Optimization of Amazons Outbound Supply Chain

Executive Summary

The supply chain includes one of the most strategic aspects of a business that significantly impact success. This report evaluates Amazons outbound supply chain highlighting the various strategies of inventory management, warehousing as well as the logistics and delivery systems used by Amazon in facilitating the delivery of products to its ecommerce based customers. The use of technology in the various aspects of the supply chain as well as the innovative capabilities and applications by Amazon are also discussed, with an analysis of how these impact consumer engagements, behavior and enhanced experience. Further the returns and reverse logistics at Amazon, as well as the various challenges that are at the core of the supply chain with corresponding recommendations to their solutions are also outlined.

Introduction

Retail is changing at an unprecedented speed, and with it come big challenges and opportunities. 2019 had the slowest rate of spending growth since 2010, largely driven by Brexit uncertainty. The industry faced large-scale business restructuring: 85,000 jobs lost, a third of FTSE 350 CEOs changing, and 9,169 store closures. Despite this, online sales continued to grow, reaching 21% of total sales (Deloitte.com, 2020.) This prompted most businesses previously with limited online presence to capitalize in the new market created thereby leading to the development of a significant number of ‘click and Mortar’ businesses. Arguably, the supply chain is retailers’ biggest opportunity to drive not only customer satisfaction and loyalty, but also efficiency and profitability. So what is the setup of the supply chain of such ‘click and mortar’ businesses.

Supply chain

Supply chain refers to a network of all individuals, organizations, resources, activities and technology involved in the delivery of a product from production to the customer. Supply chain management enables an enterprise to source necessary materials to develop a product or service and then deliver the product to the customers (Perkins and Wailgum, 2017). Virtually all products that reach the end user presents a cumulative effort of multiple organizations and involves physical and information flow from either sides of the chain. This report will analyze the various aspects of Amazons’ supply chain within the UK.

Amazon is one of the leading multinational retail companies in the globe which operates both online and physical stores. According to Glendey (2019) the company has in the past year increased its presence within UK not only through its online services but also through the development of a number of pop up shops to impact a ‘click and mortar’ business offering everything from food and drinks to electronics, cosmetics and home ware. The company employs an omni-channel strategy of supply given the wide range of products ordered from different locations as well as the need to increase consumer experience.

Cheater (2016) points out that supply chain managers utilize a central stock pool to control a number of functions such as pricing, fulfillment, sales, stock management, and ordering. These orders are then fulfilled through numerous retail channels including physical stores, online as well as on mobile devices. The rising issues within the contemporary retail market supply chain such as; on time deliveries, visibility and customer satisfaction necessitate the adoption of Omni-channel supply strategies to ensure flexibility and ability to respond quickly. Further given the unpredictability of consumers with regards to the numerous retail channels, retailers have to worry about meeting demands, ensuring the right amount of the right product available at the right location whether in a specific retail store, or warehouse feeding online and mobile sales (Agility, 2016). This ensures that Amazon maintains its market share and remains profitable and competitive.

Warehousing

Warehousing involves the process of storing physical products before they are delivered to their respective customers upon an order. Given the global nature of Amazons’ business operations, the company develops and owns warehouses in different locations in order to impact faster and efficient deliveries. Leblanc (2019) affirms that Amazon owns warehouses that are strategically located and stocked, mainly close to metropolitan areas and city centers. Johnson (2020) outlines that the company employs two strategies to ensure customer satisfaction; pure push for the products in various warehouses that are stocked based on demand and forecasting of future demand of the region, and a pure pull strategy when selling products from third-party sellers, using more of an order-by-order fulfillment model.

Taylor (2019) points out that Amazons vast warehouse network is among the key elements of its supply chain. In this respect Leblanc (2019) adds that the numbers of warehouses, location as well as size are important factors in a supply chain highlighting that Amazons’ warehouses are divided into five storage areas; The library prime storage which stores and stocks books and magazines, the pallet prime storage which stores full-case products that have very high demand, the case flow prime storage that stores high-demand products picked in less-than-case quantities and a random storage area that stores smaller, moderate-demand items. This ensures a constant supply of products demanded within a specific location in a warehouse or fulfillment centers which are often located in local urban market to ensure effective customer fulfillment.

