Retail supply chain management

Report
AE1
MAR155

Q12397725
Table of Contents
1.0 Introduction.................................................................................................................3
2.0 Company profile...........................................................................................................4
3.0 Supply Chain.................................................................................................................4
4.0 Amazon effect..............................................................................................................5
5.0 Supply Chain Management Practises............................................................................6
5.1 Supply chain Warehouse network........................................................................................6
5.2 Inventory Management and Insourcing Logistic.....................................................................8
5.2.1 Amazon as seller.................................................................................................................9
5.2.2 Fulfilment by Amazon (FBA)...............................................................................................9
6.0 Supply chain risk.........................................................................................................10
6.1 Shipping cost........................................................................................................................10
6.2 Inventory risk.......................................................................................................................11
7.0 Conclusion..................................................................................................................11
8.0 References:.................................................................................................................13
9.0 Appendixes.................................................................................................................16
Appendix 1 - Fulfilment fees + storage fees................................................................................16
Appendix 2 - European Fulfilment Network (EFN)......................................................................17
Appendix 3 - Pan-European (FBA)...............................................................................................18
Appendix 4 - Porter five analysis................................................................................................19
Appendix 5 3.1 Microeconomics of Amazon Effect.....................................................................21

Figure 1 Existing and Projected New Amazon Fulfillment........................................................7

Figure 2 Existing and Projected New Amazon Delivery Stations and Prime Now ....................9

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1.0 Introduction
Supply chain an increasingly important concept when discussing companies like
Amazon. Amazon tries to take supply chain management to a new level what can
be named as Amazon effect. Amazon effect dramatically changes the way we shop
every day. To become the number one company, need to think about storage
facilities where location played a significant role in this game. Amazon’s strategy
has been a winning strategy. Amazon did something that another company has
been able to do successfully. But in this game Amazon not only think about
customers but also about the third party sellers as they are bringing significant
investments. The Amazon found solution Fulfillment by Amazon.
Finally, Amazon may dominate the online retailer, but that not mean the
company has nothing to worry about. There is always a risk like shipping cost and
inventory risk.

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2.0 Company profile
Amazon.com is one of the most significant industry as known Amazon is a
international technology corporation focusing on e-commerce, cloud computing
which based in Seattle Washington that was founded by Jeff Benzos in July 1994.
The tech giant is the second biggest retailer in the world. Success can be measured
by the revenue market capitalisation and total sales (Levy 2018). The Amazon
started as a small online bookstore, but later begin the quick expansion to the
website what included of selling movies, music, toys and many other goods either
directly or as the middle company between different retailers.

What is the secret behind the Amazon success, how the company become one of
the biggest e-commerce sellers in the world for that short period. In early 2005 the
Amazon introduce the world Amazon Prime service where the supply chain game
was entirely changed. Amazon Prime gives the opportunity to customers to receive
the order in the two-day time. When other retailers start to go the same way,
Amazon introduces new strategy one-day delivery after one-hour delivery (Leblanc
2018). This new strategy takes Amazon to a new level, where other companies
don’t have the opportunity to compete with Amazon innovation.

3.0 Supply Chain

Laudon (2011) explains that the “Supply Chain concept started in early 1980 and
it has evolved into a fundamental business concept. The supply chain is a system of
organisation and business process to select raw materials to transfer them into
intermediate and finish products to the customer. It connects suppliers, industrial
plants, distribution centres, means of transportation, retail stores and information
using process such as selection of raw materials, inventory control, distribution
and delivery, to provide products and service from the source up to the point of
consumption.”

Before, the link between the consumer and the supply chain connect through
market-the customers communicate with the marketing department and if the

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information from the consumers include any changes in booking and if there are
any changes, communication with supply chain has done through the S&OP (sales
and operation planning system) and MPS (master production schedule) (Steven,
Melnyk and Daniel 2017). From information, it seems that for supply chain was no
need to communicate or even have any information about the consumers.
However, this system failed, the reason for that, supply chain been focusing more
on cost and meeting the schedule. But consumers often wanted more flexibility
and quicker feedback from the company. All this problem led to the development
of a new solution, where the supply chain will focus more on what want
consumers, the new system also known as the customer-centric supply chain. The
customer centric-supply chain is the result of work what was done by big
companies, one of the results is “Amazon effect” Amazon effect gives the
opportunity for the customer to look at supply chain from a different angle
(Grosman 2018).

