Case study: Amazon improvement of customer service

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Case study: Amazon improvement of customer service by improving Inventory management

Case study: Amazon improvement of customer service by improving Inventory management

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  • 1. Case study: Amazon improvement of customer service by improving Inventory management Project Report Sulaman Muhammad Em123009 Submitted to: Dr. Mujtaba Agha Department of Engineering Management Muhammad Ali Jinnah University, Islamabad June 12, 2013
  • 2. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 1 Table of Contents 1.0.Introduction ....................................................................................................................................2 2.0.Inventory Management...................................................................................................................3 3.0. How amazon warehouse work ......................................................................................................4 4.0.Amazon inventory Management....................................................................................................5 4.1.Increase no of warehouses.....................................................................................................5 4.2.Offering wide Range of Products .........................................................................................7 4.3.Purchase books directly from publisher instead of distributor..............................................9 4.4.Location & Manufacturing Postponement .........................................................................10 4.5.Inventory Outsourcing.........................................................................................................11 4.6.Selling Competitive products ..............................................................................................13 4.7.Amazon warehouse Automation .........................................................................................14 5.0.Comparison of Amazon Customer Service Satisfaction............................................................16 Bibliography ..................................................................................................................................18
  • 3. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 2 1.0. Introduction: Amazon.com, Inc. is a multinational electronic commerce company founded by Jeff Bezos in 1995. The headquarter of the company is situated in Washington, USA. Amazon.com initially start an online bookstore and sell books in united states and all over the world, but when their business grows and their customers increase, they diversify their business and also start selling DVD’s, CD’s, MP3 downloads, video games, software, toys, jewelry, furniture, electronics and many more items on their website. Now amazon.com is the world largest e-commerce company having 51,300 employees, 152 million active customers, annual revenue of $48 billion which is 27% more than Google and their website www.amazon.com ranked 16th all over the world by internet traffic. Amazon has offices, ware houses, fulfillment centers and customer service centers across the globe in six continents. Amazon.com ship their products to more than 200 countries. They have the world largest database with total capacity of 7.8 terabytes, 18.5 terabytes and 24.7 terabytes respectively. Amazon has separate websites for United Kingdom, Canada, France, Unites states, Italy, Germany, Spain, china, Brazil, Japan and India. They are also planning to launch website in Sweden, Poland and Netherlands. Fig 1.0: Shows the performance of Amazonin 2012 (Source: [amazon.com Alexa, Brandz, market capitalization as of the 5th November 2012])
  • 4. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 3 2.0. Inventory Management: Inventory management is one of the important area of supply chain, it plays an important role to achieve customer service goals. Amazon.com focus on all the areas of supply chain including inventory management to improve their customer services by decreasing response time and quick shipment of product to their customers. Inventory management is one of the three important area of supply chain, which leads to customer satisfaction[Ballou & Srivastava, 5th Ed]. Fig 2.1: shows the supply chain triangle[Ballou & Srivastava, 5th Ed]. The founder of amazon.com “Jeff Bezos” said, “The logistics of distributions are the iceberg below the water line of online bookselling”. From his statement it is clear that the management of logistics and inventory is not an easy job. Especially in e-commerce business the main issue is the shipment of product from manufacturer to customer. Customer service goals Inventory Strategy Transport Strategy Location strategy
  • 5. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 4 3.0. How amazon warehouse works: The work in amazon warehouse continue round the clock 24 hours. On average amazon receives 42 orders per second. In 2011 on average amazon fulfill 13 million orders in 24 hours and in 2012 amazon fulfill 17 million orders in 24 hours, amazon run the process very efficiently and they have same work process in warehouses all over the world. Following is the brake down of amazon process in a warehouse: 1) As the product arrives in amazon warehouse a bar code tag is put on the product and then they place it in the shelves anywhere, where space is available, they didn’t define specific places for items but place it randomly where space is available in shelves. This maximize the space in the warehouse. 2) Every shelf and a product inside that shelf has its own bar code use to track product inside the warehouse. 3) Bar code scanners are used to identify the location of the product and its information and then transmit that information and the location of product to the main computer server of warehouse. 4) When order is received a “pick list” is generated automatically they track that product, take it from the shelf and put in a yellow box. 5) The yellow box go to the packing section through conveyor belt, where they pack the product. 6) After packing the product they forward it to the shipment section where the product is loaded in to truck and carried to the desired locations. Fig 3.1: shows the yellow box on conveyor belt in amazon warehouse Figure 3.1 shows the conveyor belt carrying a yellow box to the packing section where the product has to be packed.
