Amazon's Distribution Strategy

Amazon.com’s Distribution Strategy (Europe) – Review/Case

Analysis
Introduction
While taking a decision on the design of supply chain, companies should focus on its strategy,
decision on operations and most importantly, proper planning. In a company, based on the needs of
the customer and design of the systems, flow of supply chain management varies. While designing,
reviewing constantly at different stages also helps companies differentiate various processes in their
supply chain.
Amazon.com is an e-commerce company with its presence worldwide and headquartered in Seattle,
United States. Amazon.com, in its early days dealt only with Books but later on it diversified into a
lot of other product lines like Video Games, Electronics, Toys, Jewellery, Furniture, MP#s, DVDs
among other products. Today they are a huge $75 billion organization with a very diverse product
portfolio and successful operations round the globe. The new Kindle Fire Tablet computer is one of
their latest notable product and their Cloud Computing business is one of the industry leaders. Going
by the revenue, growth and market capitalization, Amazon is the 4 th most successful start-up of all
times.
Jeff Bezos started this amazing company in 1994 with the intention of “Get Big Fast”. This strategy
was a brilliant one for the company in US as they were able to function with a competitive lead time
for delivery after the orders were placed. Now this strategy was also put in place for the expansion in
Europe. Not only were the European markets culturally different from US but also the market
conditions and the consumer behaviour & expectations different from a consumer in US. The
challenges here were very dissimilar to the operational challenges in US in terms of transportation,
stocking and distribution.
The report will look into the challenges that Amazon faced in Europe and the operational/supply
chain decisions they had make to overcome those challenges, also, “How has globalization made
strategic fit even more important to company’s success”. The recommendations/ analysis are based
on the concept of centralization of the distribution across a full continent and the concepts taught in
the class.

AMAZON US
“Earth’s Biggest Bookstore”
Amazon used the Internet to change the business of buying books into a very fast, easy and
enjoyable shopping experience. Amazon has more than 2.5 million different book titles in its kitty
and is very rightly called the “Earth’s Biggest Bookstore”.
From the very beginning, Amazon always kept the wholesalers and the publishers on their side
which thereby allowed them to keep a very truncated inventory and low inventory holding costs.
These tie-ups with wholesalers and publishing houses not only allowed Amazon to reduce costs on
warehousing but also get huge bulk discounts, for example From a publishing house Amazon used to
get a discount of approximately 48% and around 41% from the wholesalers)
Amazon had a general lead time for delivery of 4 to 7 business days across the whole country of
United States. Amazon developed its infrastructure hugely in the late 90’s and eventually launched
their Music and Video businesses also. The idea was to “Get Big Fast” through diversification and
geographic expansion by having more distribution centres in their business geography.
Some would say that the expansion of Amazon was the fastest expansion experienced by any
company for its distribution capacity. Expanding and making distribution was the first step, next step
was to figure out which distribution centre will carry which all products, given the fact that Amazon
not only expanded in distribution capacity across geographies but also in terms of the product lines
in its product portfolio.
The 3 aspects of deciding the products to be carried by a distribution centre are:

As Jeff Wilke, the Vice President of Operations at Amazon said about what Amazon had,

Amazon quickly adapted to the Six Sigma DMAIC reviews as a tool to reduce variations and defects in
its distribution centres.
Jeff Wilke’s team followed 5 strategies to improve inventory management
1. Better forecasting of customer demand by improving the ability of the software by refining it
to the tune of better anticipation of the demands, both seasonal and regional. This made
sure that risk of buying either too much or too less was reduced.
2. Better relations with the wholesalers and direct vendors to cater to any sudden surge in
demand for any particular bestselling book title. This was also used to get some needed
momentum for the slow velocity titles.
3. Available-to-Promise Functionality: Amazon integrated the supply chain management
systems of its suppliers with its own thereby getting a synergy in the process. Now amazon
was able to tell its customers the exact time frame in which it could deliver the products to
them. For example, if a product is available with the Amazon distribution centre themselves,
then the lead time for the delivery of the product was within 24 hours. But if the product
was not available with the Amazon DC then the lead time for delivery increased to 2 – 3
business days. This allowed Amazon to have the information about the inventory of the
suppliers at all times at the very item level.
 4. Cascading Buying Rules: These rules by Amazon determined which supplier was the best fit
for which product in terms of the price and the options for delivery such that if the item is
not available with the supplier giving the best price then the next supplier in cascade will be
selected for the delivery.

