Amazon strategies to manage its inventory

Amazon .com called itself “Earths Biggest Bookstore” because it has been ranked as the best consumer e-business. It sells books, music over the internet. From both market and supply chain management point of views, Amazon has some challenges and strengths. Managing inventory is one of the company opportunities to overcome its financial barriers regarding the warehouses and shipping costs. Amazon follows some strategies to manage its inventories. It had the decision to outsource its inventory to reduce its inventory costs and to sell competitor’s products on its site to achieve both managing its customer relationship and sustaining its competitive advantage. As its competitors estimate that Amazon.Com has the highest percentage of the e-business bookstore. So, Amazon tries to share its information and outsources this area of its business to improve inventory cost and customer service levels.

1- Amazon’strategies to manage its inventory:

Amazon found the decision of stocking the stores with all the possible products was not the right one. Although that the customer might choose not to purchase if there are not enough goods in the stock, It decided to manage its inventory in the season of 2000, following certain strategies. It started from reducing the warehouses, concentrating more on the quality of the products and the manufacturer or the publisher of the products. Then it had to decide the center of distribution it can send its products to and know how to receive and track the product once it was in the warehouse. Amazon also decided to buy its products directly from the manufacturer to sustain its vendor’s relationships to gain the best deal from them.

Amazon.com developed a distribution infrastructure to provide its customers with the fast delivery from the company directly. Its distribution facilities have the great impact on increasing its products that are delivered and shipped very fast to the customers. The quick shipping process comes out of the great availability of the goods to achieve its customer satisfaction. This network distribution is called manufacturer storage with direct shipping which is one of the six distinct distribution network designs. It has advantages and disadvantages. Through this network, manufacturer storage with direct shipping can be appropriated for a large variety of low demand, high value items with several partial shipments. Drop-shipping model is also suitable if it allows the manufacturer to postpone customization, and there should be few sourcing locations per order. Drop shipping is not be suitable to be used if there are multiple locations that have to shipped directly to customers on a regular basis. Amazon can centralize inventories at the manufacture and then save inventory costs. Also, Drop shipping offers the manufacturer the opportunity to further lower inventories by postponing customization until after the customer order has been placed. However, when a customer orders several items from several manufacturers such as Ingram and Amazon, this include multiple shipments to the customer and thus increase costs. Also, this business model can has negative effect on Amazon’s competitive advantage by making no entry barriers for competitors because of its popularity and better margins (Chopra, 2001 ) . In terms of handling costs because the manufacturer has to deliver the order directly to the customer, Amazon developed its software to manage the split shipment if multiple items are ordered. So Amazon needs to share its information with the suppliers to provide the customers with the product availability and order processing to save time and reduce inventories. However, Cachon and Fisher point in their paper” Supply Chain Inventory Management and the Value of Shared Information” that information technology or software give the retailer the chance to share demand and inventory data faster and cheaper. They investigate how information sharing whether it is traditional information sharing or full information sharing between the retailer and the supplier affects supply chain inventory management regarding reducing lead times and increasing delivery frequency by reducing shipment batch sizes. The result of the study they have done is that the average of full shard information policy in supply chain costs is lower than of traditional information policy. But from Chopra’s and Meind perspective IT must be fully shared between all the stakeholders; suppliers and retailer. Amazon.com provides its customers with experience from beginning to end and own the whole data which gives them all the information they need about the product availability though the inventory is located at the manufacturer. At the same time the buyers should have a clear idea about the order processing that is placed at the retailer. By owning such a system, Amazon could achieve high level of customers services because the information is directly linked to the customers in the system. As the company expands its operations, these systems are replicated across the distribution centers. Amazon.com’s case is a good examples that illustrates how evolving industry standards can affect data-sharing strategies between customers and suppliers because it does not stock all the books advertised on its site, but shares customers’ order data with suppliers to speed customers’ orders.. This system solves the problem of inventory costs because Amazon. com spent US300m in 1999 to outfit the 3 million square feet of warehouse space. Finally Amazon does not need to stock every single item in the warehouse. Instead of that, the retailers or their vendors will send the products without ever being stocked on the shelves of the warehouses. So, it started to develop its software to increase competitive pressures on all on line retailers in general and to rearrange its warehouses in different regions in particular. Amazon’s unique strategy is described as change and growing intense competition. Its systems and network infrastructure increase the traffic on its Web site and expanding sales volume through its transaction-processing systems. Amazon’s main concern regarding its network distribution and software is to avoid the unanticipated system disruptions, slower response times, weakens customer service and impaired quality and speed of order fulfillment, or the postpone in supporting the customer with the accurate financial information.

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2) Outsourcing its inventory management:

I think Amazon had taken the right decision to outsource its inventory management. In the case of Amazon did not outsourced all of its inventories but it keeps its popular ounces. This was a good decision for many reasons; the major ounces are to cut down its costs and give particular concern on it core activities. It partnered with other distributors for shipping the inventory like Ingram Micro and Cell Star. At the time the partners shipped the items, Amazon concentrated on its e-commerce expertise. Also, Amazon managed order fulfillment while Toys “R” Us managed the supply processes. Amazon outsourced much of its fulfillment. Although it acquired more than 4.5 million square feet of warehouse space worldwide by the end of 2000, it is using only 40 percent of its warehouse space. Through outsourcing; Amazon increases its efficiencies in distribution. From a another perspective there are Some risks of outsourcing because of the complexity, confusion or unclear decision making, and broken information flows in decentralizing, which can be corrected

by redesigning processes and improving information technologies. Others thinks that small companies only can get benefit from outsourcing or third party because they need experience and supports in technology. However outsourcing leads large companies to have complex supply chains and many distribution managers (Razzaque and Cheng 1998). Amazon’ outsourcing inventory contributes to profits through providing its employees and users with the methods and strategies to maintain the firm’s competitive advantage, adding value to the goods, enriching customer service and assisting in opening new markets. One of the benefits of third party logistics is providing provide their customers experience that otherwise would be hard to acquire in-house. An company should consider certain criteria in outsourcing process such as quality, capacity, labor, scheduling and skill to be important in a make-or-buy decision (Razzaque and Cheng 1998). In Amazon’s case, it had an agreement with Ingram Micro Inc because it is one of the largest wholesale of electronic goods to provide logistics to services for computers at Amazon. com. Moreover, it has great experience in distributing process and customer satisfaction.

3- Selling others products on its website

The idea of selling other competitors products on Amazon’s site is very profitable because the clients can be aware of the prices of other’s product compared with Amazon. This provides the company with more profits without making advertising to their low price products. It opens new stores on its site to give greater availability of the products and draw more customers. IT gives the customers the chance to turn to Amazon to buy more than books and music especially because Amazon handled the site orders, while the third party company handled the inventory. It may seem at first that a customer always wants the highest level of performance along all these dimensions. In practice, however, this is not always the case. Customers ordering a book at Amazon.com are willing to wait longer than those that drive to a nearby Borders store to get the same book. Customers have the advantages to find a variety of books at Amazon compared to the Borders store. On the other hand, firms that target customers who value short response times need to locate close to them. These firms must have many facilities, with each location having a low capacity. Thus, a decrease in the response time customers desire increases the number of facilities required in the network. For example, Borders provides its customers with books on the same day but requires about 400 stores to achieve this goal for most of the United States. Amazon, on the other hand, takes about a week to deliver a book to its customers, but only uses about 5 locations to store its books.