Case Study- A case study of Amazon on its supply chain management.pdf

Siddharth Kumar Rai |Mobile: +91 9560331260 Email: siddharthkumarrai45@gmail.com
C a s e s t u d y o f A m a z o n s u p p l y c h a i n m a n a g e m e n t 1 | P a g e
A Case Study on Amazon’s Supply Chain
Management
Siddharth Kumar Rai
Certificate Programme in Supply Chain Management
CEP, Indian Institute of Technology Delhi
Email-siddharthkumarrai45@gmail.com

Contents
1. Introduction...........................................................................................................................................3
2. Amazon changing the way supply chain management works...............................................................4
2.1 Amazon FBA and FBM................................................................................................................4
2.2 Amazon Fulfillment Centers.........................................................................................................5
2.3 Amazon Delivery Fleet.................................................................................................................6
2.4 Amazon’s warehousing strategy ...................................................................................................7
2.5 Outsourcing Inventory Management and Insourcing Logistics....................................................8
2.6 Delivery Options for Customers ...................................................................................................8
2.7 Delivery Options for Customers ...................................................................................................8
2.8 Classes and Zones.........................................................................................................................8
2.9 Automation ...................................................................................................................................9
2.10 Supply Chain Cost ........................................................................................................................9
3. What Happens After You Click the Buy Button?.................................................................................9
3.1 Receiving Products .....................................................................................................................10
3.2 Storing of Items...........................................................................................................................10
3.3 Picking Orders ............................................................................................................................10
3.4 Quality Assurance.......................................................................................................................10
3.5 Packing Orders............................................................................................................................11
4. Amazon’s One-Day Shipping.............................................................................................................11
4.1 Rock the Customer Experience or Die........................................................................................12
4.2 ROI Needs a Radical Rethink.....................................................................................................12
5. What We Can Expect from the Future................................................................................................12
5.1 Drones.........................................................................................................................................12
5.2 Expansion of manufacturing sector.............................................................................................13
6. Conclusion ..........................................................................................................................................13
7. References...........................................................................................................................................14

1. Introduction
Amazon has changed the face of retail through its use of bold supply chain strategies and the deployment
of innovative technologies. The online retailer's history is one of rapid growth and relentless innovations.
It's reshaping the supply chain and leaving competitors scrambling to catch up.
In 2004, 10 years after Amazon was founded, its annual revenue was just under $7 billion. According to
Statista, by 2018, revenue reached almost $233 billion. [1] In fact, Amazon is the fastest company to
reach $100 billion in sales revenue, taking only 20 years. [2] From its inception, Amazon has been
growing approximately 20% per year. It grew by over 20% from 2018 to 2019. [3] Currently, it enjoys
nearly 14% of gross global e-commerce sales.[4] Many believe Amazon is aiming for $1 trillion in yearly
revenue. If you take Amazon’s roughly 20% yearly growth rate into the calculation, it should reach that
goal by 2027.
Whether or not the company achieves that goal by then, its transformation from a simple online
bookseller to the most formidable force in the retail industry is remarkable. One of the driving forces
behind that transformation is its innovative and highly efficient supply chain. Amazon’s continuous
efforts to deliver products to the customers in the shortest possible time are putting intense pressure on
other retail industry giants across the globe and thus changing the way supply chain management works
Figure 1: Amazon's Incredible Long-Term Growth (https://www.statista.com/chart/4298/amazons-long-
term-growth/