  • 6. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 5 4.0. Amazon Inventory Management: When Jeff Bezos starts his business he wanted to offer a wide selection of books to customers and did not want to spend his time and money in opening warehouses and managing inventories, but soon he realize that the only way to gain the customers satisfaction and provide a better system of product shipment, he must have to open his own warehouses and arrange inventory. Following are the steps regarding inventory management, which amazon takes to improve customer satisfaction: 4.1. Increase no of warehouses: Initially amazon.com has only ten warehouses from where they fulfill the orders from all over the world but soon they realize that the no of warehouses are very less and fulfillment of order takes more time and this can effect customer satisfaction. In addition they also found that the distribution of product directly from merchant to the customer can influence customer decision to order next time. So they have to keep their own inventory and increase the no of warehouses to maintain customer satisfaction. Fig 4.1(a): shows the relation between response time and no of warehouses[chopra and meindl, 2007].
  • 7. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 6 From the figure it is clear that when the no of warehouses increase the response time decrease, and when the no of warehouses decrease the response time increase. So by increasing the no of warehouses and locate them near the customer will improve response time [chopra and meindl, 2007]. So, they increase the no of warehouses and immediately add six new warehouses. So by adding more warehouses amazon reduce the distance between warehouse and customer, hence reduce the delivery time and transport cost. Latter on they keep increasing their warehouses and now they have more than 50 warehouses in 13 countries. Fig4.1(b): Amazone.com warehouse interior Problem As by increasing the no of warehouses amazon will increase its efficiency and will decrease fulfillment time but by increasing the no of warehouses the cost will also increase because as the number of warehouses increase the holding cost will also increase.But at this stage amazon didn’t care about the cost and their only focus was on improving customer satisfaction because they think if we provide good customer service then the number of customers will increase and when number of customers will increase then they will order more and hence, the holding cost of inventory per unit will decrease as shown in figure 4.1 (c).
  • 8. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 7 Initially the management of amazon.com take hard decisions only to provide best service in order to increase the numbers of customers and that time they didn’t care about profit, that’s why amazon make their first profit seven years later after the formation of company. Fig 4.1 (c): shows the relation b/w cost/unit & inventory Quantity [Ballou & Srivastava, 5th Ed]. From the figure 4.1 (c). It is clear that as we increase the no of quantity of inventory in a warehouse the cost per unit of inventory decrease. Now amazon almost receives 42 orders per second so it mean they also have to fulfill 42 orders per second for which they need to have a lot of inventory in their ware houses, so now the quantity of inventory in their warehouses have increased so their holding cost has decreased. 4.2. Offering wide Range of products: Initially Amazon.com has only stock of books but soon they add every possible item in their inventory which the customer wanted to buy. The availability of product is an important factor, if customer need a product and that is not available in amazon stock, this can make the customer annoying and he can go to some other source. So to overcome this problem and maintain customer satisfaction Amazon.com added a huge verity of products in their inventory. Increasing the verity of products increase the customer the attraction [chopra and meindl, 2007]. Now Amazon.com offers 16 main categories of products listed as follow:
  • 9. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 8 1) MP3s and cloud players 2) Amazon cloud drive 3) Kindle 4) App store for Android 5) Unlimited instant videos 6) Digital games and software 7) Audio books 8) Books and magazines 9) Movies, music & games 10) Electronics & computers 11) Home, garden & tools 12) Grocery, health & beauty 13) Toys, kids & baby 14) Clothing, shoe & jewelry 15) Sports & outdoor 16) Automotive & industrial Problem As amazon.com has added a large verity of products in their inventory based on speculation. They didn’t do any survey to find what the customers want, they just add every possible item in their inventory which they think the customer want and because of this their inventory size become very large due to which their holding cost of inventory increase. The figure below shows the curve of holding cost
