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Amazon Global Online Retail Operations

Supply chain analysis


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Samantha Da Silveira

3 years ago | 18 min read

Amazon’s supply chain may be the most innovative of its kind. It is experiential, meaning it puts the customer first and works backwards. It is a vast and complex system that works in such an efficient way it is able to provide speedy deliveries while also cutting down on excessive costs.

By following a flywheel model, their low prices pull in customers and merchants, which boosts volumes, which leads to lower prices, and all this generates growth for as long as the company puts the interests of the customers first.

1. Amazon’s approach to materials management

Amazon’s supply chain structure

Amazon’s strategy is to control the shipment of goods across the entire supply chain, including procurement, shipment to distribution centers, and customer delivery.

Inventory network

Amazon has three main models:

Retail - inventory owned and fulfilled by Amazon, purchased from vendors

Fulfillment By Amazon (FBA) - inventory owned by third-party sellers and fulfilled by Amazon

Marketplace - inventory owned and fulfilled by third-party sellers

Building network

As of September 2020, Amazon’s global outbound distribution network consists of 175 operating fulfilment centres, 84 sortation centres, 105 Prime Now Hubs, 651 delivery stations, and in the United States alone there are 190 fulfilment, supplemental and return centres combined (MWPVL International, 2020). Fulfilment centres are what Amazon calls its warehouses and their first-mile; it is here that inventory comes in from manufacturers and is shipped out directly to customers.

Sortation centres are the middle-mile and where merchandise is sorted before it is sent to distribution centres. Amazon Prime Now Hubs, unlike the fulfilment centres, are closer to city centres, much smaller and they are operated by humans, not robots, who manually pick out the items for the orders. Delivery stations are the last-mile where customer orders are prepared for delivery.

Within their network of building types, they also have specialised centres for non-sortable goods where Amazon workers pick, pack and ship bulky or larger-sized items such as patio furniture, outdoor equipment, or rugs.

They have centres where they take in large orders of the types they believe will sell quickly and allocate them to fulfilment centres. There are also additional types of buildings that handle specific categories of items or manage goods at peak times of the year like the holiday season.

Amazon’s distribution network and logistics

Amazon has been increasingly relying more on its in-house delivery logistics. Challenges like fulfilling their two and one-day Prime shipping promises for their customers means that Amazon

Logistics has needed to streamline and expand its delivery services. This has led to Amazon needing to rely on both conventional and unconventional ways of delivering and transporting goods.

The typical flow of goods through Amazon’s inbound system, for their FBA and Retail, starts with overseas products arriving at cross-dock centres to be split across fulfilment centres. There are two models of inbound handling; one is where the vendor or seller manages their inbound flows and the other where Amazon will cover the costs and collect the goods via air freight. Amazon uses both outsourced companies, like FedEx and UPS, and their internal air and truck fleets to handle inbound deliveries. Amazon has multiple airport hubs scattered across the entire USA and several thousand truck trailers to transport goods between fulfilment centres. They have even started to use self-driving trucks to haul some cargo in the US. Amazon reserves space on third-party ocean vessels to handle imported goods from China and organises its own logistics, allowing them to eliminate almost all other intermediaries on the way to the US.

For outbound logistics, Amazon uses a combination of air and ground transportation. After goods are picked and packed, they are sent to outbound sortation or delivery centres through intermediaries like UPS, FedEx or local couriers to be prepared and loaded for last-mile delivery.

Amazon’s last-mile fleet is a combination of outsourced and in-house services. Goods can be delivered by third-party partners like UPS, FedEx, USPS and local couriers, or via Amazon’s in-house services.

Amazon has a series of delivery solutions like their Mercedes-Benz Sprinter vans, Spartan walk-in-vans, which have been ordered in 2019, Amazon Flex which allows drivers to use their personal vehicles to deliver packages in a program similar to UBER. There is also Scout which is an electric wheeled autonomous delivery device which travels at a walking pace on sidewalks.

There is Amazon Prime Air, which is still in the testing phase but will allow customers’ packages to be delivered via an autonomous drone. By next year, Amazon will have 100’000 electric delivery vans built by manufacturer Rivian.

