Inventory management. Amazon - Research Paper Example

?Contents Contents Introduction 2 Aims and Objectives of the research 2 Literature Review 3 Company and market overview 3 Lessons from American Distribution strategy 3 Distribution strategy in Europe 5 Additional Theory 6 The Company today 7 Strategic Framework 8 Conclusion 8 Current Status 9 Future Direction 10 References 11 Introduction Logistics is one of the key issues for any business enterprise; even for service and software enterprises whose output is not physical in nature. It is however, the main consideration for retail businesses. The growth of enterprises in the retail industry has depended on their ability to manage inventory which is a part of the larger process of logistics management. The competitive advantage possessed by a company is also determined by similar factors. Efficient management of logistics allows a company to focus on other activities such as adding value to existing products, etc which indirectly increase the productivity of the organization. However, in today’s business scenario, the retail market has evolved and efficient logistics management is no longer just an advantage, it is the norm. Companies have found several different ways in which to achieve this, usually in alignment with their business models. The use of IT technologies has been one of the main factors that have hastened this process since companies are now able to communicate between offices regardless of the distance that separates them (CILTUK, 2007: 10-11). In order to understand the practical issues concerning inventory management, we examine the case of Amazon in the below report. Aims and Objectives of the research The following case study which examines the case of Amazon reflects on the growth of the company with respect to various theories associated with logistics management, in particular with the subject of inventory management. It attempts to relate the issues faced by the company and its subsequent successes to the research available in the field. It also explores the alternatives available for the company that might help it grow further. With the above information, the study also attempts to predict the future direction of the company based on the current status of the company and available business scenarios. Literature Review Company and market overview Amazon was setup in 1994 by Jeff Bezos as an online book store. Similarly, it was established in Europe as a book store in 1998. As a result of its successes, it was launched in other countries as well. Amazon International consists of a number of subsidiaries such as Amazon Japan and its operations in Europe. Its Europe operations have needed an improvement to match its expected growth rate. In particular, its distribution strategy has been looked at more closely and an attempt has been made to emulate the American structure. Due to advancements in technology, Amazon has been able to enter a number of markets. However, technology, coupled with the opening up of new markets across the world has also led to an increase in the number of competitors in the field. Lessons from American Distribution strategy Reducing the costs incurred due to the purchase and holding of inventory or stocks is one of the main challenges for a retail store. However, the challenges faced by an online store are unique. Amazon was setup at a time when most of its competitors, other book stores, were brick and mortar stores or mail – order catalog businesses. The challenge of maintaining a low cost for stocks, at the same time satisfying customer demands is magnified for an online store. Amazon initially tackled this problem by holding minimum stocks while relying of wholesalers to satisfy most of its demand. This helped reduce the holding cost of stocks. At the same time, Amazon also tied up with publishers so that the unit cost of stocks would also decrease (Waters, 2003: 52). A combination of the two helped the company's capacity grow from 1 million book titles to 2.5 million book titles in the early years. This also helped ensure that orders were completed within 4 to 7 days of being placed whereas the inventory turns were as high as 70 in 1990 (Simchi-Levi, 2008: 210). Amazon grew rapidly in the years following its establishment. Apart from increasing its existing business in new regions of the country, the company also decided to expand its market through the sale of music products. However, the rate of growth of the company was so rapid that existing infrastructure systems were not able to handle the new demands and therefore new processes or systems became necessary. The company realized the problem early on and dedicated a huge portion of its software spending into developing more stable back office systems that could cater to the huge volumes of information. Thus the company was able to avert a disaster even before it took shape (Simchi-Levi, 2008: 419-420; Waters, 2003: 42). Although the entry into the music industry gave Amazon an opportunity to increase its customer base and productivity of existing distribution centers, it faced new and pressing challenges. A number of companies had entered the online market and began operations in all of the markets that Amazon had penetrated. Therefore, Amazon had to develop a new competitive advantage to sustain its growth. It had to rework its sales strategy. The company decided to reorganize its distribution strategy and took a number