Document Innovate Page 1 of 3 ‘THE WALL STREET JOURNAL, Toy Wars Il: Holiday Cyber Battle Begins -- Amazon Vows to Avoid Mess Of 1999 Christmas Rush; Too Many Kermit Phones Wall Street Journal; New York, N.Y.; Sep 25, 2000; By Nick Wingfield; ‘Sic:454110 Edition: Eastern edition Start Page: B.I ISSN: 00999660 Subject Terms: Strategic planning Electronic commerce Postal & delivery services Companies: Amazon.com Abstract: Inside the company, however, things were a mess. As the result of a frantic expansion strategy in 1999 that saw it open four more distribution warehouses and two new online product stores, Amazon was mired in logistical kinks that drove its costs up sharply. Eager hot to alienate customers with out- of-stock items, Amazon had bought far too much inventory -- including such things as a 50-week supply of Kermit the Frog telephones -- leading to a major charge against earnings for unsold goods. Inexperienced temporary workers led to glitches and delays in Amazon's shipment centers. In the all-important toy category, the company believes it has solved its purchasing and inventory problems by partnering with Toysrus.com, the Internet operation of Toys "R" Us Inc. Under their agreement, the burden of purchasing and owning most of Amazon's toy inventory now lies with Toysrus.com. Amazon, in turn, handles toy shipments, the operations of the toy Web site and all of the toys in its warehouses. Amazon executives say partnering with the world's second-largest toy retailer has given its online store better access to toys and for better terms Amazon also wants to mitigate the human toll. For years, employees at Amazon's corporate headquarters, from Chief Executive Jeff Bezos on down, have pitched in at the company's warehouses at Christmas time. When Amazon had only a couple of warehouses, including one conveniently located near its Seattle headquarters, the work was greeted enthusiastically by many employees. Full Te} Copyright Dow Jones & Company Inc Sep 25, 2000 SEATTLE ~- On Dec. 24 last year, Amazon.com Ine. filled its last pre-Christmas order, a shipment to a customer in Hawaii. With a mixture of exhaustion and exhilaration, company executives declared Amazon "clean," meaning that every order for a book, toy, compact disk or other item that Amazon had in stock was packed and shipped. By most accounts its customers were happy. Inside the company, however, things were a mess. As the result ofa frantic expansion strategy in 1999 that saw it open four more distribution warehouses and two new online product stores, Amazon was mired in logistical kinks that drove its costs up sharply. Eager not to alienate customers with out-of-stock items, ‘Amazon had bought far too much inventory -- including such things as a 50-week supply of Kermit the Frog telephones -- leading to a major charge against earnings for unsold goods. Inexperienced temporary workers led to glitches and delays in Amazon's shipment centers. "Behind the scenes, it was a bit ragged," says David Risher, the senior vice president in charge of Amazon's USS. online stores, With memories of Christmas past still haunting it -- and investors and customers no longer forgiving the http://proquest.umi.com/pqdweb?TS=1027965335&RQT=309&CC=2&Dtp=1&Did=0000000609C 7/29/02Document Page 2 of 3 foibles of dot-coms -- Amazon vows that things will be different this fall. The online giant says that already it has begun managing its inventory better. It is grouping items like DVDs and DVD players together in its shipping facilities -- last year, in an illogical arrangement blamed on the company's rapid growth, the players and disks were housed in different states. The company says it has begun using demand-forecasting tools that will help minimize shipping costs, which have been a drag on its profitability. For instance, Amazon has started estimating how heavy demand will be for, say, a Palm hand- held computer by ZIP code, then sending what it hopes will be the proper inventory to the warehouse that supplies each area. In the all-important toy category, the company believes it has solved its purchasing and inventory problems by partnering with Toysrus.com, the Internet operation of Toys "R" Us Inc. Under their agreement, the burden of purchasing and owning most of Amazon's toy inventory now lies with Toysrus.com. Amazon, in turn, handles toy shipments, the operations of the toy Web site and all of the toys in its warehouses. ‘Amazon executives Say partnering with the world’s second-largest toy retailer has given its online store better access to toys and for better terms, Amazon also says its staff will be better prepared and trained this year. Temporary employees at its warehouses, for instance, will be assigned only to gift-wrapping, packing of single items and other jobs “where they can’t impact the customer experience," says Jeffrey A. Wilke, Amazon's senior vice president of operations. More critical jobs will be handled by better-trained permanent workers. This year, Amazon has added pressure to do better Investors have grown increasingly