4.0 Amazon effect

Nowadays it’s rare to wait a long time and not receive a package to a doorstep.
Consumers don’t want any more to wait 7-10 days for an order. What they want is
order today and get your delivery on the next day or the same day. Not a long time
ago customers were ordering clothing, toys or electronics. Now, consumers have
the opportunity to order everything that they want, start from dinner groceries for
today night to a dress for tomorrow school entertainment

The Amazon effect has dramatically changed the way how we shop now since the
company showed the world how the supply chain could work. The Amazon effect
describes how the entire marketplace has had on traditional forms of commerce,
similar to “brick-and-mortar” retail 1. In these circumstances are known as Amazon
effect (Grosman 2018).

1
Brick-and-mortal refers to a physical presence of an organization or business in a building
or other structure. The term brick-and-mortar business is often used to refer to a company
that possesses or leases retail shop, factory production facilities, or warehouse for its
operation

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5.0 Supply Chain Management Practises
Amazon on the market is like one big cult in the world. It is one of the favourite
choice for customers, only for one reason: quick and efficient supply chain
management. The combination of sophisticated information technology, huge
warehouse network, multitier inventory management and excellent logistic
management give priority among all the biggest companies in the world (Lebranc
2018).
5.1 Supply chain Warehouse network
Amazon has seven types of distribution centre which serving the Amazon growing
customer base:
 Large Sortable Fulfilment warehouse (works with items which can fit in a
large box) (Formspace 2014)
 Small sortable fulfilment warehouse (works with items which can fit into a
small box) (Formspace 2014)
 Non-sortable fulfilment warehouse (works with items too large for box
shipment) (Formspace 2014)
 Replenishment Warehouse (transfer centre to move goods from
manufactures to other fulfilment centres) (Formspace 2014)
 Customer Return warehouse (returns for damaged missing, unsatisfactory or
incorrectly shipped items) (Formspace 2014)
 Specialty items Warehouse (high price items such as jewellery or specialty
apparel) (Formspace 2014)
 Grocery Item Warehouse (Dry goods and Perishable items, like meats, dairy,
vegetables) (Formspace 2014)
Opportunity of different type of warehousing availability to pick items quicker and
faster, and reducing the shipment movement. Second opportunity is less time for
training of new staff members in the warehouse. This company strategy has been a
winning strategy on the market what other companies not able to do successfully

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 Figure 1 Existing and Projected New Amazon Fulfilment

(MWPVL 2014)

Location for Amazon played critical role in their success. Not only are the
warehouses big and optimized but they are strategically located in proximity to
large metropolitan areas. For the smaller populated areas there are warehouses
too, but they are smaller and contain more of the most wanted items and less of
the less ordered items (Box Around the World 2019).

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 Figure 2 Existing and Projected New Amazon Delivery Stations and Prime Now

(MWPL 2014)
5.2 Inventory Management and Insourcing Logistic
Amazon supply chain heavily depends on outsourcing of its inventory
management. Especially the products with the low demand frequently not stored
in central Amazon warehouse. Especially all the products what a sold by third-
party sellers

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(Lebranc 2018).

(Statista 2018)

It not a surprise that 52 percent of Amazon sales done by third party sellers. In
2018 it was have been reached 42.7 billion dollars. Amazon quick delivery time is
possible only due to its dependence on its logistic (Statista 2018). But Amazon got
a solution for third-party sellers “Fulfilment by Amazon” and “European Fulfilled
Network.”
5.2.1 Amazon as seller
The Amazon sales channel is the web store front-end that serves as the core of
their business. Customers go the Amazon website, look to the product, and place
the order. Amazon is responsible for all front-end customers relationship and back-
end logistic in this model. Once the order is placed, Amazon decides which internal
distribution centre or drops shipper should be responsible for shipping the order to
the customer. Amazon is then accountable for coordination the fulfilment of the
order. When a product is sourced from its internal distribution centres, Amazon
picks, pack and ship the order to the end customer. When the product is sourced
from a drop shipper, such a book distribution packages the item in an Amazon box
and deliver it to the end customer. In this model, Amazon owns the customer

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relationship, provided the technology, owns or purchases the inventory and
executes the logistic of each order.

