INDIAN INSTITUTE OF MANAGEMENT BANGALORE

8/10
Amazon.coms European Distribution
Network



5
th
August 2013
Supply Chain Management
Submitted by Group 7
Rajpal Singh (1211047)
Diwyesh Anjan (1211094)
Gaurav Kumar (1211095)
Gaurav Pandey (1211096)
Hari Prasad (1211097)
Gaurav Kumar Mehra (1211183)


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Amazon Distribution Network


Evaluation of Distribution Network in US
The Amazons distribution network in US can be evaluated on the parameter of:
Supply Chain Management
Customer Service Management
Supply Chain Management
Amazon always followed a distinctive procurement strategy i.e. hold modest inventory and rely
on wholesalers. Initially Amazon stored only 5% of its orders in its warehouse. This allowed them
to decrease inventory holding cost. Amazon was able to decrease the inventory turns from 70 to
17 in the period 1997 - 2002.
When Amazon started to feel the pressure from Wall Street in 2000 and its stock price began to
fall, it turned its focus towards operational excellence treating customer right but at lower
cost. To achieve this, Amazon adopted the innovative management techniques like Six Sigma
and Total Quality Management. These practices led Amazon to improve inventory record
accuracy, simulate holiday seasons, create a new Flow Manager position in each DC which
helped them to redesign major distribution processes and reconfigure DC layout to make it
easier to locate, sort and ship customer orders. Amazon also developed a method called Postal
Injection or Zone Skipping to reduce shipping cost. The postal injection method helped
Amazon reduce its shipping cost by 5%-17%.
Amazon DC
Wholesalers
Customers
Publishers

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For inventory optimization in the distribution network, Amazon followed a principle where it
reduced the inventory carrying cost by having products at the right place in the right amount
and at the right time. This also helped them to reduce the split shipments. Amazon refined the
software used to forecast customer demand and hence reduced the risk of buying too much or
too little merchandise.
The operating margin for Amazon in the given period 1996-2001 was negative implying that the
operating expenses exceed the operating incomes. The trend is shown in the figure below:



Amazons mantra to deliver at any cost in the year 1999 helped it achieve growth but the
expenses were huge, because of which the operating margin came down drastically. In the
fourth quarter of 2001, Amazon showed a positive operating margin due to the investments in
optimization in the operations at DC, use of technology etc.
Amazon adopted several niche technology like radio frequency technology, voice technology
etc. to optimize its operations.
Customer Service Management
Amazon provided a wide variety of products to the customers. It started off with a selection 1
million titles and increased it to 2.5 million titles in less than three years to become the Earths
Biggest Book Store. Subsequently Amazon expanded its product line to include music and video
category in 1998. The product category also included electronics, hardware, toys etc.
Amazon designed its distribution network and DCs considering the suppliers, customer
locations, inbound and outbound freight rates, warehouse expense rates, tax rates etc. Amazon
selected the DC locations such that to deliver the products to customers within 2-3 days lead
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
1996 1997 1998 1999 2000 2001 2002
Operating margin
Gross margin
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time. During the period 1997-1999, Amazon added 3.2 million square feet of distribution
capabilities which increased its capacity to pack, wrap and ship to nearly 1 million boxes a day.
Amazon adopted the dual delivery model one through its DC located nearby and other
through Drop Ship directly from suppliers. This allowed to Amazon to have high product
availability for customers.
Amazon provided the available-to-promise functionality in its customer service which gives an
accurate time frame for a customers order to ship.

Thus, we can conclude that Amazon was successfully adapting the supply chain and distribution network
to meet with rapidly increasing growth in customer base and reduce the operating expense.

Various Order Fulfilment model used by Amazon in United States
Amazon used multiple fulfilment models in US in order to minimise its inventory holding and to provide
reliable and speedy customer service while delivering variety of products.
Model 1: Distributor storage along with carrier delivery

This is the oldest model followed in Amazon. Major features of this model are:
Minimise Inventory level at DC - Amazon maintains minimum inventory at DCs and sources other
titles like books, DVDs, music, etc after the receipt of the customer order. In case of non availability
of customer order at Distribution centres, Amazon places order to publishers, wholesalers,
suppliers, etc to fulfil it by supplying the same to Amazon DCs.
Assessing inventory level at DCs is important for fast moving items whose demand can be better
predicted. However, in case of unavailability of item at Amazons DCs, order fulfilment to the
customer requires increased lead time. Thus in order to reduce the lead time as well as dependence
on the wholesalers, Amazon had increased its warehouse capacity and the number of titles held at
Amazon DCs in addition to introducing new DCs as part of its expansion plan.
Amazon is able to specify the accurate time frame within which the order will be available to the
customer by integrating the suppliers management system with its own warehousing, inventory
and transportation systems. Wholesalers and publishers are used to keep inventory of slow moving
items and are used as safety net for out-of-stock items in order to respond to quick surge in
demand.
Amazon DC?
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Amazon also uses zone skipping to deliver the orders to the customers by arranging full truckloads
of order to be driven from DCs to major cities, thereby bypassing the postal services sorting hub.
Reducing Amazon shipping cost drastically.


