Amazon.com Operational Management Strategies - Case Study Example

Amazon.com – Operational Management Strategies Amazon.com – Operational Management Strategies Operations Management Operations management is vital for an organization to succeed in the highly competitive 21st century business world. The competition is very intense and every organization has to be on its toes to keep up with the changing dynamics and the needs of the market. Traditional view of operational management was limited to manufacturing alone. Operations management was confined to activities that would involve acquiring of raw materials, converting them into finished goods and ensuring the supply of it to the end customer (Galloway, 1993). Operations management is not confined to manufacturing alone but also encompasses services. Hence, operations management can be best defined as effective and efficient management of all operations of the organization that contribute to improving the systems that are aimed at creating and delivering quality products and services to the customers (Young, 2009). It involves designing, redesigning, overseeing, implementing, executing of the various business operations. Operations management has a twofold effect on the profit of an organization and hence it is vital for the overall success of an organization. Organization is benefitted from the improved effectiveness due to operations management and the created products and services are such that they meet the requirements and needs of the customers. In simple words, increased efficiency will result in increased revenue which results in a more competitive organization and increased efficiency will also reduce costs (Galloway, 1993). Following are the 10 operational management strategies that an organization can apply: Product/ Service Design, Quality Management, Capacity Management, Location, Layout Design, Human Resources, Supply Chain Management, Inventory Management, Scheduling and Maintenance. This paper is aimed at analysing how Amazon.com has applied operational management strategies to succeed and gain competitive advantage in the market. Amazon.com Amazon.com is a multinational customer-centric American company. Headquartered in Seattle, Washington Amazon.com is an electronic commerce company and the largest online retailer in the world. It was founded by Jeffrey Bezos and incorporated in 1994. Even though it was incorporated in 1994, it went live in 1995. Started as an online book store, Amzon.com today has diversified and expanded its product and service line (Reuters, 2011). Today, Amzon.com sells numerous products from different categories. It not online sells books online but also sells computer software, CDs, DVDs, food, furniture, video games, toys, electronic apparels, MP3 downloads, etc (Google Finance, 2011). Consumers, sellers and enterprises are three primary customer sets that the company serves. Apart from selling products online, the company also generates revenue from various other sources such as co-branded credit card agreements, third party selling, reselling and online advertising (Google Finance, 2011). For the following countries Amzon.com has separate websites: United States, United Kingdom, Canada, Italy, France, Germany, Spain, China and Japan (Amazon.com, 2011). Amazon has numerous software development centres, fulfilment and warehousing centres across the globe to meet the growing demands (Reuters, 2011). Amazon’s Product Categories: Books, DVDs, videotapes, music CDs, musical instruments, toys & games, software, consumer electronics, sporting goods, lawn and garden items, apparel, clothing, kitchen items, gourmet food, tools, baby products, beauty products, watches, jewellery, industrial & scientific supplies, groceries and health and personal-care items (Amazon.com, 2011). Amazon’s Services: Amazon Web Services, Amazon Publishing, Amazon Prime, AmazonBasics, Amazon.com exclusives, Amapedia, Subscribe & Save, AmazonLocal, Amazon Wireless, askville, Amazon Marketplace, Amazon Fresh, etc (Amazon.com, 2011). Amazon.com and Operational Management Strategies Amazon.com has been very successful in applying operational management strategies to improve its efficiency and effectiveness. Even though not all operational management strategies have been applied by Amazon.com, some of them have been. The primary operational management strategy that has resulted in the mammoth success of the company is product and service design and this paper mainly concentrate on this. Following are the operational management strategies that Amazon.com has used to best effect: Product/Service Design Amazon.com mainly started as a service oriented company but has now diversified its business with numerous products and services. Service and product design has been one of the main operational management strategies that Amazon has used to become the largest online retailer in the world. In product design, the focus is mainly on actual designing, manufacturing and marketing of the product coupled with research and design, and new product development process. The purpose here is to ensure that product has great qualities that meet the customer’s needs and demands and come up with diverse products. On the other hand, service design is focused on improving the quality of the service and in turn the customer’s experience. Service design concentrates on planning the whole operation and then ensuring that all the components of the operations are organized and executed as per the plan. The various components of the service include infrastructure, people, communication channels, and material components. Amazon.com has used this operational management strategy very effectively and this has been the main reason behind the success of the company. Amazon.com has been able to continuously innovate with respect to service and product design. The numerous services of Amazon such as Amazon Prime, Subscribe & Save, Amazon Marketplace, Amazon Fresh Amazon.com exclusives, AmazonBasics, are all results of effective use of service/product design. A very good example of service design at work is the retuning or refining of Amazon Auctions to Amazon Marketplace. Amazon Auctions was born out of the need to compete with eBay but failed to penetrate the market. The service offered via Amazon Auctions was of not much value to the customer and more important to the company. The service was the redesigned and the strategy was retuned in order to involve all its customer sets. The result was Amazon Marketplace where third party sellers were allowed to sell their products to the consumers at competitive prices (low prices). This proved to be a great success for the company. Amazon.com charges a commission on each sale and this gives it a greater margin as it does not have