of steps in this direction. Firstly, the company decided to increase the number and size of its distribution centers. This was done very methodically, so much so that specialized software was used for the purpose. A number of factors had been built into the software so that the location and product portfolio of each centre was optimal. This helped decrease lead times and increase the capacity of stock held by the company. Due to the above steps, Amazon was able to package nearly 1 million boxes a day by 2001 (Simchi-Levi, 2008: 211-214). The management of product portfolio of each distribution centre was given special attention and this process was continually improved as new distribution centers were established and new products added. Apart from specific actions aimed at correcting and improving certain functions of the company, Amazon initiated a number of processes that were aimed at increasing efficiencies overall. This included looking into the processes of the distribution centers, inventory costs and delivery processes more closely. However, it was determined that customer satisfaction must be maintained during the processes of reducing costs. Initiatives such as the application of Six Sigma to the processes of the distribution centers, simulating peak season demands, further optimization of product portfolio in distribution centers, streamlining purchase processes, increasing the efficiency of temporary staff, etc were undertaken. As a result, the revenues of the company increased 26% in 2002 compared to its revenues the year before. Arnold (2009: 411) explains that continuous process improvement involves using existing systems more efficiently than purchasing the most advanced ones. Distribution strategy in Europe Amazon was founded in Europe in 1998 by which time the company was comfortably setup in the US. It thus had an advantage in terms of the knowledge of expectations of customers and challenges in the field. It initially followed a strategy similar to that in the US by entering the online market as a book retailer, of which the UK and Germany were the biggest. It then diversified into other markets. However, Amazon did not have a smooth journey to the top as in the US since there were a number of established competitors already present, albeit not through the online channel. In Germany and the UK, Amazon acquired companies that were successful so that it could enter the market whereas in France it setup its own enterprise from scratch. In addition, a number of customizations had to be made to each of the strategies employed in the countries. Apart from setting up different interfaces for its different customers, Amazon had to rework its entire sales and distribution strategy even to the point of allowing different payment options based on local preferences. Procurement strategies from publishers and wholesalers also had to be different so that the method adopted would be the most optimal. While most of the methods employed in the US market had to be altered for Europe, there were a few inherent advantages to this change as well such as the efficiency of the local postal service which saved on shipping orders on purchases within the country. With such a wide number of country – specific factors, it was decided to decentralize operations and allow a country manager to manage the various functions of each subsidiary. Additional Theory Given the various benefits enjoyed by the company on account of its actions, let us have a look at the theoretical basis that supports them. This will help the company further improve their processes and activities. According to Christopher (1998: 15), competitive advantage can be gained either through a cost advantage or a value advantage compared to other operators in the market. This is evident in the case of Amazon, since it initially gained successes in the US by possessing a cost advantage through tie – ups with wholesalers and publishers whereas its later strategy depended on creating a value advantage since a number of competitors had entered its market and had the capacity to sell products at the same price as Amazon. Creating a value advantage was more challenging and involved a number of strategies itself. In the US, reducing lead times was a major step in this direction which required efficient management of distribution centers in terms of product portfolio and the location of the distribution centers. In addition, order of multiple products also provided opportunities to attract customers and maintain their loyalty. In fact, most of the activities of Amazon have been centered on trying to add value to its existing product portfolio. The Company today Soon after its successes in Europe in 2001 and 2002, Amazon launched a web services platform which it developed into one of the largest in the world. However, a more significant change took place in 2007 when Amazon launched the Kindle, thus becoming an OEM (original equipment manufacturer). An interesting factor is that with the launch of the product, there were initial fears that one of its main markets, the books industry, would be significantly disturbed. However, Amazon has always innovated and transformed traditional methods of business. Books continue to contribute to a significant sum of the sales and e-books are sold three times more compared to hard covers as of 2010 (Cendrowski, 2011). Amazon has always leaned towards adopting a customer – centric approach to doing