Amazon.com: Operations Management - Case Study Example

Amazon.com: Operations Management Table of Contents I. Introduction 3 II. Amazon.com and Operations Management 4 References 12 I. Introduction This paper discusses Amazon.com in the context of its operations management within the firm, as well as in the context of the challenges faced by the firm operationally (Google 2014; Reuters 2014). The companys store front is basically its website, where the value drivers to the customers have been identified by the firm to be convenience, choice and price. Peddling a wide array of products from various manufactured goods to books, music, and apps, the company also allows various generators of copyrighted content, from artists to writers to movie makers, to sell their content through the site. Amazon also partners with various sellers in pushing their products through the Amazon portal as well as through third party sellers own websites, and enables orders fulfillment through its excellent and innovative logistics and supply chain processes. Here operations management plays a key role. Amazon also has strong businesses in cloud computing and general computing through its Kindle tablets, where it also sells mobile apps on a forked version of the popular Android operating system. Jeff Bezos is founder, chairman and Chief Executive Officer of Amazon (Google 2014; Reuters 2014). The companys business model hinges on being able to offer the best prices for all kinds of products via its web portal, and then turning around and excelling in operations to continually drive down costs and realize profits from such operational excellence, relying on moving large volumes of products on thin margins in order to generate maximum profitability. Aspects of the operational excellence of interest to Amazon include excellence in order fulfillment, warehousing, customer service, and transactional ease. All of the companys strategic moves and investments can be understood in the context of how those moves and investments fortify this fundamental company DNA business strategy (Reuters 2014; Google 2014; Solomon 2014; Kopp 2014; King 2014; Bensinger 2014). As a software services provider, Amazon excels in being able to provide the cloud computing architecture to businesses and enterprises of all manner of operation and variety, from small companies to the very large. This is the cloud computing platform Amazon Web Services, which leads the industry and has consistently been at the top of the heap in comparison to competitors that include Google and Microsoft. Its reference list for outstanding work in such cloud computing services include operations giants Unilever and Nokia, as well as online plays such as LinkedIn and Netflix. Meanwhile, a large enabler service involves its tailored services to writers and authors through its so-called Kindle Direct Publishing, which transforms Amazon.com into a publisher of books (Palmer 2014; CrunchBase 2014; Reuters 2014; Bishop 2014; Wagner 2013). Operationally, meanwhile, Amazon.com divides itself organizationally into two operations fields, one being North America, where the focus is on generating business from its North American-centered assets, including Amazon Web Services revenues, and the International segment, which in turn is focused on generating business from its international assets (Google 2014; Reuters 2014). II. Amazon.com and Operations Management Because of its strategy of being a viable and successful online retailer by generating efficiencies in operations and in scale, operations is an important enabler of strategy, and can be considered as the lynchpin of its business strategy. Without optimized operations, Amazon will be unable to be profitable given the very small margins that it places on top of its retailed products and services, and will not be viable in comparison to industry giants in retailing, including Wal-Mart, which can be construed as having a similar foundational business strategy as Amazon. As mentioned in the Introduction, this paper posits that operational excellence underpins and helps explain all of its major activities. Amazon Web Services is an enabler of operational efficiency for Amazon to such an extent that the excellence of its cloud computing offerings has attracted its own set of computing clients and has become a promising new business segment for Amazon in and of itself. Stated another way, Amazon Web Services serves the interests of Amazon.com, which uses those very same services to gain efficiencies in operations from the software platform/server side. At the same time, the robustness and scalability of Amazon Web Services has allowed Amazon.com to build a new business leasing out or offering their in-house cloud computing platforms to other firms. Meanwhile, Its investments in physical warehouses and orders fulfillment centers/facilities, investments in drones, work in developing a Kindle tablet platform to act as a platform for consuming books, music, apps, and other digital content, its planned use of drones for delivery, and other key activities find their root in Amazon.coms quest to continue to innovate in logistics and the operations that support the whole business at Amazon. For Amazon.com it is clear that the online presence is supported by continuously growing and improving operations at the back (Crum 2013; Layton 2014; Dickey 2012). It is important to see that the way the company fulfills orders is an important part of its overall operations, and the way the company has invested large sums of money to build out an effective and highly efficient orders fulfillment process requires that Amazon execute on a very focused operations strategy that emphasizes speed as well as cost efficiencies in order for Amazon to be a viable concern. Worldwide, the company is said to have 80 centers for fulfillment spread throughout the world, from which Amazon processes the products that are ordered through its website properties for delivery to its customers. Timeliness, products variety, product integrity, and accuracy of the orders fulfillment process are key aspects of fulfillment operations. Seasonal demand growth and slack, on the other hand, has implications for the way fulfillment operations manages manpower in order to meet labor needs in an optimal way. The growth in the business of Amazon too translates to the need to further build out and tweak this orders fulfillment infrastructure. It can be said that operations excellence is the flip side of the companys excellence in efforts relating to generating sales at the front end. Amazons use of its software services and online platforms provide scalable and configurable options to the entities that sell products in Amazons online portals, as well as to Amazons associates. While Amazon.com innovates in terms of allowing customers to build out their own