As for delivery locations, Amazon strives to give customers as much flexibility and as many options as possible. Besides the default option of having goods delivered to a specific address, Amazon also has services like Amazon Key and Amazon Hub. The former is a smart lock system that allows the delivery person to enter the premises of the delivery address and the latter are lockers that customers can go to and pick up their package using a key code.

Amazon’s approach to intermediaries management

This entire system, from start to finish, is tied together by Amazon’s integrated solutions. Amazon relies on its internet of things (IoT) integrated system to manage all the intermediaries within its supply chain.

They rely on extensive product sales forecasting and inventory management systems to fulfil orders quickly and at a high rate of accuracy while optimising shipping to customers. Its supply chain is extensively internal, allowing Amazon to maintain complete control while also enabling an operation based competitive advantage.

When a customer places an order on Amazon.com, the website integrates with its order sourcing engine in real-time to determine from which warehouse it should ship the order. This procedure is aimed at minimising transportation costs associated with that order.

Location tracking

IoT in logistics is a data-driven technology that allows data extraction from every entity belonging to a network. In Amazon’s supply chain, this technology provides the availability of a more extensive set of real-time data and the ability to analyse and improve strategic decision-making capabilities.

Amazon is better able to track locations and have enhanced overall visibility of the supply chain by tracking the location of a shipment, therefore, having a more insightful understanding of each link in the supply chain. It helps ensure the quality of goods from the manufacturing unit to the time it reaches its destination. It is also helpful in choosing the best alternative route in the case of potential disruption.

Environment sensing

IoT improves the supply chain intelligence with its ability to capture shipments while they are en route. It helps monitor the temperature throughout the shipment and maintain the perishable foods’ quality. The system even notifies the respective personnel that there is a problem.

Fleet management

With an IoT powered system, Amazon can track the location of their vehicles as well as the staff assigned to a vehicle at any given time. It gives the company a more transparent view of how the resources are utilised and provides insights on how to further improve resource allocation.

It can help automate vehicle maintenance and repair, along with helping to ensure safety compliance with the possibility of tracking their drivers’ health. With all this information on the vehicle, the driver and the traffic, Amazon can continue to improve the fleet and fuel cost management.

Eco-friendly shipping

IoT devices and systems allow Amazon to analyse, monitor and even manage the carbon footprint at every level, letting the company pinpoint the process causing higher carbon emission and then taking specific measures to make it more efficient. The data collected through IoT sensors make it possible for operations to optimise its load and choose the most efficient mode of transportation for any shipment.

Supply-demand balance

IoT technologies can also offer insights that improve the ability to forecast demand by using the data captured through IoT to enable a better understanding of customer behaviour, product usages, needs and demand. It can provide more than just simple Point of Sale data, like for instance, ones that can track back to the actions that drive the consumer to that point. It makes it easier for operations to decipher the consumer perspective of not only when the purchase was made, but why it was made.

Location

To be able to reduce its response time, Amazon strategically locates their warehouses (fulfilment centres) close to its customers.

Controlling inventory

Amazon keeps a reduced inventory, which allows them to lower inventory management costs. Instead, they keep an increased range of inventory which helps Amazon to increase their customer base. They manage their inventory through location postponement, where the inventory is centralised in one strategic location and only transported to the desired locations when the demand arises, thus helping them reduce their facilities costs.

Amazon manages the inventory of their popular or frequently purchased goods internally as opposed to their non-popular products which are stocked by third-party distributors who deliver the goods when Amazon requests it.

To reduce the risk of holding more extensive inventory and reduction in the holding costs, Amazon handles some orders by drop-shipped inventory. It is a supply chain management method where the retailer does not keep goods in stock but instead transfers customer orders and shipment details directly to the manufacturer or wholesaler, who then ships the goods directly to the customer.

With Amazon Marketplace, third-party sellers can sell their goods through Amazon’s e-commerce platform. It allows Amazon to increase their product offering, its availability, allow customers to conveniently find their products all in one place and also provide a comparison of Amazon’s lower prices versus that of other merchants.

How lean and agile practices might produce competitive advantage for the organisation

Amazon is no stranger to lean, and agile methodologies and their operations are no exception. Some practices they already have in place are driven by their integrated systems, which lower costs and increase customer satisfaction, by making processes more efficient and cutting out waste.

