A CASE ANALYSIS ON AMAZON’S SUPPLY

CHAIN MANAGEMENT
 INTRODUCTION

Company Background
Formerly known as Cadabra in 1994, Amazon (Amazon.com) is known as one of the
world’s largest online retailer and a prominent cloud service provider. They engage in the retail
sale of consumer products and subscriptions not just in North America but also internationally.
Jeff Bezos, the founder of Amazon, started his company from his garage in Bellevue,
Washington. He was initially a book seller, and during Amazon’s early operation, the business
was able to ship books to 50 states in the U.S. and 48 other countries. This was made possible by
the funding of Nick Hanauer’s investment of $40,000 and another from Tom Alburg with
$100,000. From just selling books, Jeff Bezos continued to make changes and expand his
business by adding new features, introducing movies and music to his company, and partnering
with other companies to be sold in Amazon for a small commission.
Currently, Amazon operates at their headquarters in Seattle, Washington with individual
websites for software development centers, customer service centers and fulfillment centers in
many locations around the world. It also operates in three segments, North America,
International, and Amazon Web Services (AWS) which  is a comprehensive, evolving cloud
computing platform. The first AWS offerings were launched in 2006 to provide online services
for websites and client-side applications. They are now able to sell electronics including Kindle,
Fire tablets, Fire TVs, Rings, and Echo and other devices. Services also include Amazon Prime
which is a membership program that provides free shipping of various items; access to streaming
of movies and TV episodes; and other services.
Mission & Vision Statement
The mission statement of Amazon is “We strive to offer our customers the lowest
possible prices, the best available selection, and the utmost convenience.”. With this, we can tell
that Amazon strives to become cost-friendly for its customers. They wish to give the customers
the best and high-quality products with minimal costs. Amazon made this possible to its
customers by ensuring the global shipping rates are affordable as well as providing discounts and
benefits through its membership program. They also wish to satisfy customers by being able to
provide a wide variety of services and products. Lastly, Amazon, through its online systems, are
able to give top convenience to its customers at the comfort of their own home. On the other
hand, Amazon’s vision statement focusses on dominating at the global level while giving its
customers worthwhile shopping experience.
Corporate officers
The key executives of Amazon are Jeffrey P. Bezos, Founder, Chairman, President, and
CEO; Brain T. Olsavsky, Senior Vice President and CFO; Jeffery A. Wilke, Chief Executive
officer of Worldwide Consumer; Mr. Andrew R. Jassy, Chief Executive Officer of Amazon Web
Services Inc., and; Shelley L. Reynolds, Vice President, Worldwide Controller and Principal
Accounting Officer.
Corporate strategy
Amazon makes use of a corporate strategy considered to be a concentric diversification.
It is one of the different strategies adapted by organizations to attract new customers and increase
appeal to present ones. This involves having to introduce new products or services to expand
market share such as in the case of Amazon introducing grocery shopping options to their site
called Amazon Go and Amazon’s Whole Foods, Amazon apparel that introduces clothing
subscriptions, and Amazon Prime on top of the already operating Amazon Bookstores Amazon
Prime that also offers discounts, timely deliveries, waiving of shipping fees, and giving out
benefits to avoid state taxes, overall lowering the price further. This experience has helped in
improving customer satisfaction.
Amazon’s strategy also takes in to account the leveraging of technological capabilities for
business success and following a cost leadership strategy aimed at offering the maximum value
for its customers at the lowest price. This strategy is to build e-commerce competitive advantage
through continuous improvement of information technology infrastructure. In relation, the
company also has the strategic objective of heavily investing in research and development to
optimize the performance of its IT resources. This strategy also allowed Amazon to minimize its
price levels and in turn lower the prices for their products and services which is quite significant
in their aim to appeal to their customers. This has helped Amazon stay in line with the fulfillment
of their vision and mission statement.
Amazon makes use of Big Data Analytics which is a tool used to map consumer
behavior. This has brought Amazon the competitive advantage where it focus on technology,
actualizing the benefits of economies of scale, and leveraging the efficiencies from the synergies
between its external drivers and internal resources have been the cornerstones of its business
model. What can be noticed from physical stores is that they do not post the price of the items
along side them. As a matter of fact, the customers use their phones or a built-in kiosk in the
stores so that they can know the price of the products. Amazon uses this to map out the browsing
behavior of their customers.
Despite the ongoing competition with Walmart and eBay, with their use of
concentric diversification we can tell that Amazon focuses mainly on the customer
satisfaction rather than the competitors. Amazon have outlined four principles that guide
the company: customer obsession rather than competitor focus, passion for invention,
commitment to operational excellence and long-term thinking. Their services focus on
selection, price, and convenience.