websites and to market products within the Amazon ecosystem, making use of its software services and marketing platforms, Amazon at the back makes sure that all of the products that are sold are efficiently handled by its fulfillment operations infrastructure. It is worth noting further that even the investment community knows that Amazon rises and falls on the strength and efficiency of its fulfillment and general operations, and here the measure of the success of Amazons strategy is its operational income or profits. Where Amazons operational profit margins increase, the prognosis is that future growth in revenues will translate to higher absolute profits. The other aspect of its operational and business strategy is that cost and efficiency gains in operations can scale up, so that as the companys revenues grow the hope is that operational efficiencies keep up or even improve, translating into higher profit margins. History reflects this reality, with the market traditionally rewarding Amazon.com with higher share price valuations in quarters where Amazon.com showed improvements in its operational margins, even when those quarters show lower absolute margins due to Amazon spending part of its profits and plowing it back to investments to further improve its operational efficiencies and scale (Crum 2013; Layton 2014; Dickey 2012). Stated another way, fulfillment and being able to handle operations in the most efficient and profitable manner, while at the same time being able to handle growth in operations through time, are the key operational challenges perennially facing Amazon.com. Amazon needs to grow its sales to grow profits, and do so with operational cost and efficiency excellence. The literature notes that this has been at the heart of the many challenges in operations that Amazon.com has faced from day one, due to the way Amazon.com itself hinged its success on being able to fulfill a growing mass of orders on its websites in a timely and effective manner. What is true in its early years is true now as well. The growth in product shipment volumes translate to the need to grow the physical infrastructure too. The costs tied to sourcing products, warehousing them, tracking their movement through the supply chain and logistics chain, and delivering them to end-customers need to be managed amidst an environment where cost inputs such as labor and fuel costs can vary and move up. At the same time, the constraints have ever been relating to the prices of Amazon.com-peddled goods relative to competition. Operationally, Amazon.com has not only been competing with other online plays, but with firms that have a long history of operational excellence, including the giant Wal-Mart. Therefore, Amazon needs to be able to offer goods at low prices while being able to generate profits from low margins and challenging operational constraints and cost bases. To its credit the literature notes that Amazon.com has approached this challenge to make operations and fulfillment efficient in a strategic manner, attacking the challenge from many angles and making gains in operational and cost efficiency not through one initiative but through a confluence of many initiatives done in concert and continuously through time. For instance, its many innovations in book publishing and distribution, as well as its forays into the distribution of third-party goods and electronic content, are seen as aspects of a sustained strategy to continuously improve its fulfillment processes and its overall operations. The new story coming out of Amazon.com relating to its planned use of drones for delivering goods to its customers is a study in microcosm of the many ways that Amazon.com is trying to innovate around this perennial and core challenge in operations of being able to optimize the cost base and making fulfillment as efficient and cost-effective as possible (Barr 2013; Rao 2011; Johnson 2010; Crum 2013; Layton 2014; Dickey 2012). Taking the analysis of the drone strategy further, and analyzing this in the context of the planned drone fleet in the context of the perennial challenges facing Amazon, one sees that the drone fleet plan fits in well with the companys overall mandate to continue to find ways to improve its operational margins by reducing operations costs. In the case of drones, one can see the potential savings from delivery costs, as well as the gains in fulfillment efficiencies that can translate to Amazon being able to move larger volumes of products at lowered costs. The move has implications for Amazons cost structure, as well as for its top line, because the drones will improve operational efficiencies to the point where both reduced costs and larger product volume movements lead to higher overall margins for the firm. Moreover, the drone fleet can open up new business opportunities for Amazon, in that it can leverage new operational capabilities in delivery and fulfillment to take on the businesses of traditional giants in certain forms of delivery, such as FedEx. As analyzed earlier, Amazon has already done this in the past, namely leveraging excellence in aspects of its operations to launch new profitable businesses, as in the case of Amazons cloud computing services offered to businesses as a utility. This can happen too with the drone fleet. Looking at the dynamics of this planned move, Amazon sees the drone fleet as enabling the firm to cull new gains in efficiency in its fulfillment and general operations. This translates to a healthier strategic and operational positioning for the firm. At the same time, the planned move allows Amazon to then turn around and leverage these new capabilities to grow its revenues by getting into new related lines of businesses where the drone fleet is a natural fit. Taking a step back, one can see that the planned acquisition of the drones is innovative from a technology point of view but is in line with Amazons historical moves to meet the challenges tied to its core strategy of operational excellence (Barr 2013; Rao 2011; Johnson 2010; Crum 2013; Layton 2014; Dickey 2012). References Barr, A. (2013). Amazon testing delivery by drone, CEO Bezos says. USA Today. [Online] Available from: http://www.usatoday.com/story/tech/2013/12/01/amazon-bezos-drone-delivery/3799021/ [Accessed 5 March 2014] Bensinger, G. (2014). Amazon Tempts the Anti-Amazons. The Wall Street Journal. 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[Online] Available from: http://www.forbes.com/sites/briansolomon/2014/03/04/facebook-follows-amazon-google-into-drones-with-60-million-purchase/ [Accessed 5 March 2014] Wagner, S. (2013). Cloud Wars in 2014: Amazon Versus Google and Other Follies. ReadWrite. [Online] Available from: http://readwrite.com/2013/12/31/2014-cloud-predictions-amazon-web-services-google#awesm=~oxGqeTPinXqMD0/ [Accessed 5 March 2014] Read More