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An Investigation of Amazon's Supply Chain

Management Strategy

By Alhapen Ruslin Chandra


alhapenruslin@yahoo.com
Jurusan Administrasi Niaga Politeknik Negeri Padang

Abstrak

Manajemen persediaan merupakan suatu elemen penting dari suatu bisnis. Efektivitas
pengelolaan manajemen rantai pasok dan logistik merupakan hal yang signifikan yang
dapat mengefisiensikan biaya pengelolaan persediaan. Amazon merupakan suatu contoh
yang menarik dalam pengelolaan persediaan. Strategi pengelolaan persediaan yang
memperhitungkan ketidakpastian permintaan membuat Amazon dapat mengurangi jumlah
persediaan sebagai mana juga safety stock-nya. Amazon hanya mempunyai persediaan
produk-produk yang cepat terjual. Sedangkan produk-produk yang tidak popular diserahkan
pada mitra outsourcing-nya. Amazon juga memanfaatkan mitra outsourcing untuk
pengapalan yang juga dapat menghemat biaya. Disamping itu, Amazon juga mengajak
pesaingnya untuk menawarkan produk mereka pada situs-nya. Strategi ini dapat
meningkatkan jenis produk yang dapat dijual Amazon. Tetapi untuk melakukan manajemen
rantai pasok produk pesaing tersebut tetap dilakukan oleh para pesaing tersebut. Dengan
demikian Amazon tetap dapat melakukan pengelolaan persediaan dengan efektif.

Kata Kunci : Persediaan, Manajemen rantai pasok, Outsourcing

1. Background Amazon wanted and what it decided. On


the hand Amazon did not want to deal
Inventory management plays important with its inventory and on the other hand,
role while pursuing company objectives. Amazon managed its own inventory to
Amazon is a good example how a ensure customers satisfaction.
company should manage its inventory.
When Bezo, founder of Amazon.com
selected competitive strategy which he
wanted to develop with Amazon to run an 2. Amazon.com strategy of
online business, he used three criteria inventory management
such as: offer low price product, has a
relative big market, and wide range of In 1999, Amazon had ten warehouses
choices (Pillai, 2004). He found books after adding new six warehouses which
matched with the criteria because there increased capacity became over five
were 1.5 million books in English, 3 million square feet. They were supported
million books in all World Wide languages by very well maintained and fully
and 4,200 publishers in the United States computerised inventory system which led
(Kotha, 1998). To get a low price offering to easiness in dealing with management
to customers, Bezo wanted to decrease inventory (Pillai, 2004). Furthermore, in
inventory cost by not opening store as holiday season 1999, Amazon stocked
well as warehouse (Pillai, 2004). every possible item that customers
Conversely, Amazon managed inventory wanted to buy in order to avoid customer
by maintaining its own warehouse to get disappointment due to could not find what
benefits of time and cost efficiency in they want (Pillai, 2004). In this situation
order to satisfy customers (Pillai, 2004). In we can see that Amazon focused on
this situation, it can be seen that there effort to satisfy its customers as it
was an inconsistency between what
An Investigation of Amazon's Supply Chain Management Strategy

