In 2018, Amazon became the second company to reach $1 trillion in value. We will see how Amazon and especially how its Supply Chain has become a must in the world of global e-commerce.
(Amazon Supply Chain & Logistics video/ Please activate the automatics subtitle in English)
For Amazon and Jeff Bezos, the mission is simple. As he himself says, “Our goal is to be earth’s most customer-centric company”, in other words, to become the company most focused on customer satisfaction, selling absolutely everything, anywhere in the world.
For this purpose, Amazon addresses several types of customers and offers several services:
- General public: Amazon.com (books, objects, applications, films…)
- Marketplace: FBA (fulfillment by Amazon)
- Content creation (film, series)
- Service in the Cloud and Machine Learning
Amazon Clients & Services
Amazon’s virtuous circle :
A diagram was drawn by Jeff Bezos at the very beginning of Amazon. Its goal: to sell as many products as possible, which will increase customer experience and satisfaction, which increases traffic because customers are happy, which increases the number of salespeople and therefore products, which increases quantities, which reduces structural costs, which makes products cheaper etc, etc…
This is how Amazon keeps growing indefinitely.
An example of this virtuous circle is Amazon Prime. After paying a subscription, you have access to all free deliveries in less than 48 hours, in addition to series, films or books on Kindle platforms. In the long term, Amazon realized that its Prime customers were buying 3 times more products through Amazon, which allows the company to sell more, then according to the logic of its virtuous circle to offer more, and finally to reduce its structural costs and logistics costs.
- A turnover of $178M with a $42M increase in 2017 (equivalent to French major retailer Carrefour for instance)
- $3M in profit because Amazon invests most of its earnings in R&D and growth with always more warehouses
- High seasonality over the Christmas period
- 50% of e-commerce en ligne in the US
- 2/3 of its sales in the US = dependence
- Only 4% of the Chinese market
- 613 000 employees today and 200 000 hirings in 2017
In terms of acquisitions, Amazon invested early in technologies such as Alexa in 1999 or Audible in 2008. They also acquired competitors such as Zappos in 2009, which was the leader in online shoe sales, Kiva System, which produces logistics robots, and the Whole Food Market fresh produce chain to increase its presence in physical distribution.
Far from being a mere bookseller, Amazon has massively diversified its offer, notably thanks to the “FBA” which allows resellers to sell products on the platform, but also with IT services (AWS, Retail, Music, Films…).
To this end, Amazon very quickly invested and acquired innovative companies or technologies. For example, Amazon now invests almost as much in movies and series as Netflix.
Amazon product range
Amazon offers nearly 560,000,000,000 products in the United States, which is considerable, with various categories: clothing, books, electronics, games, accessories… Especially since, as mentioned above, Amazon is diversifying into other services, in B2B or B2C.
In France, almost 310,000,000 products are meant for sale.
Most of these products are clothes, shoes, jewelry, but also household appliances, books, everything related to electronics, sports, and many others as you can see below.
Product offer per country
Long Tail Amazon
Amazon actually applies the long tail strategy. The long tail is to sell a large number of different products in very small quantities. This reasoning is based on the fact that low demand will lead to the low competition but a very high conversion rate. To develop this long tail, Amazon has developed the famous “FBA” where the reseller refers to the product, pays for the stock and leaves the distribution and delivery to the end customer to Amazon.
Amazon is also developing its own private labels, its own brands, such as Amazon Basics, which finally offers a synthesis of the most popular products on the platform. Amazon Basics already offers a wide range of products, but Amazon continues to expand its range to offer more and more products at a better price-quality ratio.
Amazon Basics Products
In 2018, Amazon had more than 800 logistics sites counting around 20M m^2 worldwide, with half of its sites based in the US :
- Fulfillment centers (round 300 worldwide)
- Delivery stations (round 300 worldwide)
- Prime Now Hubs (small warehouses close to cities, they allow Amazon to achieve deliveries within 2 hours and represent the future for Amazon – round 80 worldwide)
- Sortation Centers (distribution centers that allow parcels or pallets to be sorted, they are generally located next to fulfillment centers – around 80 worldwide)
- Pantry/Fresh Food DC’s (fresh produce distribution center – round 20 mainly in the US)
- Whole Foods Retail (12 warehouses gained after Whole Food Group takeover)
- Airport Hub (in construction in Kentucky)
As a result, Amazon continues to invest in a logistics network that is ever faster, more efficient and closer to the customer. The company also remains focused on the United States, as evidenced by the fifty or so sites under construction in the United States.