A wide range of activities are also simultaneously carried out in the process of warehousing including inventory control, packaging and storing. In addition to a highly talented human resource team, Johnson (2020) clarifies that Amazon also applies the use of technology in the process of warehousing. Leblanc (2019) points out that Amazons Automated robots can pick and pack without needing any human assistance thus promoting a high efficiency of the company’s warehouses and diverting a majority of the human resource to delivery duties consequently impacting fast and on-time deliveries that helps maintain the company’s market share.

Inventory Management

Inventory management also referred to as warehouse operations involves activities and processes within a warehouse that involve the handling of products and tracking of inventory, including receiving inventory, batching and storage in bins, shelves or pallets, packaging and eventual release for delivery to different customers. Leblanc (2019) points out that at Amazon, warehouse operations are managed by chain employees and carried out using automated robots. Lopienski (2018) advances that effective warehousing operations impact businesses through effecting low costs, ensuring sufficient quantities of products at hand within a warehouse at any particular time, ensure space and storage optimization within the warehouse as well as effective administration and customer service.

Given the online business sales and enterprise, a wide range of Amazons’ front end inventory management strategies (impacting the selection and delivery by customers) are technically advanced with the use of software such as the company’s official e-commerce website, through a search engine (Leblanc, 2019). Search sites enable customers to access and view virtually all products within a warehouse enabling easier choice and thereby enhancing consumer experience. Lee (2019) points out that Amazon allows different brands whose products they sale to manage their own inventory through the internal Amazon Inventory Management Systems. Products in this system can have inventory under four major categories and are broken down into the system highlighted in table 1:

Table 1: Categories of inventory control

Lee (2018) confirms that while the Amazon inventory management system can drive one factor in the consumers search results, there are many factors to be considered.

Order Fulfillment

Order fulfillments include the delivery services of products and services to different individuals who order them. Given the enhancement of consumer experience is a key consideration factor for Amazon; the company carries out deliveries at customer convenience meaning home or office delivery. Kessler (2018) points out that while the customer has the autonomy of deciding where to accept their deliveries, they also have the option of picking up their products in any fulfillment center of proximity thereby ensuring effective consumer engagement and retention. These deliveries can be fulfilled directly by brand agents of the various products bought or by Amazon employees depending on the product and the agreement between the brand and Amazon.

Fulfillment by Amazon: where Amazon takes responsibility of the product delivery and as such directs brands to effective warehouses or fulfillment centers from which Amazon manages distribution or

Self-fulfillment: where the brands manage their own supply chain and fulfillment but use the Amazon enterprise for marketing and sales.

Lopienski (2018) highlights third party logistics as the alternative logistics strategy used by Amazon in the delivery of consumers’ products and services. The company given its online operation requires resources tools and technology such as transport vehicles, mobile devices and computers to be able to connect the ecommerce with customers and enable the delivery of orders as they are placed. Amazon outsources logistics to third party handlers including transport and logistics companies for delivery services. Lopienski (2018) further says that in other countries where effective warehousing is not yet in place, the company outsources other order fulfillment services including; warehousing products while replenishing often, inventory management, picking, packing, shipping, and other services needed to get orders to your customers. This enables effective consumer satisfaction and as such market retention.

Technological engagement

Amazon being primarily developed as an Ecommerce business which supports online sales and purchases has technology in cooperated in virtually all the steps and aspects of its supply chain from warehousing and inventory control all the way to sales and delivery of the products and services to the respective customers who order the products. Gillimore (2018) highlights that technology and digitization is the core enabler of the customer driven supply chain which is exhibited in ecommerce business and economy. Given the increasing shift of individuals from traditional shopping and purchasing to utilization of online resources and markets, the current supply chain including physical interaction will be obsolete in the next half a decade (Kessler, 2018).

Amazon is the leader of ecommerce and business in the digital economy and likewise the innovators of the utilization of computers and technology in robots and other robotics machines within their warehouses. Johnson (2020) outlines that Amazon uses a wide variety of automation and robotic solutions in their warehousing activities including: picking and packing as well as stacking and storing inventory. This impacts a much faster and more efficient warehousing process and thus impacting speedy deliveries. The technology and machines also enable the cutting back on costs such as warehousing and staffing costs which avail funds for utilization in other logistics and supply chain needs such as deliveries (Leblanc, 2019).

