Amazon.com Operational Strategy

1. Introduction:

Amazon.com has become the largest customer friendly online retailer and provides one click purchase facility to its wide range of products including books, music, toys, gifts, electronics etc. For 2011 Amazon’s net sales documented the value of $48077 million to earn net income of $631 million (Annual Report, 2011). Currently, Amazon is serving more than 137 million of its customers with its 56200 employees all over the world (Distinguin, 2011). Moreover, International traffic also ranks Amazon at 16^th position. However, Amazon achieved this milestone through deploying its threefold strategy of limitless inventory, customer convenience and low price. The purpose of current study is also to explore that how Amazon achieved its objective by using its digital channel.

2. Mass Customization:

Primary difference between a physical retailer and Amazon is its online operations that allow Amazon to adopt mass customization. Amazon.com provides an opportunity to offer huge collection of books, music or other products without keeping them physically on shelf. Millions of books are available at Amazon for purchase while a large brick and mortar store is required to keep such huge inventory. In 1999 Amazon consistently added new product line or capabilities after every six weeks to increase its sale revenue. Currently, its product range can be divided into 34 broad categories. Such product customization differentiates Amazon with its competitors. It is argued that product customization is a critical source of competitive advantage even as compared to price competitiveness as it allows customers to select products according to their needs and wants at one place (Dewan et al., 2003; Murthi and Sarkar 2002). So, one can attribute such mass customization to the success of Amazon.com.

2.1 Amazon Operating Models:

However, to provide such mass customization Amazon follows its three operating models. First, it sells its own inventories and manages customer relation and supply chain on its own through Amazon.com. Second, Amazon also act as third person and allow other companies to place their products at Amazon.com for sale. However, Amazon only manages front end customer relations while logistic issues are controlled by sellers. In 1999 Amazon offered Zshop facility that allows small companies to sell their product through Amazon.com. His strategy was to compete with e-bay who was also providing similar services of auction. At last Amazon has also introduced its e-commerce solutions and design web sites and offer hosting services to its customers. In other words these three operating models provide huge collection of products that is consistent to its business strategy limitless inventory.

3. Integrated Business Operations:

Success of Amazon strategies lay within its integrated business operations. Figure 1 illustrates that how Amazon fulfill its customers order through integrating its operations. Amazon.com server uses the supply chain optimization software to predict demand and also optimize its supply chain. In first step customers’ data for credit card is processed to finalize their orders. Amazon warehouse is also information about customer order in this respect for coordination. This is done to find out stock information at Amazon warehouse. However, in case of shortage at Amazon warehouse appropriate suppliers are selected. This information is transferred to publishers, music companies and electronic OEM for further process. After receiving order information publishers, music companies and electronic OEM dispatch required products physically to the nearest Amazon warehouse. At Amazon warehouse these items are packed and also send to customer place through UPS or US postal services. In this way Amazon develop integrated business operations that share information over its network for effectiveness.

Figure 1: Amazon Network of Fulfillment

Amazon integrated system speeds up the process and customers can receive their product at same or next day. This will positively contribute to customer’s loyalty. Moreover, Amazon also made required changes to its fulfillment system when needed especially for huge order fulfillments. For instance Amazon received record advance order of 275000 for single volume of Harry Porter. This challenged information staff at Amazon. During such event Amazon mailed to its customers for confirmation of delivery information. Moreover, before shipment data regarding each package was updated. For Shipment purpose Amazon contracted with Fedex for shipping 250000 orders at released date that scheduled 100 flights to fulfill orders. In this way, Amazon successfully met such huge order fulfillment on released date.

3. Low Cost Strategies:                         

Porter (1980) argued that firms can gain sustainable competitive advantages through adopting differentiation, cost leadership or focus strategies. While on the other hand Loudon & Loudon, (2006) argued that firms can gain cost leadership through online operations as it reduces ordering and inventory cost. Mass customization at Amazon also augmented its profitability through high activity with low variable cost. Fixed cost per unit decreases with the increase in activity as compared to variable cost per unit (Drury, 2006). While in case of Amazon fixed cost of system dominates as compared to nominal variable cost. Cost of technology, many parts of fulfillment cost and advertisement costs are fixed in nature. On the other hand Amazon is bearing nominal variable cost. This indicates that high activity will lead to low fixed cost per unit cost that Amazon can use to settle for low prices. So, this mass customization will also lead to high productivity that ultimately will optimize profits through decreased fixed cost per unit. Moreover, Amazon also reduces its costs through cross docking shipments. For instance Amazon place its different items like books, toys, electronic etc simultaneously in single order to the closest warehouse located near to customers. To do so, Amazon uses its “12 technologies” to optimize solutions and to predict demand.

4. Customer Fulfillment Network (CFN) Strategy:

On the other hand Amazon has also adopted the customer fulfillment networking (CFN) strategy that emphasize to augment gross profit margins through purchasing books directly from publishers rather than involving distributors who add their profits. CFN strategy was developed to integrate customer relationship management and order fulfills management applications. CFN system compares customers’ demand with their capabilities to recognize that whether Amazon can fulfill their orders with reasonable profits or not. It also allows predicting dynamic demand that ultimately reduces the carrying cost and transportation cost at Amazon warehouse. Moreover, it also allows improving their cash flow as less cash is tired up in inventory and increase inventory turnover that ultimately augments firm’s profits.

5. Customer Centric Strategies:

One can also explain Amazon’s success in respect of its ability to extract and use of customer information. Amazon keeps a complete record of all of its customers. Amazon main a data base that knows that when and what a customer orders. If a customer has not been placing order for some time then Amazon sends him an e-mail coupon containing information regarding entirely different or related product line to stimulate customers for reordering. For instance it is possible that you will receive an e-mail regarding computer equipments products if you last purchased a notebook.

5.1 personalized Options:

Similarly, Amazon.com also provides convenience in selecting products over its website through customization. Web pages are customized according to the liking of their customers. One can easily personalize his selection when he login as a customer at Amazon.com. All the Amazon products are divided into 34 broad categories. A person can select and search within these 34 broad categories easily. It is consistent with their strategy of providing convenience to customers.

5.2 Customer Review:

It is argued that digital means of information can be used to communication product quality and also creates a bond between buyers and sellers especially within online markets (Chevalier and Mayzlin, 2006). Amazon also stimulates its customers to write editorial and review of book they purchased. This option of book review communicates positive information to other potential customers and increases the like-hood of purchase. It is also consistent with Chevalier and Mayzlin, (2006) who also argued that improvement in scores obtained by a book through book review contributes to purchase intentions and lead to high sales revenue.

3.3 Quick Shipment:

Providing hassle-free fulfillment of customers’ order is also viewed as one of the key success areas of Amazon. For most of the product Amazon offers same or next day fulfillment. This is what makes different Amazon with other online retailers. However, Amazon does this through its integrated order fulfillment process as demonstrated in figure 1.

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