Business Process Improvement Assignment: Optimizing Freight Cost for Amazon

Introduction

Amazon is one of the largest and most successful e-commerce companies in the world, offering a
wide range of products and services to millions of customers across the globe. According to its
2022 annual report1, Amazon had over $386 billion in net sales, over $21 billion in net income,
and over 1.3 million employees in 2022. Amazon operates in various segments, such as online
retail, cloud computing, digital streaming, artificial intelligence, and smart devices. Some of its
main competitors are Walmart, Alibaba, Microsoft, Google, and Netflix.

One of the key factors that contributes to Amazon’s success is its efficient and innovative
logistics and delivery system, which enables it to offer fast and reliable shipping options to its
customers, such as Prime delivery, same-day delivery, and drone delivery. However, despite its
advantages, Amazon also faces some challenges and inefficiencies in its freight management
process, which affects its profitability and customer satisfaction.

Problem Statement

The problem that I seek to improve is the high freight cost that Amazon incurs due to various
factors, such as:

 Increasing demand for fast and free shipping from customers, which puts pressure on
Amazon to use more expensive modes of transportation, such as air freight and express
delivery.

 Rising fuel prices and transportation tariffs, which increase the cost of moving goods
from suppliers to warehouses and from warehouses to customers.

 Inefficient routing and scheduling of trucks and drivers, which leads to wasted time, fuel,
and capacity.

 Lack of visibility and coordination among different stakeholders involved in the freight
process, such as suppliers, carriers, warehouse managers, and delivery agents.

According to a report by Morgan Stanley2, Amazon spent about $61 billion on shipping costs in
2022, which accounted for about 16% of its net sales. This was an increase of about 37% from
2021, when it spent about $44 billion on shipping costs. The report also estimated that Amazon’s
shipping costs could reach $90 billion by 2023 if it does not improve its freight efficiency.

The high freight cost not only reduces Amazon’s profit margin, but also affects its customer
loyalty and retention. According to a survey by AlixPartners3, about 36% of online shoppers said
they would switch to another retailer if their preferred delivery option was not available or too
expensive. Moreover, about 28% of online shoppers said they would abandon their cart if the
delivery cost was too high.
Therefore, it is imperative for Amazon to optimize its freight cost by implementing business
process improvement strategies that can enhance its operational efficiency and effectiveness.

Proposed Solution

The proposed solution for reducing Amazon’s freight cost is to adopt a holistic and data-driven
approach that involves the following steps:

 Analyzing the current state of the freight process and identifying the root causes of
inefficiencies and waste using tools such as SIPOC (suppliers, inputs, process, outputs,
customers) diagram4 and FMEA (failure mode and effects analysis) matrix.

 Designing the future state of the freight process and defining the desired outcomes and
metrics using tools such as SMART (specific, measurable, achievable, relevant, time-
bound) goals and KPIs (key performance indicators).

 Implementing the changes required to achieve the future state using tools such as PDCA
(plan-do-check-act) cycle and DMAIC (define-measure-analyze-improve-control)
methodology.

 Monitoring and evaluating the results of the changes using tools such as dashboards and
balanced scorecards.

The following is a brief description of each step:

 Analyzing the current state: In this step, I would use a SIPOC diagram to map out the
main elements of the freight process, such as who are the suppliers (e.g., manufacturers),
what are the inputs (e.g., raw materials), what are the activities involved in the process
(e.g., loading, transporting), what are the outputs (e.g., finished goods), and who are the
customers (e.g., end-users). I would also use a FMEA matrix to identify the potential
failures that could occur in each activity (e.g., delays, damages), their causes (e.g.,
weather conditions), their effects (e.g., customer dissatisfaction), their severity (e.g.,
high), their occurrence frequency (e.g., medium), their detection difficulty (e.g., low), and
their risk priority number (RPN) (e.g., 8). This would help me to prioritize the areas that
need improvement based on their impact on the freight cost and performance.