increased availability and outbound


logistic performance. Responsiveness
Product availability is a significant factor
High
which influences customer loyalty as well
as easiness of return and timeliness of
delivery (Heim and Sinha, 2001). In
addition Newton (2001) found that product
distribution from merchant to consumers
would influence consumer decision to
order next items. Innis and La Londe
(1994) also acknowledged that one of the Low
most important factors which affect Cost
consumer satisfaction and intention to High Low
repeat purchasing is physical distribution
capability. Base on these perspectives,
we can see that by increasing the number Figure 1.Cost-Responsiveness
of inventory, Amazon increased Efficient Frontier (Chopra &
availability to satisfy customers. In Meindl, 2007, p.30).
addition, by adding several new facilities,
Amazon could increase its outbound The figure shows that when a company
transport performance by reducing the wants to increase its responsiveness, it
distance and delivery time as the should increase cost as a consequence.
warehouses were closely located to
customers' houses or offices. Furthermore, in 1999, most of the
decision to determine what sorts of items
By stocking a wide range of items and should be stoked was based on
managing its own inventory as well as speculation. We can see that Amazon
adding several warehouses, consequently stocked every possible item which would
Amazon could increase responsiveness be bought by consumers (Pillai, 2004).
in order to satisfy customers. Chopra and Using speculation strategy, Amazon
Meindl (2007) acknowledged that supply faced a great amount of uncertainty with
chain responsiveness is a capability to: its inventory. Additionally, inventory in
large volume would increase inventory
a. respond to wide range of demand holding cost as well as face a possible
b. fulfil order in short lead times depreciation of the inventory value (Bailey
and Rabinovich, 2005).
c. manage a huge variety of items
d. develop highly innovative items Increasing in the number of warehouses
and locate them close to consumers
e. provide a high level of service could minimize respond time (Chopra and
f. manage supply uncertainty Meindl, 2007). The figure 2 shows
relationship between desired response
However, despite of increasing of time and number of facilities.
responsiveness, Amazon should spend a
lot of money to handle inventory. The figure 2 shows that when a firm deal
Increasing responsiveness requires cost with customers who prefer to decrease
increasing. Chopra and Meindl (2007) response time, the number of facilities
describe the relationship between should be increased. However, increasing
responsiveness and cost in the figure 1. in the number facilities will increase
facilities cost (Chopra and Meindl, 2007).

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An Investigation of Amazon's Supply Chain Management Strategy

Required considering demand of distribution


Number centre region.
of facilities
d. Bought the books from publishers
instead distributors to get a good
margin

e. Developed new software to


accommodate region demand to
assist decision which distribution
Desired
centre should stock products.
response time
f. Reduce split shipment by reducing
order which were delivered from
different warehouses and stocking
Figure 2. Relationship between desired several items which customer
response time and number of usually buy together in one point.
facilities (Chopra & Meindl,
2007, p.77) g. Outsourcing shipping activities
When Amazon decided to increase From 1999 to 2000, there was a
responsiveness by adding more significant development which Amazon
warehouses, consequently it increased had done. Decision to reduce inventory
facilities expense. Pillai (2004) by reducing risk of demand uncertainty
acknowledged that cost of one and at the same time increase the range
warehouse which Amazon managed was of inventory was a significant factor in
around $50 million each. It means dealing with inventory. Reducing
Amazon needed around $500 million for inventory led to decreasing of holding
ten warehouses in 1999. Additionally, cost. Increasing the range of inventory
Amazon inventory was supplied by allowed Amazon to increase its
distributors instead publisher (Pillai, availability. Chopra and Meindl (2007)
2004). Hence, it could not get a good pointed out that response to wide range
margin. of demand and capability to fulfil order in
short lead times are parts of
Overall, increasing inventory on the basis responsiveness. Heim and Sinha (2001)
of speculation and increasing in the also acknowledged that product
number of warehouses without availability and timeliness of delivery are
improvement in dealing with inventory led some of the most important elements
Amazon did not achieve successful in which influence customer satisfaction.
managing the inventory in 1999. Therefore increasing the range of product
could increase responsiveness.
In holiday season 2000, Amazon tried to
increase efficiency of inventory In 2000, Amazon also improved its
management. Pillai (2004) highlighted inventory management performance
several decisions they made such as: through location postponement. In location
postponement, inventory could be
a. Reduced the number of inventory centralized in one strategic location where
based on demand uncertainty it could be transported to possible
destinations when demand is coming
b. Increased range of product offering (Bailey and Rabinovich, 2005). When
holding service levels is steady, location
c. Increased of efficiency of logistic by postponement can reduce safety stock
deciding which distribution centre (Zinn and Bowersox, 1988). Therefore by
should stock particular inventory by reducing orders which were delivered