Front end inventory management impacting consumer choice and purchases also significantly utilizes the enterprises online app and different search engines to enable customers view different products in different aspects such as color, size and even efficiency in the case of electronics and other practical products. According to AMZ advisors (2019), Amazon has presently embraced the use of drones for delivery of their products to impact consumer experience. While the program has not been fully adopted yet, with the installation of an Amazon branded landing mat customers will be able to have a 30 minute or less deliver. This technology for starters will only be available within the biggest Amazon online markets across the globe and will also require a less than 15 miles distance from the nearest drone-enabled warehouses (Johnson, 2020). All these technological enhancements to the company’s outbound supply chin significantly impact customer experience, engagement maintaining the company’s market share and ensuring continued profitability.

Consumer engagement and Behavior

Engagement

Retailers and brands have a significant challenge of consumer engagement and retention. Grasso (2019) points out that with the increasing rise in consumer expectations, different brands and retailers are tasked with strategizing how to remain afloat in the omni-channel contemporary global market, not only to keep up with the competition, but also to drive consumer awareness and engagement and inspire consumer loyalty. According to Grasso (2019), Amazons’ consumer engagement strategy includes key factors such as technology and feedback, all of which are significant in impacting consumer engagement and loyalty.

Amazon Web Services (AWS, 2020) highlights the use of strategies including: Customer analytics in Demographic data, interest data and engagement data. Using these data Amazon can specify their main market demography and the various products that they are interested in, their favorite mode of engagement including whether physical or online and eventually being able to double down on these with algorithms that improve consumer experience. This is reflected in the consumer behavior in the retail market and towards Amazon in general.

Behavior

While 66% of the US customers typically engage the first search of a new product on Amazon and an even bigger number go to the platform to buy a specific product when they are ready, these numbers are even much more in the UK. Butler (2019) points out that up to 90% of UK shoppers and retail market search and use Amazon for their daily purchases and shopping. While 25% of these have active subscriptions with Amazon prime, another 40% have access to its prime subscription services.

Most Amazon shoppers visit the online retailer at least once a month and just under a fifth once a week, underlining the retail dominance Amazon has gained. Butler (2019) estimates that as many as 15 million people in the UK, just over a quarter of the adult population, are now signed up to Prime, which costs £7.99 a month for unlimited one-day delivery on many items plus film, TV and music-streaming services. A further 13% of people share access through someone else’s account. This underscores the increasing desire for convenience and enhanced consumer experience which Amazon significantly takes advantage of.

A study by mintel (2019) (see Appendix II) further points out that while 70% of the UK population confirm Amazon as their first choice for shopping, 59% confirm that they are loyal to the company and wouldn’t shop anywhere else. Among the reasons highlighted includes 51% who assume it has the cheapest prices, 40% who believe it supports independent retailers and 29% who believe Amazon smile is a good way to give back to charity. However another 45% of the population also believe it is responsible for the closure of physical brick and mortar stores and are thus adopting on account of limited physical stores to shop at (Butler, 2019).

Returns and Reverse Logistics

While outbound supply chain and logistics impact the distribution of different products and services from the warehouse all the way to the customer upon order, sometimes the products are denied or returned by customers for one reason or another. Mayersen (2019) highlights that, as a result of the significantly popular 30-day return policy by Amazon, a large amount of products amounting to billions of dollars are returned back to the company’s warehouses every year for different reasons by different customers. This impacts the need for development of a returns and reverse logistics strategies.

Mayersen (2019) confirms that among the strategies Amazon Applies include repackaging and reselling these products as new products depending on the condition and how long the customer took to return them, or resell them as used products for a substantial fraction of its original amount. A substantial amount of these products are eventually sold to massive liquidation sites that sell them in bulk for a fraction of the prices. Meyersen (2019) confirms that Amazon uses Liquidation.com as one of its main return resellers contributing up to $7 billion throughout the company’s lifetime.

Corporate Social Responsibility

Corporate Social responsibility is currently among the most significant factors that impact business performance and stakeholder interests. Given the wide range of stakeholders involved in different businesses with varied needs and requirements to be fulfilled by Companies, organizations are not only obliged to comply with CSR considerations but have to comply in Order to attract consumers as well as profitability and success. Amazon engages in CSR strategies that target main stakeholder groups including: Customers, employees as well as the community.

Customers: Amazon CSR strategies and considerations place the highest priorities on consumers given their consideration as the primary determinants of its e-commerce business success in direct purchase revenues. Ferguson (2017) premises that in a bid to satisfy the needs of the customers as the primary stakeholders which include: Fair pricing, service convenience and online secure transactions with the company, the company emphasizes and capitalizes in using digital technology for delivering high quality services. This includes use of advanced information and communication technologies for secure transactions and for efficient purchase and delivery processes, as well as effective training of employees to maximize on the benefits of these technologies. Through unique market mixing strategies the company can also effectively eat competitors in pricing impacting lower prices for the customers (Fugerson, 2017).

