Amazon.com Business Strategy
Introduction to case study
Amazon.com Business Strategy
It is important to understand Amazon.com's business strategy before analyzing its position in the internet retail industry. Amazon's annual report states that their mission is to offer "Earth's biggest selection" and to be "Earth's most customer-centric company, where customers can find and discover anything they want to buy." Specifically stated, their business strategy is to "offer customers low prices, convenience, and a wide selection of merchandise."
Amazon Inventory Segmentation
Amazon.com has competed on selection with traditional retailers since its inception. It is estimated that Amazon.com offers over 20 million items for sale through its website and affiliates (Anderson, 2004). Amazon.com is able to support this selection through its multi-tier
129 inventory network. The following is a description of the three tiers or echelons that comprise
Amazon.com's inventory network.
The website www.amazon.com owns the relationship with the customer. The first tier within the supply chain network is the Amazon.com distribution center network. Inventory is aggregated in distribution centers, which enables Amazon.com to carry less overall inventory than physical retailers that have to carry inventory in stores and DCs to support customers. The benefits of inventory aggregation are an improved ability to respond to fluctuations in geographic demand and high service level support with a lower level of safety stock.
The second-tier in the inventory model is composed of wholesaler and partner DCs. This tier includes drop shippers such as Ingram Book Distributors, Baker and Taylor, and other book distributors. Also CD distributors and other partners that are utilized to fulfill Amazon.com orders are also seen at this level. If Amazon.com is unable to fulfill the item from its DC, Amazon.com's IT systems can look into partner inventories to determine which party to assign the order. This prevents the Amazon.com customer from experiencing a stock-out for an item that Amazon.com carries but currently does not have in its own stock. It also allows Amazon.com to offer items that it does not sell directly through its inventory.
Publishers, manufacturers, vendors, and third-party sellers comprise the third-tier in the Amazon.com multi-tier inventory model. These parties further enable Amazon.com to offer the nearly unlimited selection that they offer. Additionally, products sourced from these entities enable Amazon.com to avoid distributor markups, reduce their dependency on distributors, and improve margins.The graphical representation of Amazon.com's three-tier inventory model is shown on the following page.
In this model, Amazon.com IT systems pass information to each tier in the supply chain model. Physical products can then flow from any tier to the customer. Furthermore, partners in second and third tier replenish Amazon.com distribution centers with their inventory.
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