OPERATIONS MANAGEMENT - II

GROUP REPORT
“SUPPLY CHAIN MANAGEMENT PRACTICES IN AMAZON”

SUBMITTED TO: Dr. P.Praveen Vijaya Raj

SUBMITTED BY: GROUP 12

Group No S. No Name Roll No

1 Adil Mohammed 21PGP140

2 Omanshu Yadav 21PGP159
Group 12
3 Osheen Mishra 21PGP160
(5 Members)
4 P V Sindhuri 21PGP161
5 Ritika Chandnani 21PGP191
 Supply Chain Management Practices In Amazon

Introduction to Inventory Management Practices in Amazon

Inventory Management and focus on its optimization is one of the major factors which influences in the
company’s long-term success. The way a firm manages inventory management determines whether it can
achieve its immediate and long-term goals.

When it comes to Inventory Management, Amazon is said to be one of the best firms to have efficient
Inventory management practices and has kept evolving over time. The company’s founder laid three
principles on which Amazon was to operate in an online Business market. They were to offer products to
the customers at lower prices, they were to target a bigger market and the third principle was to offer wide
range of products to the customers.

To meet its objective of offering products to customer at lower prices it was necessary that it wouldn’t
open stores or warehouses in order to cut down the inventory costs. But in contrary Amazon operated its
own warehouse and started managing the inventory. This was necessary to design an inventory process
which was time efficient and cut the total costs. This turned out to be the better approach keeping
customer satisfaction as priority.

1. Inventory management strategies

In the year 1999, Amazon expanded its warehouse capacity from 3 lakh square feet to 5 million square
feet by adding 6 new warehouses and making it to a total of 10 warehouses. Amazon faced a hurdle in
building warehouses on such a huge scale, as each warehouse cost around $50 million.

To ensure that the return rate is kept to a bare minimum Amazon chose to order any goods from its
warehouses only after customers had made up their minds about buying it, and this technique has proven
to be fairly effective in lowering Amazon's return rate. In light of the fact that most segments of internet
retail were experiencing high return rates at the time, achieving a minimal return rate was critical.

Inventory Outsourcing -

Amazon recognised the necessity to expand its warehouses and stocks to satisfy the demand of an ever-
increasing number of consumers while keeping the same quality of service after proving its mettle in
customer-oriented services and ensuring customer pleasure. However, Amazon realized that doing so
would require a significant investment, which would exacerbate the financial crunch. This will also put
pressure on Amazon to raise the price of services to customers, contradicting its own value proposition of
offering things at a reduced cost to customers.
However, Amazon was certain that its client base would grow, and it needed a mechanism to manage the
increased demand for goods and storage space. At this moment, Amazon concluded that internet shopping
and e-commerce, rather than inventory management, are its key competencies. As a result, Amazon chose
to outsource its inventories.

Many analysts, however, doubted that raising Amazon's inventory capacity on a speculative basis would
result in a deadlock. With this in mind, Amazon responded to the problem by reducing inventory in 1999-
2000 to lessen the risk of demand uncertainty, and it concluded that rather than expanding inventory, it
would be preferable to improve the breadth and variety of inventory with alternative possibilities of items.
Amazon's actions throughout this time can be summarized as follows:

● On the basis of demand uncertainty, lowering inventory levels.

● Increasing the variety of products in its inventory and warehouses at the same time.
● Purchasing things directly from manufacturers rather than wholesalers to assure cheap prices for
clients while maintaining a healthy profit margin.
● Use of software to determine which inventory should be used to meet a customer's demand.

Drop shipping model.

Dropshipping is a relatively new but growing trend in the realm of product reselling, particularly in
ecommerce. It is a procedure or method for ecommerce enterprises to outsource the procurement, storage,
and delivery of things that their customers have requested. The seller just sends an order to the
manufacturing or fulfilment centre. After an order is placed, the third party is in charge of managing the
product, preparing it for delivery, and finally delivering it. This technique of order fulfilment appeals to
Indian companies looking for low overhead and capital investments. This strategy, however, has a
number of drawbacks. Dropshipping may be appealing to firms looking to sell generic products, but it can
limit prospects to create a global brand or offer a variety of products.

Pros:
Unlike a traditional business, which requires the purchase of a store, a warehouse, and numerous other
expenses, a dropshipping firm only requires access to the internet. Dropshipping offers the ability to
reduce overhead costs because you don't have to store or ship the products.
Multichannel selling: Multichannel selling is a way to attract more buyers in this industry. Dropshipping
allows you to sell products directly from your website, through Amazon's Global Selling programme, or
on social media.

Drop shipping allows you to deliver shipments to any area in the world, regardless of where you are
located. The store owner can operate his or her business from any location.
Cons:
Product quality: Dropshipping allows you to cut down on your involvement.Order selection, packaging,
and shipment are all handled by a dropshipping business, therefore you don't have any control over the
process.Because you don't handle order fulfillment, you might not be able to use special discounts and
promotions to entice customers, such as bundling or free delivery.
Profit margins: If your product has few to no differentiators, you may find yourself competing more
aggressively on pricing. Low-cost sales might eat into your profit margin.

