How Amazon Is Changing Supply Chain Management

The online retailer has quickly innovated its way to the top

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Amazon has changed the face of retail through its use of bold supply chain strategies and the deployment of innovative technologies. The online retailer's history is one of rapid growth and relentless innovations. It's reshaping the supply chain and leaving competitors scrambling to catch up. 

Rapid Growth

In 2004, 10 years after Amazon was founded, its annual revenue was just under $7 billion. According to Statista, by 2018, revenue reached almost $233 billion. In fact, Amazon is the fastest company to reach $100 billion in sales revenue, taking only 20 years. From its inception, Amazon has been growing approximately 20% per year. It grew by over 20% from 2018 to 2019. Currently, it enjoys nearly 14% of gross global e-commerce sales. Many believe Amazon is aiming for $1 trillion in yearly revenue. If you take Amazon’s roughly 20% yearly growth rate into the calculation, it should reach that goal by 2027.

Whether or not the company achieves that goal by then, its transformation from a simple online bookseller to the most formidable force in the retail industry is remarkable. One of the driving forces behind that transformation is its innovative and highly efficient supply chain. Amazon’s continuous efforts to deliver products to the customers in the shortest possible time are putting intense pressure on other retail industry giants across the globe and thus changing the way supply chain management works.

Game-Changing Delivery Strategy

Back in 2005, Amazon launched its Amazon Prime service. By paying an annual membership fee, customers received guaranteed two-day shipping on hundreds of thousands of products. The introduction of two-day delivery was the game-changer that established the dominance of Amazon in the online retail industry. When many other retailers started to catch up by offering their own free two-day shipping, Amazon tipped the playing surface again by offering a one-hour delivery with its Amazon Prime Now service (which it has since changed to a free two-hour delivery). The company has always made life difficult for its major competitors with its innovative strategies.

Advanced Supply Chain Management Practices

Amazon enjoys a cult following. It is a favorite choice for customers due to one crucial reason: quick and efficient supply chain management. The combination of sophisticated information technology, an extensive network of warehouses, multi-tier inventory management, and excellent transportation makes Amazon’s supply chain the most efficient among all the major companies in the world. Those efficiencies have made the current shop-from-home world possible.

Outsourcing Inventory Management and Insourcing Logistics
Amazon’s supply chain heavily depends on the outsourcing of its inventory management. Products that are infrequently ordered are not stored in regular Amazon warehouses. It may come as a surprise to you that third-party sellers are behind over 50% of Amazon’s sales. That amounted to over 3.4 billion products sold by third-party sellers in one year according to a May 2020 Amazon Report.

Amazon’s two-hour or same-day shipping is possible due to its dependence on its own logistics. Amazon understands too well that depending on third-party logistics to deliver these orders would just lengthen the product delivery time. That’s why Amazon mostly uses its own delivery vehicles for same-day or one-hour delivery options.

Delivery Options for Customers
Amazon has different warehouses for different kinds of products and customer preferences. Prime delivery, one-day delivery, first-class delivery, and free super-saver delivery are some of the common delivery options available to Amazon customers. Amazon’s continuous efforts to meet every customer's delivery preferences make it a logistics giant.

Push-Pull Strategy for Supply Chain Success
Amazon’s own warehouses are strategically placed and stocked, moving closer and closer to main metropolitan areas and city centers. As a result, it uses a pure push strategy for the products it stores in its warehouses, forecasting demand for the specific region. On the other hand, it uses a pure pull strategy when it sells the products from third-party sellers, using more of an order-by-order fulfillment model.

Classes and Zones
Amazon boasts 110 fulfillment centers in North America and almost 800,000 employees. To make good on increasingly fast delivery promises, the company has positioned many new warehouses in proximity to local urban markets. (Walmart's online strategy in China now similarly makes use of a closer-to-the-customer fulfillment model, operating a network of mini-warehouses.)

The location, size, and number of warehouses are important factors in Amazon’s supply chain success. Its warehouses are divided into five storage areas. Its library prime storage stores books and magazines. Next, its pallet prime storage stores full-case products that have very high demand. Next, case flow prime storage stores high-demand products picked in less-than-case quantities. Its reserve storage accommodates irregularly shaped and low-demand products. Finally, its random storage area stores smaller, moderate-demand items.

In 2012, Amazon acquired a provider of automated and robotic warehouse solutions called Kiva Systems. And in 2015, that company was rebranded as Amazon Robotics. The robots of Amazon Robotics can pick and pack without needing any human assistance, enabling Amazon to complete warehouse activities incredibly quickly. Amazon has increased its army of warehouse robots at a rate of almost 35,000 per year since 2015. As of 2020, Amazon had more than 45,000 warehouse robots and counting.

To date, Amazon’s robotics have been aimed at bringing goods to people for the picking of orders. The next generation of robots will see them picking as well as packing orders on their own to reduce the need for human workers.

While Amazon has been increasing its army of robots in its warehouses, other online retailers were initially slow to follow. Now, however, robots are catching on both domestically and abroad in large facilities and smaller islands of automation within existing facilities. Autostore is an example of a robotic automation provider that can accommodate such islands of automation.

Supply Chain Cost
Due to the huge economies of scale and a bundle of industry-leading supply chain strategies, Amazon has been able to keep its overall per unit supply cost to a bare minimum. As a result, it has been difficult for other companies with far lower sales volumes and only their own warehouses to compete.

Drones: The Supply Chain of the Future

In 2013, Amazon’s CEO Jeff Bezos announced that his company was developing a drone-based delivery system called Amazon Prime Air that would be delivering products under five pounds in locations within 10 miles of Amazon’s fulfillment centers within just 30 minutes or less. There are, of course, many hurdles to overcome to realize this dream. But Amazon is keeping at it. As of November 2017, it announced the development of a drone that would self-destruct during flight, if required, to keep people safe.

Research and regulatory compliance updates continue, but there is no concrete date yet for the official flight of Amazon's drones. Still, developing the drone-based delivery system is a major indicator that Amazon is doing everything possible to leverage all of the latest supply chain technologies to maintain its place as the clear market leader.

Manufacturing Sector

Amazon is not just a retail giant anymore. It now produces a wide variety of products including batteries, backpacks, Bluetooth speakers, iPhone chargers, dog poop bags and more. Its product manufacturing arsenal continues to expand to include more and more categories.

Amazon understood that it could produce many of the third-party products it is selling to customers at much lower prices. The company's high volume naturally lends itself to low-cost production. As a result, the manufacturing sector of Amazon is making it financially stronger while grabbing market share from many manufacturing companies. This manufacturing support for its retail operations provides Amazon with an important revenue growth opportunity.

The Bottom Line

The rate of Amazon’s innovations in supply chain management has been mesmerizing, making it difficult for lower-volume competitors to keep up. Amazon is forcing its major competitors to invest more in supply chain automation, lessen the overall product delivery time, increase the number of warehouses, and even engage in product manufacturing.

Its acquisition of Whole Foods is also a bold declaration of its move to embrace brick-and-mortar retail, and further emphasizes the convergence of traditional retail and e-commerce strategies. Most importantly, Amazon’s unique supply chain strategies and continuous technological innovations have already changed the way supply chain management works. With impending advances in robotics, drones, and other autonomous vehicles, one can only guess what innovations are next for Amazon.