TUTORIAL 1

SUPPLY CHAIN MANAGEMENT

Kartik Sharma

19BBA10015

CASE STUDY: Amazon

Online Sales Amazon sells books, music, and many other items over the Internet and is one of the
pioneers of online consumer sales. Amazon, based in Seattle, Washington, started by filling all orders
using books purchased from a distributor in response to customer orders. As it grew, the company
added warehouses, allowing it to react more quickly to customer orders. In 2009, Amazon had about 20
warehouses in the United States and another 30 in the rest of the world. It uses the U.S. Postal Service
and other package carriers such as UPS and FedEx to send products to customers. Outbound shipping-
related costs at Amazon in 2009 were almost $2 billion. With the Kindle, Amazon has worked hard to
increase sales of digital books. As of 2009, Amazon offered more than 460,000 books in digital form. The
company has also added a significant amount of audio and video content for sale in digital form.
Amazon has continued to expand the set of products that it sells online. Besides books and music,
Amazon has added many product categories such as toys, apparel, electronics, jewelry, and shoes. In
2009, one of its largest acquisitions was Zappos, a leader in online shoe sales. This acquisition added a
lot of product variety. According to the Amazon annual report, this required creating 121,000 product
descriptions and uploading more than 2.2 million images to the Web site! In 2010, another interesting
acquisition by Amazon was diapers.com. Unlike Zappos, this acquisition added little variety but
considerable shipping volumes.

Q.1 Why is Amazon building more warehouses as it grows? How many warehouses should it have and
where should they be located?

Ans. As it grows, the company added warehouses, allowing to react more quickly to consumer response
It is clear that when the number of warehouses increases the response time decreases and when the
number of warehouses decreases the response time increases. So, by increasing the number of
warehouses and locating those near the customer will improve response time. Amazon has around 50
warehouses, 20 in USA and 30 in the rest of the world. Amazon should build warehouses around the
world more where they have not reached yet or where demand is more considering the other countries.

Q.2 What advantages does selling books via the Internet provide over a traditional bookstore? Are there
any disadvantages to selling via the Internet?

Ans. Advantages: Convenience, customers can browse and buy from home: 24/7 shopping for the
customers; Geographical barriers are absent. Driving customer demand by introducing new books
customer which is not possible in a traditional bookstore. On the online-portal, even if the customer had
no plans/intentions of buying a recommended book, they might actually end up purchasing it as an
impulse buy. This may result in more sales, more customer satisfaction and therefore more profits for
Amazon.

Disadvantages: Response time Transportation cost might be considerable factor.

Q.3 Should Amazon stock every product it sells?

Ans. No…. It should stock those products which are in higher demand.

Q.4 What advantage can bricks-and-mortar players derive from setting up an online channel? How
should they use the two channels to gain maximum advantage?

Ans. The performance of traditional bookstore supply chain can be improved significantly by combining
the strength of the retail and online channels. It is important to realize that the benefits of aggregation
are most significant for low- demand books whose demand is hard to forecast. The book supply chains
should be structured so that retail outlets carry many copies of best sellers for customer purchase and
one copy of low demand books to encourage customers to browse and make impulse purchase.
Terminals or internet kiosks should be provided so that customers wanting to order low demand books
that the bookstore can offer. This approach allows the supply chain to reduce inventories by aggregating
low demand books sold online while keeping transportation costs low for best sellers sold at retail store.

Q.5 What advantages/disadvantages does the online channel enjoy in the sale of shoes /diapers relative
to a retail store?

Ans. Advantages:

• Time to market.
• Flexible pricing, portfolio, promotions.
• Low facility cost.

Disadvantages:

• Transportation cost.
• Response time.
• IT cost.

Q.6 For what products does the online channel offer the greater advantage relative to retail stores?
What characterizes these products?

Ans. Online channel offer the greater advantage for those products having large product varieties. For
example; Netflix offers a much large selection of movies than any video rental store, offering the same
selection at a store would require a huge location with correspondingly large amount of inventory.
Question No 2

Consider the purchase of a can of soda at a convenience store. Describe the various stages in the supply
chain and the different flows involved?

Ans. The stages of supply chain involves:

⇒The supply chain stages comprise customers, retailers, distributors, manufacturers, and raw material
suppliers.

⇒Initially, the supplier provides the raw material to the manufacturer, by getting the order and money
is passed from the manufacturer to the supplier.

⇒The dealer/distributor gives an order to the manufacturer who in turn makes the product and delivers
it in return for money.

⇒The retailer orders it from the distributor and money is passed from the retailer to the distributor.

⇒A customer purchasing a can of soda at a convenience store shows the end of the supply chain, the
money going to the retailer from the store.