 Designing the future state: In this step, I would use SMART goals to define the specific,
measurable, achievable, relevant, and time-bound objectives that I want to achieve by
improving the freight process. For example, one of the goals could be to reduce the
freight cost by 10% in one year. I would also use KPIs to measure the progress and
success of the goals. For example, one of the KPIs could be the average cost per
shipment. I would also benchmark the best practices and standards of the industry and
competitors to set realistic and challenging targets for the goals and KPIs.
  Implementing the changes: In this step, I would use the PDCA cycle to plan, do, check,
and act on the changes required to achieve the future state. For example, one of the
changes could be to implement a dynamic routing and scheduling system that can
optimize the routes and schedules of trucks and drivers based on real-time data and
factors, such as traffic conditions, weather conditions, customer preferences, and delivery
deadlines. This would help to reduce the travel time, fuel consumption, and idle time of
trucks and drivers. I would also use the DMAIC methodology to define, measure,
analyze, improve, and control the changes using data and statistical tools, such as
histograms, Pareto charts, control charts, and hypothesis tests. This would help to identify
the root causes of variation and waste in the freight process and implement solutions that
can eliminate or minimize them.

 Monitoring and evaluating the results: In this step, I would use dashboards to visualize
and communicate the results of the changes using charts, graphs, tables, and indicators.
This would help to track and compare the performance of the freight process before and
after the changes using the KPIs. I would also use balanced scorecards to align and
balance the results with the strategic goals and objectives of Amazon using four
perspectives: financial (e.g., freight cost), customer (e.g., delivery satisfaction), internal
(e.g., process efficiency), and learning and growth (e.g., innovation). This would help to
evaluate the overall impact and value of the changes on Amazon’s competitive advantage
and long-term success.

Underlying Technologies

The proposed solution would require various underlying technologies that can support and
enable the changes in the freight process. Some of these technologies are:

 Cloud computing: This is a technology that allows Amazon to access, store, process, and
analyze large amounts of data from various sources (e.g., suppliers, carriers, warehouses,
customers) using remote servers over the internet. This helps to reduce the cost and
complexity of managing IT infrastructure and resources, as well as enhance the
scalability and security of data.

 Artificial intelligence: This is a technology that allows Amazon to use machine learning
algorithms and models to learn from data and make predictions and decisions based on
patterns and trends. This helps to improve the accuracy and efficiency of routing and
scheduling systems, as well as optimize inventory management and demand forecasting.

 Internet of things: This is a technology that allows Amazon to connect various devices
(e.g., trucks, scanners, sensors) to each other and to the internet using wireless networks.
This helps to collect and transmit real-time data on various aspects of the freight process,
such as location, speed, temperature, weight, etc.
  Blockchain: This is a technology that allows Amazon to create a distributed ledger that
records transactions among different parties involved in the freight process (e.g.,
suppliers, carriers, warehouses) in a secure and transparent way. This helps to reduce
fraud, errors, disputes, and intermediaries in the freight process.

Conclusion

In conclusion, Amazon is a leading e-commerce company that faces high freight cost due to
various factors that affect its logistics and delivery system. To reduce its freight cost, I propose a
solution that involves analyzing the current state of the freight process using SIPOC diagram and
FMEA matrix; designing the future state of the freight process using SMART goals and KPIs;
implementing the changes required using PDCA cycle and DMAIC methodology; monitoring
and evaluating the results using dashboards and balanced scorecards. The solution also requires
underlying technologies such as cloud computing, artificial intelligence, internet of things, and
blockchain to support and enable the changes in the freight process. By implementing this
solution, Amazon can optimize its freight cost and improve its operational efficiency and
effectiveness, as well as enhance its customer satisfaction and loyalty, and maintain its
competitive edge and long-term growth.
Netflix’s global expansion has indeed faced several regulatory challenges. Here are some key
points:

1. Netflix must secure content deals region by region, and sometimes country by country1.

2. It also must face a diverse set of national regulatory restrictions, such as those that limit
what content can be made available in local markets1.

