Illustration: © IoT For All Supply Chain Analysis Amazon’s supply chain may be the most innovative of its kind. It is experiential, meaning it puts the customer first and works backward. It is a vast and complex system that works in such an efficient way that it can provide speedy deliveries while also cutting down on high costs.
By following a flywheel model, their low prices pull in customers and merchants, which boosts volumes, which leads to lower prices, and all this generates growth for as long as the company puts the interests of the customers first.
Materials Management Approach
Supply Chain Structure
Amazon’s strategy is to control the shipment of goods across the entire supply chain, including procurement, shipment to distribution centers, and customer delivery.
Amazon has three main model:
• Retail – inventory owned and fulfilled by Amazon, purchased from vendors
• Fulfillment By Amazon (FBA) – inventory owned by third-party sellers and fulfilled by Amazon
• Marketplace – inventory owned and fulfilled by third-party sellers
As of September 2020, Amazon’s global outbound distribution network consists of 175 operating fulfillment centers, 84 sortation centers, 105 Prime Now Hubs, 651 delivery stations, and in the United States alone, there are 190 fulfillment, supplemental, and return centers combined (MWPVL International, 2020). Fulfillment centers are what Amazon calls its warehouses and their first-mile; it is here that inventory comes in from manufacturers and is shipped out directly to customers. Sortation centers are the middle-mile and where merchandise is sorted before it is sent to distribution centers. Unlike the fulfillment centers, Amazon Prime Now Hubs are closer to city centers, much smaller. They are operated by humans, not robots, who manually pick out the items for the orders. Delivery stations are the last-mile where customer orders are prepared for delivery.
Within their building types network, they also have specialized centers for non-sortable goods where Amazon workers pick, pack and ship bulky or larger-sized items such as patio furniture, outdoor equipment, or rugs. They have centers where they take in large orders of the types they believe will sell quickly and allocate them to fulfillment centers. There are also additional types of buildings that handle specific categories of items or manage goods at peak times of the year, as the holiday season.
Distribution Network and Logistics
Amazon has been increasingly relying more on its in-house delivery logistics. Challenges like fulfilling their two and one-day Prime shipping promises for their customers means that Amazon
Logistics has needed to streamline and expand its delivery services. This has led to Amazon needing to rely on both conventional and unconventional ways of delivering and transporting goods.
The typical flow of goods through Amazon’s inbound system, for their FBA and Retail, starts with overseas products arriving at cross-dock centers to be split across fulfillment centers. There are two models of inbound handling; one is where the vendor or seller manages their inbound flows, and the other where Amazon will cover the costs and collect the goods via air freight. Amazon uses both outsourced companies, like FedEx and UPS, and their internal air and truck fleets to handle inbound deliveries. Amazon has multiple airport hubs scattered across the entire USA and several thousand truck trailers to transport goods between fulfillment centers. They have even started to use self-driving trucks to haul some cargo in the US. Amazon reserves space on third-party ocean vessels to handle imported goods from China and organize its own logistics, allowing them to eliminate almost all other intermediaries on the way to the US.
For outbound logistics, Amazon uses a combination of air and ground transportation. After goods are picked and packed, they are sent to outbound sortation or delivery centers through intermediaries like UPS, FedEx, or local couriers to be prepared and loaded for last-mile delivery. Amazon’s last-mile fleet is a combination of outsourced and in-house services. Goods can be delivered by third-party partners like UPS, FedEx, USPS, local couriers, or Amazon’s in-house services. Amazon has a series of delivery solutions like their Mercedes-Benz Sprinter vans, Spartan walk-in-vans, which have been ordered in 2019, Amazon Flex, which allows drivers to use their personal vehicles to deliver packages in a program similar to UBER. There is also Scout, which is an electric wheeled autonomous delivery device that travels at a walking pace on sidewalks. Amazon Prime Air is still in the testing phase but will allow customers’ packages to be delivered via an autonomous drone. By next year, Amazon will have 100,000 electric delivery vans built by manufacturer Rivian.