2. Amazon changing the way supply chain management
works
Whether you’re a larger or smaller company looking to scale your online operations, Amazon is a great
example to look at with regards to increasing productivity, expanding reach, and building profit.
While there is a plethora of factors that have led to Amazon being the ecommerce leader that it is today,
its state-of-the-art supply chain model is the most critical element to its success. Amazon launched in
1995 as a website that sold only books. Now, however, Amazon is one of the fastest-growing companies
with one of the best supply chain operations in the world.
Amazon’s current supply chain model is similar to the model back in 1995 when the company only sold
books online. However, it is much larger in scale and has a range of technological innovations that have
helped to streamline both operations and efficiency.
In this case study, we’ll explain the key elements contributing to Amazon’s success and what to expect
from this supply chain powerhouse in the future.
2.1Amazon FBA and FBM
FBA (Fulfilment by Amazon) – With this option, Amazon will take care of all logistics and customer
support. Third-party sellers will just have to send bulk products to Amazon’s fulfilment centers for them
to pick, pack, and ship. For third-party sellers who don’t have logistics in place and are handling small
and lightweight products, FBA is usually the better choice.
In addition to the above, Amazon also has an FBA Onsite program where Amazon uses its own
warehouse management software to help with optimizing the third-party seller’s warehouse. While third-
party sellers will take care of the inventory of their own products, Amazon is in charge of picking up
orders from the seller’s warehouse and selecting the most efficient and effective fulfilment method.
FBM (Fulfilment by Merchant) – In this option, third-party sellers will be in charge of listing their
products on Amazon and handling all of the storage and fulfilment aspects of the process on their own.

Figure 2: Usage of Amazon FBA (https://www.statista.com)
2.2Amazon Fulfillment Centers
With 112 million of Amazon’s customers having a Prime membership and utilizing two-day shipping, it’s
vital that Amazon has the fulfilment and logistics network to accommodate these orders.
Amazon India has recently announced its plans to expand its fulfilment network in India, with a nearly 40
per cent increase in its storage capacity over the last year. With this expansion, Amazon.in will have more
than 43 million cubic feet of storage capacity, across 15 States, supporting around 850,000 sellers across
India.
The expansion is in line with Amazon India’s continued efforts to heavily invest in the country and create
tens of thousands of direct and indirect work opportunities. Amazon India’s overall fulfilment network
will be spread across a floor area of more than 10 million square feet. This is more than the land size of
125 football fields, housing millions of products from notebooks to dishwashers.

Figure 3: Amazon fulfilment centre (https://www.aboutamazon.in/)
2.3Amazon Delivery Fleet
While having the capacity to store inventory and fulfil orders is key, Amazon’s delivery fleet is just as
important. To deliver orders to its customers, Amazon has various transportation and delivery partners
that help keep up with demand.
To start, Amazon’s trucks help carry about 2,000 boxes or more from the fulfilment centers to the sort
centers. There, Amazon then distributes the packages according to location and the delivery speed
required. After that, the company selects the most efficient transportation mode to transport these
packages.
On the ground, Amazon uses trucks, vans, bikes, and at times – even robots. Interestingly, Amazon is
now exploring the use of drones to deliver items to locations that are near their fulfilment centers.
Recently, Amazon has also launched the Delivery Service Partners company that provides its employees
with $10,000 in start-up costs and three-months of pay to launch their own delivery business. This not
only helps with strategically expanding Amazon’s delivery network, but it is also an awesome way to
make money with Amazon.

2.4Amazon’s warehousing strategy
A big part of Amazon’s success lies in its expert warehousing strategy, which ensures products are easily
accessible from pretty much everywhere in the world. This strategy suffers several changes along the
years until it achieves its current form.
All the company’s warehouses are strategically placed near big metros and population hubs, and
inventory is spread amongst them to ensure supply can meet demand. There are even minor warehouses
in smaller areas to ensure orders can be sent and delivered fast, no matter what is being purchased.
Warehouses are also optimized internally. Upon arrival at an Amazon warehouse, your product is scanned
by an Amazon employee. This is to both identify your product and confirm that it is at the correct
fulfilment centre. An Amazon employee then inspects each product for signs of damage and performs a
title verification. After passing inspection, your product is sent off to be stored.
After an exhilarating ride on the conveyor belt, your product is assigned a specific space (usually a bin) in
storage. This location is scanned and saved. This thorough sorting and storage system allows Amazon to
easily pull your product for shipment when a purchase is made.
Video 1: How Amazon Receives Your Inventory (https://youtu.be/dAXdeqcHBp4)
Amazon manages a lot of land and much of this land consists of warehouse space. Amazon doesn’t
approach warehouse management in a traditional manner. One disruptive decision made by Amazon was
divided its distribution network into 4 types of facilities. The more typical are:
1. Cross-dock centres, where packages from foreign vendors remain here until more stock is
required by the fulfilment centres; and fulfilment centres, that can be seen as typical warehouses,
where Amazon stores its goods, and the workers pick and pack products for customers.

