Logistics & Supply Chains Management Assignment 4 |

Date: 23/01/2021

The Internet is one of the pioneers of online consumer sales. Amazon, based in Seattle, started
by filling all orders using books purchased from a distributor in response to customer orders. As
it grew, the company added warehouses, allowing it to react more quickly to customer orders.
In 2013, Amazon had about 40 warehouses in the United States and another 40 warehouses in
the rest of the world. It uses the U.S. Postal Service and other package carriers, such as UPS and
FedEx, to send products to customers. Outbound shipping related costs at Amazon in 2012
were over $5 billion. Following the introduction of the Kindle, Amazon has worked hard to
increase sales of digital books. The company has also added a significant amount of audio and
video content for sale in digital form. Amazon has continued to expand the set of products that
it sells online. Besides books and music, Amazon has added many product categories such as
toys, apparel, electronics, jewelry, and shoes. In 2009, one of its largest acquisitions was
Zappos, a leader in online shoe sales. This acquisition added a great deal of product variety:
According to the Amazon annual report, this required creating 121,000 product descriptions
and uploading more than 2.2 million images to the website. In 2010, another interesting
acquisition by Amazon was diapers.com. Unlike Zappos, this acquisition added little variety but
considerable shipping volumes. Several questions arise concerning how Amazon is structured
and the product categories it continues to add:
1. Why is Amazon building more warehouses as it grows? How many warehouses should it
have, and where should they be located?
Ans.
• Amazon is investing in building more warehouses to get closer to its customers and
provide faster service.
• Spent $13.9B on warehouses since 2010.
• Over 90 warehouses world-wide.
• To help speed delivery.
• Warehouse locations near top 20 U.S. metros for increased profits.
• According to Tompkins, an industry observer, the company is building tens of millions of
square footage of DC space; more and more of which is near major metropolitan areas.
In 2004, 38% of Amazon’s fulfillment capacity was less than 200 miles from a major
metropolitan area. Today, 79% of its DCs are within 200 miles of a major metropolitan
area.
• “For anyone who doesn’t get it, Amazon is absolutely going to same day delivery in
major markets. It’ll be next day delivery in secondary markets and two-day delivery in
tertiary markets. If you’re going to do six days to North Dakota, you’re dead.” ¹ –
Tompkins International

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 Logistics & Supply Chains Management Assignment 4 |

2. Should Amazon stock every product it sells?

Ans.
No, it can stock books that have a high demand and source less popular ones from external
sellers. Amazon stocks deep and works with partners that carry what it does not carry.
• Stocking every book, it sells will result in a large inventory.
• “Popular” books can be stocked.
• “Not so popular” books can be replenished from the publisher on demand.
• Results in a slight delay in shipping to the customer, but Amazon saves a lot of money in
inventory costs.
• Has network of third party merchants who sell through Amazon. These third party
merchants generally specialize in out-of-print books or books that deal with relatively
arcane subjects. Those books are shipped to the customer directly from the third party
and are billed by the third party to the customer's credit card or PayPal account.
Amazon takes a small commission for acting as a middleman.
• Stock only those products with high demand.

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3. What advantage can bricks-and-mortar players derive from setting up an online channel?
How should they use the two channels to gain maximum advantage?
Ans.
Advantages
• Convenience; customers can browse and buy from home: 24/7 shopping for the
customers; Geographical barriers are absent.
• Driving customer demand by introducing new books customer may be interested in
though a recommender system. This may not be possible in a traditional bookstore. On
the online-portal, even if the customer had no plans/intentions of buying a
recommended book, they might actually end up purchasing it as an impulse buy. This
may result in more sales, more customer satisfaction and therefore more profits for
Amazon.
• Reduced inventory costs - Amazon offers a much larger selection of books than a typical
bookstore. Offering a similar selection at a traditional store would require a huge
location and resources for maintaining such a large inventory.
• More efficient marketing campaigns due to targeted marketing; thereby reducing
marketing costs.
• Flexible pricing based on customer demand.
• Easier and more accurate forecasting of demand and supply of books.
• No bookstore maintenance costs.
Disadvantages
• Time lag between customer placing an order and order delivery.
• Cost of delivering the product to the customer.
• Missing out on customers who prefer the traditional ‘bookstore’ experience: Customers
cannot read a few pages of the book, nor can they get the “feel” of the book.

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4. What advantages and disadvantages does the online channel enjoy in the sale of shoes and
diapers relative to a retail store?
Ans.
Advantages
• Gain maximum advantage by making strategic decisions on what type of books to sell on
which platform.
• Use retail stores to stock high-demand books to save on shipping costs.
• Have a listing or a sample copy of low-demand books in store. Once a customer places
an order, they can source it from their warehouse or from third party vendors. This way
they save on inventory costs for storing the less popular books in retail stores.
• To drive customer demand, they can have a copy of low-demand books and internet
portals/kiosks to place online orders at retail stores. By allowing customers to place
online orders at the retail store, they are initiating a ‘pull’ supply chain and can save on
inventory costs for low-demand books.
• Cater customers who prefer buying online for the sake of convenience.
• Drive demand for less popular or less noticed products, using a recommender system on
their online portals based on the customer’s browsing history.
• Give customers the option of ordering a book online and picking it up at a nearby store
for the sake of convenience and also so the customer can save on shipping charges.
• Have more demographic and geographic coverage for their marketing campaigns at
lower budgets since advertising online is less expensive and needs fewer (financial and
labor) resources than does physical marketing.
• Have targeted, customized marketing campaigns for different segments of customers.
• Have flexible pricing for products based on their demand.
• Easier and more accurate forecasting of demand and supply of books.
Disadvantages
• Response time,
• IT cost,
• Customers some time misses the shopping experience.

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5. For what products does the online channel offer the greater advantage relative to retail
stores? What characterizes these products?
Ans.
Integrating the two would be a good idea as there would be more co-ordination and thereby
more efficient/optimal management of low-demand and high demand book orders.
It is also easier to forecast and manage demand and supply for books when the two supply
chains are integrated.
Since all stages of the supply chain, except the end retail/customer phase, of both platforms
would be the same it makes sense to integrate the two to reduce supply chain management
costs and for better planning and management.
For example, they could give the customer the option of ordering a book online and picking it
up at a nearby store for the sake of convenience so the customer can save on shipping charges.
In such a case, it is crucial that the two supply chains be synced.

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