Inventory Management at Amazon

A Brief about E-Commerce Industry:Types of Business Models:

• Buy and Sell: Products are purchased by the company and stacked in warehouses. These products are displayed on the website.
• MarketPlace: Products from multiple vendors are displayed in the website. Company take care of marketing and transactions and shipping, doesn’t hold the inventory.

Industry Analysis and Market Details:

According to a survey by ASSOCHAM E-Commerce is expected to reach USD 56 Billion by 2023.

• More than half of the total 1.2 billion population of India falls under the ‘below 25 years of age’ bracket. 
• 65% of India’s population, representing the working age group of 15 to 64 years, would aid the further growth of e-commerce, driven by their rising disposable income. Notably, discretionary spending in India is expected to jump to 70% by 2025 from 52% in 2005. 

                                               SWOT Analysis Of E-Commerce Industry

Amazon:Introduction

• Sells products such as books, DVDs, Electronics online in more than 60 Countries.
• Uses Amazon-to-Buyer Sale Approach 
• Multi level E-Commerce Company.
• Operates 7 websites that support their business operation globally and offers 20 million items for sale.

     Amazon uses Multi-Tier Inventory model where information flow takes place from tier-1(Amazon Distribution centre) to tier-3(vendors, manufacturers etc) and physical flow takes place from Tier-3 to Tier-1.

How Amazon deals the supply chain with fluctuating demand? 

Amazon.com carries high-demand title in inventory, whereas it purchases low-demand titles from distributor in response to a customer orders.Managing inventory is one of the most important tasks of a retailing company. If there are not enough goods in stock some of the customers might be disappointed. Stocking too many will reduce the profit margins.

 So Amazon Inventory management aimed at following strategies:

• Maintain inventory of millions of items.
• Shipment within one week.
• Have a clear understanding of customer’s delivery needs.
• Coordinate with wholesale suppliers and independent producers to make available to customers both current and the soon to be released books.
• Provide two day delivery on most orders.
• Allow customers to query the status of their purchases and track their own shipments.

Amazon Inventory management- Technology usage

• The Central Amazon Data warehouse is made up of 28 Hewelett Packard servers, with four CPUs per node, running Oracle 9i database software.
• The architecture handles millions of back-end operations and third party seller queries.

Amazon has Strategic Alliances with many vendors for procuring various products.

• Ashford.com( Online retailing of luxury and premium products )
• Drugstore.com (Online retail and information source for health, beauty, wellness, personal care and pharmacy).

Implementation of Inventory Management:

• Amazon aimed at ‘hassle-free operations’, customer satisfaction, time and cost efficiency.
• Amazon managed to reduce the size of its inventories because of efficiently managing the warehouse.
• Careful decision about ‘product’, ‘supplier’ & ‘distribution centre’ i.e. ‘which product to buy’, ‘from where’ & ‘which centre it would send its product to’.
• Huge investment in infrastructure (revamped the layout of its warehouse) and technology (refining its software helped in demand forecasting)
• Aimed at cutting down expenses via outsourcing some of the routine activities.
• Partnered with other companies for shipping the inventory.

When it managed its own inventory, Amazon earned the reputation of providing superior customer service. Despite this it decided to outsource inventory management and adopted following stratagies:

• Amazon decided to outsource its inventory management with a reason to earn more profits.
• Keeping a stock of frequently purchased/ popular items.
• Acted as a trans-shipment centre between distributors to the customer.
• Main Distributors:      Ingram Micro – whole sale distributor, handled books & computer                                             Cell Star – handled cell phone sales
• In August 2001, Amazon entered into an agreement with Ingram Micro Inc (largest wholesale dealer of electronic goods & SCM services) to provide logistics & order fulfilment services for desktops, laptops etc at computer store at Amazon.com. The aim was to maximize operating efficiencies, streamline supply chain logistics and reduce inventory costs.
• In 2001, Amazon decided to include products of competing retailers and some used items on their website.
• Customer could now verify the prices of Amazon’s product vis-à-vis those of other retailers.
• Reduction in the cost of advertisement of there low pricing of products as customers can compare now.
• In 2003, Amazon handled the orders for Borders, Target, Circuit City, Toys “R” Us.
• Amazon only handled the net orders, the companies handled the inventory.
• Services proved to be immensely profitable for Amazon.

The Article is written by B.kiran.He is currently studying PGP 1st year at Indian Institue of Management.

Book Review: The Goal

The following Book Review has received II Prize in the Book Review Competition held at Indian Institute of Management, Raipur.

The Goal is an international bestseller business novel. It was authored by Dr. Eliyahu M. Goldratt and Mr. Jeff Cox and was first published in 1984 by The North River Press.

Dr. Goldratt was an Israeli physicist, who later became a business management guru. He has written this book as a piece of fiction. In the introduction of the book, Dr. Goldratt has stated that science can be utilized to understand and solve many industrial issues. Secondly, he has said that the main requisite for expanding the learning about anything is the courage to face inconsistencies and to question the existing popular beliefs and methods. “The Goal” also demonstrates the effectiveness of Socratic way of approaching and resolving problems, which in this story, includes the complexities of a manufacturing unit as well as marital issues. Dr. Goldratt has justified this by asserting his belief that the deductive process is the only way through which we can learn. The book aims at explaining the validity of and logic behind Dr. Goldratt’s Theory of Constraints.

The story describes the exciting journey of one Mr. Alex Rogo, in which he discovers the obvious flaws in the current industry practices, and with the help of his ex-teacher and physicist - Dr. Jonah, sets out to fix them. Alex is the plant manager at one of the manufacturing units of UniCo in a town called Bearington. UniCo has been running in losses for the last few years, and one of the major reasons for this is the unprofitability of the division to which Alex’s plant belongs. The conditions in his plant are also very tough. Everything seems to be delayed and utterly urgent. Most of the orders are running late by weeks. Everybody seems to be busy all the time, and yet, the unit is running into losses. All of this is despite the fact that this plant is equipped with the latest technology including industrial robots and computer systems.