One example of this is how the promised delivery date is what drives the selection of transportation of a package to the customer. It is calculated thanks to their digital technologies, that link all processes and collect data. This data can later be analysed to gain insight on how to optimise the operations.

Amazon eliminates ambiguity about what the workers need to do in their tasks to avoid any abnormalities and has processes put in place to track and eliminate them regularly.

They have their senior management work in customer service at least once a year to allow their executives to see events on the front line, understand problems that arise and then help find solutions. Amazon also extends their lean principles to merchant partners who are obliged to follow strict packaging rules, or they risk having their partnership terminated.

They use lean practices in their inventory management with the stowing of products and distribution of goods and customer service. For defective products, they remove the entire product line when multiple defects are identified and only place them back up when the issue is resolved.

Amazon is easily the benchmark for supply chain lean synchronisation. However, to continue improving, they must continue focusing on producing goods only when needed and have a low capacity utilisation, which results in the production of no surplus output going into inventory.

A lower inventory allows them to expose any problems and solve them, which in turn results in fewer stoppages. They need to focus on eliminating all forms of waste, which is any activity that does not add value or is a hindrance to the operations (Slack, Brandon-Jones and Johnston, 2015a, p.468).

Photo by Jasmina Seidl on Unsplash
Photo by Jasmina Seidl on Unsplash

2. Amazon’s supply chain management

The role of relationships in Amazon’s approach to materials management

Contractual arrangements

Amazon has many supply arrangements throughout its supply chain. At the beginning of 2019, Amazon adjusted its approach to suppliers by buying from wholesale suppliers, which forced vendors to shift to a third-party approach if they wanted to continue to sell on Amazon’s platform. The third-party model is more profitable for Amazon, especially in the case where suppliers’ volumes are at a lower level. Because third-party sellers manage their sales, Amazon incurs lower overhead costs versus a first-party relationship like buying and storing products and assigning vendor account managers.

In B2B buyer-supplier relationships, Amazon has the upper hand. Amazon’s dominance and the power they have to make the suppliers’ products themselves, as they did with their battery brand outselling Duracell, gives them the power to negotiate and ask more from the suppliers at each contract renewal. For instance, Amazon tries to force suppliers to take on more of the freight cost between warehouses or buy more ads on Amazon, in return for remaining a major wholesale partner.

In the end, partnership supplier relationships involve customers forming long-term relationships with suppliers. In return for the stability of demand, suppliers are expected to commit to high levels of service. These relationships are challenging to sustain and rely heavily on the degree of trust (Slack, Brandon-Jones and Johnston, 2015b, p.433).

The impact of outsourcing on the operations

As previously explained, Amazon has a series of outsourced partners they rely on throughout their supply chain, including FedEx, UPS, ocean vessels and many other local couriers depending on the country. While these partnerships provide a current competitive advantage for Amazon, they believe that they can do better with an in-house logistics operation and that is why they are increasingly building their fleet and not renewing contracts with their outsourced partners.

They believe they can be more reliable, especially after incidents, like the one involving FedEx and them stranding tens of thousands of orders in warehouses during the holidays in 2013.

The benefit for Amazon to use outsourcing for their deliveries was that they could build a delivery network quickly, due to the existence of thousands of courier services. However, due to Amazon’s high standards of service, they cannot rely on their outsourced partners to achieve the same level of quality, therefore wanting to enhance their in-house last-mile-delivery network.

Reverse logistics

Amazon uses the same outsourced intermediaries in its return operations as its standard logistics and has to deal with millions of returns each year. While the delivery process may be the reverse of the last-mile, there are other considerations to take into account like, for example, what to do with the returned goods.

Even though Amazon repackages some products and sells them as new or resells them as used, a considerable amount of products end up being sold to liquidation sites who sell them in bulk for a fraction of the original price.

Amazon tries to liquidise the returned products as fast as possible to avoid paying for storage, therefore needing to sell them at a fraction of the price. However, they can recuperate some losses on the sale, and they can even make money selling the returned goods to re-commerce businesses that sell the refurbished items back through Amazon’s platform.