Jurnal Akuntansi & Manajemen Vol 3 No.2 Desember 2008 ISSN 1858-3687 hal 87-93 89
An Investigation of Amazon's Supply Chain Management Strategy

from several warehouses and stocking them, a firm should not outsource its
several items which were likely bought all business activities when it has resources,
together by customer at one point, competencies or capabilities which:
Amazon managed its inventory by
location postponement. It allowed a. allow to create better customer
Amazon to reduce the number of safety value added or more economically
stock. than competitors

To sum up, by taking into account the risk b. can not be easily imitated or
of demand uncertainty and location substituted by competitors
postponement, Amazon could reduce the
number of inventory as well as safety c. allow to dominate competition in
stock. Ultimately, Amazon could reduce the market
the holding cost. By outsourcing shipping
activities, Amazon also could reduce cost d. can be used in multiple activities or
of shipping. These cost efficiency were business units and can be
main factors of obtaining the first net profit occupied to access many markets.
of $5 million in fourth quarter 2001 for
Amazon (Pillai, 2004). Therefore, in 2000, Most of Amazon resources, competencies
Amazon improved its efficiency dealing and capabilities were e-commerce.
with inventory management and started to Therefore e-commerce should not be
achieve successful in managing it. outsourced. However, inventory
management could be outsourced.

By outsourcing inventory, Amazon could


3. Amazon's inventory outsourcing focus on its core business and also obtain
access to inventory management
Amazon obtained good reputation of expertise which provided by its partners.
providing superior customers service by Bailey, Masson and Raeside (2002)
maintaining a good level of highlighted there are several benefits
responsiveness. High responsiveness . from outsourcing activities such as: cost
could make consumer happy since they reduction, quality of service improvement,
could get product they want. However, by flexibility and allow organization focus on
doing so, Amazon should increase the its core competencies, access to
number of warehouses as well as resources such as: skilled human
inventory which led to increasing the cost resources and up to date technology, and
(Pillai, 2004). Chopra and Meindl (2007) increase flexibility associated with
highlighted that increasing in the number fluctuating demand. In addition, Shefi
facilities will increase cost of facilities. In (1990) acknowledged that outsourcing of
addition by stocking many items to logistic activities provides many
increase variety and availability to reduce advantages such as: better transport
risk of out of stock, consequently Amazon system, reducing cost, obtain professional
should spend a lot of expense in dealing logistic services, access to technology
with inventory. development, flexible process, and
simplification of administration.
From the beginning of its business,
Amazon had expertise in e-commerce. The smart way Amazon did was it did not
Thus, outsourcing inventory could be a outsource inventory management of
right decision since inventory products which were popular or frequently
management was not its core purchased by customers (Pillai, 2004).
competency. Maltz and Ellarm (1999) Popular products inventory were
highlighted some criteria that can be used managed internally while non popular
to determine what activities should not be products were stocked by distributors who
outsourced by a company. According to deliver the product when Amazon had

90 Jurnal Akuntansi & Manajemen Vol 3 No.2 Desember 2008 ISSN 1858·3687 hal 87·93
An Investigation of Amazon's Supply Chain Management Strategy