5.2.2 Fulfilment by Amazon (FBA)

Another part of Amazon as a seller is Fulfilment by Amazon gives the sellers the
opportunity to sell the goods through Amazon seller centre. FBA is an Amazon
solution that will help the seller reach a new level on the market. The company
will help you to get more new customers, and customers will benefit like fast
Prime delivery and opportunity to easier to sell the good around Europe. The
system merely works, third-party sellers send the product to the contribution
centre, and Amazon takes care of storage, delivery, customer service, returning
handling. Seller only pays the fees what applies by Amazon (Appendix 1) based on
the weight and dimension. FBA make it easy to sell around Europe. They are giving
the opportunity to choose from two options what are works best for your business
(Appendix 2, 3).

6.0 Supply chain risk

Amazon may dominate the online retailer, but that not mean the company has
nothing to worry about. In the world been many different stories when the most
prominent companies have fallen. Company understand that they can felt quick
and hard to the down for a short period. In the annual report, the company told
about the biggest fear and the risk factors.

In 2016 Amazon listed some typical concerns what include “intense competition”
and rapid expansion “straining” management and other resources as well as
dangerous associated with doing business around the world. Those are the pretty
typical risk for a company of Amazon size and reach.

6.1 Shipping cost

Amazon biggest fear is the optimising shipping operation. The company success is
the ability to control shipping cost, giving the people an option to pay $99 a year
for two–day shipping. In the United States, around 65 million people have Prime
subscription which a equals 52 per cent of its total customer (Levin 2017). Amazon

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needs to make them happy to keep them with the company, but Amazon knows
that shipping could become a huge problem. A failure to optimise inventory in our
fulfilment network may lead to higher shipping cost by required long-zone or
partial shipment.

Delivery is one of the significant parts of the Amazon what they cannot control,
and they depend on the logistics companies such as FedEx, UPS, Postal Services
and many more. Investing in their logistic services will be a significant
commitment for the company, but Amazon has the data, the infrastructure and
customer relationship to make it work. Amazon work on the program where they
think to get a deep discount with the logistic companies. That experience has
likely taught it a lot about making its delivery (Bowman 2016).

6.2 Inventory risk

According to the Amazon (2016) Fulfilment and inventory optimisation by Amazon
and third parties are in the high level of risk. It may be affected by operational
consequences as a result of season time of the year, new product launches, rapid
changes in product cycles and pricing, defective merchandise, changes in customer
demand and customers spending patterns, changes in consumer tastes concerning
our products and other factors. The company have to think of what happens on the
market to avoid overstocking or understocking that company manufacture or sell.
Demand for the product can change significantly between the time inventory or
component are ordered and the date of sale. When the company put a new
product on the market or start manufacturing a new product it is difficult to
establish vendor relationship, determine appropriate product or component
selection and actual forecast demand. The acquisition of certain types of inventory
or components may require significant lead-time and prepayment, and they may
not be returnable. Amazon carries a broad selection and significant inventory
levels of specific product, such a consumers electronics and company may be
unable to sell products in sufficient quantities or during the low selling season.

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Anyone of the inventory risk factors set forth above may adversely affect operation
result.

7.0 Conclusion
The supply chain management is a large scope which cannot be described in the
single report. This report has taken approach where was looked at the main point
of the supply chain. Amazon is the big retail company but there always is where to
grow. Future concept of the company make all work automated, drone delivery
already is tested by the company. To be successful you need to go with one step
with the future.

