the one which works best is

keeping the 3 DCs fully integrated with sites having mixed inventories based on demand

patterns, inventory and transport costs. This would require an analysis of demand patterns, costs,

transport options, It requirement and DC capabilities. The benefit is that demand variability will

decrease across the supply chain due to virtual pooling, total inventory and its associated costs

will decrease due to consolidated distribution and shipments via central DCs. Transportation

costs can also decrease because of postal injections. This will also mitigate the mismatch of

demand and supply that can happen due to forecasting issues and the bullwhip effect will

decrease as well. The problem with keeping 3 fully integrated Dc’s is that there will be bigger

inventory than a single DC along with higher coordination complexity and IT costs as well.

There would also be a longer lead time to customers. Another issue that would arise from having

fully integrated DCs is if a customer places an order that is spread amongst 2 DCs it would

require a split order which would drive up cost. Amazon would need to analyze purchasing

patterns of customers to group items bought together in the same DC. The single European DC

has the issue that there is an increased distance from supplier to customer with higher

transportation costs and in increase in lead times along with lower flexibility. These issues also

are present with the 2 DC setup of north and south DCs which make either of these poor choices.

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Amazon should keep its French DC since it aims to expand to other European countries and

France is strategically located to serve Spain, Slovenia, and Switzerland. This will also help in

the long run if there are any disruptions in the supply chain since having multiple DCs can

reduce the impact on service. Dealing with issues of transportation Amazon should educate

customers on associating shipping price with the delivery level chosen. Amazon would also need

to leverage EDN volume and implement postal injection which would reduce shipping costs 5%

to 17%. Amazon could also create preferred partnerships with pan-European carriers such as

Fedex, UPS, Parcel2go, or TNT. Amazon could promise them preferred

Conclusion

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References
Chiron, Claire & Hammond, Janice. (2005). [Link]’s European Distribution Strategy.

Wikipedia. (2011).

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