Amazon Case 2010

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AMAZON.COM: E-TAILING GROWS DESPITE THE SLUMPING ECONOMY

The Opportunity Anldzon.com (amazon. com) reported that its annual profit for 2008 had doubled, witll a 41 percen t revenue increas e, de spi te adverse U.S. ilnd global economic conditions.

Entrepreneur Jeff Sezos fa ced an opportunity rather than a business problem. In the early 1990s, Sezos saw the huge potential for retil il sales over the Internet and identified books as the most logical prod uct for e-tailing. In July 1995, Sezos started Amazon.com, an e-tail ing pioneer, offeri ng books via an electronic catalog from its Web site. Over the years, the compallY has recognized that it must continually enhance its business models and online storefront by expanding its product selection, improving the customer experience, and adding services and alliances. In addition , the company recognized early on the importance of order fulfillment and warehousing. It has invested hundreds of millions of dollars in building physical warehouses designed for shipping small packages to hundreds of thousands of customers. Amazon.com's challenge was, and remains, how to succeed where many have failed- namely, how to sell consumer products online, at a profit, and show a reasonable rate of return on investment.

The Solution: Reaching Out to Customers In addition to its initial electronic bookstore, Amazon has expanded its offerings to a vast array of products and services segmented into three broad categories: media (books, music, DVDs, etc.); electronics and other merchandise (including its new wireless reading device, "Kindle"; office supplies; cameras; toys; etc.); and other (nonretai l activi­ties, such as Web services, Amazon Enterprise Solutions, etc.). Key fea tures of the Amazon .com superstore are easy browsing, searching, and ordering; useful product informa­tion , revi ews , recommendations, and perso nali zation; broad selection; low prices; secure payment systems; and efficient order fulfillment.

The Am azon.com Web site has a number of features that make the online shopping experience more enjoyable. Its "Gift Ideas" section features seasonally appropriate gift ideas and services. AmazonConnect allows customers to select their favorite authors, read about them, and then receive e-mails from those authors.

Amazon also offers various marketplace services. Amazon Auctions hosts and operates auctions on behalf of individuals and small businesses throughout the world. The Shops service hosts electronic storefronts for a monthly fee, offering small businesses the opportunity to have customized storefronts sup­ported by the richness of Am azon's order-fulfillment processing. Customers can use Web-enabled cell phones, PDAs, or Pocket PCs to access Amazon .com and shop anywhere, anytime. Amazon.com also can be accessed via AT&T's #1 21 voice service.

Amazon is recognized as an online leader in creating sa les through customer intimacy and customer relationship man agement (CRM), which are cultivated by informative marketing front ends and one-to-one advertisements. In addition, sales are supported by highly automated, efficient back-end systems. When a customer ma kes a return visit to Amazon , a cookie file (see Chapter 4) identifies the user and says, for

example, "Welcome back, Sarah Shopper," and then proceeds to recommend new books from the same genre of the cus ­tomer's previ ous purchases and a range of other items. It also provides detailed product descriptions and rating s to help consumers make informed purchase decisions . The site has an efficient search engine and other shopping aids. Amazon.com has a superb wa rehousing system that gi ves the company an advantage over the competition.

Customers can personalize their accounts and manage orders online with the patented "l-Click" order feature. l-Click includes an electronic wallet (see Chapter 11) , which enables shoppers to place an order in a secure manner without the need to enter their address, credit card number, and other information each time they shop and allows customers to view their order status, cancel or combine orders that have not yet entered the shipping process, edit the shipping options and addresses on unshipped orders, modify the payment method for unshipped orders, and more.

In 1997, Amazon.com started an extensive associates program . Sy 2009, the company had more than 2 million part­ners worldwide that refer customers to Amazon .com. Amazon.com pays a 4 to 10 percent commission on any resulting sale. Starting in 2000, Amazon.com has undertaken alliances with major "trusted partners" that provide knowledgeable entry into new markets. For example, clicking "Office Supplies" allows customers either to select from Amazon. co m's office supplies or to browse those of Office Depot; clicking "Health and Personal Care" allows customers to benefit from great deals offered by Weight Watchers. In yet another extension of its services, in September 2001 Amazon signed an agreement with Sorders Group Inc. , providing Amazon's users with the option of picking up their merchandise at Sorders' physical bookstores (In-Store pi ckup). Amazon.com also is becoming a Web fulfill­ment contractor for national chains such as Target. Am azon also has its own search engine, called A9 (a9.com), and offers a range of Web services to developers (Amazon Web Services) .