Employees: Dudovskiy (2020) highlights that Amazon further values its employees as essential determinants of organizational performance and CSR policies and programs. Their major interests being competitive compensation and career development, Amazon engages in CSR activities to enable their satisfaction including facilitating the development of new ideas to significantly increase business efficiency. The company also engages in leadership development and an appropriate compensation policy based on the organization’s high growth potential.

in addition the companies consistent growth increasingly create opportunities for employee growth especially in leadership and management positions offering regular opportunities of interest and development to their employees. Howland (2017) confirms that the firm has additional HR strategies for ensuring growth and retention of their employees to further impact business performance. Pivot design, the retention strategies according to Howland (2017) offers underperforming employees a chance for performance improvement rather than firing with an option for voluntary resignation with severance benefits.

Communities: Ferguson (2017) points out that the interests of communities include development and support in order to impact standards of living and individuals well being. This could be through education, healthcare and environmental conservation. Amazon addresses the interests of the community in their CSR strategies including development of support systems and participation in charity events through its primary community support arm, Amazon Smile. For instance a percentage of sales revenues are donated to customers’, chosen charitable organizations and community development projects which impact the development of communities around there the company operate and where their warehouses are located. Dudoviskiy (2020) also highlights that the company has created an Amazon relief fund with an initial contribution of $25 million dollars to help deal with the negative impact of Covid 19 pandemic on business.

Challenges and Recommendation

Challenges

Despite the effectiveness of the outbound supply chain at Amazon, just like any other company and as a result of the rapidly changing market trends, consumer needs, taste and preferences, the companies supply chain still undergoes a number of challenges. Juneja (2015) points out the existence of major challenges with regards to logistics and delivery service, their robotics and machinery used in the warehouses are also up to 10 years old impacting a reduction in efficiency and in addition a number of brands are concerned about losing their brand identity.

According to Veeraraghavan and Abdallah (2019) the company is currently facing a serious delivery crisis given the ending of contracts with the transport and logistics companies they used. FedEx having terminated both air cargo shipment and ground shipping contracts with Amazon leaves the company with only U.S postal services and third party delivery companies in its other countries of operation. This presents a challenge given the company’s policy for fast and onetime deliveries.

Tompkins (2018) further insists Amazon has supply chain challenges too citing that the robotics and automated systems adopted by the company for warehouse management and organization are also about 10 years old and by the standards of machines are significantly depreciated in terms of effectiveness and efficiency thereby providing a challenge in the supply chain. Tompkins (2018) further points out brands associated with the company which have significantly contributed towards its robust and diverse supply chain are pulling out of contracts with concerns of losing their own brand identity. Having developed a big reputation and brand name of itself and forwarding all the transactions between the different brands and the customers, these brands are denied direct contact with customers and thus significantly impacts loss of brand identity. The exit of these brands from Amazon presents a challenge in the company’s supply chain with regards to suppliers.

Recommendations

Despite these challenges and a wide range of others the company is big and innovative enough to be able to handle these concerns and forge forward with their growth and profitability. Among the various recommendations f managing these challenges includes:

Developing or absorbing a transport and logistics company and branch to specifically deal with the delivery of Amazon orders in all locations to enable a faster and more guaranteed delivery. This could effectively compliment the drone delivery strategy to further improve the efficiency of the company’s delivery.

Regular maintenance and a refurbishment program could be adopted to enable the maintenance and revival of the depreciating automation and robotics system so as to further boost efficiency. This could further be digitized with the emergent technologies such as Internet of Things to further enhance efficiency.

In addition to developing their own production system, Amazon can also enter into contracts with more brands and allow more intensive brand inventory control so as to enable the enhancement and empowerment of individuals’ brands. This effectively impacts consumer experience and partner brand satisfaction

Conclusion

Amazon boasts of a highly strategic supply chain management system which ensures a very effective and efficient outbound supply chain system. Combining an Omni-channel inventory management system with highly efficient and innovative technological applications in its warehousing activities as well as a superlative transport and delivery system the company can maintain its competitive advantage and stay ahead of its competitors thereby impacting increased growth and profitability.

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