8.0 References:

Amazon, 2016. Annual report [viewed 17 March 2019]. Availabe from:

http://www.annualreports.com/HostedData/AnnualReportArchive/a/NASDAQ_AMZ
N_2016.pdf

Amazon, 2018. Growing your business internationally has never been easier!
[viewed 21 February 2019]. Available from:
https://services.amazon.co.uk/services/fulfilment-by-amazon/unified-account-
and-efn.html

Amazon, 2019. Amazon.com Announces Fourth Quarter Sales up to 20% to $72.4

Billions [viewed 27 February 2019]. Available from:
https://ir.aboutamazon.com/news-releases/news-release-details/amazoncom-
announces-fourth-quarter-sales-20-724-billion

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Bowman, J., 2016. Is This the real Reason Why Amazon.com wants Its Own
Delivery Service? [viewed 18 March 2019]. Available from:
https://www.fool.com/investing/general/2016/02/15/is-this-the-real-reason-why-
amazoncom-wants-its-ow.aspx

Box Around The World, 2019. What you should Know About Amazon Supply Chain
Management It’s Must Read! [viewed 15 March 2019]. Available from:
https://boxaroundtheworld.com/amazon-supply-chain-management/

Formaspace, 2014. Amazon’s amazing fulfilment warehouse strategy [viewed 10

March 2019]. Available from: https://formaspace.com/articles/material-
handling/amazons-warehouse-strategy/
Grosman, L., 2018. What Amazon effect means for retails [viewed 8 February
2019]. Available from:
https://www.forbes.com/sites/forbescommunicationscouncil/2018/02/22/what-
the-amazon-effect-means-for-retailers/#98ee0ad2ded2

Grosman, L., 2018. What The Amazon Effect Means For Retailer [viewed 18
February 2019]. Available from:
https://www.forbes.com/sites/forbescommunicationscouncil/2018/02/22/what-
the-amazon-effect-means-for-retailers/

Kline, B. D., 2017. This Is What Amazon Worries About [viewed 16 March 2019].
Available from: https://www.fool.com/investing/2017/05/24/this-is-what-
amazon-worries-about.aspx

Leblanc, R., 2018. How Amazon is Changing Supply Chain Management [viewed 9
February 2019]. Available from: https://www.thebalancesmb.com/how-amazon-is-
changing-supply-chain-management-4155324

Leblanc, R., 2018. How Amazon Is Changing Supply Chain Management [viewed 19
February 2019]. Available from: https://www.thebalancesmb.com/how-amazon-is-
changing-supply-chain-management-4155324

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Levin, R. M., 2017. Amazon Prime Grows in the US, at a Slower Pace [viewed 17
March 2019]. Available from: https://www.huffingtonpost.com/michael-r-
levin/amazon-prime-grows-in-the_b_12789582.html

Levy, A., 2018. The 7 Largest E-Commerce companies in the world [viewed 8
February 2019]. Available from: https://www.fool.com/investing/2018/12/26/the-
7-largest-e-commerce-companies-in-the-world.aspx

Statista, 2018. Percentage of paid units sold by third-party sellers on Amazon

platform as of 4th quarter 2018 [viewed 19 February 2019]. Available from:
https://www.statista.com/statistics/259782/third-party-seller-share-of-amazon-
platform/

Statista, 2019. Net sales revenue of Amazon from 2004 to 2018 (in billion U.S.
dollars) [viewed 9 February 2019]. Available from:
https://www.statista.com/statistics/266282/annual-net-revenue-of-amazoncom/

Steven, A., A. Melnyk and J. Stanton, 2017. The Customer Centric Supply Chain
[viewed 7 February]. Available from:
https://www.scmr.com/article/the_customer_centric_supply_chain2

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9.0 Appendixes
Appendix 1 - Fulfilment fees + storage fees

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Appendix 2 - European Fulfilment Network (EFN)

With EFN, seller have opportunity to ship the product to Amazon Fulfilment
Centres and the products will come to the end customers around the Europe
marketplace. The products will be stored, picked and shipped and easily bought on
amazon.co.uk, amazon.de, amazon.fr, amzon.it and amzon.es (Amazon 2018).