  • 10. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 9 Fig 4.2: Shows the cost & inventory relation.[Ballou & Srivastava, 5th Ed]. The quantity of inventory is directly proportional to holding cost. The holding cost increase as the no of items in the warehouse increases [Ballou & Srivastava, 5th Ed]. How Amazon overcome this problem Due to large verity of products in the inventory of amazon the handling cost become very high so to overcome this issue amazon take a decision to fulfill the order of those products directly from the manufacturer warehouse which has low demand, and will not store such items in their own warehouses, this will decrease the inventory of amazon, in return of which the holding cost will decrease. Improve forecasting Initially amazon.com added a large verity of products in their inventory based on speculation. They didn’t do any forecast to find what the customers will buy, they just add every possible item in their inventory which they think the customer will buy and because of this their inventory size become very large due to which their holding cost of inventory increase. So to overcome this problem amazon improve their forecasting, they make forecast and come to know that which products the customers will buy and then they add only those products in their inventory which they think the customers will buy, so in this way they reduce their inventory due to which the holding cost of inventory also decrease. 4.3. Purchase books directly from publisher instead of distributor: In order to improve customer service amazon.com take another step and they decided to buy book, Cd’s and DVD’s directly from the publisher instead of distributor. By purchasing books, cd’s and DVD’s directly from the publisher has two benefits: 1) Amazon will get a best deal from them 2) This will shorten the time of getting the products because there will be no middle man
  • 11. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 10 Fig 4.3: shows the process of amazon before and after modification. As amazon.com will buy books directly from the publisher so they will get a good margin and will have a best deal from them because there will be no middle man between them to get profit from amazon. So then amazon can offer that products to their customers on a good price which leads to customer satisfaction. Also by purchasing products directs from the publishers will shorten the time and amazon will be able to make the products available quickly on their sites due to which customer satisfaction will increase. 4.4. Location& Manufacturing postponement: Amazon.com also improve the performance of their inventory management by adopting location postponement. Postponement is the strategy adopt by the companies to build agile supply chain. In postponement amazon centralized their inventory in one strategic location and from that location they supply the products to the desired locations. This process make the supply chain faster because the inventory will stored in a centralized location and it can be quickly forwarded to any location where required. This make the process faster which leads to customer satisfaction. Location postponement has also another advantage that when the products are stored in the centralized location, at that point value-adding process can also be performed.
  • 12. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 11 Amazon also adopt the policy of manufacturing postponement for their non-popular products. And they offer a huge verity in a single product, and when amazon receive the order of a specific product than they (amazon) order to the manufacturer to manufacture the product. For example amazon offer a huge verity of colors in at-shirt on their website but they don’t know which color of t-shirt the customer will order and they also cannot keep all the t-shirts in their warehouse which they offer on their site because this will increase holding cost. So the manufacturer will manufacture all the t-shirts in white color and dye them later when order is received to amazon. In this way amazon can reduce their holding cost and also offer a huge verity of products to their customers. Reduce Safety stock Amazon also reduce the safety stock in warehouses by adopting the strategy of location postponement and improving their forecasting. So by reduction the safety stock in their warehouses the inventory holding cost decrease. 4.5. Inventory outsourcing: Amazon obtain a good reputation of excellent customer service by their quick responsive system. With the passage of time the customers of amazon.com increase rapidly and it became difficult for amazon to fulfill customer orders with the current warehouses as the no of orders increase day by day. So first the management of amazon think to increase the no of warehouses but they already have a lot of warehouses, and they also know that by adding more warehouses they have to bear a huge cost, because the no of warehouses are directly proportional to the cost. Fig 4.5(a): shows the relation between cost and warehouses[chopra and meindl, 2007].