to bear the cost of storing and delivering the product to the customer. Amazon media sales are an example of innovative use of operational management strategy. Amazon’s strategy of displaying text and banner ads of brands from Google has worked brilliantly. This strategy was in contradiction of the common belief that displaying ads would lead to a cluttered store. Amazon has revealed that worldwide media sales were responsible for approximately seventeen percent of the total revenue. Marketing is an important aspect of service/product design and Amazon uses numerous online marketing channels to drive traffic to the website and in turn sales. Customers are directed to the websites through channels such as portal advertising, sponsored search, email marketing, associate programs, etc. Amazon also uses other indirect ways of marketing. Amazon Prime, free shipping offers and other customer loyalty tools are also viewed as marketing tools. These tools nearly generate 615 visits to the website each year. This is a clear indication of the success of the marketing strategy of Amazon. Amazon has been very successful in using technology to make the experience of the customers better. Software based recommendations is an example of use of technology to improve the quality of the service. The search results on the website have also been improved to give more accurate results. Various other aspects that have been changed to improve the quality of the service are various recommendation algorithms, moving features around the page, search rankings and relevance, home page designs. All these have contributed towards making the experience of the customer worthwhile and in turn have resulted in financial success. Kindle is an example of product design. Kindle is now not just a e-book reader but has become an entire ecosystem opening numerous ways for Amazon to generate revenue out of it. Kindle is more than e-book reader; it is a media store, publishing imprint, platform for media sales and more. Kindle ecosystem is growing at a great pace and soon could be responsible for 10% of the overall revenue of the company. This clearly shows how Amazon.com has used product design to not just come with a new product but also innovate with it make it an ecosystem (Gobry, 2011). Supply Chain Management Amazon’s supply chain and its fulfilment abilities is the major strength of the company that has fuelled its success so far and will continue to do so in the future. Amazon.com has fulfilment and warehousing centres in numerous cities from where the product is shipped to the customer. Amazon not only ships and manages its own products but also the products of other retailers which give the company an advantage over its competitors. Amazon has adopted innovative ways to manage its supply chain. Amazon on its website might have millions of products but it does not have to stock it all. It has made arrangements with manufacturers to directly ship the product to the customer. Therefore, Amazon uses different techniques to have the product delivered to the customer. Amazon’s supply chain management is very hard for its competitors to duplicate. Delivers loads of goods to the stores and single products to individual customers is a different ball game. This is where Amazon’s supply chain is different from and its numerous supply chain management techniques put it ahead of its competitors (Knowledge@Wharton, 2009). Inventory Management Inventory management is of paramount importance for Amazon.com. For a retail company with no physical stores, efficient management of inventory is critical. Effective inventory management has been one of the major reasons why Amazon.com has been able to post profits year after year. Amazon.com has used numerous ways to improve inventory management. One of the strategies that has worked brilliantly for Amazon.com is partnering with other companies that take care of handling inventory (Sandoval, 2002). That is, the partners ship the inventory while Amazon.com capitalises on its expertise in e-commerce. Also it has many partner companies that handle inventory and fulfilment while Amzaon.com charges a fees and a percentage on the sales. The inventory cost is covered by the partner company. This brought down the cost on inventory by a huge margin. Also Amazon.com rearranged its warehouses wherein it items that were ordered frequently where placed simultaneously, for example CDs and CD players. As a result of this inventory levels were lowered and the fulfilment expenses were cut down (Sandoval, 2002). Scheduling Amazon has numerous shipping options like same day shipping, two-day shipping, regular shipping, etc. This allows Amazon to schedule its deliveries. Also it has refined its software to predict the demand of the customers in different regions and at different times. This makes it easy for Amazon to be prepared and reduces the risk of buying too less or too much merchandise. Conclusion We have now seen how operational management strategies are vital for an organization’s success. Amazon has used operational management strategies to achieve financial success and gain competitive advantage in the market. It is a result of this that Amazon is the world’s largest online retailer. Amazon has used product/service design, supply chain management and inventory management to great effect to increase its effectiveness and efficiency. It has adopted numerous strategies to improve it service and hence customer’s experience with the company. Therefore, this paper has successfully analysed the application of operational management strategies by Amazon.com. References Amazon.com (2011). Amazon. [Online]. Available at: http://www.amazon.com/ref=gno_logo. Accessed on 4 December 2011. Galloway, R.L. (1993). Principles of operations management. NY: Routledge. Gobry, P.E. (2011). How Amazon Makes Money From The Kindle. [Online]. Available at: http://articles.businessinsider.com/2011-10-18/research/30292632_1_amazon-s-kindle-kindle-hardware-digital-books. Accessed on 5 December 2011. Google Finance (2011). Amazon.com, Inc. (Public, NASDAQ:AMZN). [Online]. Available at: http://www.google.com/finance?q=amazon. Accessed on 5 December 2011. Knowledge@Wharton (2009). Fit for the Holidays: Amazon Is Shaping Up and Shipping Out. [Online]. Available at: http://knowledge.wharton.upenn.edu/article.cfm?articleid=2382. Accessed on 5 December 2011. Reuters (2011). Amazon.com Inc (AMZN.O). [Online]. Available at: http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=AMZN.O. Accessed on 5 December 2011. Sandoval, G. (2002). How lean can Amazon get?. [Online]. Available at: http://news.cnet.com/2100-1017-886784.html. Accessed on 5 December 2011. Young, S.T. (2009). Essentials of Operations Management. CA: SAGE Publications, Inc. Read More