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Appendix 3 - Pan-European (FBA)

Pan-European is a simply solution for seller to sell the goods around the worlds.
Seller only need to send the product to an Amazon Fulfilment Centre in your home
marketplace and watch how the goods are send around the Europe distribution
centres based on anticipated demand (Amazon 2018).

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Appendix 4 - Porter five analysis

Competitive rivalry - HIGH

The rivalry in online industry is very high, reason of that there is big competition
on the market. Also, every year new players coming to the market. The main
competitors of Amazon are Ebay, Alibaba, Flipkart and many more. For the
company like Amazon not only important big players but also the small-scale
retailers, brands and online stores also fighting in for the market share. Every day
many online retailers try to target particular part of the market such as electronic,
dress, toys etc. All of this has lead to intense rival competition for Amazon.

Threat of New Entrants – LOW

In 21 centuries there are not a big problem to create a new online retail store, the
difficulties are become to a high level retailer like Amazon. The investment, time
and effort plays significant role. Digital technology in last year made a significant
change. Many new companies have been entered the e-retail business. Also many
international and domestic brands have emerged. The new company can easily
enter the market but won’t be able become a successful like Amazon. The new
project will require huge investments in warehousing, distribution, logistics,
marketing and many m0re factors. This is only a few factors what making
difficulties for new entrants to compete with Amazon or attempt to grab market
share form it. This is why threat of new entrance is very low for brand like
Amazon.

Bargaining Power of Suppliers – LOW

Being such reputable player on the market, Amazon continuously has the upper
hand over the supplier in the supply chain. Moreover, the number of supplier to
Amazon is so high, they have to follow a many different set of rules and regulation
set by the company. Amazon guaranteed that the supplier are following ethical
work principles at their work location. No suppliers can even think of forward
integration. For Amazon switching cost for supplier is almost negligible. Due to its
large sales for any items, on the market there are many new suppliers that are
ready to work with the Amazon with the requirement that amazon wants from
supplier. Therefore, supplier don’t have an influence on the company and they

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cannot influence on the prices of Amazon. All information above making bargaining
power of supplier against Amazon is low.

Bargaining Power of Buyers – HIGH

Amazon puts a lot of stress on client fulfilment and product quality. Amazon give
opportunity to customer receive a product on time and any returns or replacement
are properly handled to convert first-timers into every day client. The customer
switching cost is low. Moreover, customers are well informed and due trend of
online retailers, have a number of options to go to. Amazon dependent from the
buyers and customers have strong bargaining power on the company as there are
many competitors on the market.

Threat of Substitutes – HIGH

The substitution to Amazon are retailers like Argos, outlet stores, online retailers
of brands that Amazon sell on their platform, small markets in cities. Since
Amazon does not sell anything unique, it faces high threat of substitutes. A single
mistake will make the customer to change online retailer. At the same time, many
people prefer to visit the retailer shop ether to shop online. This all make high
threats of substitutes.

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Appendix 5 3.1 Microeconomics of Amazon Effect

Amazon has shoved the world the new strategy, how the supply chain can be
changed by innovating new technology to the market. After ten years when
amazon was founded, its annual revenue nearly has reached seven billions dollar.

(Statista 2019)

According to the statistic the Amazon is the quickest growing company in the
worlds, which only for 20 years reached $100 billion in sales revenue. It is the
fastest growing company in the world, every year sales revenue is going up to 20
percent. The company target is to reach $1 trillion for next 10 years (Leblanc
2018). By simple calculation it seems that Amazon will reach the target by 2027.
By adding 20 percent on every year. Also Amazon are doing 6.4 percent of all
worlds e-commerce trade.

Looking to the annual report of 2018 they been very impressive in many dimensions
and add to the perception of a retail juggernaut in both online, and how physical
store presence. Financial performance of 2018 highlights:

 Net sales increased 31 percent to $232.9 billions, compare $177.9 billions

in 2017 (Amazon 2019).

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 Operation income increased to $ 12.4 billion, compare with operation
income of $4.1 billion in 2017 (Amazon 2019).
 Net income increased to $10.1 billion, or $20.14 diluted share, compare
with net income of $3.0 billion, or $6.15 per diluted share, in 2017
(Amazon 2019).

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