Amazon Case Study

Prepared By: Muhammad Saad Memon

History of Amazon
Founded as Cadabra.com by Jeff Bezos in 1994, Amazon.com was launched in 1995. It is one of the first major companies to sell goods over the Internet and one of the most recognized and respected online businesses. Amazon has grown admirably from its initial beginnings as a small online bookseller to a giant superstore company. During this process of rapid growth, it has incurred significant losses and it becomes more expose to a greater competition and threats. Cutting costs and achieving profitability remain Amazons greatest challenges.

History of Amazon
It has become the number one online retailer by steadily building its reputation and brand, beginning its operation in July of 1995. Moreover, it has expanded from its existing business of selling books to selling a wide variety of products such as DVDs, music CDs, computer software, video games, electronics, apparel, furniture, food and more.

Amazon Problem Summary

Tom Taylor in June 2002 was transferred from Seattle to London (as a Director European SC Operations) to address following issues. Amazon International, comprising Amazon Europe and Amazon Japan now represent 35% of Amazons revenue and was the fastest growing segment of the company. To sustain its growth Amazon Europe faced multiple expansion options.
It could replicate the broad array of product lines Amazon offered on US, launch new marketplace activities or, expand into other European countries, Amazon Europe needed to build up its infrastructure to support the vision.

Tom had to decide which infrastructure would best support Amazon Europe's growth potential.

Case Problem 1
1) Should Amazon Europe build a European Distribution Network (EDN), where the location of inventory would be strategically rather than geographically determined, or does it need the three independent DCs in UK, Germany and France?

Solution Case problem #1

As far as the question whether EDN should be implemented is concerned, I would suggest that EDN should be implemented, and the location of the inventory should be strategically determined. One the major strategy for growth of Amazon Europe is to expand its operations into other European countries. To setup an independent operating unit in a new country would prove to be very expensive for Amazon Europe. This is also support by Figure 7-2 where the net income drastically falls when Amazon Europe opens a new DC.

Solution Case problem #1 (cont.)

The case mentions that Amazon hoped that under an EDN, its procurement department would be able to centralize its purchase and extract higher volume discount from suppliers (Page 228, 2nd Para). This would further reduce the costs involved. Historical records shows that each European DC has experienced a system failure at least once. Thus the EDN implementation would reduce the risk of relying on a single DC to serve a large base of customers. An EDN implementation would also help to balance the load across different DCs. Thus with all these advantages and considering the strategic plans of Amazon Europe, the idea of implementing EDN looks very logical.

Case Problems 2 & 3

2) Out of the different possible alternatives to design the EDN, which alternative should be chosen?
should the different sites be linked to single European distribution center or to keep the three distribution centers and allow there to fulfil customers orders from other country sites or to keep only two DCs, one serving North European customers and other south European customers. Should all the three DCs hold the inventory as theyre doing presently or, Amazon should selectively share inventory among European sites to reduce inventory holding costs. And how to address the issue of inventory ownership?

3) What should be the function of DC in the EDN.

Solution Case problem #2 & 3

Out of different alternatives of designing EDN, the optimal choice is that Amazon Europes operations should be integrated fully, with the three sites inventories physically mixed, based on demand pattern and inventory and transport costs. Even though these choice require analysis of demand pattern, costs, transport options, IT requirement, and current DC capabilities, but once implemented, this design would prove to be very cost effective. A disadvantage of this is that incase a customer buys products which one spread across two or more DCs, there would be split orders which would add to the cost. Thus it is necessary to minimize this gap by analysis of past data of what all items are bought together and placing these items together in a DC as far as possible.

Case Problems 4

4) Should Amazon keep the French DC?

Solution Case problem #4

To begin with, Amazon Europe should keep the France DC. This is for two reasons:
Amazon Europe plans to expand in European countries. During its expansion, the France DC can prove to be strategically located to serve new countries through the EDN network. Disposing off France DC while implementing EDN may lead to complexity in operations. So if at all France SC is to be remove, it should be in a phased manner.

Case Problem 5
5) With the implementation of an EDN, there would be an impact on transportation. This would most likely had to reduction in delivery service levels. How to address the issue of customer satisfaction?

Solution Case problem #5

To take case of the problem of transportation, the transportation team should work collaboratively with customer service to educate customers to associate a different shipping price to the delivery service level chosen. Amazon Europe can seek better terms with pan-European carriers to improve the service levels. From a centralized procurement, the volume discount that Amazon would get from suppliers can be used to improve service time.

Case Problems 6 & 7

6) Would Amazon be able to detect fast moving item or other demand trends for each country if buying was to be consolidated at the European levels? 7) How to resolve issue of a better coordination among departments and a clear HR plan?

Solution Case problem #6 & 7

Amazon would need better coordination among different departments and also to do a good demand forecasting for three countries. This would require a good IT infrastructure and a collaborative environment. The money needed for this could be used from the salaries of the employees who would be laid off in time.

Case Problems 8 & 9

8) Network optimization may lead to reduction of staff in operation team. How to make it smooth and convenience management?

9) Relocation of employees. How to address this issue?

Solution Case problem #8 & 9

The HR issue would be of utmost important. Amazon Europe should draw a clear HR plan to implement the change. Amazon Europe could offer higher package to critical employees to relocate and may take in local staff if needed.

Case Problem 10

10) Impact of EDN implementation on customer satisfaction?

Solution Case problem #10

The entire process of implementing EDN is likely to have big impact on the customers. Because in the three countries one used to very fast delivery, a delay because of implementation of EDN may lead to dissatisfaction and even loss of customers. Thus it is important to communicate this change to the customers well. The customers should be told the following benefits would arise out of END implementation:
Increase product range. Easier and faster delivery of out-of-stock items (because now it may be fetched from country where available).

Solution Case problem #10 (cont.)

For Germany and France, where book list prices are fixed and cant be discounted by retailers. Amazon Europe can make express delivery (through panEuropean carrier) free and for UK, they could give extra discount. This money could come out of the higher volume discount from suppliers because of centralized procurement department.

Summary of Case Study

Amazon Europe Should implement European Distribution Network (EDN). Its operations should be integrated fully with three sites. Inventories physically mixed based on demand pattern, inventory holding costs, and transportation costs. A centralized procurement department would ensure high volume discount from suppliers. This all would need a challenging HR polices as well as IT enabled collaborated network.