Amazon Warehouses in France
In France, Amazon has 11 warehouses based mainly around Paris and one Prime Now Hub.
These warehouses have been opened as Amazon has grown since 2007, and there is a trend towards specialization of these warehouses, with the Prime Now Hub set to multiply as it has been in England.
It is very likely that in the near future, each major French urban area will have its own Prime Now Hub.
Inside the warehouses, Amazon has a fairly traditional organization, highly mechanized in upstream and downstream flows but always very manual in picking and order preparation.
Amazon’s great strength is to use real-time information to optimize its storage. The algorithm makes it possible to optimize picking, the space used by-products or the frequency of picking to improve the work of warehouse employees.
5 classics storage areas exist :
- Library Prime: Books & Magazines
- Pallet Prime: complete cartons of high-demand products (20/80 logic – ABC classification)
- Case flow prime: cartons storage where picking is below 1 product (20/80 logic)
- Voluminous / Heteroclite (ABC Classification)
- Small products, low sales (80/20 – represent most of the inventory as explained with the Long Tail Strategy)
Amazon Warehouses Automation
To improve its performance and costs, Amazon is investing heavily in the mechanization of its warehouses. With conveyors or sorting platforms for example, or by buying a company such as Kiva System, which creates robots (now Amazon Robotics). Amazon had 47,000 robots in 2017 compared to 15,000 in 2015.
For the moment these robots only bring the objects to the person responsible for picking, but the objective is clearly to make everything fully automatic in order to limit the number of employees
The graph below shows that Amazon’s preference has clearly shifted to robots with a target of 2 million robots in 2020.
Amazon FBA (Fulfilled By Amazon)
Amazon FBA (Shipped by Amazon in French), one of Amazon’s weapons, works very simply: you send your products to Amazon, they store your products until they are purchased on the platform, then Amazon takes care of shipping and delivering your products to the end customer.
This technique allows Amazon to increase its product offering while outsourcing the high inventory cost. This allows Amazon to optimize its financial ratios in order to be able to invest more and more in technology and services.
FBA now represents nearly 53% of Amazon’s sales, which allows the company to continuously increase its size with new incoming products and its profitability with the outsourcing of inventory costs.
- You send you products to Amazon
- Amazon stocks your products
- Customers buy your items
- Amazon prepares the order
- Amazon send your sold goods to customers
In terms of transport, the majority of deliveries are now subcontracted by Amazon. But their objective is to develop their own service to deliver 50% of orders in advance.
4 types of delivery exist at Amazon for the moment:
- Drop Shipping (delivery by the supplier, however, this mode is not highlighted on the Amazon site because the customer experience is not controlled, i.e. Amazon never sees the products and can never control their delivery time)
- “Slow Free Delivery” (3/5 days)
- Prime: Delivery in less than 48h (for subscribers – 40€ in France)
- Prime Now: Delivery in less than 2 hours (under certain conditions, notably geographical). Prime Now also has only 30,000 references, mainly on so-called “urgent” products (Beauty, Health, etc.). Once again, the strategy is to develop these Prime Now Hub throughout metropolitan France.
The problem with these fast deliveries is the cost of transport. While the cost of storage has remained stable for about ten years, the cost of transport has exploded.
To face this and optimize costs, Amazon is implementing different strategies :
Amazon Prime Air
Amazon is building its own fleet of express aircraft to build its air delivery network. The fleet currently consists of 40 aircraft (Boeings 767-300) but is currently expanding. In parallel, Amazon acquired an air hub in Kentucky for $1.5 billion.
- 40 Boeing 767-300 fleet
- Goal: Develop its own air delivery network
- Air Hub in Kentucky acquired for $1,5 B
The last mile battle
The last mile before delivering the customer. This is a very expensive point in terms of logistics. To solve this, Amazon has acquired 20,000 Mercedes vans that Amazon will resell as a credit to small entrepreneurs who will handle deliveries for Amazon, under the name Amazon Flex Kit.
