Republic of the Philippines

UNIVERSITY OF RIZAL SYSTEM

Binangonan, Rizal

GRADUATE SCHOOL
MBA I
BA 205: Advanced Production and Operations
Management

APPLICATION: INVENTORY MANAGEMENT AT AMAZON.COM

REPORTER: RICLYN D. MOSCOSA, CPA

Brief Background

Jeffrey Preston Bezos, the CEO of Amazon.com, launched the company in 1995 with his sole
aim to earn money without much ado. At first, he aspired for hassle free operations. He wanted
to concentrate more on earning heavily, while satisfying his customers. Amazon.com was
intended to be a “virtual” retailer—no inventory, no warehouses, no overhead—just a bunch
of computers taking orders for books and authorizing others to fill them. Bezos, only wanted
to offer a wide collection of books but did not want to get stuck in opening store and warehouses
and running them smoothly. But things clearly didn’t work out that way. He soon realized that
the only solution to satisfy his customers and enable Amazon to enjoy the benefits of time and
cost-efficiency was to build and maintain its own warehouse.

The Amazon’s Inventory Management costed him about $50 million and to get the money,
Amazon issued $2 billion as bonds. Now, it stocks millions of items of inventory, amid
hundreds of thousands of bins on shelves in over 150 warehouses around the world.

During his first month of operations, Amazon shipped books to 45 different countries. And
within few years, several new e-ventures were introduced posing threat to its operations. So,
Amazon.com expanded its product lines over the years. From just only selling books thru
online, promoting itself as “Earth’s Biggest Bookstore, and launched its site at a time when
bookstore chains such as Barnes and Noble, Waldenbooks and Crown Books were familiar
storefronts in American shopping malls. Amazon’s success with books allowed the e-
commerce giant to expand far beyond its origins. Various products were launched in the next
years following his launching of online bookstore i.e., music & videos in 1998; auctions,
electronics, toys, zshops, home improvement, video games and groceries in 1999, among
others. Selling electronics helped the company grow rapidly and put traditional electronics
stores like Circuit City out of business. It’s also possible that consumers learned new ways to
price-shop; they “unintentionally were able to leverage brick-and-mortar stores as showrooms
for their own products.

In the early 2000s, Amazon realized it had been sitting on a technology gold mine. The
computer systems that powered its online shop were so robust that Amazon figured it could
expand its network and be the backbone of many more online stores.

The company gave the world a glimpse of its enormous ambition when it started making its
own tech devices. It launched the popular Kindle e-reader in 2007, a product that has gone on
to be a category leader. Morgan Stanley estimates that the company sold $5 billion in Kindle
devices in 2014. It also got in on the tablet market with the Amazon Fire HD in 2012, and the
video and audio streaming marketing in 2014 with the Amazon Fire TV — both with moderate
success. Its 2014 Fire Phone — meant to compete with the iPhone and Android phones — was
a total flop, though, and the company took a $170-million hit. It discontinued the phone a year
later. Instead of being burned by its smartphone venture, the company launched its digital home
assistant device, the Amazon Echo, in 2015. The company was the first to release such a device,
which doubled as a home speaker and came packaged with Alexa, the voice-commanded
artificial intelligence that can answer questions, make orders on Amazon, and play music.

When Amazon Studios launched in 2010, few in Hollywood knew what to make of the nascent
production company’s ambitions. The fledgling division solicited online script submissions,
receiving thousands of screenplays for feature films and television pilots but developing few
of them.

Run by former Walt Disney Co. executive Roy Price, Amazon’s foray into original
programming started modestly, with series including the John Goodman political satire “Alpha
House” that premiered in 2013, and the detective drama “Bosch” in 2015. Though its quirky
“Mozart in the Jungle” and “Transparent” won industry plaudits, Amazon was still seen as an
also-ran to Netflix’s booming original content strategy.

Then in 2017, Amazon made history by becoming the first streaming company to score an
Oscar nomination for best picture, with the Casey Affleck drama “Manchester by the Sea.”
Amazon paid an eye-popping $10 million for the domestic rights to the film at the 2016
Sundance Film Festival.

The company also launched a music-streaming subscription, Amazon Music Unlimited, to

compete with Pandora and Spotify.