I

II

• Part 2: Internet Consumer Retailing

T he Results In 1999, Time magazine named Sezos "Person of the Year," recog­nizing the co mpany's success in popularizing online shopping. In January 2002, Amazon declared its first profit-for the 2001 fourth quarter. Since then , the company has remained profitable. Annual sales for Amazon.com have trended upward, driven largely by produc.t diversification and its international presence. This pioneer e-tailer now offers over 17 million book, music, and DVDjvideo titles to some 20 million customers.

Amazon also offers several features for international customers, including over 1 million Japa nese-language

titles. Amazon.com maintained its position as the number one e-tailer in 2008, generating revenues of $19.2 billion, with a net income of $645 million. In 2009, the Amazon.co l Web site attracted at least 615 million visitors . Like all businesses , Amazon. com, the ki ng of e-tailers, which has shown all others the potential of B2C E(, will continue to walk the fine line of profitability, at least in the short run.

Sources: Compiled from Reuters (2008), Dignan (2008), and amazon. cor (accessed February 2009) .

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The case of Amazon .com, the most recognized and the largest e-tailer in the world, demonstrates the evolution of e-tailing, some of the problems encountered by e-tailers, and the solutions employed by Amazon.com to expand its business. It also is indicative of a key trend in Internet retailing : that the biggest online retailers are still growing and becoming rnore dominant, with the top 500 e-retailers accounting for 61 percent ($83.6 billion) of all online sales in 2007 (Hanks 2007). E-tailing , as dernonstrated by the Amazon case, con­tinues its double-digit, year-over-year growth rate despite the global econornic downturn. This is, in part, because sales are shifting away from stores and also because online shoppers are, in general, more affluent. However, some experts argue that online retailers will need to better understand customer behavior and preferences if they are to achieve a better convergence between technological capability and customer desires. In this chapter, we will look at the delivery of both products and services online to individual customers. We also discuss e-tailing successes and failure s.

Openjng Case

HOW AMAZON.COM FULFILLS ORDERS

The Problem With traditional retailing, customers go to a physical store and purchase items that they then take home. Large quantities are delivered to each store or supe rillarket; there are not too Illany delivery destinations . With e-tailing, custo illers want the goods quickly and to have them shipped to their homes. Deliveries of sillall quantities need to go to a large nUlllber of destinations. Too, items must be available for imillediate delivery. Therefore, Illaintaining an inventory of iteills becoilles critical. Mailltaining inventory alld shipping products cost Illoney and take tillle, which Illay negate sOllle of the adva ntages of e-tailing . Let's see how Aillazon .colll, the "king" of e-tailing, handles the situation .

When Aillazon.coill launched in 1995, its business Illodel called for virtual retailing-no warehouses, no inventory, no shiPlllents. The idea was to take orders and receive paYlllents electronically and then let others fill the orders . It soon became clear that tilis Illodel, although appropriate for a small cOlllpany, would not work for a giant e-tailer.

The Solution Aillazon.coill decided to change its business Illodel and handle its own inventory. The coillpany spent close to $2 billion to build warehouses around the country and beca ille a world-class leader in warehouse Illanagement, warehouse automation, packaging, and inventory management. Amazon.com outsources the actual shipment of products to UPS and the U.S. Postal Service (USPS).

How is Amazon.com able to efficiently fulfill millions of orders every month?

( Step 1. When a customer places an order online, a com­puter program checks the location of the item. It identi­fies the Amazon.com distribution center that will fulfill the order. Alternatively, it may identify the vendor that will fulfill the order in those cases where Amazon.com acts only as an intermediary. The program transmits the order automatically and electronically to the appropriate distribution ce nter or vendor. Here, we describe what happens in Amazon.com's di stribution centers, such as the 800,000-square-foot facility in Fernley, Nevada.

• Step 2. A "flowmeister" at the distribution center receives all orders and assi gns them electronically to specific employees.

" Step 3. The items (such as books, games, and CDs) are stocked in bins. Each bin has a red light .and -a button. When an order for an item is assigned, the red light turns on automatically. Pickers move along the rows of bins and pick an item from the bins with red lights; they press the button to reset the light. If the light returns, they pick another unit until the light goes off.