Supply Chain Structure

Amazon’s Supply Chain involves the combination of multi-tier inventory management,
superlative transportation, and a highly efficient use of Information Technology. Amazon’s
distribution strategy also involves four components, these are warehousing, delivery, technology,
and manufacturing. In warehousing, warehouses are placed near populated areas and inventory is
spread among the to ensure supply can meet demand. Mini hubs are also found near smaller
areas I order to provide costumer service to those that do not live in megapolises. In terms of its
inventory, Amazon heavily depends on outsourcing. Regarding this, Amazon had decided to
outsource only some part of its inventory for the purpose of reducing risks and optimize services.
The products with the highest demand are the ones that are being managed in-house while other
products are to be delivered by distributors on demand. With their use of multi-tier inventory,
they are also able to keep track of inventory, systems, and operations in real-time. Amazon
divides their inventory into three segments. First is the Amazon’s distribution center, next is the
wholesaler and partner DCs, and lastly, the publishers or manufacturers, vendors, and third-party
sellers. If you are a third-party seller selling in the Amazon marketplace, you are given two
fulfillment options. One is the Fulfillment by Amazon (FBA) which allows sellers to simply let
Amazon handle all the listing-keeping your product in their inventory, shipping, and other
customer services. The other option is to sell your own products at your own fulfillment.
In the delivery of products, Amazon divides its customers into different segments that
follows the price differentiation strategy. These segments are one-day delivery, free super saver
delivery, first class delivery and Prime customers delivery. These segments offer customers to
choose an option of paying higher for faster deliveries or remain at a traditional lead time. Users
of Amazon can now receive their orders within hours through Prime shipping. Amazon uses
Amazon-branded trucks and delivery vans as mode of transportation as well as drones for Prime
Air users that land in your backyard. Some other third-party delivery companies such as FedEx
and UPS are also part of their distribution channel.
As for the technology, warehouses are manned with Amazon robots as well as the said
drones in delivery. With this, they are able to cut costs as well as resolve the problem with issues
regarding Amazon’s unsuitable working environment. For the manufacturing, despite being an
intermediary for third party seller, they are also able to produce their own product and with that,
decided to procure on their own. This allowed them to cut down on cost. The products they
manufacture themselves are offered as branded lines ranging from household goods to pet goods.
Another part of the Amazon’s Supply Chain Management Structure is the use of the
push-pull strategy. This strategy talks about how the products are pushed towards the customer
(push strategy) and how customers are pulled towards a product (pull strategy). On the case of
Amazon, they use the push strategy on the inventory-by putting warehouses closer to the
customers-while shipment of orders is done in a pull strategy- by selling products from the third-
party sellers.
 ANALYTICAL TOOLS
A. SWOT Analysis