Other ways Amazon handles returns is to have the goods routed through reverse logistics centres, other items will go back to their original site, and others may go back to the manufacturer itself. Besides the default method of returning goods, customers also have the option to return products through, Amazon Lockers at Whole Foods, Amazon Books stores, Amazon 4-Star stores, Amazon Hub locations, third-party locations like Kohl’s, UPS, and more.

Reverse logistics presents very similar challenges to forward logistics in terms of coordination and the need for efficiency through route optimisation and the need for scale.

This is where Amazon’s integrated platform plays an important role, as it collects and centralises real-time data to provide insights in order to improve the returns processes. It continually shares and manages the data necessary to run efficient returns and reverse logistics operations.

Photo by david henrichs on Unsplash
Photo by david henrichs on Unsplash

3. The role of emerging technologies in Amazon’s approach to supply chain

Technology is critical in creating a competitive advantage throughout the supply chain. It helps organisations improve on costs, quality, delivery dependability, product innovation and time to market, which are the most impactful qualities of competitive advantage. Companies must have the ability to integrate helpful technologies into their ERP systems and provide the organisation with tools to help optimise their operations and continuously refine their processes.

Amazon is the leader in supply chain capabilities and has been able to integrate some of the most advanced technologies into their ERP system. These technologies allow for supply chain visibility with real-time data in the handling of goods and materials at any stage of the supply chain.

They allow predictive strategies to anticipate patterns to proactively resolve issues before they occur, meet demands without overstocking, and minimise costs. Data can be gathered from these integrated systems to gain and produce insights and recommend growth strategy in the context of the business’ needs.

Amazon uses many emerging technological trends, tools and innovations in its supply chain management, the biggest ones being big data, artificial intelligence and machine learning.

Big data allows the company to control quality, cash flow, real-time deployment, warehouse efficiency, weather patterns, predictive strategies and inventory, supply and demand, through valuable insights. Artificial intelligence and machine learning allow Amazon to optimise its supply chain through improvements of forecasting, planning, implementation and maintenance in logistics. This is achieved by:

• emulating human performance and knowledge through tightening data security;

• applying predictive modelling to third-party logistics;

• providing full supply chain visibility to improve key performance indicators management;

• automating inventory management, shipping transactions and delivery;

• improving customer service.

Cognitive technology

Cognitive technology, a combination of big data and AI could allow Amazon to have better control over pandemic crises. Companies can have the information they need to adjust their strategies in real-time to be able to make better, quicker decisions.

With situations like consumers panic-buying essential goods, vendors can have more accurate intel on consumer demand and become better able to procure at a more realistic capacity. They can have more visibility as to what other vendors have in stocked to avoid the vendors themselves from panic buying.

Internet of things (IoT)

All the functional components within and across the supply chain are kept connected through the internet of things (IoT) which increases visibility and connectivity while also reducing costs. Amazon already uses this in their ERP system, however, combined with wearable mobile devices, it could give Amazon a greater competitive advantage.

Having their human resources wear devices such as smartwatches, Fitbits and smartphones can introduce ubiquitous technology supply chain processes with the total elimination of labour-intensive selection of items from inventory to fulfil a customer order.

It can be assumed that IoT allows Amazon’s warehouse and logistics managers to track inventory and monitor equipment securely. It can improve asset utilisation, better customer service, streamline inventory and supply availability and provide safer, more reliable work environments.

Photo by Dan Gold on Unsplash
Photo by Dan Gold on Unsplash

5G

5G will ensure better connectivity between suppliers, make third-party logistics more efficient through ultra-low latency and massive data capacity. It also allows for higher-level performance and new user experiences as it interconnects more easily people, machines, objects and devices.

It can extract greater amounts of data concerning location, temperature, pressure, and other information that is critical in the end-to-end supply chain. It will ensure uniformity of information sharing with all stakeholders and resolve issues that would otherwise be aggravated with time delays.

Cloud computing

Amazon uses cloud computing throughout the entire supply chain, allowing them to track materials and products, get real-time updates, and inform customers of the status of an order. Cloud-based solutions enhance data storage space, integration, security, and information sharing. It allows for activities and processes to be streamlined between multiple devices and an enterprise of software users.

