Amazon Inventory Management Essay Example

Amazon Inventory Management Essay Example Amazon Inventory Management Paper Amazon Inventory Management Paper Introduction Launched by Jeff Bezos, the Amazon. com website started in 1995 and is today considered as one of the most prominent retail website on the internet with a record turnover of US$ 14. 87 billion in 2007. Jeff Bezos’s intention was to create an internet based company with the most dedicated product portfolio on the internet where customers could find anything they might want. Amazon’s success is based on technology, services and products (Jens et al. , 2003). Controlling inventory is known to be one of the toughest problems for companies. With 39 million active customer accounts and a vision such as being â€Å"Earth’s biggest selection of product†, Amazon has been putting a lot of effort to be as efficient as possible in their inventory management. The purpose of this report is to understand the evolution of the inventory management of Amazon and how it has affected the company’s growth. This case study is both a practice case and a problem solving case, so the first section of this report focuses on the practices used by Amazon in the 4 stages and then in the second section we will solve the problem regarding their product returns problem and provide recommendations. I-The 4 Stages of Amazon Amazon’s Inventory management can be divided into 4 stages: An initial start with no inventory Built warehouses to store inventory Entered into partnerships with distributors Entered into partnerships with retailers Initially started with no inventory In the first stage Amazon’s main objective was to create a virtual bookshop, where customers could have more choices than any physical bookshop in the world, but also, he did not want to spend time and money on building warehouses and deal with inventory because each warehouse could cost around $50 million dollars. First stage logistic process As shown in figure 1, customers used to order products from Amazon’s website, Amazon then forwards the order to the distributor, who in turn sends the product back to Amazon and finally, Amazon ships the product to the customer. Initially this didn’t look like a bad idea but it wasn’t long till Bezos understood that if he had to build on strong customer satisfaction and needed to have his own inventory. This left him with two choices, either improve information system flow throughout the supply chain or build warehouses to manage its own inventory (Hof, 1999). Built warehouses to store inventory In this stage the objective of Amazon was to build warehouses and gain better control over their Inventory and increase the range of products while reducing their logistics cost (Choen et al. , 2004). Figure 2: Second stage logistic process As show on figure 2, Amazon used to procure items from their distributor and store them in their warehouses. Customer makes an order and Amazon couriers it to them. This helped Amazon to maximise its storage capacity as well as decrease their logistics costs. However Amazon did face a major problem of managing a large inventory along with high warehouse maintenance costs. This left Amazon with two options, either to use its warehouses more effectively by boosting sales or outsource its inventory management. 3. Entered into partnerships with distributors This was a huge risk as Amazon had a very good reputation in providing superior customer service and if this task was outsourced; their hard earned reputation may be damaged (Saunders, 2001). On the other hand Amazon would now be able to concentrate on its core activities by reducing the need for warehouses. Figure 3: Third stage logistic process (Drop-shipment model) This model gave greater flexibility in terms of product range. They could focus their attention on listening to the market in order to be more reactive by discovering products Amazon’s visitors wanted and then being able to rapidly add them to the product list. On the other hand, there was no capital investment and no danger of suddenly having a warehouse full of outdated items. Figure 3 shows how drop shipment works. However, whereas Amazon was planning to extend this model to all other categories, the company started to encounter some problems (Julie et al. , 2004). Since Amazon uses drop-shippers as well as their own warehouses, split shipments became problematic. This reduced overall efficiency as 35% of Amazon orders were of this nature. 4. Entered into partnerships with retailers This led Amazon to enter the fourth stage where they entered into partnerships with other retailers. The process is illustrated in figure 4. Figure 4: Fourth stage logistic process They main benefit of this stage was that Amazon could expand its product categories while cutting cost incurred through shipping and operating their warehouses. Amazon used best practices from eBay to assist them in this stage as shown in figure 5. Figure 5: Best Practices from eBay 5. Further Analysis As we have mentioned above we have analysed and discussed the various stages that Amazon went through in terms of their business strategy, which also affected their logistics management. We identified that Amazon had different motives for modifying their logistics management when moving from one stage to another. When