  • 13. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 12 From the figure4.5(a), it is clear that by increasing the number of warehouses will cause a direct effect on the cost and as the number of warehouses increase the cost will also increase[chopra and meindl, 2007]. So instead of bearing a huge cost, the management of amazon decided to outsource their inventory. This was a big risk for amazon to outsource their inventory because they had a good reputation in managing inventory and they don’t want to lose their customers. The owner of amazon Jeff Bezos said that inventory is not our core business so we have to outsource our inventory and focus on our main objective. Outsourcing the inventory has several benefits like: 1. Better and faster delivery of product 2. Less amount of inventory has to be managed in warehouse, this will reduce holding cost 3. Allow organization to focus on the main goal 4. Obtained professional logistics services 5. Increase of revenue Amazon take a smart decision and they decided not to outsource the best seller products but only outsource those products which has less demand. They decided that the inventory of popular products will manage internally and non-popular products will be outsourced. So amazon outsource their inventory and keep their focus on e-commerce. This result in increase in revenue and fast shipping in turn of which the customer service improved. Amazon also handle orders through drop shipment, they contract with some of the leading companies for logistics and shipment like Ingram Micro and Cell Star. Ingram micro is the largest whole sale dealer of computer, hardware and laptops and also provide logistics services. Sell star handle the logistics of cell phones. So amazon.com contract with these companies for logistics and shipment. Ingram micro ship computer hardware and laptop for amazon and cell star ship cell phone for amazon. The drop shipment model was very successful for amazon because it reduce the holding cost and logistics cost of amazon.
  • 14. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 13 Fig 4.5(b): shows the process of drop shipping 4.6. Selling competitive products: Amazon.com take a decision to sell the products of their competitors on their site. This will give several advantages to amazon. First it will give a wide range of products to their customers. Amazon increasing the range of products for their customers could increase variability as well as availability. The availability of product is one of the important factor which could influence customer satisfaction [Heim & Sinha, 2001].As they will offer competitive products so customers will not look for other sites to find the product. Secondly, amazon allow customers to access much information about the product including price etc. so the customer can compare the price offered by amazon and their competitors, and as amazon is trying to offer the product to their customer on low price as much as possible and that’s why the amazon did not have to promote their low price because the customers can compare the price of amazon.com with their competitors on amazon website.
  • 15. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 14 Fig 4.6: shows the price of amazon and its comparison with their competitors (source: [Wells Fargo & Company]) As amazon offer the product on a reasonable price as compared to their competitors and provide complete information about the price of their products andalso show the price of same product offered by their competitors, so customers found amazon cheaper, which leads to customer satisfaction. And amazon did not keep the product of their competitors in their own inventory, but when order received they shipped that product directly from the inventory of their competitors, so the amazon.com did not bear the holding cost. 4.7. Amazon warehouse automation: As the no of customers of amazon.com increase day by day and it was getting hard to fulfill the orders quickly in the ware houses, so the management of amazon decided to make their warehouses fully automated. Because this will decrease fulfillment time which will leads to customer satisfaction. The average number of people working in a good warehouse are about 30-40 in a single shift to run the process fairly but the figure will be doubled if they want to earn high customer ratting. But increase in the no of labor will increase labor cost. So to overcome this problem, reduce labor cost and fulfill the order quickly the amazon decided to make their warehouses fully automated by using kiva system in their warehouses. This robotic system cut down the time by 60-80% because the robots don’t work in shifts nor they need brake nor they get paid hourly. The people working in the warehouse can make a mistake but the kiva robots works on programing so the percentage of error is almost zero. So by applying kiva system in their warehouses amazon decrease the fulfillment time and increase the customer satisfaction.