Fulfillment by Amazon (FBA)

FBA allows Indian vendors to contact overseas buyers and transport their products across the globe in a
hassle-free manner, comparable to dropshipping. Although it is not required to sell on Amazon to use
FBA services, Amazon Global Selling is a wonderful alternative for ecommerce exports, with over 300
million customers worldwide and 18 markets to sell to. Here's what you receive when you pick FBA to
dropship your products:

- Your products are stored in the Amazon fulfilment facility.

- Amazon's Prime shipping option ensures fast delivery to locations all over the world.

- Amazon provides customer care 24 hours a day, 7 days a week.

- Returns are handled by Amazon FBA.

- When you need to refill your products, Amazon FBA tells you.
Inventory management strategies-

Amazon has been able to fulfill its storage and distribution because of the vast distribution network it has.
Currently,it has around 175 centers which actively cater to fulfilling the basis of streamlined selling and
this has number has increased exponentially from a mere 10 in 1999 but with the onset of internet boom
as of now Amazon ships around 1.6 million orders per day and to cater to this need,expanding the
warehouses is quintessential and a huge challenge and is economically not feasible as the higher end of
the warehouses cost around 300 million dollars. With the increasing number of customers and the high
percentage of customers returning orders everyday, even after the expansion of warehouses and parallel
increase in COGS as well as sales,the inventory turn over ratio is seen to be declining.

Fig 1 : Amazon Inventory Ratio

To address the issues, we performed an analysis based on the following metrics:

● Turnover Ratio = Cost of Goods Sold / Average Inventory

This ratio indicates how many stock turns are taken, Amazon for now has an inventory turnover
ratio of 10. So approximately the firm is making 3 stock turns per quarter or let’s say 10 times a
year which is a decent number in the e-retail industry. The major factors contributing to a low
inventory turnover ratio are:
Customer demand is often overestimated, and it becomes difficult to sell through

Seasonality is a major contributing factor for product demand, high sales during festivals,
holidays are common but the excess stock in place affects the ratio negatively.

● Days Sales - This metric is very important to understand stock levels and their balance, identify
and work on slow-moving products. A lower DSI is preferred as it tells us that the average
number of days the firm was able to finish inventory.
 ● Sell Through Rate - This is given as the ratio of the number of units sold over the initial inventory
and is calculated by dividing the average number of units sold by the total units stored at the
centers and multiply by 90 days ( Amazon follows a 90 days period)

To combat the above mentioned problems,we calculated the metrics for the last 9 years and then plotted a
trend line across the same. We forecasted the metrics over the existing line to better understand the
roadmap to inventory management at Amazon
RECOMMENDATIONS

● Using intelligent picking strategy, which is a digital form of picking similar to wave picking. It
utilizes an intelligent location system and filters from wave picking sessions to create the most
efficient pick route possible.
● Using AI technology for predicting Future Demand which would analyze the historical data of
different Distribution Channels and would predict the inventory stock accordingly
● Implementing Blockchain Technology to connect warehouses, suppliers, retail planners and
distribution centers to have permanent records and communicate within the transaction records
and optimize the whole supply chain.
● Automating Returns management process to reduce steps in the returns workflow and optimize
Inventory cost.
Digital Goods & Amazon’s Supply Chain Strategies-

Amazon has a history of always experimenting with different business strategies in the industry after
assessing market conditions and forecasting future needs of the general public. Amazon launched well-
planned initiatives after realizing that the online digital goods market would peak in the future years.

The truth that Amazon recognised at the time was that the printed book market, which contributes
significantly to Amazon's sales, will decrease by as much as 4.7 percent by 2015.

By 2015, the ebook market is predicted to rise by up to 300 percent, signaling a significant shift in
people's reading habits.

Customers in the United States are expected to spend more on online music than on recorded music,
therefore this could be a good time to enter the digital and online music business.

Amazon has already discovered that online subscriptions for music and online streaming services have
been on the rise, while its other businesses, such as DVD sales and recorded track sales, have seen
significant declines.

As a result, Amazon behaved wisely in this area and made a debut in it, judging the future market of the
digital world. The best aspect was that Amazon attempted to organize its supply management tactics in a
way that minimized inventory management costs. Amazon developed a three-step system to ensure
customer delivery, as depicted in the diagram below:

Hence Amazon created a value chain for the sale of digital products. Because there were fewer
intermediates in this area, Amazon was able to capture a big proportion. As a result of its business
relationships with numerous content creators in the digital business industry, Amazon was able to sell
more and more services.

When it came to digital product inventories, Amazon could save a lot of money since it used the approach
of giving orders to digital vendors only when they were needed, and holding things digitally was, of
course, free. Amazon may be able to enhance its profit margins by investing less in inventory
management as a result of this. One of Amazon's founding ideals was to make customers' purchasing
experiences easier. Because there was no need to physically ship the goods, the selling of digital things
made it easier for Amazon to keep its consumers pleased.