2. In 2014, Amazon introduced Sortation centres meant to improve “last mile delivery.” No
product is held at these locations. Instead, prepared customer packages move through conveyor
belts while Amazon associates and robots ‘sort and route the packages by zip code before they are
sent to a carrier for final delivery.
3. During 2020, Amazon opened several Delivery stations, the way that the company found to own
“last mile delivery” in its distribution system. These stations give Amazon flexibility in areas
with a high volume of orders.
4. Nowadays, Amazon are also investing in Amazon Prime Now hubs, the Amazon system for
time-sensitive items, like groceries, relies on Prime Now hubs. These hubs manage items that are
typically delivered within 2 hours of purchase.
The location, size, and number of warehouses are important factors in Amazon’s supply chain
success. Its warehouses are divided into five storage areas. Its library prime storage stores books and
magazines. Next, its pallet prime storage stores full-case products that have very high demand. Next,
case flow prime storage stores high-demand products picked in less-than-case quantities. Its reserve
storage accommodates irregularly shaped and low-demand products. Finally, its random storage area
stores smaller, moderate-demand items.
2.5Outsourcing Inventory Management and Insourcing Logistics
Amazon’s supply chain heavily depends on the outsourcing of its inventory management. Products that
are infrequently ordered are not stored in regular Amazon warehouses. It may come as a surprise to you
that third-party sellers are behind over 50% of Amazon’s sales.[5]
That amounted to over 3.4 billion products sold by third-party sellers in one year according to a May
2020 Amazon Report. [6]
Amazon’s two-hour or same-day shipping is possible due to its dependence on its own logistics. Amazon
understands too well that depending on third-party logistics to deliver these orders would just lengthen the
product delivery time. That’s why Amazon mostly uses its own delivery vehicles for same-day or one-
hour delivery options.
2.6Delivery Options for Customers
Amazon has different warehouses for different kinds of products and customer preferences. Prime
delivery, one-day delivery, first-class delivery, and free super-saver delivery are some of the common
delivery options available to Amazon customers. Amazon’s continuous efforts to meet every customer's
delivery preferences make it a logistics giant.
2.7Delivery Options for Customers
Amazon’s own warehouses are strategically placed and stocked, moving closer and closer to main
metropolitan areas and city centers. As a result, it uses a pure push strategy for the products it stores in its
warehouses, forecasting demand for the specific region. On the other hand, it uses a pure pull strategy
when it sells the products from third-party sellers, using more of an order-by-order fulfilment model.
2.8Classes and Zones
Amazon boasts 110 fulfilment centers in North America and almost 800,000 employees.7 To make good
on increasingly fast delivery promises, the company has positioned many new warehouses in proximity to
local urban markets. (Walmart's online strategy in China now similarly makes use of a closer-to-the-
customer fulfilment model, operating a network of mini-warehouses.)

The location, size, and number of warehouses are important factors in Amazon’s supply chain success. Its
warehouses are divided into five storage areas. Its library prime storage stores books and magazines.
Next, its pallet prime storage stores full-case products that have very high demand. Next, case flow prime
storage stores high-demand products picked in less-than-case quantities. Its reserve storage
accommodates irregularly shaped and low-demand products. Finally, its random storage area stores
smaller, moderate-demand items.
2.9Automation
In 2012, Amazon acquired a provider of automated and robotic warehouse solutions called Kiva Systems.
And in 2015, that company was rebranded as Amazon Robotics. The robots of Amazon Robotics can pick
and pack without needing any human assistance, enabling Amazon to complete warehouse activities
incredibly quickly. Amazon has increased its army of warehouse robots at a rate of almost 35,000 per
year since 2015. As of 2020, Amazon had more than 45,000 warehouse robots and counting.
To date, Amazon’s robotics have been aimed at bringing goods to people for the picking of orders. The
next generation of robots will see them picking as well as packing orders on their own to reduce the need
for human workers.
While Amazon has been increasing its army of robots in its warehouses, other online retailers were
initially slow to follow. Now, however, robots are catching on both domestically and abroad in large
facilities and smaller islands of automation within existing facilities. Autostore is an example of a robotic
automation provider that can accommodate such islands of automation.
2.10 Supply Chain Cost
Due to the huge economies of scale and a bundle of industry-leading supply chain strategies, Amazon has
been able to keep its overall per unit supply cost to a bare minimum. As a result, it has been difficult for
other companies with far lower sales volumes and only their own warehouses to compete.
3. What Happens After You Click the Buy Button?
How does an Amazon Fulfilment Center work? These are the steps that take place after a shopper has
clicked the buy button.