3. Netflix faced regulatory compliance issues in its targeted markets, competition with
domestic competitors, and the need to satisfy local preferences23.

4. Heightened risks include greater regulatory and censorial interference with its operations,
higher ‘localisation’ costs and the lack of adequate delivery channels in many of its
newly targeted markets4.

These challenges highlight the complexities of international expansion for streaming services
like Netflix. Despite these hurdles, Netflix has managed to establish itself as a global force in the
video streaming industry21.

Learn more:

1. hbr.org2. hbsp.harvard.edu3. fernfortuniversity.com4. fitchsolutions.com— see less

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According to (Zhang, 2021)

BMI Article

Eight Challenges To Netflix's Global Expansion

Telecommunications / Global / Wed 13 Jan, 2016

Netflix's global rollout is a laudable achievement but faces significant investment and operational
challenges. Heightened risks include greater regulatory and censorial interference with its
operations, higher 'localisation' costs and the lack of adequate delivery channels in many of its
newly targeted markets. The upside is that Netflix appears to have succeeded in convincing
content producers to take a global approach to licensing, abandoning the traditional country-by-
country model that hampers content consumption by a core segment of Netflix's audience: the
on-the-move millennial.

Through its global player application, Netflix is now technically available in 194 of the 197
countries in the world, with China being the only significant omission from that footprint. Global
coverage has been attained one year earlier than expected but it seems that, in its rush to achieve
its goal, some fundamental regulatory and technical issues have been compromised. Investors
and the stock markets will not be kind to the leading streaming video service provider if it cannot
solve these problems in the short to medium term. BMI has identified at least eight inter-related
challenges facing Netflix as a global provider.

Language Barriers And Local Relevance

Much of the content technically accessible anywhere in the world is available only in English.
Subtitles in 20 languages are available, but omit key African, Asian and Eastern European
languages; this limits the appeal of the service in many countries worldwide. Creating subtitles
for all of its content will be an expensive and time-consuming task and we are not surprised that
Netflix chose to launch as soon as possible rather than wait for more languages to be added to the
platform. It does, however, give local pay-TV providers and emerging rival streaming video
service providers an edge in the meantime. That edge will be hard to deflect even with local
language subtitles if popular 'local' content and programming is not offered on Netflix. We
believe Netflix will find it hard to persuade audiences to forsake trusted providers if its catalogue
lacks known 'brands' or if content has little relevance or interest.

Increased Regulatory/Censor Scrutiny

The tone and topicality of many of the premium films and TV shows that helped Netflix build its
business in North America and Europe will be found to be objectionable on multiple levels in
many of its new target markets. Political, religious and cultural sensitivities must be respected
and it is far from clear how - or even if - Netflix is working with local regulators and content
censors to ensure that its programming does not violate local laws. Already, objections have been
raised by regulators in India, Indonesia and certain African states. Failure to submit to increased
scrutiny will result in formal blocking of Netflix services, fines and a tougher crackdown on
illegal accesses facilitated by virtual private network (VPN) connections.

High Cost Of 'Ownership'

Although a uniform low price has been set by Netflix for the global service, the average
subscription fee of USD7.50 per month will be beyond the means of consumers in many
emerging markets, providing little incentive for subscribers to switch from trusted cable and
satellite TV services or from the IPTV or streaming services they already get from their
telco/broadband provider. The cost of 'ownership' is pushed higher as streaming requires both a
connected device (smart TV, smartphone, tablet) as well as a high-quality broadband connection.
Many emerging markets lack adequate wireline broadband infrastructure outside the main
population centres, while streaming over mobile broadband is either very expensive for the end
user or subject to 'throttling' by telcos, even those professing to offer 'unlimited data' packages.

In many emerging or frontier markets, piracy of traditional pay-TV services is endemic; even
Netflix can be accessed illegally using VPN connections. There will be little incentive for such
consumers to switch to paid services.

