The Problem

More than 20 years after completing its first sale, Amazon has become an online retailing powerhouse that is competing with bricks-and-mortar global retailers such as Walmart and Target. In addition, it is competing in the digital marketplace (e.g., ebooks, music, movies, and TV shows) with Apple's iTunes store and Google's Google Play.

Amazon's goal is to provide customers with the best selection, price, and availability. Sometimes the best price is not the lowest, but the one that provides the best shipping option. Amazon's Web site and apps offer a simple, consistent, and reliable user experience. Product information, prices, customer reviews, related products, recommended products, shipping information, and more appear in the same location on the page. Amazon's analytics systems use a customer's order and search history to create customized experiences for that customer, and Amazon's order fulfillment process delivers products swiftly and accurately.

Supply chain management is critical to Amazon's success. In 1995, Amazon began with two fulfillment centers. The company has now expanded to more than 165 distribution and fulfillment centers located around the world. Amazon supports this operation with a proprietary, in-house information system that is completely integrated. When the company receives an order, the order-management, inventory-management, and warehouse-management systems locate products around the world and determine the optimal fulfillment plan. Fulfillment is the business term that refers to the steps involved in receiving, processing, and delivering orders to the end customer. For Amazon, a global company with many products in many distribution centers, and many orders that require cooperation across centers (meaning the entire order cannot be fulfilled through one distribution center), fulfillment requires a very high level of coordination.

To achieve this coordination, Amazon has to know where every product is located in every distribution center worldwide. For example, when suppliers send products to be Fulfilled by Amazon (FBA), their products are immediately scanned into Amazon's inventory-management system. A stower then places the goods in any available bin. Items are not organized in any logical manner. However, the product and bin location are recorded by the proprietary information system. When an order is received, a picker will walk through the warehouse, guided along an optimal route by a scanner (powered by the proprietary information system) to the proper bins in order to select the items. The pickers then bring the items to an organizer, who begins preparing them for delivery. Prepared boxes are sent down the slam line, where the packages are weighed and slammed with a shipping label. Finally, labeled packages are sorted to appropriate loading docks based on the shipping company that will handle the delivery.

Despite the effectiveness of Amazon's proprietary information system, several key factors, such as the weather, partner delivery companies, and the competition, remain beyond the company's control. For example, during the 2013 holiday season, several companies, including Amazon, promised last-minute delivery without taking into account the capacity of the parcel-delivery companies, FedEx and UPS which were unable to meet the demand. In addition to the demand overload, inclement weather also strained the delivery system. Under normal conditions, parcel-delivery companies can adjust delivery to account for weather. During the 2013 holiday season, however, these companies were already operating at capacity. As a result they could not make the necessary adjustments to account for inclement weather.

After the 2013 holiday season, Amazon tried to smooth things over with its customers by offering gift cards or credit. More importantly, the retailer determined that it needed to implement certain structural changes to expand its control over its entire supply chain and distribution system.

The IT Solution

Amazon needed to develop a method to increase its control over the delivery of its products. One common strategy to increase efficiencies and control is to reduce the number of steps in a system. Significantly, Amazon adopted the opposite approach, adding more sorting centers to its distribution channel. Sorting centers sort pre-packaged orders by zip code. This process enables Amazon to control delivery along the entire route to the local post office for Sunday delivery (in select markets). In certain markets where Amazon owns a delivery system, the company can now maintain control all the way to the customer's door.

Adding a step in the distribution system required Amazon to update its proprietary information system. Previously, once the system had slammed a delivery sticker onto a package, Amazon was basically out of the delivery loop. The retailer might maintain tracking (if offered by the delivery company), but it was not in control of the delivery. After adding the new step, the fulfillment center would maintain the package, and the system would direct the pre-packaged order to the appropriate sorting center. When packages arrived at the center, the information system would sort them by zip code. They were then delivered to the local post office or to another carrier for the last mile of delivery. In select cities, Amazon maintains its own delivery service. In other cities, the company has contracted with the U.S. Postal Service (USPS) to deliver on Sundays.

Sunday delivery spreads the delivery service over another day of the week, thereby reducing the workload on the other six days. This shift, coupled with the use of sorting centers, enabled Amazon to expand its operations, increase control, and offload some delivery work to another day of the week.

The Results

The additional step and the enhanced coordination enabled by Amazon's proprietary information system increased the company's control over its supply chain and reduced its dependence on parcel-delivery companies. Having learned from the 2013 holiday delivery debacle, Amazon expanded its operations and achieved a strategic advantage by gaining more control over its supply chain.

Amazon's sorting centers, updated supply chain management system, and agreement with the USPS helped the company achieve a record year in 2015. The retailer shipped to more than 185 countries, added more than 54 million Prime Members. In addition, Amazon reported no major problems with the new delivery system. Finally, the company reported sales revenue of $107 billion.

Amazon's updated system has generated some unintended consequences. For example, the increased demand on Sunday delivery through the USPS has increased the agency's workload and caused some postal workers to complain about 60-hour weeks and working 21 consecutive days. Although this problem is beyond Amazon's control, it does impact the firm's operations because it could lead to delivery delays. Additionally, other retailers have contracted with the USPS to offer Sunday delivery, putting more strain on Amazon's ability to rely on the agency as a delivery option.

Questions 1.Describe the problems that Amazon faced during the 2013 holiday season. 2.Discuss how Amazon solved those problems via its supply chain management system.