  • 16. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 15 Fig 4.7: shows Kiva robots driving shelves These robots can carry load up to 3000 ponds. The robot has max velocity of 1.3 meters/s. They use onboard camera which read the sticker of barcodes on the floor of warehouse. The computer server communicate wirelessly with the robots and give direction to robots.
  • 17. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 16 5.0. Comparison of Amazon customer satisfaction: The management of amazon.com always try their best to fully satisfy their customers. They make changes in their process with time to time, to make it easy, cheap, accessible and quick. Jeff Bezos the founder of company himself focus on customer satisfaction. Jeff Bezos says: “Be afraid of our customers, because those are the folks who have the money. Our competitors are never going to send us money”. “If you do build a great experience, customers tell each other about that. Word of mouth is very powerful”. “If you make customers unhappy on the internet, they can each tell 6,000 friends”. From these it is clear that how much the management of amazon.com is worried about customer satisfaction, that’s why they focus on customer satisfaction from the very first day and now they have successfully achieve their target of customer satisfaction. Amazon stand 1st in customer satisfaction from last several years and beat companies like Apple, Wal mart, FedEx, DHL, American Airlines, Delta airlines,Nokia, McDonald’s, KFC, pizza hut, Domino’s pizza, Dell, IBM, HP, Bank of America and Citi bank [Zobgy International, 2012]. The ranking of Amazon.com by different organizations with respect to customer satisfaction are as follow: In 2008 Amazon.com stand first in ranking by the survey of American Consumers Satisfaction Index (ACSI), 2008. In 2009 Amazon.com stand first in ranking by the survey of Customer service champs from business week, 2009. In 2010 Amazon.com stand first in ranking by the survey of Foresee E-retail satisfactionIndex, 2010. In 2011 Amazon.com stand first in ranking by the survey of NRF foundation, 2011. In 2011 Amazon.com stand first in ranking by the survey of Temkin Group, 2011. In 2012 Amazon.com stand first in ranking by the survey of Foresee E-Retail Satisfaction Index, 2012.
  • 18. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 17 In 2012 amazon.com stand first in ranking by the survey of Zobgy International, 2012. From the surveys above it is clear that amazon.com has successfully achieve their goal of customer satisfaction. And they are still continuously improving their inventory management in order to increase the customer satisfaction more and more.
  • 19. Amazon improvement of customer service by improving Inventory management Supply Chain Management Page 18 Bibliography Books: Ronald H. Ballou & Samir K. Srivastava, 2007 Business logistics / Supply Chain Management, 5th Ed. Sunil Chopra & Peter Meindl, 2007 Supply chain Management: strategies, Planning & operation3rd Ed. Gregory R. Heim & Kingshuk K. Sinha, 2011 A taxonomic Analysis of Electronic food Retailers. Websites: http://www.fabernovel.com/en/works/97-amazon-com-the-hidden-empire http://www.scribd.com/doc/20695369/case-study-report-on-inventory-management-at- Amazon-com http://www.slideshare.net/AnujSharma4/study-of-inventory-management-of-amazoncom- 12733801 http://www.chegg.com/homework-help/questions-and-answers/amazon-supply-chainamazon- s-supply-chain-management-edge-companies-shopping-experience-com-q1707443 http://www.amazonstrategies.com/2012/03/an-inside-perspective-on-amazons-purchase-of- kiva-systems.html http://news.cnet.com/8301-1023_3-20050445-93.html http://www.forbes.com/sites/prospernow/2012/08/28/amazon-1-in-customer-service-but-will- this-lead-to-sustainable-loyalty/ http://money.msn.com/investing/the-complete-company-rankings-2012.aspx http://www.forbes.com/2008/02/20/service-consumers-retail-biz-cx_tvr_0220service.html http://www.amazonstrategies.com/2013/05/amazon-upgrades-offer-listing-page-olp.html http://www.rfgen.com/blog/bid/246924/Amazon-s-inventory-management-secrets http://www.the-whole-truth.co.uk/chaotic-storage-system/