requested (Pillai, 2004). Rabinovich and service, it allowed customers to get their
Evers (2003) highlighted that in a orders in a timely manner. Therefore,
situation when demand level is Amazon could obtain the profit without
increasing, Internet retailers should not sacrifice customers satisfaction by
allow other forms to hold inventory in keeping an appropriate level of supply
supply chain since they can produce chain services to customers.
optimal service to fulfill orders by locating
the stock in their own facilities efficiently. To sum up, when stocked popular items
Bailey and Rabinovich (2005) also found on hand and simultaneously outsourced
that increasing in product popularity the others, Amazon could reduce the
generates an increasing in relying on level of inventory in its warehouses.
inventory which was held internally. Moreover, popular item orders generated
These findings match with the study of high level of turn over. In addition, by
Maltz and Ellarm (1999) who proposed developing a partnership with best firm in
that a firm should not outsource its supply chain service, Amazon could keep
business activities if it has capabilities, the level of customers satisfaction since
competencies and resources to create its partner could deliver the orders in
better customer value added or more appropriate lead time. Therefore, it was a
economically than competitors. In good decision for Amazon to outsource its
addition, Zhu and Kraemer (2002) argued inventory.
that there was positive linkage between e-
commerce capability and increasing of
inventory turnover. Popular product with
high demand led to high level of turn over. 4. Amazon sells competing retailers
Therefore, though it had to manage products on its site
popular products inventory, Amazon did
not have to spend much money relatively Decision to sell competitors products in its
since the high level of product turn over. site could provide several advantages for
Amazon. Firstly, it would widen the range
Amazon also handled the orders by drop- of product offering. Increasing in the
shipped inventory, for example: Amazon range of product which Amazon offered to
cooperated with Ingram Micro; a largest its customers could increase variability as
wholesale dealer of electronic products well as availability. Heim and Sinha (2001)
and supply cahai management service, to highlighted that product availability was
provide logistics and fulfil the orders of one of the significant factors which could
desktops, laptops and other computers influence customers satisfaction. Hence,
accessories at Amazon.com computer consumers did not need to browse other
store (Pillai 2004). Bailey and Rabinovich sites to find the products. Secondly, it
(2005) suggested that online orders allowed customers to access much
should be handled simultaneously by information including price of both
internal stock and drop-shipped inventory. Amazon and its competitor product.
To maximize profit, online retailer could Amazon did not need to promote its low
postpone inventory location as well as prices as customer could compare
ownership to upstream supply chain between Amazon and its competitors
echelon and drop ship the items when price on the site directly (Pillai, 2004).
consumer place the order to avoid the risk Thus, it could be used as a sign for
of out of stock (Bailey and Rabinovich customers that Amazon set the price
2005) . By consolidating relationship with reasonably.
upstream partner for example Ingram
Micro, Amazon could avoid risk out of Brynjolfsson and Smith (2000) argued
stock and reduce level of inventory as that online shopping events were
well as holding cost. In addition, since the influenced by consumers assessment of
partners which Amazon chosen, had best information on the item that they want to
performance in supply chain management order, as opposed to accessing the item

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An Investigation of Amazon's Supply Chain Management Strategy

itself. Therefore when consumers who Bailey, W., Masson, R & Raeside, R,
considered to buy a book might be they 2002, 'Outsourcing in Edinburgh
considered to buy another item relate to and the Lothians', European
the book, for example when a consumer Journal of Purchasing & Supply
wanted to buy a computer program book, Management, vol. 8, pp.83-95.
he or she might be want to buy a software
or even hard ware as well. Therefore it Brynjolfsson, E., & Smith, M.D., 2000,
was a good decision to widen the product 'Frictionless Commerce? A
that Amazon offered even by selling its Comparison of Internet and
competitors product. Furthermore, since Conventional Retailers',
Amazon did not hold unpopular product Management Science, vo1.46,
in-stock, the competitors should be no.4, pp.563-585.
stocked such product by themselves. As
a result, Amazon did not have to spend Chopra, S & Meindl, P. 2007, Supply
the holding cost of such inventory. Chain Management Strategy,
Planning, & Operation, 3rd edn,
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transshipment centre whereby Amazon Jersey, USA.
only handled the orders while the
inventory was handled by its competitors Heim, G.R & Sinha, K.K., 2001,
whose product offered by Amazon (Pillai, 'Operational Drivers of Customer
2004). In this situation, Amazon employed Loyalty in Electronic Retailing: An
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could keep customer satisfaction as well Maltz, A. & Ellram, L., 1999, 'Outsourcing
as cost efficiency. Supply Management', The
Journal of Supply Chain
Management, vo1.35, no.2, pp.4-
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