Amazon.coms European Distribution Strategy - Assignment Example

1a. As the business of e-tailing grew, Amazon.com faced tougher challenges from competitors like buy.com and Barnesandnoble.com. The first challengethat they faced was how many distribution centers (DC) to maintain and where to locate them. Through the help of i2 Technologies’ Supply Chain Strategist Software they did manage to identify and open up five different DCs at a cost of $320 million. The next challenge was which product type to stock at each of the DCs. They had a wide range of merchandise on offer with widely different characteristics. Some items were large while some very small; some had regional demand while others had nation-wide demand. Some had seasonal demand whereas others had uniform demand patterns over the year. They carried all product types at each of the DCs except for two centers. Another challenge was the material handling equipments for the warehouses to facilitate handling and picking up of the items. They did employ radio-frequency technology, voice technology and pick profiles. This system was beneficial for single-item orders but for multiple-item orders another step was required. To group the items from the same customer, sorters had to place them into sortation slots and then the items in each slot had to be withdrawn from the slot and packaged together. To ensure efficiency they developed key metrics to measure the number of items picked per hour, inventory accuracy and the number of hours spent from order confirmation to dispatch. All these efforts did help them to deliver 99% of the orders on schedule but Amazon lost $323 million on $676 million in revenues in the fourth quarter of 1999. They needed initiates to reduce shipping and stocking costs. 1b. How did Amazon.com in the US use IT to impact its supply chain management? To meet the challenges they first introduced DMAIC (define, measure, analyze, improve and control) which helped to reduce errors and improve inventory accuracy. They created a new floor manager position in each DC which redesigned the distribution process. To improve management the software was rewritten to pinpoint demand in different regions. They introduce the available-to-promise capability in which they tied the suppliers’ inventory to customer interface which allowed Amazon to display on the website the accurate time frame for dispatch. To avoid holding inventory they tailored software to evaluate multiple fulfillment options. They used the drop-shipment method in which the wholesaler directly dispatched the order to the customer. To ensure smooth delivery, they initiated the “postal injection” which bypassed the postal service’s sorting hubs. This reduced the shipping costs from 5 to 17%. Data warehousing is their greatest strength which includes order data, customer data and inventory data. The data warehouse is connected to almost every system in the company. Two large HP Superdome servers are at the heart of the data warehouse (HP, 2002). Each Superdome runs a large Oracle database. The first prepares the data which can be used for reports. The second Superdome is the actual data warehouse. The Superdome also has a range of options to meet current financial needs and there is scope for future growth. The front end of the data warehouse is a collection of HP LT16000 Intel based Linux servers. This helps in extracting, transforming and load processing. This system has allowed them to handle two and half times the number of queries and the time spent has decreased by 20%. 2a. Amazon had to tailor the traditional value chain to meet the local needs. They had to maintain dedicated websites for each customer base in Europe. While the functions like browsing and searching were same, language, editorial and items on display were unique to each country. They also opened 24x7 customer care center that could speak the local language and understand the local customer needs. They had to address the selling regulations as per the prevailing laws in each country for instance discounting by retailers was not permitted in France and Germany. Only 38% of the Europeans customers made online purchases so they had to integrate other payment options like local checks or postal orders for the Germans. This required new software and creating of new processing system. The procurement strategy too was different than the US. France had no wholesalers while Germany had a single wholesaler. Electronic data exchange which they used in the US was low in practice among the distributors in Europe as they relied on email and fax. As a result Amazon could not know if the orders were fulfilled until the order was physically received in the distribution center. For dispatches the Royal Mail and the Deutsche Post were excellent for local deliveries but not for cross-border supplies on a pan-European basis. This resulted in delays or lost shipments leading to negative customer experience. It also resulted in higher shipping costs and without any increase in the shipping standards. 2b. To address these issues, Amazon.com.uk, Amazon. de and Amazon.fr were treated as independent subsidiaries of Amazon.com. Each country had its own organization and a country manager to whom the local employees of all the departments reported. This took care knowing the local needs, preferences and the government regulations. Each subsidiary owned and operated a dedicated warehouse to facilitate deliveries and control costs. Tom Taylor was transferred from Seattle to London who immediately raised the proportion of high velocity items in stock, created and implemented vendor scorecards, improved the accuracy of forecasting tools, reduced suppliers’ lead times and decreased customer order backlogs. The DCs now received a clear list of the receipts and shipments due in the following weeks. A comprehensive daily report presents the backlog on orders received from customers from each of the three organizations. This helped to identify the exact problem area – with the supply chain (order placed with the wholesaler/distributor but not received by Amazon), with the DC (item received but not recorded in stock) or customer type where the customer had placed the order using the check payment method but the check had not yet reached Amazon. Then the backlog type was referred back to the owner and asked to identify the root cause and resolve the underlying issues. This helped to avoid the same issue in future. This decentralized fulfillment model would help in cost savings. 3. The purpose of a European distribution network (EDN) was to locate the inventory strategically instead of having three independent distribution centers in each of the three European countries. Having an EDN may facilitate global sourcing and reduce inventories of different items but there are other issues to be taken into consideration. Firstly it would affect the transportation process thereby reducing the service levels. As of now the customers in these three countries are used to next-day deliveries, which could now stretch to 2-3 days with an EDN envisaged. Global sourcing which is one of the benefits expected out of EDN also is not feasible because the vendors too have a local presence in each country. It would not be cost effective for them to dispatch goods from one global source. Ultimately they would be dispatching from their country specific locations. Negotiations would have to be carried out at the country level and hence global sourcing does not leverage any advantage. Besides, it would make no sense for a supplier in one country to send the products to the EDN located in another country only to be shipped back against order to the country of origin. It would require training the staff before implementation if they have to do away with the three DCs and just maintain the EDN. This would again be a costly proposal and would take time to implement. Under the circumstances, the best approach would be to keep three distribution centers and allow them to fulfill the customer orders using the drop shipment approach. They would have to determine which products to be drop-shipped and when. Again, they should not hold inventory of all products at all DCs. To reduce inventory-holding costs, they should share the inventory holding depending on which items move fast in which region. It can hold a certain product category at the DC of a particular country. This would have to be decided based on each country’s sales in that category over the past 12 months. This would reduce the stock levels at each of the locations. For fast delivery, should the product have to be shipped from another country’s DC, Amazon should tie up with a pan-European carrier which would facilitate the deliveries instead of relying on the postal service. Even though Royal Mail and the Deutsche Post offer excellent service but a reliable pan-European carrier would be one shipper to be concentrated upon. Having diverse agencies for different countries requires tracking orders with different agencies. In the case of a pan-European carrier real time tracking could be possible and if consolidated with one agency better terms could be bargained. These would require certain changes in the process like transportation, and changes on the website. The customers should be informed in advance of the delivery schedule in case of items that would be shipped from another location. With these changes the EDN would reap benefits for Amazon.com. HP (2002), Success Story, 23 Oct 2007 Read More