Amazon has long aspired as a grocer, starting in 1999 when it invested millions in
HomeGrocer.com, a first-of-its-kind online supermarket that was ultimately doomed by the
dotcom bust.

It wasn’t until 2007 that the company launched its first grocery delivery service, AmazonFresh,
rolling it out slowly by invitation-only to residents of the affluent Seattle suburb of Mercer
Island. Pick-up locations were later added in nearby Kirkland and Bellevue.

In 2013, AmazonFresh expanded to Los Angeles and San Francisco. More cities have been
added, including San Diego, New York, and Philadelphia as well as Tokyo and London.

AMAZON.COM ONLINE ORDERING PROCESS

1. You order items in Seattle takes charge. A computer assigns your order to one of Amazon’s
massive U.S. distribution centers

2. The “flow meister” at the distribution center receives your order and determines which
workers go where to fill your order.

3. Amazon’s current system doubles the picking speed of manual operators and drops the error
rate to nearly zero.

4. Your items are put into crates on moving belts. Each item goes into a large yellow crate that
contains many customers’ orders. When full, the crates ride a series of conveyor belts that wind
more than 10 miles through the plant at a constant speed of 2.9 feet per second. The bar
code on each item is scanned 15 times, by machines and by many of the 600 workers. The goal
is to reduce errors to zero—returns are very expensive.

5. All items converge in a chute and then inside a box. All the crates arrive at a central point
where bar codes are matched with order numbers to determine who gets what. Your three items
end up in a 3-foot-wide chute— one of several thousand—and are placed into a corrugated box
with a new bar code that identifies your order. Picking is sequenced to reduce operator travel.

6. Any gifts you’ve chosen are wrapped by hand. Amazon trains an elite group of gift wrappers,
each of whom processes 30 packages an hour.

7. The box is packed, taped, weighed, and labeled before leaving the warehouse in a
truck. A typical plant is designed to ship as many as 200,000 pieces a day. About 60% of orders
are shipped via the U.S. Postal Service; nearly everything else goes through United Parcel
Service.

8. Your order arrives at your doorstep. In 1 or 2 days, your order is delivered.

AMAZON.COM INVENTORY MANAGEMENT

QUESTION: Managing inventory is one of the most important tasks of a retailing company. If
there are no enough goods in stock some of the customers might be disappointed. Stocking too
many will reduce the profit margins. Do you think Amazon.com adopted the right strategy
while trying to manage its inventory? Was it successful in its task?

- Bezos (CEO) aimed at “hassle-free operations”, customer satisfaction, time, and cost
efficiency.
- Building warehouse cost was around $50 million and to finance this Amazon issued $2 billion
as bonds
- In 1999, Amazon added 6 warehouses (10 in total) in Nevada, Kansas, Kentucky, Georgia
and North Dakota. But now, they have over 150 warehouses around the world.
- It increased its warehousing capacity from 3,00,000 sq ft to 5 million sq ft
- The return rate was only 0.25% compared to the return rate of 30% in many segments of the
online retail industry
- Excellent use of technology – coding, computer signals, etc.
- Systematic Procedure
- Developed proprietary software (Appath cloud software, Brightpearl, etc.)
- In 1999, adopted the strategy to store all possible product range
- In 2000, Amazon managed to reduce the size of its inventories because of efficiently
managing the warehouse
- Careful decision about product, supplier and distribution center, i.e., which product to Buy
from where and which center it would send its product to.
- Decided to buy its books, CDs, videos etc. from publishers
- Maintained good relationships with vendor
- Huge investment in infrastructure (revamped the layout of its warehouse) and
technology (refining its software helped in demand forecasting)
- Aimed at cutting down expenses via outsourcing some of the routine activities
- Partnered with other companies for shipping the inventory

QUESTION: How Does Amazon Manage Inventory?

Amazon distribution strategy is built on several operation models aimed at reducing costs,
boosting Amazon supply chain acceleration, and maximizing efficiency.

Lean Inventory Management

Lean inventory management is an operations model of having a sufficient minimum of

inventory to cover the demand. The secret of this model is in forecasting and balancing the
level of stock, as freezing too much inventory is harming your business economy.