impatient with the company's steep losses, and disappointing sales last quarter added to the restlessness. While Amazon's massive investments in new warehouses last year were largely praised as a way to build for the future, and glitches in the new facilities were excused, Wall Street will be less forgiving this year if the company can't demonstrate that its operations are running smoothly. ‘The stakes are especially high at Christmas, Amazon's most punishing ~ and important - season, Last year, the company brought in 41% of its sales in the fourth quarter. As the holiday shopping season approached last year, Amazon was scrambling to complete four massive distribution centers spread across the country that were designed to make it easier to ship packages quickly to customers anywhere in the U.S. The huge warehouses were built to handle Amazon's heady expectations for the future -- like building a size-12 shoe for a size-three foot that was growing fast. ‘The new facilities were chaotic. At Amazon's McDonough, Ga., warehouse, workers needed to wear hard hats as they wrapped books, compact disks and other gift orders because the warehouse's interior was still being constructed. Temporary employees brought in for the Christmas crush were thrown into critical jobs like receiving and putting away product shipments without proper training in Amazon's inventory tools. Amazon's management of its inventory was often sloppy. With some customer orders, shipments of the various products came from different warehouses. While the customer paid Amazon only one shipping charge, Amazon had to pay its shippers twice or even more. "We got reamed on shipping,” says Mr. Wilke. Last Christmas, he admits, "there were some pretty gaping holes" in Amazon's processes. ‘Amazon had other distractions that added to its internal woes. The company expanded into two important produet categories, electronics and toys, in July of last year. For more experienced retailers, launching into http://proquest.umi.com/pqdweb?TS=1027965335&RQT=309&CC=2&Dtp=1 &Did=0000000605... 7/29/02Document Page 3 of 3 those areas with so little time before the holidays would be almost unthinkable. Most retailers make their Christmas toy purchases at an industry February, which meant Amazon had to scramble to get the items it wanted, Amazon said it ended up getting most of the toys it wanted, but because it didn't have a track record in its new product categories, the company had little negotiating power with suppliers, As a result, Amazon ended up buying the dregs of some suppliers’ product lines just so it could get hotter items. Among the duds it reluctantly purchased: the Kermit the Frog telephone from Vtech Holdings Ltd. The company went overboard on all of its product ordering just to make sure it could meet customer demand. After the Christmas chaos had settled, Amazon had so much unsold stock, primarily in toys and electronics, that it was forced to take a $39 million charge for the fourth quarter. "We bought everything," says Mr. Wilke. "We knew we're going to throw stuff away." Amazon executives say they are now much better at ordering accuracy and that the company has far more leverage with suppliers. Electronics, for one, has become Amazon's second-largest business after books. "A year later you say, “I don't think frog phones are going to be hot this year," says Amazon's Mr. Risher. ‘Amazon also wants to mitigate the human toll. For years, employees at Amazon's corporate headquarters, from Chief Executive Jeff Bezos on down, have pitched in at the company's warehouses at Christmas time. When Amazon had only a couple of warehouses, including one conveniently located near its Seattle headquarters, the work was greeted enthusiastically by many employees. Last year, however, Seattle employees were shipped off to work long shifts at Amazon's Fernley, Nev., warehouse, some doing stints for as long as five weeks, There was widespread grumbling among workers who had to car pool 45 minutes each way between the warehouse and hotels in Reno. Amazon isn't about to eliminate the tradition this year, which Mr. Bezos regards as a great way to keep corporate employees in touch with the mechanics of the business. "It's a great experience,” Mr. Bezos says. But the company will make the warehouse stints easier on workers. Mr. Wilke estimates that about 200 employees will go to Fernley for about 10 days each this year. Amazon will serve food at a Reno hotel around the clock for returning workers, who will be shuttied on buses this year. Company-sponsored snowboarding trips also are in the works. “It shouldn't be conscription and purgatory,” says Mr. Wilke. "It's voluntary.” (See related article: "E-Business: Two Big Online Toy Sellers Fight Over Delivery Speed And Exclusive Products" -- WSJ Sept. 25, 2000) taff Reporter of The Wall Street Journal Reproduced with permission of the copyright owner. Further reproduction or distribution is prohibited without permission. http://proquest.umi.com/pqdweb?TS=1027965335&RQT=309&CC=, |&Did=000000060%... 7/29/02