A very good communication boost from Amazon because delivery by drone remains impossible in urban areas for several obvious safety reasons. Based on the Amazon principle, it claims to be able to deliver in less than 30 minutes within a 16km radius of the delivery center. Nevertheless, Amazon is putting in place strong lobbying to achieve its goals.
Amazon offers to change your lock so that the delivery person can drop off a package at home even if you are not there. The delivery person would be filmed to ensure safety. This innovation could enable Amazon to significantly reduce its “last mile” costs.
Amazon Flying Warehouse
It is a somewhat surrealist patent for the moment filed by Amazon of an airship that would act as a floating warehouse from which drones would come to deliver you directly within a certain radius around the airship. This clearly shows the Amazon Group’s extremely long-term vision to always try to deliver its customers ever faster at the lowest cost.
Technologies Amazon (Amazon Web Services)
The third major pillar of Amazon’s strategy is its technologies. Jeff Bezos quickly understood that the data, the famous Data, would be essential for Amazon’s development in the 21st century.
Amazon developed in-house technical solutions, which were then shared with the public at unbeatable prices. The revenues from this have obviously been reinvested to reduce costs and develop new and better technologies.
In terms of Supply Chain, all the information collected by Amazon is then collected and consolidated in a huge database to optimize all its logistics, transport, supply chain and costs.
As a result, Amazon now offers a considerable number of services in computation, machine learning, security, IoT (connected objects) and analytics. I come back in particular to Machine Learning where Amazon has truly become a reference today. With Amazon Machine Learning, it is now possible to create a large number of applications with very different objectives thanks to Amazon’s algorithms and the data you have saved.
Amazon Machine Learning in Supply Chain
En Supply Chain, l’apprentissage machine vous permet de mieux organiser vos prévisions, calculs, coûts et flux. La seule condition pour utiliser ce service est d’avoir vos propres données, à condition qu’elles soient bien structurées, enregistrées dans le service Amazon et que l’objectif d’Amazon soit de rapatrier autant d’entreprises que possible ainsi que leurs données et de proposer ensuite plus de services.
Amazon Supply Chain Conclusion
Amazon’s future is quite simple: more products, more services, more countries, faster and simpler thanks to more data while being more omnichannel with more presence near major cities, more powerful by imposing its new standards and always less expensive.
Amazon Supply Chain has many strengths:
- Long term vision & “No limit” in the sense that nothing seems impossible
- Customer focus
- Powerful and independent logistic network
- Data & Technologies: able to challenge Google
- Volumes to lower prices
- Monopoly company
- Risk appetite when it comes to innovation
But Amazon also has some challenges to face :
- Its monopoly, which could be a danger to the regulator
- Its establishment in China, particularly because of Alibaba
- The cost of transport for the last mile to make delivery accessible to all
- Its number of employees in relation to its number of robots
- The customer experience of its market place because of an oversupply
- Oversupply of choice kills choice
- Dependence on Jeff Bezos: how would Amazon live without Jeff Bezos?
Should you work with Amazon Supply Chain?
Toy’s R us had relied on Amazon to distribute its toys online. Except that Amazon continued to list other toys that competed with Toy’s R Us. As a result, when the company wanted to exit the Amazon network, it did not have the structure to distribute its toys online.
Today Toy’s R us has gone bankrupt partly because of this, but Apple also sells on Amazon, with the difference that Apple sells unique products with a strong brand image. It would not be surprising, however, if Apple worked on its own online system to stop Amazon.
So working with Amazon can be a double-edged sword, depending on your positioning, your offer and the experience you provide to your customers. Brands such as Decathlon or Ikea are strong and unique enough to offer products on Amazon and always attract customers to their stores. On the other hand, it would be hard to see LVMH, which offers a very personal customer experience, going to sell its products on Amazon.
In conclusion, you are not Amazon and before starting working with Amazon or like Amazon, focus on your supply chain management basics like :
- Track and manage your supply chain performance (check this page)
- Clean & centralized data
- Subcontracting non-strategic activities
- Simplifying your processes
- Optimize your inventory (check this page)
- Sales Forecast
- Process automation
- Moving to an ERP or inventory management software (check
Founder of AbcSupplyChain | Supply Chain Expert | 15 years experience in 6 different countries –> Follow me on LinkedIn