A supply chain is the network of relationships between the upstream and downstream activities with all stakeholders who are involved in this chain of relationships. To take an example, if a particular good or service has to be delivered to the customer, there are raw materials that are needed for the manufacture, the forms of transport and means of storage for the raw materials, the transport of the finished goods to the retailers and the logistics involved in getting the goods to the customer are all parts of the supply chain that extend from the suppliers to the customers. In other words, there is a chain of relationships between the firm and the partners involved in this chain. Therefore, supply chains are comprised of all these stakeholders and the relationships between them determine the effectiveness of the supply chain. In contemporary times, supply chains can be sources of competitive advantage as efficient management of the supply chain leads to cost savings and synergies between the components of the supply chain leads to greater profitability for the firms. It is for this reason that many business leaders have focused their energies on optimizing the supply chains for increasing the top line as well as the bottom line.
In times of economic recessions, supply chains can be used as strategic levers as they can be optimized to perform better than the rivals do so that more profits can be extracted and lesser costs incurred. The optimization of the supply chain through just in time or JIT methods of holding inventory, focus on reducing the COGS or the Cost of Goods Sold by rationalizing the expenditure on the components of the supply chain all lead to a situation that can be extremely beneficial to the firms. It is for this reason that many firms like Wal-Mart, Proctor and Gamble, Tata Motors, and Unilever has focused on rationalizing the activities that form the supply chain. The point here is that with astute management of the supply chain, the firms can derive value from the process, which can then translate into greater profits and lesser costs. Apart from this, the supply chains can also be of strategic and competitive advantage because a major portion of the cost of goods sold or COGS is made up of the logistics and the supply chain expenses.
To take some real world examples, Wal-Mart is one retailer that has managed its global supply chain in an adroit and efficient manner. As it operates in various countries around the world, it needs to have control over its global supply chain and this is where the company with its focus on local capabilities and global movement and integration has made its supply chain leaner and meaner. Further, the company is obsessed with costs and therefore, it focuses exclusively on how to make its COGS and the logistics aspects of the supply chain efficient and effective. Apart from this, the single-minded obsession with reducing costs has paid off handsomely for the company as it retains its number one position in the retailer market space mainly due to its cost effective strategies that translate into lower unit prices for the products it stocks. Of course, there are many who believe that the company over emphasizes the cost reductions in its supply chain and this has led to some ethical issues. However, the point here is that in times of economic gloom, Wal-Mart with its aggressive approach to supply chain management has scored over its rivals. Without suggesting that ethics should be discarded or ignored, the fact remains that a concentrated effort to rationalize the supply chain can pay off well for companies.
Finally, the twin challenges of the globalization of the world economy and the increase in the global complexity of supply chains are formidable and when taken together with the effect of the ongoing economic crisis, business leaders have their hands full trying to make decisions on how to meet these challenges.
To start with, Amazon’s SCM has a strategic fit with its competitive strategy of being the retailer of choice for its customers. The combination of multi-tier inventory management, superlative transportation, and highly efficient use of IT (Information Technology), and its wide network of warehouses are all geared towards aligning its SCM with its competitive strategy.
The next aspect is related to its outsourcing of its inventory management. Amazon outsources the storage and distribution of products that are not frequently purchased nor ordered for immediate delivery as well as products where the costs of storing them exceed the marginal returns on their sales.
On the other hand, Amazon stocks the frequently purchased and ordered items in its own warehouses so that it can be responsive to the customer needs as well as not compromise on the delivery times and the lead times. In other words, by segregating its inventory, Amazon is able to be responsive to the customers as well as cut costs or cut slack where it is needed (Kotler, 2012, 65).
Amazon divides its customer segments and follows a price differentiation strategy. The various forms of delivery are one day delivery, free super saver delivery, first class delivery, and prime customers delivery.
For all these segments, Amazon offers the customers an option of paying more for faster delivery or retains the traditional lead-time. Coupled with the inventory outsourcing, the customer segmentation into price-differentiated customers offers the company a nimbleness and agility in the market that changes with dynamic fluctuations in demand.
A key aspect of Amazon’s SCM is that it has evolved over the years in response to its growth in the market. For instance, Amazon started off as a bookstore, which acts as an intermediary between the buyers and the sellers and does not stock any product of its own.
Gradually, this gave way to holding some items in its own warehouses and at the present, Amazon follows a push-pull strategy wherein the inventory is held in a push strategy and the shipment of the orders is done in a pull strategy. Of course, even now, Amazon follows pure pull strategies for items that it does not stock.
Any discussion on Amazon’s SCM is incomplete without an analysis of its multi-tier inventory system. The first tier is the aggregation in the distribution centers, which ensures that Amazon holds fewer inventories and responds to demand in a dynamic manner.
The next tier is comprised of the partner distribution centers and the wholesalers wherein whenever an ordered product is not available in its own distribution centers; Amazon can rely on its partners and wholesalers to supply the customer with the required product. Further, through the use of sophisticated and real time IT, Amazon is able to leverage efficiencies in its distribution.
The third tier is comprised of the networks of third party sellers, publishers, vendors, and manufacturers who ensure that Amazon acts as an intermediary that fulfills orders from customers by linking them to this tier.
The previous section has analyzed Amazon’s SCM in a detailed and comprehensive manner. By focusing on the five themes in which the analysis proceeded, we were able to identify the areas that Amazon does well in its SCM. However, there are components and aspects of the SCM of Amazon where improvements can be made. This section identifies those areas and proposes some recommendations that Amazon can follow and implement to make its SCM world class and be a source of sustainable competitive advantage.
In other words, while the other components of the SCM seem to be efficient and complementing and supplementing each other, the part of the SCM where the customer interacts has been found to be deficient. Therefore, Amazon can setup its own transportation and actualize superior last mile delivery by creating its own fleet of delivery vehicles and personnel.
Further, this recommendation also entails creation of a unified IT system that can involve all the suppliers and the stakeholders in its SCM and not Amazon alone. This would call for substantial investment as well as a new business model where Amazon does not operate in isolation but instead brings together all the elements and the components of the supply chain under one umbrella.
As it expands its global footprint, it needs a single source of truth (to use the industry jargon) wherein it can have visibility right from procurement to end customer delivery. This would also ensure that its problems with last mile delivery are sorted out and customers as well as suppliers along with the employees are linked together in a real time system.