Video 2: Here’s How Your Package Ordered Online Gets to Your Doorstep | The Quint
(https://www.youtube.com/watch?v=AnYrQt2uh_E)
3.1Receiving Products
At Amazon Fulfilment Centers, products are either taken off trailers by forklift or manually built into
pallets. The separation of freight occurs between those that are coming from an Amazon facility and those
from third-party vendors using FBA. Unsurprisingly, half of the items currently sold on Amazon are from
small businesses and entrepreneurs.
3.2Storing of Items
Unlike other warehouses that store their items by type, Amazon stores its items randomly. Amazon has
yellow tiered bins with random items – all tracked by computers. These bins then ferry to Amazon
associates based on the product size.
3.3Picking Orders
When you’ve clicked the “buy button”, and your order comes in, a robot will bring pods full of items to
Amazon associates working at pick stations. These pickers will read the screen, retrieve the item and
place it into a yellow plastic box – also known as a tote.
3.4Quality Assurance
For robots and humans to work cohesively together, there’s a great deal of quality assurance required.
There’s a need to make sure that the item’s physical location matches what’s in the computer, and that

the robots function correctly. Fine-tuning occurs throughout the entire process as technological
innovation is vital in a large-scale supply chain business like Amazon.
3.5Packing Orders
Lastly, items that belong to different shipments are both organized and scanned before being sent to the
pack station. There, the system will recommend box sizes to Amazon associates and measure out the
amount of tape required. Third-party vendor items are shipped in original boxes, but Amazon works with
third-party vendors to reduce packaging.
4. Amazon’s One-Day Shipping
Amazon already controls nearly half of the $513 billion U.S. ecommerce market. Considering the market-
leading customer experience Amazon already offers, why did Bezos and company decide to invest $800
million in order to upgrade their Prime shipping guarantee from two-day to one-day?
The key to this decision is Amazon’s singular obsession with customer centricity and an appreciation for
indirect results that don’t even register on the radar of some competitors. While this approach may be
more complex than most, insights abound for those who are able to get past the headlines. Below are two
of the most important takeaways that were either overlooked or under-covered in the media frenzy:
Figure 4: Amazon’s One-Day Shipping: The Real Story for Retailers (https://multichannelmerchant.com)