Model 2: Drop Shipping i.e. Manufacturer/wholesaler storage with direct shipping

This model was adapted by Amazon to provide more variety of products at lower response time.
Amazon also implemented necessary IT infrastructure to maintain the order visibility.According to this
model, wholesalers have to ship the order directly to the customer without going through Amazons DC.
With integrating drop shippers in software Amazon is able to allocate the ordered volume among its
own DCs and drop shippers based on the price optimization algorithm.
This model also allowed Amazon to offer computer or electronics items which were costly and
difficult to handle from its DCs. Amazon only processes order and payment and places the order on
wholesaler. Wholesaler sends the order directly to customer. Hence the physical delivery of the
order is handled by wholesalers.
This model is more useful for single item order for slow moving product. It offers relatively faster
fulfilment as compared to sending the order through Amazons DC. By pooling the entire inventory
at the manufacturing end, the variability is better managed.
This model may also result into lesser customer experience if order comprises of multiple items
from different manufacturers or wholesalers as it leads to multiple deliveries at customer end. But it
is mentioned in the case that Amazon is good at pooling these multiple products and shipping them
to customer.

Model 3: Partnering with manufacturers to handle the inventory in Amazons DC

This model is primarily similar to the first model where Amazon DCs hold the inventory. However, the
inventory is owned and managed by the manufacturer as opposed to Amazon. Amazon only maintains
the online store, order processing, order fulfilment and customer services. This model is useful for
orders with high variability where demand is uncertain and high risk of loss of inventory due to
obsolesce, damage etc. Since the inventory is owned by the manufacturer, it will bear all the financial
risk associated with inventory.
High Demand uncertainty
Compared to shipping from Amazon
DC?
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Comparison of the Order fulfilment model on Major Paramenters
Parameters/Models
Distributor storage along
with carrier delivery
Drop Shipping
Partnering
with
manufacturers
Product variety Lesser product variety Greater Product variety
Same as
distributor
storage
Lead
time
Faster reaction time with
zone skipping
Variable Response time
dependent wholesaler
product and location
similar to
distributor
storage
Customer
Experience
very good particularly for
bulky delivery
Lesser customer
experience due to pooling
of multiple product
similar to
distributor
storage
Order visibility Easier to maintain
Difficult Amazon
implemented supply
management systems
similar to
distributor
storage


Distribution Network Strategy in Europe
Current Scenario
At present, Amazon operated three separate and independent distribution centres catering to the users
in UK, Germany and France. The European market was an aggregate of the regional markets and
Amazon needs to adhere to the local laws and customs.
By 2002 revenues from its International (Europe) subsidiaries were $1.2 billion (35% of total revenue). It
was the fastest growing segment 77 %. In order to cater to these 3 different geographies, Amazon has
3 Distribution centres based in:
(1) UK Marsten Gate.
(2) Germany Bas Hersfeld.
(3) France Orleans.
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All the sourcing is done country wise and from local suppliers. The customer services centres are present
in UK and Germany (Netherlands was closed down in 2001).
Evaluation of options for European Distribution Network
With the opportunity for European expansion and long term growth needs, the infrastructure needs to
be commensurate. We would consider the below points in evaluation the options available for
establishing the European Distribution Network (EDN) :
(1) Strategic control over Inventory: The idea here would be to reduce the redundant inventory of
common products such as CDs, books, etc which are carried in more than one European DCs.
Having an EDN would result in inventory planning at global level.
(2) Global Sourcing: An established EDN would help Amazon to globally source its product
combining the synergies of individual DCs. This would highly reduce the cost of sourcing
products from the current system of individual sourcing.
(3) Risk Reduction: An effective EDN would help Amazon to reduce the underlying risk of
depending on a single DC to serve a large customer base. Historically each European DC has
experienced failure at least once.
(4) Bettering Customer Experience: For the above mentioned, EDN would help Amazon to improve
its customer experience by enabling Amazon to fulfil the order from appropriate DC thereby
reducing shipping time.
(5) Load Sharing and Growth in European Countries: Load in case of huge backlogs can be
distributed evenly across the DCs in an EDN. This would help Amazon to do load sharing. As
Amazon plans to expand in other European countries, an up and running EDN would help it to
expand smoothly as it could supply from current DCs instead of setting up local distribution
operations.