As for delivery locations, Amazon strives to give customers as much flexibility and as many options as possible. Besides the default option of having goods delivered to a specific address, Amazon also has services like Amazon Key and Amazon Hub. The former is a smart lock system that allows the delivery person to enter the delivery address premises, and the latter are lockers that customers can go to and pick up their package using a key code.
This entire system, from start to finish, is tied together by Amazon’s integrated solutions. Amazon relies on its internet of things (IoT) integrated system to manage all the intermediaries within its supply chain. They rely on extensive product sales forecasting and inventory management systems to quickly fulfill orders and at high accuracy while optimizing shipping to customers. Its supply chain is extensively internal, allowing Amazon to maintain complete control while also enabling an operation based competitive advantage.
When a customer places an order on Amazon.com, the website integrates with its order sourcing engine in real-time to determine from which warehouse it should ship the order. This procedure is aimed at minimizing transportation costs associated with that order.
IoT in logistics is a data-driven technology that allows data extraction from every entity belonging to a network. In Amazon’s supply chain, this technology provides the availability of a more extensive set of real-time data and the ability to analyze and improve strategic decision-making capabilities. Amazon is better able to track locations and has enhanced the supply chain’s overall visibility by tracking a shipment’s location; therefore, having a more insightful understanding of each link in the supply chain. It helps ensure the quality of goods from the manufacturing unit to the time it reaches its destination. It is also helpful in choosing the best alternative route in the case of potential disruption.
IoT improves the supply chain intelligence with its ability to capture shipments while they are en route. It helps monitor the temperature throughout the shipment and maintain the perishable foods’ quality. The system even notifies the respective personnel that there is a problem.
With an IoT powered system, Amazon can track their vehicles’ location and the staff assigned to a vehicle at any given time. It gives the company a more transparent view of how the resources are utilized and how to improve resource allocation. It can help automate vehicle maintenance and repair and ensure safety compliance with the possibility of tracking their drivers’ health. With all this information on the vehicle, the driver, and the traffic, Amazon can improve it’s fleet and fuel cost management.
IoT devices and systems allow Amazon to analyze, monitor, and even manage the carbon footprint at every level, letting the company pinpoint the process causing higher carbon emissions and then taking specific measures to make it more efficient. The data collected through IoT sensors make it possible for operations to optimize their load and choose the most efficient transportation mode for any shipment.
IoT technologies can also offer insights that improve forecast demand by using the data captured through IoT to understand better customer behavior, product usages, needs, and demand. It can provide more than just simple Point of Sale data, like those that can track back to the actions that drive the consumer to that point. It makes it easier for operations to decipher the consumer perspective of when the purchase was made and why it was made.
Amazon strategically locates its warehouses (fulfillment centers) close to its customers to reduce its response time.
Amazon keeps a reduced inventory, which allows them to lower inventory management costs. Instead, they keep an increased range of inventory, which helps Amazon to increase its customer base. They manage their inventory through location postponement. The inventory is centralized in one strategic location and only transported to the desired locations when the demand arises, thus reducing their facilities costs.
Amazon manages the inventory of their popular or frequently purchased goods internally instead of their non-popular products, stocked by third-party distributors who deliver the goods when Amazon requests them.
To reduce the risk of holding more extensive inventory and reducing the holding costs, Amazon handles some orders by drop-shipped inventory. It is a supply chain management method where the retailer does not keep goods in stock but instead transfers customer orders and shipment details directly to the manufacturer or wholesaler, who then ships the goods directly to the customer.
With Amazon Marketplace, third-party sellers can sell their goods through Amazon’s e-commerce platform. It allows Amazon to increase their product offering, availability, allow customers to find their products all in one place conveniently, and compare Amazon’s lower prices versus that of other merchants.
