Amazon Inventory Management

...

many segments of the online retail industry.

Use of Technology Innovation - Amazon’s warehouses were very well maintained and completely computerized. In fact, the numbers of lines of code used by Amazon’s warehouses were the same as the number used by its website. Whenever a customer placed an order, a series of automated events followed which made inventory management easier. When a customer ordered a book from Amazon, his invoice mentioned the title of the book followed by the barcode. This was a code of numbers such 3-4-5 which indicated the book’s location in the warehouse. Computers sent signals to the workers’ wireless receivers telling them which items had to be picked off the shelves. The workers decided the order in which the items had to be picked and then verified the weight of each product. The items taken from the shelves were placed in large green crate which contained the orders from different customers. When the crates got filled, they were placed on conveyer belts and sent to a central point. Here the bar codes were matched with the order numbers to find out who would receive each item. Each customer’s orders were placed in a separate cardboard box.

Special Order Groups (Outside Own Inventory) - Amazon had developed a proprietary software and had trained some of its personnel to get books which were out-of-print or to get products that were hard-to-find, using the software. The software sent orders (which the company could not cater to) to special orders groups for speedy delivery. The group obtained the titles or products that were not available with Amazon.

Advanced Strategy

Although the initial strategy adopted by Bezos was appreciated especially after the holiday season of 1999 when Bezos decided to stock the stores with every possible item that customers were likely to buy. However, Bezos had to face a lot of problems too while trying to manage his large inventory. Bezos realized the importance of managing inventory in his company. He knew that a large number of goods piled on the shelves would reduce the profit margins as piled up goods represented unutilized cash which could be used elsewhere in his business. However, if fewer goods were stocked, it meant that some of the customers were bound to be disappointed. In order to overcome this tedious task of inventory management, the company decided to do things differently in the holiday season of 2000.

Efficient Warehouse Management -Amazon managed to reduce the size of its inventories even as the company offered more products on its site. This was made possible by managing the warehouses efficiently. Amazon made careful decisions about which products to buy and where to buy them from. The company then had to decide which of the distribution centres it would send its product to and then know how to receive and track the product once it was in the warehouse.

Direct Procurement - Amazon also decided to buy its books, CDs, videos etc. directly from the publishers instead of buying them from the distributors thereby reducing costs. Amazon maintained a good relationship with its vendors so that it could extract best deals from them.

Investment in Technology & Infrastructure - The Company spent huge amounts on its infrastructure and technology between 1997 and 2000. In order to manage the inventory, Amazon refined its software. The new software helped the company accommodate inventory as per the demand in different regions. For example, Amazon used its information to rearrange its warehouses in Delaware, Kansas, Kentucky, Nevada and North Dakota. It tried to place products, like CDs and CD players which were generally purchased together, at one point.

Reduction of Split Shipments -Amazon also tried to reduce its split shipments—the orders for multiple items from different warehouses. This step considerably reduced the inventory levels. Amazon used the software to estimate customer demand at a particular place, which considerably reduced the risk of buying too few or too many goods.

Outsourcing - Amazon also tried to cut down its expenses. It decided to outsource some of its routine activities so that it could concentrate better on its core activities. It partnered with other companies for shipping the inventory. So, while the partners shipped the items, Amazon leveraged on its e-commerce expertise. Outsourcing enabled Amazon to achieve the following:

• Better and faster shipping of the orders.

• Reduction in inventory levels and lower costs in maintaining warehouses, distribution centers and inventory costs.

• Higher revenue.

Revamping Of Warehouses - It revamped the layout of its warehouses making it easier for the company to locate and sort customer orders. By doing this, it managed to save the expenses related to filling and shipping orders.

Drop Shipment Approach - In order to tide over the problem created by over stocking, Amazon adopted the Drop Shipment Approach. Drop Shipment is an arrangement wherein the retailers usually forward the orders received from the customers to the manufacturers or distributors. Manufacturers then directly fulfill the customer’s order from their own inventory. The Drop Shipment approach enabled Amazon to cut down its fixed costs which were 10-15% of the sales. Most of the products Amazon sells are smaller in size and value and have certain level of obsolescence. Therefore Drop Shipment helped it to overcome these issues.

Analysis of Execution Success of Inventory Management Strategy

This can be gauged from Amazon’s financial figures pre & post inventory management strategy implementation.

• Improved inventory management helped Amazon record its first ever profit in the fourth quarter of 2001.

• After accumulating a deficit of $2.86 billion in the seven years since its launch in 1995, Amazon recorded a net profit of $5 million in the fourth quarter of 2001.

• This profit was mainly attributed to its ability to reduce costs in stocking and shipping goods which was attributed to its advanced inventory management strategy.

• Amazon had a sales record of $1.1 billion in the fourth quarter of 2001 which was a 15 percent