On the other hand, a parallel storyline depicts the marital problems faced by Alex with his wife Julie. This highlights the difficulties faced by managers, especially those who are obsessed with their work, in their personal lives. Alex is repeatedly accused by Julie of not paying enough attention towards her and their children.

The story begins at a point when Mr. Bill Peach, the division vice president, asks Alex to make his plant profitable within three months. In case of failure, the plant was to be shut down by the management. Alex has the option to look for another job, but he decides to do whatever he can to save the plant. Here, he recollects a conversation he had with Dr. Jonah, when the latter, through a few simple questions, convinced Alex that the hi-tech robots in his plant are not contributing to the actual goal of the company. He also encouraged Alex to figure out the true goal of his organization. Faced with grave difficulties, Alex figures out that the true goal of the company is to make money. Equipped with this newly-found answer, he immediately gets in touch with Jonah and asks for his help and guidance.

Jonah explains to Alex that for generating profits, only three components of the system need to be in order. They are:

1.       Throughput: this refers to the money generated by sales and needs to be maximized.

2.       Inventory: this refers to the money invested by the system in purchasing things that it intends to sell, and must be minimized.

3.       Operational Expenses: this refers to the money spent by the system in converting inventory into throughput, and must be minimized.

Alex takes into confidence four people working in the plant - Bob Donovan (Production Manager), Ralph Nakamura (runs data processing for the plant), Stacey Potazenik (inventory control manager) and Lou (Plant controller). They discuss the three new points of measure, and conclude that they make great sense. Thereafter, Jonah, through telephone conversations and even personal visits to the plant, explains to them that the traditional points of measure such as efficiency of individual equipments, wages, etc. do not represent the true state of the system. And the reason for this is the combination of the two phenomena that exist in every plant – dependent processes and statistical fluctuations.

Alex gets a closer and better look at this concept during a forest hike with his son and other kids, where he realizes that the speed of the whole line depends on the speed of the slowest kid (bottleneck or constraint), and to improve the speed of the line, the slowest kid must be enabled to move faster. Alex, with his team, sets out to apply these principles in the plant. They successfully manage to discover bottlenecks in the system and accordingly used them to improve the throughput and reduce the inventories and operational expenses.

Needless to say, they observe huge improvements in the plant as the pending orders start shipping at a fast rate. Moreover, they successfully deliver a very large order from an important client and get themselves a long term contract as well as the faith of the marketing manager Johnny Jons.

Following a similar route and constantly debating and understanding the principles taught by Jonah, Alex and his team finally figured out the precise steps for the process of improvement:

1.       Identify the system’s constraint(s).

2.       Decide how to exploit the constraint(s).

3.       Subordinate everything else to the above decision.

4.       Elevate the system’s constraint(s).

5.       If, in a previous step, a constraint has been broken, go back to step 1, but do not allow inertia to cause a system’s constraint.

Socratic approach has been given a lot of emphasis in the book. At one point, Jonah tells Alex that he would not provide him with straight solutions, as it would be detrimental to his understanding of the concepts. Instead, Jonah gives Alex the basic principles and some relevant questions, which helps him in figuring out the solutions himself. Besides, this approach has also been adopted by Alex to resolve the marital issues with Julie, by looking for an answer to the question: what is the goal of their marriage?

Overall, “The Goal” is a very interesting and entertaining novel, which, at the same time, provides a basic and simple understanding of the Theory of Constraints. This theory, despite being plain common sense, seems far from the conventional approach of manufacturing. Moreover, the implications of these principles are applicable in many other fields and industries.

The writer of this article, Akshay Agarwal is a PGP student of Indian Institute of Management, Raipur and has done his B.Tech from Indian Institute of Technology, Guwahati.
The Book Review of the Winner of the Book Review Competition will be published in the Half Yearly Magazine. To request a copy of the magazine, mail us at opep@iimraipur.ac.in  

Lean Manufacturing at Dell

 

Dell has also used Just in Time principles to make its manufacturing process a success.  They leverage their suppliers use JIT. Dell is about quickly assembling the part which are sourced from their suppliers and delivering to customers. They force their suppliers to carry inventory and Dell stays lean on inventory. Short lead times are provided to customers and thereby shorter lead times are demanded from their suppliers. Quick assembling and quick shipping is the USP of Dell. They have been able to do successfully implement JIT because of variety of reasons. It has had a Dependable supplier base. They have been able to meet Dell’s demanding lead time requirements. Also it has a seamless system that allows Dell to transport its system requirements. The systems are very efficient as they arrive in time to help Dell fulfill its lead times. Somehow Dell has been able to fore the suppliers to carry inventory and this willingness of suppliers to carry inventory on hand allows Dell to have low costs on inventory.

Because of JIT it has been able to successfully reduce the inventory related costs.  In 1993 it followed a practice of carrying over 10 weeks of inventory. Since 2001 it carries 1 week of inventory. This saves it majority of costs now. Inventory costs are even higher in computer industry as rate of depreciation is very high. By this rate Dell used to lose roughly 10% of the value of inventory per year.  After implementing JIT it loses roughly 1%. By this calculation dell has been able to save 9% costs in inventory management.

References : www.inventorymanagementreview.org/justintime/

The writer of this article, Naman Jain, a PGP student of Indian Institute of Management, Raipur has worked in GE Healthcare Labs. He has done his B.Tech in Computer Science & Engineering from Vellore Institute of Technology, Vellore and can be reached at namanvit @ gmail . com