Amazon uses sophisticated AI-based software to refine Amazon supply chain management for
cost optimization. Amazon AWS company implements advanced computer-based technologies
of Big Data processing, involving artificial intelligence solutions, blockchain and cloud
technologies, etc.

The Amazon Managed Blockchain Quick Start allows customers to set up and manage a
scalable blockchain network; the Improving Forecast Accuracy with Machine Learning
solution generates, tests, compares, and iterates on Amazon Forecast forecasts; Data Lake on
AWS allows automated reference implementation that deploys a highly available, cost-
effective data lake architecture on the AWS Cloud along with a user-friendly console for
searching and requesting datasets.

Vendor Managed Inventory (VMI) is an operations model where suppliers restock products
when it’s time to reorder. With this model, third-party sellers control their products supply
within a retailer’s inventory. They send their inventory to Amazon’s warehouses, and Amazon
takes care of the fulfillment.

Digitizing Warehouse and 3PL

With the gigantic warehouse operations volumes, Amazon needs to optimize and streamline
all of its processes. To manage this huge stock, they involve third-party logistics (3PL).
Partnering with 3PL providers helps save time, money, and warehouse space.

To efficiently manage distribution and fulfillment processes, Amazon automates and

digitalizes its warehouses, extensively applying mobile barcode scanners and wearables.
Mobile devices enable a 24/7 cycle of order processing, item picking, and shipping, as well as
real-time visibility of stock status and levels. Mobile barcoding increases visibility and
accuracy.

Real-time integration with the central and multi-layer backend system, like an ERP or WMS
software, ensures accurate information across geographically distributed locations. Also, live
mobile inventory control connects multiple facilities in a unified supply chain.
Question: Why Is Amazon Outsourcing Its Inventory Management?

In early 2001, Amazon decided to outsource its inventory management with a reason to earn
more profits and keeping a stock of frequently purchased/ popular items. Amazon acted as a
trans-shipment center between distributor to the customer

Main Distributors:
Ingram Micro – wholesale distributor, handled books & computer
Cell Star – handled cell phone sales

In August 2001, Amazon entered into an agreement with Ingram Micro Inc (largest wholesale
dealer of electronic goods & SCM services) to provide logistics & order fulfillment services
for desktops, laptops etc. at computer store at Amazon.com. The aim was to maximize
operating efficiencies, streamline supply chain logistics and reduce inventory costs

Amazon’s supply chain is dependent on the outsourcing of Amazon inventory management.

The infrequently ordered products are not stored in regular Amazon warehouses. Over 50% of
Amazon’s sales are done by third-party sellers, who restock products when the stock is low.

Amazon earned huge sums of money, their sales increased to a considerable amount of
percentage every year and therefore, steps were taken to improve the inventory. But as the sales
increased, Amazon’s inventory ballooned by 650%. Experts say, “When a company manages
inventory properly, it should grow with its sales growth rate”, they noted, when inventory
grows faster than sales, “it means simply that they are not selling as much as they are buying.”
In this particular scenario, people at Amazon thought it in their best interests to outsource
Amazon’s Inventory Management.

Although, Amazon did great business and earned the reputation of providing great customer
service when it managed its inventory however, it wanted to concentrate on its important
activities and outsource its Inventory Management to earn profits. The people at Amazon had
an idea that outsourcing Amazon’s inventory management would damage their hard-earned
reputation. In spite of that, they decided to go ahead with their decision to outsource their
inventory.

Outsourcing inventory allows Amazon to reduce redundant inventory; frees up working capital;
allows the right products in the right quantity to the right place at the right time.

Amazon achieved its goal, i.e., to make money while ensuring great customer services.
Amazon inventory management outsourced holds products that are high in demand, and if any
customer asks for a product that is not in Amazon’s inventory, it is then, ordered to the
distributors and sent to the client.

References:

https://www.latimes.com/business/la-fi-amazon-history-20170618-htmlstory.html
https://appath.com/blog/why-amazon-outsourced-its-inventory-management/
https://sageseller.com/blog/amazon-inventory-strategy-why-amazon-outsourced-its-
inventory-management/
https://www.logiwa.com/blog/amazon-inventory-management-system