Lean and Agile Practices
Amazon is no stranger to lean and agile methodologies, and their operations are no exception. Some practices they already have in place are driven by their integrated systems, which lower costs and increase customer satisfaction by making processes more efficient and cutting out waste. One example of this is how the promised delivery date drives the selection of transportation of a package to the customer. It is calculated thanks to their digital technologies that link all processes and collect data. This data can later be analyzed to gain insight into how to optimize the operations.
Amazon eliminates ambiguity about what the workers need to do in their tasks to avoid any abnormalities and has processes to track and eliminate them regularly. They have their senior management work in customer service at least once a year to allow their executives to see events on the front line, understand problems that arise, and then help find solutions. Amazon also extends their lean principles to merchant partners who are obliged to follow strict packaging rules or risk having their partnership terminated.
They use lean practices in their inventory management to stow products and distribute goods and customer service. For defective products, they remove the entire product line when multiple defects are identified and only place them back up when the issue is resolved.
Amazon is easily the benchmark for supply chain lean synchronization. However, to continue improving, they must continue focusing on producing goods only when needed and have a low capacity utilization, which results in the production of no surplus output going into inventory. A lower inventory allows them to expose any problems and solve them, resulting in fewer stoppages. They need to focus on eliminating all forms of waste, which is any activity that does not add value or is a hindrance to the operations (Slack, Brandon-Jones and Johnston, 2015a, p.468).
Supply Chain Management
Amazon has many supply arrangements throughout its supply chain. At the beginning of 2019, Amazon adjusted its approach to suppliers by buying from wholesale suppliers, which forced vendors to shift to a third-party approach if they wanted to continue to sell on Amazon’s platform. The third-party model is more profitable for Amazon, especially when suppliers’ volumes are at a lower level. Because third-party sellers manage their sales, Amazon incurs lower overhead costs versus a first-party relationship like buying and storing products and assigning vendor account managers.
In B2B buyer-supplier relationships, Amazon has the upper hand. Amazon’s dominance and the power they have to make the suppliers’ products themselves, as they did with their battery brand outselling Duracell, gives them the power to negotiate and ask more from the suppliers at each contract renewal. For instance, Amazon tries to force suppliers to take on more of the freight cost between warehouses or buy more ads on Amazon in return for remaining a major wholesale partner.
In the end, partnership supplier relationships involve customers forming long-term relationships with suppliers. In return for the stability of demand, suppliers are expected to commit to high levels of service. These relationships are challenging to sustain and rely heavily on the degree of trust (Slack, Brandon-Jones, and Johnston, 2015b, p.433).
Impact of Outsourcing
As previously explained, Amazon has a series of outsourced partners they rely on throughout their supply chain, including FedEx, UPS, ocean vessels, and many other local couriers, depending on the country. While these partnerships provide a current competitive advantage for Amazon, they can do better with an in-house logistics operation. That is why they are increasingly building their fleet and not renewing contracts with their outsourced partners. They believe they can be more reliable, especially after incidents, like FedEx and them stranding tens of thousands of orders in warehouses during the holidays in 2013.
The benefit for Amazon to use outsourcing for their deliveries was that they could build a delivery network quickly due to thousands of courier services. However, due to Amazon’s high service standards, they cannot rely on their outsourced partners to achieve the same level of quality, therefore wanting to enhance their in-house last-mile-delivery network.
Amazon uses the same outsourced intermediaries in its return operations as its standard logistics and has to deal with millions of returns each year. While the delivery process may be the reverse of the last-mile, there are other considerations to consider, like, for example, what to do with the returned goods. Even though Amazon repackages some products and sells them as new or resells them as used, a considerable amount of products end up being sold to liquidation sites who sell them in bulk for a fraction of the original price. Amazon tries to liquidize the returned products as fast as possible to avoid paying for storage, therefore needing to sell them at a fraction of the price. However, they can recuperate some losses on the sale. They can even make money selling the returned goods to e-commerce businesses that sell the refurbished items back through Amazon’s platform.
