As seen from the hindsight of 2014, Amazon.

com 1 is a no brainer of a business

proposition. Today you can buy most things from online Amazon.com books, movies,
health and beauty products, appliances, sporting goodsand the company can ship
these purchases to your home the same day and often at little or no delivery cost to
you. The typical 2014 university student has grown up with the World Wide Web and
eCommerce and takes these services for granted. For its part Amazon recorded
revenues of $17.09 billion dollars in 2013 but for all that activity, the company did not
yield a profit. According to its founder and CEO Jeffrey P. Bezos, Amazon strives to be
the retailer of choice for all things and for all people globally. To this end, Amazons
profit margins on most products are razor thin and its business practices regarding free
shipping and generous return policies erode earnings. Still there is no question that
Amazon.com is one of the darlings of the new millenniums Internet economy and a
trend-setting retailer in the era of online retailing.
In contrast, Amazons early history was marked by startling losses and lots of red ink.
Why was this so? To understand Amazons origins, we must go back to 1994 when
Bezos worked for the Shaw grocery store chain and read a study that predicted the
Internet would explode in popularity. He figured that before long people would be
making money selling over the Web. After considering any number of products to sell
online, he settled on books, a standardized product already electronically cataloged,
that could be easily managed through an automated supply chain system. Most
notably, the typical book store typically managed an inventory of two to three
thousand books whereas his imagined online service that would carry them all. In
Bezoss business model, he would disintermediate the retail process, eliminating stores
and warehouses. Instead his customers would purchase their books from catalogs on
his companys Web site. Orders would be filled from a new kind of facility, a fulfillment
center.
In implementing this business model, Bezos quickly discovered that the only way to
ensure a positive customer experience was for Amazon to operate their own fulfillment
centers, controlling the transaction from start to finish. All of this may sound quite
straightforward today but Bezo and his backers were treading in totally unchartered
waters in 1995. To compete in this space, Amazon.com required a huge infusion of
capital. Those fulfillment centers cost about $50 million apiece. The first of these in
Fernley Nevada housed three million books, CDs, toys, and housewares in a building a
quarter-mile long by 200 yards wide. What distinguished this facility from the typical
retail warehouse was that it was completely computerized. The associated business
processes were largely automated and information intensive. Once customer orders
were placed via Amazon.coms Web site, the companys information systems would
send these orders to fulfillment center pickers who would in turn roam the shelves in
a systematic manner assembling customer orders. Along the way, these information
systems would capture detailed information on the time and steps involved in filling
individual orders, worker error rates, the flow and turnover of inventory and of course
associated cost of operations data.
Amazon managers employ this information to squeeze every last drop of productivity
out of their processes. For example, as reported by Fred Vogelstein:
1 This case study draws on a wide variety of news and media publications about Amazon, including:
Fred Vogelstein, Mighty Amazon, Fortune, May 12, 2003 (as viewed in
http://money.cnn.com/magazines/fortune/fortune_archive/2003/05/26/343082/) and George Parker, Is
Amazons business model good for books? The New Yorker, February 17 and 24, 2014, pp 66-79.
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. by redesigning a bottleneck where workers transfer orders arriving in
green plastic bins to a conveyor belt that automatically drops them into
the appropriate chutes, Amazon has been able to increase the capacity
of the Fernley warehouse by 40%. [In 2003], Amazon's warehouses
handle three times the volume they could in 1999, and in the past three
years the cost of operating them has fallen from nearly 20% of Amazon's
revenues to less than 10% percent. The company doesn't believe it will
even have to think about building a new warehouse for another year.

The warehouses are so efficient that Amazon turns over its

inventory 20 times a year. Virtually every other retailers
turnover rate is under 15. Indeed, one of the fastestgrowing and most profitable parts of Amazon's business is
its use of its supply chain management processes to service
the eCommerce business needs of other retailers, such as
Toys "R" Us and Target.

Getty
Image
s

All of this helps explain Bezos's larger point, one he's been making since he started
Amazon but that people are only now starting to believe:
"In the physical world it's the old saw: location, location, location," .. "The
three most important things for us are technology, technology, technology. There
just aren't other companies that let a consumer order two out of what are
millions of products in a warehouse and then quickly and efficiently, at low cost,
get those two things into a single box.".

But success was not a forgone conclusion. Amazon faced a lot of red ink in its first five
years. Ultimately its devotion to IT paid off. For instance Amazon spends heavily on
software application development, but now its platform requires little additional
investment in the early 2000s. Thanks largely to its conversions to the free Linux
operating system, technology and content expenses were down 20% in 2003 as
compared with 2000. As its competitors disappeared from the scene, Amazon
leveraged its data management capabilities to drive error out of operations,
personalize the Web experience for its customers, and add value to its relations with
suppliers by providing them with deep business intelligence concerning the publics
interest in their various products.
To achieve these results, Amazon developed its own methods and built its own Webenabled information systems from scratch. Fortunately, the company could take
advantage of established supply-chain management (SCM) systems for the backend of
the business. In the final analysis, it was Amazons dedication to collecting and using
information to run its business, an effort spearheaded by the companys Chief
Technology Officer Werner Vogels and his MIS team that turned the enterprise
profitable.
Once Amazon becomes expert in a capability they better position themselves to turn
that internal capability into a revenue-generating service. For instance, Amazons
initially internal need for data storage required them to design and develop large
capacity data centers. This in turn provided them with the opportunity to subsequently

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provide cloud computing services to other companies. According to Gartner, Amazon
(as of 2013) has five times as much cloud computing capacity in use for its customers
as its next 14 rivals combined2.

Assignment Questions for Discussion:

1. What is Amazons business? (describe)
2. What are the business needs/problems addressed in the case? (list)
3. What kinds of information technology assets did Amazon use to address these
needs? (list)
4. What were the business results? (list)

2 Tech executives facing up to hard realities of the cloud - FT.com (Aug 22, 2013)

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