A.1 Strengths
 Amazon has the competitive advantage against other eCommerce when it
comes to their use in technology and leveraging in Information
Technology. They make use of drones in their delivery which allows them
to distribute orders in as early as 30 minutes. This helped them vamp up
on the customer experience.
 Amazon has about 1,400 Kiva robots in their three distribution centers,
this allowed them to cut further costs and this lay back on product prices
as well as improve productivity and warehouse efficiency. Not only that
but they were able to address public critic against unfavorable working
environments as well as long commute of warehouse employees to and
from their distribution centers.
 Using their superior logistics and distribution system, they were able to
fulfill customer demands and this has resulted to a competitive advantage
against eCommerce. In terms of product returns, because of the systems in
Amazon, processing returns as well as the actual return can just take up to
30-days whereas other eCommerce such as Walmart, one of its leading
competitors can take as much as 90-days to process.
 Amazon have a low-cost structure. In 2019, this let them earn a whopping
$195.009 billion in revenues which is quite more than revenues made of
by other online retailers combined based on their financial reports and
Digital Commerce 360, a data that showed U.S’s eCommerce Growth
Rate. The reason behind this success was because of the low-cost structure
of Amazon along with its wide range of selection and the number of third-
party sellers they have.

A.2 Weaknesses
 A part of Amazon’s strategy to increase customer appeal, they offered free
shipping to help cut costs on the customer’s part. But as Amazon increases
its frequency to give such privilege, they may also risk losing margins.
Distribution and transportation can be costly and with no profit
outweighing it, this might affect the company’s financial performance.
Amazon Prime lets customers enjoy the free shipping fee for an annual fee
of just $79. Because of the privilege, a survey of 300-Amazon customers
by the Consumer Intelligence Research Partners shows that Amazon
Prime users buy more than 50% more frequently than non-Amazon Prime
users. This data also showed that shipping expenses incurred by these
Prime users have far exceeded the annual subscription fee. This indicates
that the more Prime users Amazon has, the more money they lose. This
 becomes a factor in the Supply Chain Management because supply chain’s
aim is to become cost-effective.
 Amazon may be too dependent on external delivery companies such as
FedEx and UPS. If in case these courier companies become unreliable, the
Supply Chain Management of Amazon, specifically in the distribution of
the products may become affected. This means that despite how flawless
or superior the inventory strategy and other parts of their Supply Chain is,
if the end receiver of the chain is deficient then it will still affect the
overall chain and even create an unlikeable effect on customer
satisfaction.

A.3 Opportunities
 Because of the ongoing pandemic, customer’s engagement has
significantly increased. This gives Amazon the chance to welcome in new
customers. A survey by Engine found that people are spending an average
of 10-30% more online. This includes Grocery eCommerce that had
increase sales on the second week of March because a lot of people have
opted for buying goods online that are no longer available in their local
grocery stores.
 They can expand global footprint and to developing countries such as
India who have not yet matured to online selling. Allowing themselves to
penetrate the market of developing would not only bring them more
competitors but also widen their customer portfolio and increase margins.

A.4 Threats
 Amazon’s cost structure has become easily prone to imitation. The
emergence of Walmart and eBay which are some of the biggest
competitors of Amazon allowed them to become the second in the top
leading eCommerce in the market. Upon introducing free shipping to its
customers, Walmart and eBay have also done the same. There are also
new entrants to the market that may copy Amazon’s cost structure.
 The increase in transportation costs may affect Amazon largely
considering that they are reliant on courier companies and since they offer
free shipping, they would have to bear of the costs and effectively lose
profits.

B. Michael Porter’s Five Forces Analysis

B.1 Threat of new entrants

The threat of new entrants is low. According to a statistical data from Statista,
online user penetration in eCommerce had increased by 35.5% as of 2020 and is said to
increase more by 46.5% by 2024. Despite this increase, it would take them a lot of
investment, time, and effort to o against such a big company like Amazon. It would also
require intensive strategies in warehousing, distribution, logistics, and marketing.
Although this may not be the case for everyone in the eCommerce, Amazon has had a
long start and with its continues improvements, new entrants may have a hard time
competing against the company.

B.2 Threat of Substitute Products

The threat of substitutes for Amazon is high. Walmart, eBay, Alibaba.com and
other online retailers have little differences in in product variation. Amazon also does not
sell anything unique. They sell books, electronics, household goods-all of which other
online retailers also offer to the market. Because of this, they can be threatened by several
substitutes. An example would be with their delivering services call 2-prie. Walmart have
also adapted such tactic, there is also the sale of electronics which Alibaba.com
specializes in.