Since they provide it as a PaaS, it can be assumed that Amazon uses their own custom-made supply chain management software. It allows them to stay ahead of mistakes, make modifications to orders, communicate across various media channels, and automate shipping.

Photo by Jelleke Vanooteghem on Unsplash
Photo by Jelleke Vanooteghem on Unsplash

Robotic Process Automation (RPA) and Autonomous Mobile Robots (AMR)

Amazon currently uses Robotic Process Automation (RPA) and Autonomous Mobile Robots (AMR). However, these technologies could be pushed even further, and become a real game-changer for Amazon’s operations, having an enormous impact on their supply chain. Their RPA allows them to cut costs, eliminate keying errors, speed up processes and link applications.

It allows Amazon to work with structured data to automate an existing manual task or process with minimal process re-engineering and avoid significant system integration projects and specific new major application deployments.

It would be helpful in situations like the Coronavirus pandemic to further reduce reliance on human labour and better handle future shocks to the supply chain. Many of Amazon’s warehouses are robotised, but not at 100%. AMR could be a solution to optimise the picking process and allow the company to decreasingly rely on human resources.

Photo by Josh Sorenson on Unsplash
Photo by Josh Sorenson on Unsplash

Drones

Amazon is using drones and very soon, a fleet of driverless vehicles. Both these technologies will help Amazon lower costs by decreasing the amount of human intervention and in the case of drones, give more access to remote and hard-to-reach rural areas.

Virtual and augmented reality

Other interesting emerging technologies that could change the way Amazon’s supply chain is managed are virtual and augmented reality. It could allow supply chain businesses to enhance employee and customer digital experiences.

They allow for enhanced logistics and warehousing, and better purchasing choices for customers leveraging product visualisation or store layout and planning.

Blockchain

Blockchain is a powerful emerging technology that Amazon already uses and provides third-parties as a service. This technology has the potential to provide more traceability and security regarding invoices and shipments, which can take several months to process. It can also assist companies by managing contracts and agreements and monitoring financial transactions and products.

3D printing

A significant technology that is disrupting businesses and manufacturing worldwide is 3D printing and Amazon may have an opportunity to benefit from it. An order could be placed on Amazon, one of several roving delivery trucks could receive the order, print the 3D goods in the truck, and then proceed to drop off the ordered products inside the delivery time frame.

Photo by Norbert Kowalczyk on Unsplash
Photo by Norbert Kowalczyk on Unsplash

RFID

RFID is a well-established technology, however, it is increasingly being used to transform environments into technologically ubiquitous spaces. Amazon already uses this technology in much of its operations, however, as technology evolves, RFID can be further enhanced to integrate with new and innovative technologies.

Its benefits are that active and passive RFID tags provide data on items to which they are attached. Internet-connected trackers use long-range networks to let companies track specific items throughout their delivery journeys.

Satellite trackers provide location data on an item anywhere on the planet, even in areas that do not have cellular coverage. Bluetooth tags and beacons also offer tracking data in smaller, more confined areas. Near-field communication (NFC) tags, based on RFID standards, allow workers to use their mobile devices as readers for the NFC tags, which provides an advantage over RFID tags and readers.

4. Future challenges and recommendations

Amazon’s supply chain is a fluid network machine that works harmoniously thanks to its excellent management of intermediaries, its infrastructure and the advanced technology used to make all actors in the chain communicate and work together efficiently.

For Amazon to continue optimising their operations, they need to develop sophisticated operations research models and IT capabilities to implement decisions at scale, allowing operations to reduce fulfilment and transportation costs without compromising the promised delivery date to the customer.

They could make significant improvements with deliveries to smaller islands like in the Azorean archipelago, which is done through local third-party delivery services. These freight transporters do not usually make many trips between the mainland and the islands and it may take many weeks before customers receive their orders, which would have otherwise only taken a few days.

They also need to invest more heavily in figuring out how to make their operations more sustainable than they are at the moment, to be able to maintain and even increase their massive brand equity and comply with present and future governmental regulations.

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Samantha Da Silveira

Experience designer based in Luxembourg. Curious about everyday problems and how to resolve them. https://www.samanthadasilveira.com/


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