Amazon Inventory Management

Managing inventory is one of the most important tasks of a retailing company. If there are not enough goods in stock, some of the customers might be disappointed. Stocking too many will reduce the profit margins. Do you think Amazon.com adopted the right strategy while trying to manage its inventory? Was it successful in executing this strategy?

"In the physical world it's the old saw: location, location, location. The three most important things for us are technology, technology, technology."

– Jeff Bezos, CEO, Amazon.com

Introduction

Amazon.com (Amazon) was one of the first online shopping sites launched in 1995. Since its inception, it has been consistently ranked as one of the best retail sites on the Internet and is regarded as the universal model for successful Internet retailing. In March 1998, Amazon was ranked among the top 20 Internet sites in almost all the major market surveys. According to an analyst, ― “When you think of web shopping, you think of Amazon first." The Forrester PowerRankings in 2000 ranked Amazon as the best online shopping site.

Amazon.com, often referred to as simply Amazon, is an American electronic commerce and cloud computing company with headquarters in Seattle, Washington. It is the largest Internet-based retailer in the United States. Amazon.com started as an online bookstore, later diversifying to sell DVDs, Blu-rays, CDs, video downloads/ streaming, MP3 downloads/streaming, audiobook downloads/streaming, software, video games, electronics, apparel, furniture, food, toys and jewelry. The company also produces consumer electronics—notably, Amazon Kindle e-book readers, Fire tablets, Fire TV and Fire Phone—and is the world's largest provider of cloud infrastructure services (IaaS). Amazon also sells certain low-end products like USB cables under its in-house brand AmazonBasics. Amazon has separate retail websites for United States, United Kingdom and Ireland, France, Canada, Germany, Italy, Spain, Netherlands, Australia, Brazil, Japan, China, India and Mexico. Amazon also offers international shipping to certain other countries for some of its products. In 2015, Amazon surpassed Walmart as the most valuable retailer in the United States by market capitalization. Amazon was popular among its customers for shipping the goods within the estimated time, leading to satisfied customers, improved market share and repeat business. By the end of 2002, Amazon had 22.3 million registered users on its site. By 2003, Amazon became the biggest book, music and video retailer on the Internet and offered more than 4.7 million books, videos, music CDs, DVDs, computer games and other products. Further, Amazon had the distinction of being the first e-commerce site to use collaborative filtering technology.

Inventory Management Model & Objectives of Amazon.Com

Amazon owed a large part of its popularity to its excellent customer service, which was due to its exemplary inventory management. Amazon uses 3-Tier Inventory model as shown below where information & physical flow takes place between from Tier-1 & Tier-3.

Amazon was started with a focus on the following four value propositions:

• Convenience

• Selection

• Price and

• Customer Service

With these values, Amazon opted for e-business of retailing which offered the convenience. Amazon offered more choices than a conventional retailer. Since, it had the volumes it was able to offer products cheaper to the customer. It always met the shipping schedule and therefore had a lot of satisfied customers. However, as Amazon expanded it kept on changing its strategy and adapted itself. This ensured that though the four value propositions were still maintained the supporting business model kept on evolving. In order to meet the above, Amazon took deliberate and conscious decisions in managing its Inventory.

Amazon Inventory management which is derived from its SCM key objectives were guided by following objectives

• Maintain inventory of millions of items.

• Shipment within one week.

• Have a clear understanding of customer’s delivery needs.

• Coordinate with wholesale suppliers and independent producers to make available to customers both current and the soon to be released books.

• Provide two day delivery on most orders.

• Allow customers to query the status of their purchases and track their own shipments.

Amazon's Strategy to Manage Its Inventory

Amazon's inventory management strategy can be divided into two parts -

• Initial Strategy

• Advanced Strategy

Initial Strategy

Own Warehouse - When Bezos started his venture, he aimed at hassle-free operations. He wanted to offer his customers a wide selection of books, but did not want to spend time and money on opening stores and warehouses and in dealing with the inventory. He however realized that the only way to satisfy customers and at the same time make sure that Amazon enjoyed the benefits of time and cost efficiency was to maintain its own warehouse. Building warehouses and operating them was a very tough decision for Bezos. Each warehouse cost him around $50 million and in order to get the money, Amazon issued $2 billion as bonds. In 1999, Amazon added six warehouses in Fernley, Nevada; Coffeyville, Kansas; Campbellsville, Kentucky; Lexington, Kentucky; McDonough, Georgia; and Grand Forks, North Dakota. On the whole, Amazon had ten warehouses.

Warehouing Capacity Enhancement - In the same year, Amazon increased its worldwide warehousing capacity from 300,000 square feet to over five million square feet. Amazon's warehouses which were a quarter- mile long and 200 yards wide stored millions of books, CDs, toys and hardware.

Low Return Rate - Since Amazon ordered books and other products from the warehouses only after the customers had agreed to buy them, the return rate was only 0.25 percent compared to the return rate of 30 percent in