Netflix Tunes In To Streaming Trends

Netflix Subscriptions (000)

Source: Netflix

Billing/Payment
Netflix customers typically pay for their subscriptions through credit cards, although Latin
American expansion was achieved through the use of prepaid cards that unlock access for a
certain period of time. By going global, Netflix will be entering markets where credit card use is
very low, where usage of formal banking services is patchy and where access to retail outlets
stocking prepaid cards may also be problematic. The company must find new ways of allowing
customers to pay for subscriptions, particularly in Asia and Africa where cash payments are the
only realistic option for consumers.

Content Licensing

In announcing the new global service, Netflix noted that every new dollar it will spend on
content will be for content with global licensing rights. This unequivocal statement suggests that
this applies as much to content licensed from third parties such as TV studios and film
companies as to original content that Netflix produces itself. It is far from clear that this is the
case and it is difficult to believe that enough major content producers have agreed to uniform
fixed-term global licensing fees when tiered fees applied to different markets around the world
would yield much higher overall revenues over varying timeframes. In addition, although sales
of physical media such as DVD have declined markedly, per-unit DVD sales are likely to be
more valuable than income obtainable from streaming deals for key products or brands.

That said, as consumers increasingly want the power to be able to access their digital media
content libraries from anywhere in the world, global licensing would be a significant step
forward in completing the transition from physical to digital consumption/storage. The question
is whether - in the interim - smaller rival streaming providers will have the power to strike
similar deals with content owners. If they cannot do so, it could be said that Netflix is abusing its
dominant position and additional regulatory scrutiny of distribution deals will be needed.

Increased Transparency

Although it is listed and regularly provides key performance indicators (KPIs) relating to
revenues and subscriber numbers by region, Netflix will come under greater pressure to become
more transparent in its reporting processes. In terms of subscription numbers, the company
merely reports total registered and paying memberships in the US and the rest of the world. To
comply with greater regulatory scrutiny, we believe Netflix would have to begin reporting more
detailed country-level information, at the very least; this will be another additional cost that
Netflix will have to bear.

Late To Market

Some of the more mature Asian and Middle Eastern markets Netflix will now enter already have
a thriving subscription video-on-demand market, including a number of high-profile streaming
services. Being late to market is not a significant problem, given that the Netflix brand is almost
completely synonymous with the concept of streaming video, but Netflix will have to work that
much harder to displace rivals.

It is also unclear how Netflix will market its global player service in its 130 new markets. In
some, it will maintain its well-worn strategy of operating as a standalone brand targeting existing
users of high-speed broadband services. At the same time, it will work with consumer electronics
vendors to have the Netflix app pre-installed on new devices or installed as part of operating
system upgrades; this is a strategy that has also worked well for it in North America.

For the most part, the company will have to partner with local telcos, cable TV operators and
broadband providers, arranging for the Netflix application to be integrated into these players'
service packages and user interfaces on home gateway devices, as appropriate. This has proved
to be the most effective way of penetrating TV saturated markets in Europe. However, with
African telcos and broadband providers having invested heavily in their own streaming services
(cf. Iflix, Icflix, Aflix, HQ, Viu, etc), we expect Netflix will find it difficult establishing
commercially viable partnerships in the medium to long term.

The Upside

The way in which video services are consumed will be changed fundamentally by new
technologies and distribution models. Streaming will be a big part of that change and it has
needed a market disrupter like Netflix to force that change. In particular, global content licensing
- such as the model that Netflix seems to have developed - is part of the solution needed to allow
consumers to access their digital libraries regardless of where they are. The European
Commission's efforts to allow location-neutral access to content at the regulatory level is the
other key part of that solution. We therefore take a broadly positive view of Netflix's ability to
force change on the market. However, we do not think the company will easily adapt to the
issues raised by these changes, and this is something investors and the stock market should
consider when engaging with the company.