• Step 4. The picked items are placed into a crate moving on a conveyor belt, which is part of a winding belt

The Results Each warehouse can deliver 200,000 or more pieces a day. All five warehouses must handle more than 3 million pieces a day during the busiest part of the holiday seas on. However, in 2004, the warehouses were able to deliver only 1 million pieces a day, creating some delays during peak periods. Amazon.com leases space to other reta ilers with online bu si nesses, such as Target and Toys uR" Us. The system gives Amazon.com the ability to offer lower prices and stay competitive, especially

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system that is mo re than 10 miles long in each ware­house. Each crate can reach many destinations; bar code readers (operated automatically or manually) identify items in the crate at 15 different points in the conveyor maze. This trac ks the location of an item at any given time and reduces errors to zero.

, Step 5. All crates arrive at a central location where bar codes are matched with order numbers. Items are moved from the crates to chutes, where they slide into card­board boxes. Sophisticated technology allows items picked by severa l people in different parts of the ware­house to simultaneously arrive in the sa me chute and be packed in one box.

c Step 6. If gift wrapping was selected, this is done by hand .

< Step 7. Boxes are packed, taped, weighed, labeled, and routed to one of 40 truck bays in the warehouse. From there, they go to UPS or the USPS. The items are sca nned continuously.

Amazon.com rents out space in its wa rehouse and provides logistic services to other companies. It takes orders for them, too. How does it work?

1. Sellers label, pack, and ship items to Amazon.com.

2. When Amazon.com receives sellers' items, they store them until an order is placed .

3. When an order is placed, Amazon.com will pick, pack, and ship the item, and may combine it with other items in the same order.

4. Amazon.com manages postorder customer service and handles returns as needed.

beca use the company is becoming a huge online marketplace that sells thousa nds of items. As of 2007, profitability was increasing steadily.

To increase efficiency, Amazon.com combines items into one shipment if they are small enough. Shipping warehouses do not handle returns of unwanted merchandise-the Altrec.com warehouse in Auburn , Washington , handles returns .

Sources: Compiled from news items at amazon. com (accessed March 2009), Heizer and Render (2007), and LaMonica (2006).

510 Part 5; EC Support Services

( WHAT WE CAN LEARN ..•

The Amazon.com case illustrates the complexity of order fulfillment by a large e-tailer and some of the solutions employed. Order fulfill­ment is a major EC support service, and it is the topic of this chapter. This chapter examines other support services, primarily acquisi­tion of products and services, finance and accounting services, and customer services and customer relationship management (CRM).

12.1 ORD ER FU LFILLME NT AND LOGISTICS­AN OVERVIEW

The implementation of most EC applications requires the use of support services. The most obvious support services are security (Chapter 10), payments (Chapter 11), infrastructure and technology (Online Chapter 18), and order fulfillment and logistics (this chapter). Most of the seryices are relevant for both B2C and B2B . Exhibit 12.1 summarizes the major services described in these chapters, which organizes services into the following categories, as suggested by the Delphi Group (delphigroup.com); e-infrastructure, e-process, e-markets, e-content, e-communities, and e-services . The exhibit shows representative topics in each category.

The first three sections of the chapter give an overview of order fulfillment and logistics. Taking orders over the Internet could well be the easy part ofB2C. Fulfillment and deli­

very to customers' doors can be the tricky parts. Many e-tailers have experienced fulfillment problems, especially during the 1990s . Amazon.com, for example, which initially operated as a totally virtual company, added physical warehouses w:ith thousands of employees in order to

expedite deliveries and reduce order fulfillment costs.

EXHIBIT 12.1 E·Commerce Services _ _ _ _ E-Infrastructure

Consulting Services

I System Development Web Site Design

Integration Standards

Web Hosting, Security, Others

Networks, EDI, Extranets

E-Catalogs

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Other Services

E-Process

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Order Fulfilfment and

Logistics

EC Applications Portals, Buy-Side, Sell-Side,

Auctions, Exchanges

Marketing, Sales,

Advertising

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E-Markets

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Affiliate Programs, Data

Mining

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E-Commun ities

Business Partners

Government

Customers

Suppliers

~ E-Services __ Lr-----------~--~I Directory Services

Management and Analysis

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Sources : Adapted from ChiD (1997) , p. 18, from Murphy (2004), and From Natural Fusion ( lIatll ra lFlisioII. COIll) .

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