Available Options for Establishing EDN
There are 3 options for Tom Taylor to go forward with his EDN idea. We will evaluate each of these
options in detail:
(1) Single European Distribution Centre:
In this option, Amazon would link the different sites to a single European distribution centre. Amazon
needs to determine the optimal location, create transportation plans and other implementation
decisions. Below are the advantages and disadvantages of this approach:
Advantages:
Having a single DCs would help Amazon to do effective inventory planning, sourcing and delivery
setups.
Eventually market (demand) will
increase so no point going for single
DC
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Sourcing and Purchasing costs will be significantly reduced as they will do a global sourcing for all
its geographies (sites).
Centralized control over order reception, fulfilment and shipment.
Disadvantages:
Supplier market forces across geographies are different.
Compliance to local laws and culture specificities will be a major issue.
Customers are currently used to receiving their orders in 1-2 days. The new system coupled with
the local delivering capabilities (Detusche Post, Royal Mail etc) will lead to delays in delivery and
lost shipment. Though these postal systems are good in delivering nationally, they still do not
have pan European delivery competencies.
As the single DCs would have to cater to demands of multiple geographies, it would require huge
resources in terms of capacity, technology etc in order to maintain the same service level. This
would result in huge capital investments.
Failure of a single DC would mean huge disruption in their delivery network. This is the risk that
Amazon cant afford.
The location of the single DC as part of EDN would be a crucial decision. A new DC built from
scratch would again require huge capital investment from Amazon.

(2) Keep the 3 Distribution Centres:
In case of continuing the 3DC approach, Amazon needs to allow fulfilment of customer orders from
other country sites. Here the shipment approach that is appropriate (e.g. drop shipment) needs to be
evaluated. Amazon has 3 implementation options. The approaches for these 3 options are mentioned
below along with their advantages and disadvantages.
EDN as Primary Backup: Here, all 3 DCs continue to delivery using their local carrier and their own
inventories. The EDN (ie DCs of other 2 countries) would serve as a backup in case of failure or
disruption at a particular DC. This would ensure that current service levels for order fulfilment are
maintained along with an effective risk mitigation mechanism. However, this option may result in
redundant inventories at various DC. The major benefit of establishing EDN incurring significant
costs is not met as EDN serves only as a backup and the sourcing is still done locally.

Shared inventory among European DCs: Here the 3DCs would share the inventory among the
European sites which would result in significant reduction of inventory holding costs. For e.g.
some product categories could be served from a single DC based on the demand pattern of the
orders reducing stock level in other DCs. The downside of this approach is that since a product
might be available only at a single DC, this option would result in major transportation costs and
also face the risk of delays and disruption in case of failure of the DC. Another disadvantage would
be in case of multi-item orders resulting into split orders which will result in increased costs.

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Fully Integrated DCs: Here the operations across 3 DCs are fully integrated with the inventories at
the three sites physically mixed based on patterns of demand, inventory and transportation costs.
As this option is based on analysis of demand patterns, it would result in lower stock outs and
lower inventory costs along with lower transportation costs. This also ensures the reduction of
split orders and minimizes the risk in case failure of a single DC. A properly integrated EDN would
also facilitate global sourcing by virtue of analysis of mixed demand patterns. The downside of this
approach is the huge amount of analysis, planning and implementation costs in order to integrate
the operations across all DCs. However given the growth plans of Amazon, this investment looks
better from the long term perspective.
All three options require Amazon to analyse demand patterns, costs, and transportation facilities
across geographies, IT requirements and the DC capabilities apart from inventory ownership
under these options.
(3) 2 DC in the North and 1 in the South:
Considering the geography of Europe, this option would allow 2 DCs in the North to serve the customers
from countries in Northern Europe with the 1 DC in the south serving the Southern European customers.
Location of DCs, transportation plans and implementation decisions also needs to be determined in this
option.
Advantages
This option would allow the optimal order fulfilment for the Northern and Southern European
countries and reduce the delivery time for local customers close to the DC.
Disadvantages
Significant high costs as these DCs might be different from the existing 3 DCs in UK, Germany and
France.
As discussed before the delivery capabilities of national carries are not suitable for pan European
delivery.
Recommendations
Based on the above analysis, we would like to recommend the option of having 3 fully integrated
Distribution Centres in UK, Germany and France. This would ensure better responsiveness, lower
variable costs and better delivery service levels. With the creation of the robust EDN, these 3 DCs will be
capable to handle not only the demands in their respective countries but also cater to the growth of
Amazon in other European nations.
Why better responsiveness?
Lower Inventory, yes.