business, whatever the market, method of sales, products sold, etc. This has helped sustain its competitive advantage and grow from an online book seller to the largest internet retailer in the world. Strategic Framework The issue of EDN relates to the wider issue of centralized versus decentralized operations. It has implications not only in Europe but is much more important for the company as it expands to other markets in Asia and the Middle-East. While local distribution centers, shipping procedures, etc have proved significantly advantageous compared to central facilities, the decision between centralized and decentralized management is much less obvious. While centralized management leads to global optimization and thus help realize the goals of the company in all its locations, decentralized management will result in local optimization and the quick and effective implementation of strategies unique to the location of operation. Another obvious advantage of centralized management is that in addition to the development of local strategies, it is possible to interconnect all of the local strategies or implement lessons from each of the local strategies which cannot be the case with decentralized management. A major factor required for the implementation of such a system would be the quick access to information from each of its centers around the world which can be achieved by modern IT systems. However, one of more recent phenomena when compared to others is that of outsourcing in which each of the stakeholders have different methods of operation and objectives. The centralized approach might not be the most effective in this case (Simchi-Levi, 2008: 240-41). Conclusion It is clear from the above case that logistics management involves a number of issues and not is just a certain set of procedures. It has now evolved from a mere cost saving process into a strategic advantage for a company. However, the process of transformation is still in motion since many companies still view it only with respect to the activities of transportation, handling and storage, especially in industries other than the retail sector. In future, it will encompass all of the process associated with the flow of goods and information. The management of information within a company is still largely the duty of the IT function today. However, there is an advantage in applying the lessons learnt in the flow of goods to that of information as well. Such a trend is bound to have an impact on the factor of innovation in a company since easy availability of information is known to enhance it. Apart from innovation, more efficient goods and information logistics management will also have a positive effect on the team structure and motivation. However, one of the major challenges that will be faced is complexity. With an increase in the number of processes involved, factors affecting and dependant areas of logistics management, it is important to keep the entire process as simple as possible. This is because of the fact that an increase in complexity invariably causes the entire supply chain to become unstable. However, ICT technologies can be employed in a number of ways not only to reduce the complexity, but also as a feedback mechanism in the entire process. Hence, as much attention and resources, need to be devoted to the IT structure of the company as to the development of its logistics strategy (Gracht, 2008: 87-90). Current Status The case for an EDN (European Distribution Network) had been made as early as 2002; however, Amazon continues to have distribution centers in each of the countries it operates in, mainly due to issues in transportation of stocks between countries. However, in addition to logistics issues in existing markets and new markets where Amazon plans to enter, the company faces the challenges associated with maintaining and expanding the market created by Kindle due to which 7 million of them were sold in the year 2010 (Cendrowski, 2011). Maintaining its place in the market in the face of competition from companies such as Apple, etc is a big challenge. Future Direction There is little doubt that Amazon will continue to expand both its products, services and markets. While this will demand innovation, Amazon has time and again demonstrated that it is willing to modify its business model to accommodate its objectives. Global sourcing and supply issues will test the company in new markets that might not have the same predictability and stability as their counterparts in the US and Europe. With outsourcing having matured in the last few decades, the company will need to interact more closely with third parties who will manage a considerable number of functions of the company in future. References Arnold. 2009. Introduction To Materials Management, 6/E. Pearson Education India. New Delhi. Cendrowski, S. 2011. How Amazon Keeps Cranking. Fortune. Vol. 163, Issue 3. Christopher, M. 1998. Logistics and Supply Chain Management. Pearson Education India, New Delhi. CILTUK (Chartered Institute of Logistics and Transport in the UK). 2007. Global logistics: new directions in supply chain management. Kogan Page Publishers. Great Britain. Gracht, H. A. 2008. The Future of Logistics: Scenarios for 2025. Gabler Verlag, Germany. Simchi-Levi. 2008. Designing N Managing Supply 3E. Tata McGraw-Hill. New Delhi. Waters, C. D. J. 2003. Inventory control and management. John Wiley and Sons. England. Read More