1 - AMAZON Solution

Homework 1-
Amazon
Company Overview
• Amazon.com Inc:
– Sells books, music and many other items over the
internet and is one of the pioneers of online
consumers sales.
– Headquartered in Seattle, Washington.
– Uses the U.S. Postal Service and other package
carriers such as UPS and FedEx to send products
to customers.
Problems
1. Why is Amazon building more warehouses as it grows? How
many warehouses should it have and where should they be
located?
2. What advantages does selling books via the Internet provide
over a traditional bookstore? Are there any disadvantages to
selling via the Internet?
3. Should Amazon stock every product it sells?
4. What advantage can bricks-and-mortar players derive from
setting up an online channel? How should they use the two
channels to gain maximum advantage?
5. What advantages/disadvantages does the online channel enjoy
in the sale of shoes (diapers) relative to a retail store?
6. For what products does the online channel offer the greater
advantage relative to retail stores? What characterizes these
products?
1. Why is Amazon building more warehouses as it grows? How
many warehouses should it have and where should they be
located?
• Amazon is investing in building more warehouses to get closer to its customers
and provide faster service.
• Spent $13.9B on warehouses since 2010.
• Over 90 warehouses world-wide.
• To help speed delivery.
• Warehouse locations near top 20 U.S. metros for increased profits.
• According to Tompkins, an industry observer, the company is building tens of
millions of square footage of DC space; more and more of which is near major
metropolitan areas. In 2004, 38% of Amazon’s fulfillment capacity was less than
200 miles from a major metropolitan area. Today, 79% of its DCs are within 200
miles of a major metropolitan area.
• “For anyone who doesn’t get it, Amazon is absolutely going to same day delivery
in major markets. It’ll be next day delivery in secondary markets and two day
delivery in tertiary markets. If you’re going to do six days to North Dakota, you’re
dead.” ¹ – Tompkins International
1. Source: http://www.mmh.com/article/supply_chain_amazon_is_changing_the_rules_of_the_game
2. Should Amazon stock every book it sells?
No, it can stock books that have a high demand and source less popular ones
from external sellers. Amazon stocks deep and works with partners that carry
what it does not carry.
• Stocking every book it sells will result in a large inventory.

• “Popular” books can be stocked.
• “Not so popular” books can be replenished from the publisher on demand.
3a. Advantages
• Convenience; customers can browse and buy from home: 24/7 shopping for the
customers; Geographical barriers are absent.
• Driving customer demand by introducing new books customer may be
interested in though a recommender system. This may not be possible in a
traditional bookstore. On the online-portal, even if the customer had no
plans/intentions of buying a recommended book, they might actually end up
purchasing it as an impulse buy. This may result in more sales, more customer
satisfaction and therefore more profits for Amazon.
• Reduced inventory costs - Amazon offers a much larger selection of books than a
typical bookstore. Offering a similar selection at a traditional store would
require a huge location and resources for maintaining such a large inventory.
• More efficient marketing campaigns due to targeted marketing; thereby
reducing marketing costs.
• Flexible pricing based on customer demand.
• Easier and more accurate forecasting of demand and supply of books.
3b. Disadvantages
• Time lag between customer placing an order and order delivery.
• Cost of delivering the product to the customer.
• Missing out on customers who prefer the traditional ‘bookstore’ experience:
Customers cannot read a few pages of the book, nor can they get the “feel” of
the book.
4. What advantage can brick-and-mortar players derive from setting up an online channel?
How should they use the two channels to gain maximum advantage?
• Gain maximum advantage by making strategic decisions on what type of books to sell on
which platform.
• Use retail stores to stock high-demand books to save on shipping costs.
• Have a listing or a sample copy of low-demand books in store. Once a customer places an
order, they can source it from their warehouse or from third party vendors. This way they
save on inventory costs for storing the less popular books in retail stores.
• To drive customer demand, they can have a copy of low-demand books and internet
portals/kiosks to place online orders at retail stores. By allowing customers to place online
orders at the retail store, they are initiating a ‘pull’ supply chain and can save on inventory
costs for low-demand books.
Also:
• Cater customers who prefer buying online for the sake of convenience.
• Drive demand for less popular or less noticed products, using a recommender system on
their online portals based on the customer’s browsing history.
• Give customers the option of ordering a book online and picking it up at a nearby store for
the sake of convenience and also so the customer can save on shipping charges.
• Have more demographic and geographic coverage for their marketing campaigns at lower
budgets since advertising online is less expensive and needs fewer (financial and labor)
resources than does physical marketing.
• Have targeted, customized marketing campaigns for different segments of customers.
• Have flexible pricing for products based on their demand.
• Easier and more accurate forecasting of demand and supply of books
5. Should traditional booksellers like Barnes and Noble
integrate e-commerce into their current supply chain or
manage it as a separate supply chain?
• Integrating the two would be a good idea as there would be more co-ordination
and thereby more efficient/optimal management of low-demand and high
demand book orders.
• It is also easier to forecast and manage demand and supply for books when the
two supply chains are integrated.
• Since all stages of the supply chain, except the end retail/customer phase, of
both platforms would be the same it makes sense to integrate the two to
reduce supply chain management costs and for better planning and
management.
• For example, they could give the customer the option of ordering a book online
and picking it up at a nearby store for the sake of convenience so the customer
can save on shipping charges. In such a case, it is crucial that the two supply
chains be synced.
6. For what products does the e-commerce channel offer
the greatest advantage? What characterizes these
products?
The e-commerce channel offers the greatest advantage for products that are
not too popular and have a low demand or demand which is hard to predict.
Having such products sold online would help save inventory costs. Some
examples of these products are: electronics, books, clothing, office supplies
and household goods.
It also offers a great advantage for products that can be delivered digitally
(e.g. books, music).

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Homework 1-

• Stocking every book it sells will result in a large inventory.

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