B.3 Bargaining power of buyers

Amazon’s buyers have a high bargaining power. A part of Amazon’s mission
statement is to bring customer satisfaction by giving a wide variety of selection and
convenience. They make sure that products are delivered with less lead time as well as
handle any returns safe and sound. They have also introduced many products for the
buyers to choose from as well as avail free shipping which cuts costs on the buyer’s point
of view. Other than this, because of the high increase of online retailers in the market,
buyers may have a lot to choose from, even if it is not from Amazon. Let us also consider
the fat that Amazon does not offer anything unique so buyers can opt for another retailer.
Thus, the buyers’ bargaining power is high against Amazon.

B.4 Bargaining power of suppliers

The bargaining power of suppliers against Amazon is low. Amazon lays out
several regulations that third-party sellers must follow thus garnering the upper hand
amongst its suppliers. Because Amazon is such a big company, these suppliers does not
have any power to influence the product prices in Amazon, but they should always be
ready when Amazon needs supplies, especially when demands rise. Other than this, since
the bargaining power of buyers are high, the power of suppliers may be low since the
buyers have many other products-including suppliers- to choose from.

B.5 Intensity of Rivalry

The rivalry in the eCommerce world is high. It is also said that number of players
in the recent years has increased and continues to increase. Most online retail stores now
offer similar products and services such as free shipping and 2-day deliveries, both of
which is practiced by Amazon and Walmart, the top two most competitive online retailers
in the world. There are also online retailers that specifically have target products such as
electronics like Alibaba.com who is also a competitor of Amazon. And considering that
Amazon also have electronics in their markets, they may have the lower- hand in
 competing against a company that specializes on that certain product. There is also the
existence of local retailers that can offer similar products at a lower price.

PROBLEM IDEATION

Statement of the Problem

On the of issues of Amazon is the bullwhip effect. Bullwhip effect is a phenomenon in
the supply chain that describes how small fluctuations in demand at the retail level can cause
larger fluctuations in demand at the wholesale, distributor, manufacturer, and raw material
supplier levels. This usually happens when a retailer has become overly reactive to the demand
that it causes a domino effect on the supply chain. This may also be the effect of having little
coordination with the different levels of the supply chain.
Another problem with Amazon is that they have become too dependent on courier
companies to cut back on transportation costs. This has become a problem because Amazon has
been gaining negative feedbacks because there are times when FedEx and UPS become
inefficient in delivery such as delays in deliveries when the demand is high. This is one of the
problems Amazon must face in their supply chain. To emphasize, no matter how perfect or
flawless the inventory and technology system they have, if the distribution to its customers is
being complicated then it may affect profit margins in the long run. Considering that it is also
Amazon’s mission to provide the best customer service, this may affect public opinion on them.

Causes and Indicators of the Problem

Bullwhip effect usually begins when there is little coordination in the supply chain. This
can also be brought by the excess focus of a company on customer demand. Other factors may
also include forecasting based on insufficient information, lack of communication, lead-time
issues, and less optimal decisions made on the supply chain. In the case of Amazon, yes, they do
focus too much on customer satisfaction and demand but the reason behind why they are facing
such phenomenon is because there is lack in integration in their supply chain, specifically in their
inventory strategy. We have mentioned before that Amazon makes use of multi-tier inventory.
There have been instances where the different tiers of inventory lack in real time changing of
information. Even though Amazon uses high quality Information Technology, problems like
these are not avoidable. That is why Amazon continues to improve their systems.
As for the usage of courier companies, Amazon opted for their services because it is cost
effective and more efficient. This is a result of Amazon’s dedication to reduce its costs in
operation and in turn reduce the overall product price. Part of their supply chain network is to use
small carrier partners like UPS to ship goods from their small transportation hubs in high
demand areas with the same purpose of cutting back on transportation costs. Reports have shown
that more 50% of Amazon’s delivery services were done by FedEx and UPS.