Amazon went from having no inventory to building warehouses, was primarily to grow their business as they wanted to offer a larger range of products to their customers. From there, Amazon then decided to enter into partnerships with distributors. The main motive behind this move was to improve its logistics efficiency. Finally they entered into partnerships with retailers. Again Amazon’s key objective was to grow the company as now they will be able to display the retailer’s products on Amazon’s website, thereby further expanding their product range. After our case study date Amazon has gone on to further increase the variety of products offered and at the same time improving their operations. This has been achieved by taking up the Six Sigma approach to its distribution operations and by applying lean manufacturing and Total Quality Management methodologies to its processes. Amazon now ships to more than 200 countries. Therefore they have begun to use a global trade management solution to provide customers with more information. They have also started to be a drop shipper where Amazon will handle inventory and shipping for other e-businesses. Many years back Amazon would have never thought of doing such an activity as having more inventory meant more costs. However, Jeff Bezos has seen the potential in doing this, as they have the experience and reputation in managing inventory and logistics, which other e-businesses find that hard to ignore. II-Conclusions and Recommendations 1. Conclusions We have learnt some important lessons when it comes to logistics management in e-businesses after considering Amazon’s case. Firstly, flawless logistics and fulfilment are key drivers of customer retention and long-term profitability. Like Amazon, all other e-businesses should get their corporate mind set straight, meaning that they should understand that it’s all about the customer and a positive profit-margin. E-businesses should be able to provide customers with the 3R’s, which are the right product at the right place at the right time. At the same time they have to make a profit. So they key challenge is to be able to deliver both. Other e-businesses should consider outsourcing some of its activities so that they could direct focus towards their core activities. Amazon did this and was able to concentrate on other activities such as marketing its brand. After arriving at the fourth stage Amazon was faced with a major problem regarding their reverse logistics process. This has resulted in frustration among customers due to difficulties in returning a product to Amazon and the handling of returned products by Amazon was not very efficient. This was eating into their profits. Therefore a solution must be developed to tackle this issue. 2. Recommendations Amazon’s reverse logistics procedure is a very long process and required Amazon to allocate a lot of resources to make sure that it runs smoothly. These resources may be put to better use in attending to Amazon’s core activities such as product fulfilment. Figure 6 shows the reverse logistics procedure of Amazon. Figure 6: Amazon’s Reverse Logistics Process We would recommend that Amazon considers in outsourcing its reverse logistics to a third-party reverse logistics provider. There are certain factors Amazon will have to take into consideration if an outsourcing strategy is to be chosen (Rao, 1994). These factors are as follows: Amazon has to see if it is a company that handles a large inventory. Amazon has to see what the characteristics of the products that they offer. Amazon should look into the level of required customer service that has to be offered. Amazon should see if reverse logistics is considered to be a core activity in the company. We have answered these questions to see if our recommendation is appropriate for Amazon to consider. The number of products that they handle is unimaginable and they receive countless amounts of orders per day. For example, Amazon. com just finished its 13th Christmas season in 2007 and December 10th of 2007 was the busiest day with customers ordering more than 5. 4 million items on that day, which is 62. items per second (Chaffey, 2008). Therefore it is inevitable there would have been a large number of returns. Even their vision states that they want to offer customers anything they might want by having Earth’s biggest selection of products. The characteristics of the products that Amazon handles vary considerably. They handle products of different shapes and sizes. Larger items would take up valuable space. Amazon will have to offer good customer service to its buyers. If customers have a difficult experience when returning products and do not get a quick response, they may end up being dissatisfied and etaining first time buyers at Amazon may prove to be a failure. After analysing the company more closely, we realized that Amazon is more interested in getting the products to their customers in the most efficient manner. Therefore forward logistics could be considered to be a core activity with the company but is not the case for reverse logistics. After answering these questions, outsourcing their reverse logistics seems to be the best option as Amazon could then focus on their core activities. Bibliography Saunders. 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