5. Drop Ship Orders: Amazon took some time to adopt this strategy which they should have
adopted in the very beginning. According to Drop Ship strategy, whenever the customer
orders an item and the distribution centre of Amazon does not have the product then
Amazon places the order on its supplier. Then instead of the supplier shipping the item to
Amazon DC and then the Amazon DC shipping the item to the customer, the supplier directly
ships the item to the customer, thereby drastically decreasing the lead time for delivery by
removing the unnecessary steps of the supply chain products .

AMAZON EUROPE
The initial targets for Amazon were UK and Germany, primarily because both these countries were
the prime markets for book selling and online purchasing in the continent of Europe. Germany had
an excess of 2000 publishing houses and UK had an excess of 3000 publishing houses. Amazon made
an acquisition in Europe by acquiring Bookpages and TeleBuch in UK and Germany respectively.
Again, in line with the idea followed in US, Amazon Europe wanted to “Get Big Fast”. Both the UK
Amazon.co.uk and German Amazon.de increased their product portfolios by integrating the music
and video businesses along with the books business at the very offset of the culmination of the
respective expansions in the two countries. Even though the competition from the online bookstores
of the respective countries was fierce, Amazon was successful in becoming the market leader in both
the countries. The combined sales of the 2 countries crossed the 10% of the total Amazon revenue
mark, signifying the epic success of the geographic expansion.
The next venture was in France. When Amazon entered UK and Germany they did it through
acquisitions, however when they entered France they did not acquire any established company,
instead they got the business up and running from the scratch. The formula was simple here too,
“Get Big Fast”, which is why the business started with the complete portfolio of books, music, video,
toys, et al.
Growth in International sales for Amazon grew by 74%, which in turn helped the European business
to cross the 13.4% of the total Amazon revenue mark.
Challenges in replicating amazon’s US model in EUROPE
Although Amazon was doing well in Europe but the ambition was high as they had the intention to
repeat the success of Amazon US in Europe too. However they were confronted with some heavy
challenges from the European markets. These challenges could be tackled but to do that they
required some radical change in the strategies that Amazon applied and adopted in US. The 4 main
challenges were:
 Selling regulations in Germany & France :The prices of the books being sold in Germany &
France were fixed. No discounts could be offered on those prices. The selling model for Amazon
in US was to offer discounts on the prices of the books, which they got from the wholesalers and
publishing houses. Over here they could not provide those discounts that they got on the bulk
purchases from the wholesalers and publishing houses.

 Payment options: In Europe, more than 62% of the customers used cheques to make the
purchases. The core competency of Amazon was online retail which meant online purchasing via
credit cards. This came as a major challenge to Amazon as they did not have any brick or mortar
store where the concept of payment through cheques can happen.

 Different supply market factors: In US, Amazon relied heavily on the suppliers for the books.
However in Europe they suffered a setback because of the dearth of wholesalers and big
suppliers. In UK although they were able to manage the supply with a handful of suppliers, but in
France there were none. This forced Amazon to have tie ups with umpteen number of publishers
for the supply of books.

 Low penetration of EDI in European countries: Amazon used EDI (Electronic Data
Interchange) to have a communication with the supply chain management of the suppliers in US.
This increased the efficiency of their own supply chain tremendously. In case a supplier was
having a stock out of a particular item in his inventory, he could respond back in real time to
Amazon with a rejection to take the order from customer. This enabled Amazon to immediately
send the information back to the customer about the unavailability of the item. This, however,
was not much in use in Europe as they still used the concept of emailing and Fax but not any sort
of real time data sharing.

In addition to the challenges mentioned above there were other challenges too. Amazon relied
comprehensively on the national postal services in the respective countries of Europe where
they were operating. But they were competitive only in their own countries and not in other
countries. This created a challenge for Amazon because they had a lot of shipments which were
cross country shipments.
How to detect demand trends, especially for fast moving items, if European level buying is
consolidated?
 The only way to make sure that the inventory levels in a distribution centre is at an optimum
level is through better forecasting. Making sure that the replenishment in a warehouse is done
at proper interval in adequate quantities is by having an accurate information about the demand
in future.
 Demand estimation is the backbone for any supply chain management system. Proper
implementation and information processing through ERP is the method used by the most
 successful companies in the world. ERP helps improve the planning for the supply chain, both
inbound and outbound aspect of it.
 Besides that money saved through the cost cutting initiatives should be invested to develop the
supply chain, logistics and distribution characteristics of the EDN.
 In addition to that, it is very important to capture the easy wins first and get a hold of the
market. It is very critical for Amazon to have standardization and build synergies across the
divisions in Europe. To do that it is important that Amazon defines and implements comparable
metrics (for example vendor lead time) across the European countries to develop enhanced
understandings of their operational activities