Impact of the Problem

Bullwhip effect can be costly. Excess inventory can result in wastes when the customer
demand is not increased. On the other hand, having too little inventory can cause unfulfilled and
unavailable products. They can be detrimental to customer satisfaction and overall experience.
Insufficient inventory also has effect on lead time of deliveries. Businesses use safety stock as a
buffer against demand fluctuations. However, safety stock is not a solution to the bullwhip
effect, but it provides enough product to fill orders until more arrives from suppliers. It can
lessen the effect’s symptoms, as it is used as a safeguard for costly variables in supply chain
management. Another is the problem with courier services. Just as we mentioned before, because
Amazon relies too much in inefficient courier companies, this has caused negative reputation for
Amazon. The prolonged lead-time of the products especially when the demand is high has
decreased customer satisfaction.

RECOMENDATION
Alternatives
A. On Bullwhip Effect
Amazon may choose to improve on supply chain communication and
collaboration. This would let them align all functions of the supply chain network. When
there is better communication, response to demand changes is also improved and thus
reduce excessive or insufficient inventory. Although disadvantage would be the need to
change in software when the current technology used is insufficient to provide real time
communication
Another step that amazon may take is to use better forecasting and visibility tools.
This enables the company to be more accurate in demand forecasts. Although it may be
costly and that forecasts are not 100% reliable and demands ca change over time, this
may help them in better understanding customer behavior.
Amazon may also opt for exploring demand-driven approach to supply chain
management. This makes use of all the alternatives used above. It also helps the company
gain insight in supply chain occurrences and provides a more coordinated holistic
approach. Disadvantages may include timeliness in terms of deciding the right strategy to
be used.
 They can also set up stock reserves if in case there is insufficient
B. On Courier Inefficiency
Amazon may start building its own shipping and logistics network and become more
independent in distribution. Although it will be costly at first and timely in setting up the
whole system, it will hopefully become more cost efficient in the long run as well as
provide a much better customer experience.
Amazon may also wish to retain their current distribution strategy. But it is better
to switch to another courier service besides FedEx to reduce negative feedbacks. UPS and
USPS are known for better shipping services, especially with UPS that is cheaper.
Although the risks remain, UPS, USPS and other courier companies cannot guarantee a
perfect distribution system to Amazon and its users.

Recommended Strategy
Amazon’s bullwhip effect, just like any other companies, is unavoidable. But what we
can do is to lessen the possible damage it can do. The first thing hey should do is to not overlook
the bullwhip effect. Despite the intensity of technology Amazon has, just as mentioned earlier, it
can never be prevented. Another is that they should look at demand-driven strategies which
incorporates all other alternatives such as improved communication and coordination as well as
looking into forecasting as secondary basis for inventory sourcing.
With regards to the courier inefficiency, it is best that Amazon expand on the Amazon-
branded shipping rather that rely to much on third party companies. This may be costly at its first
implementation, but the benefit will outweigh its cost in the long run, preventing more casualties
and improving customer service. Not only that but it also will give the company a better
connection with the customers and reduce barriers.
Implementation
To implement the said recommendations, it will take Amazon some time, effort, and high
investments. Building up shipping networks as well as outsource materials for building the
Amazon-branded trucks or ships may take a lot of funding and time. It will also take a lot of
evaluation. The use of private fleets may or may not have guarantee to go as successful as any
other risks. These risks are what Amazon must prepare for especially in changing their old ways.
Amazon is also huge for having the best Information technology, so building new forecasting
systems will probably be an easy job for them. And besides, even now, they continue to improve
their systems.

CONCLUSION
Amazon is best known for their effective and cost-friendly Supply Chain Management; it
plays a crucial role on the company’s success. Thus, it is only best that Amazon continues to
work on improving their system to provide better service to their customers in-line with their
mission and vison. But with these, it is also important that they do not compromise their profit
like with what happened with their free-shipping service. Just like any other Supply Chains, it is
crucial that they nurture communication and coordination in all their structures especially with
their partners. It is supply chain management’s aim to become efficient and cost-effective, after
all and any changes to this system will greatly affect Amazon’s operations.
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