4.1Rock the Customer Experience or Die
Amazon’s $800 million dollar investment would be considered a massive liability and probable loss by
most retailers. With the expenses involved in offering free shipping, it’s not hard to see why Amazon’s
annual shipping bill is set to exceed $7 billion dollars according to the latest estimates. Retailers often
opt to pass these costs on to their customers or offer fulfillment options that won’t leave them
substantially in the red, but they’re missing the point.
By offering free one-day fulfillment Amazon knows it will lose billions of dollars more, but it’s playing the
long game. It’s betting on gaining market share while increasing order density and volumes, impulse
buying, general expenditures and customer loyalty in order to maintain an edge over the competition
and drive long term profits.
Customer loyalty, just one of the many benefits, is critically important. Bain & Company research shows
that increasing customer retention rates by 5% increases profits by 25% to 95%. Furthermore, a 2018
study by Dropoff found that 65% of U.S. consumers who shop on Amazon would order from a different
retailer if the same delivery options were available. Providing ever improving customer experiences
starting with fast shipping is more a necessity for survival and a precursor to success than a simple
feature.
4.2ROI Needs a Radical Rethink
A traditional cost/benefit analysis may not provide enterprises with a compelling case for making big
investments in same-day delivery and a customer-centric experience. Luckily, the vast majority of
enterprises are not alone. Even Amazon probably wouldn’t come up with compelling growth numbers if
it used standard methods to crunch the costs of its one-day offering – at least by its own standards.
However, Amazon adds into its ROI equation intangible benefits such as brand perception, which drives
a significant amount of its success with customers and partners, as well as with its own workforce
recruiting efforts. According to Harvard Business Review, these intangible benefits “account for well
over half the market capitalization of public companies” and are often undervalued.
5. What We Can Expect from the Future
With the scale that Amazon is growing, it’s evident that technological innovation is at the company’s
forefront. Below are some innovations that are currently in the pipeline.
5.1Drones
Amazon is in the process of developing a drone-based delivery system called Amazon Prime Air. With
this innovation, Amazon will deliver products that weigh under five pounds to locations within 10 miles
of Amazon’s fulfillment centers. While there are many hurdles that Amazon would need to overcome,
it’s an incredible innovation that’s currently in the pipeline.
The drone delivery service is still currently in development with Amazon testing a variety of vehicle
designs and delivery mechanisms to discover how best to deliver packages in various operating
environments. Amazon Prime Air was expected to begin in select cities in late 2019 but has since been
delayed. It still shows, however, that Amazon is leveraging the latest supply chain technologies and
maintaining its position as the clear market leader.

Video 3: Prime Air [https://www.amazon.com/Amazon-Prime-Air/b?ie=UTF8&node=8037720011
5.2Expansion of manufacturing sector
While Amazon is a retail giant, it has also diversified its business. It now produces various other products
from backpacks to smart speakers, virtual assistant AI technology, and more. As Amazon has already
established itself in the market, the company can sell third-party items to customers at lower prices.
With low-cost production, Amazon is naturally grabbing market share from a multitude of
manufacturing companies. This expansion into the manufacturing sector has provided Amazon with a
critical revenue growth opportunity
6. Conclusion
The rate of Amazon’s innovations has been incredible – making it difficult for competitors to keep up.
The retail giant has shaken up the supply chain automation industry and forced competitors to invest
more to have a slice of the pie. From increasing the number of fulfillment centers, expanding their
delivery fleet, investing in new technology, and even engaging in product manufacturing, it’s exciting to
see what else Amazon will do in the future.
With Jassy as CEO, it is likely that Amazon will significantly expand their web services and grab an even
bigger market share than they already own. Regardless of which industry they venture into next,
Amazon’s consumer-centric approach, organization, unique supply chain strategy, and technological
innovations can only mean that they’re only going to continue to shake up the industry.

7. References
[1] Statisa. "Annual Net Revenue of Amazon From 2004 to 2019
[https://www.statista.com/statistics/266282/annual-net-revenue-of-amazoncom/]
[2] U.S. Securities and Exchange Commission. "Letter to Shareholders
[https://www.sec.gov/Archives/edgar/data/1018724/000119312516530910/d168744dex991.htm#:~:text=
To%20our%20shareowners%3A,than%20Amazon%20achieved%20that%20milestone.]
[3] CSIMarket. "AMZN's Revenue Growth by Quarter and Year
[https://csimarket.com/stocks/single_growth_rates.php?code=AMZN&rev]
[4] Statisa. "Global Retail E-Commerce Market Share of Amazon From 2016 to 2019
[https://www.statista.com/statistics/955796/global-amazon-e-commerce-market-share/]
[5] Statisa. "Percentage of Paid Units Sold by Third-Party Sellers on Amazon Platform as of 2nd Quarter
2020
[https://www.statista.com/statistics/259782/third-party-seller-share-of-amazon-platform/]
[6] Amazon. "Insights From the 2020 SMB Impact Report
[https://www.aboutamazon.com/news/small-business/small-business-success-in-challenging-times]
[7] Macrotrends. "Amazon: Number of Employees 2006-2020 | AMZN
[https://www.macrotrends.net/stocks/charts/AMZN/amazon/number-of-employees]

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