Another way Amazon handles returns is to have the goods routed through reverse logistics centers, other items will go back to their original site, and others may go back to the manufacturer itself. Besides the default method of returning goods, customers also have the option to return products through Amazon Lockers at Whole Foods, Amazon Books stores, Amazon 4-Star stores, Amazon Hub locations, third-party locations like Kohl’s, UPS, and more.
Reverse logistics presents very similar challenges to forward logistics in coordination and efficiency through route optimization and the need for scale. This is where Amazon’s integrated platform plays an important role, as it collects and centralizes real-time data to provide insights to improve the returns processes. It continually shares and manages the data necessary to run efficient returns and reverse logistics operations.
Role of Emerging Technologies
Technology is critical in creating a competitive advantage throughout the supply chain. It helps organizations improve costs, quality, delivery dependability, product innovation, and time to market, which is the most impactful competitive advantage qualities. Companies must have the ability to integrate helpful technologies into their ERP systems and provide the organization with tools to optimize their operations and continuously refine their processes.
Amazon is the leader in supply chain capabilities and has been able to integrate some of the most advanced technologies into their ERP system. These technologies allow for supply chain visibility with real-time data in handling goods and materials at any stage of the supply chain. They allow predictive strategies to anticipate patterns to proactively resolve issues before they occur, meet demands without overstocking, and minimize costs. Data can be gathered from these integrated systems to gain and produce insights and recommend growth strategies in the business’s context.
Amazon uses many emerging technological trends, tools, and innovations in its supply chain management, the biggest ones being big data, artificial intelligence, and machine learning. Big data allows the company to control quality, cash flow, real-time deployment, warehouse efficiency, weather patterns, predictive strategies, and inventory, supply, and demand through valuable insights. Artificial intelligence and machine learning allow Amazon to optimize its supply chain through improvements in forecasting, planning, implementation, and maintenance in logistics. This is achieved by:
• emulating human performance and knowledge through tightening data security;
• applying predictive modelling to third-party logistics;
• providing full supply chain visibility to improve key performance indicators management;
• automating inventory management, shipping transactions and delivery;
• improving customer service.
Cognitive technology, a combination of big data and AI, could allow Amazon to have better control over pandemic crises. Companies can have the information they need to adjust their strategies in real-time to make better, quicker decisions. With situations like consumers’ panic-buying essential goods, vendors can have more accurate intel on consumer demand and become better able to procure at a more realistic capacity. They can have more visibility about what other vendors have in stocked to avoid the vendors themselves from panic buying.
Internet of Things
All the functional components within and across the supply chain are kept connected through the internet of things (IoT), which increases visibility and connectivity while also reducing costs. Amazon already uses this in its ERP system; however, it could give Amazon a greater competitive advantage combined with wearable mobile devices. Having their human resources wear devices such as smartwatches, Fitbits, and smartphones can introduce ubiquitous technology supply chain processes with the total elimination of labor-intensive selection of items from inventory to fulfill a customer order. It can be assumed that IoT allows Amazon’s warehouse and logistics managers to track inventory and monitor equipment securely. It can improve asset utilization, better customer service, streamline inventory and supply availability and provide safer, more reliable work environments.
5G will ensure better connectivity between suppliers, make third-party logistics more efficient through ultra-low latency and massive data capacity. It also allows for higher-level performance and new user experiences as it interconnects more easily people, machines, objects, and devices. It can extract greater amounts of data concerning location, temperature, pressure, and other critical information in the end-to-end supply chain. It will ensure uniformity of information sharing with all stakeholders and resolve issues that would otherwise be aggravated with time delays.
Amazon uses cloud computing throughout the entire supply chain, allowing them to track materials and products, get real-time updates, and inform customers of an order’s status. Cloud-based solutions enhance data storage space, integration, security, and information sharing. It allows for activities and processes to be streamlined between multiple devices and an enterprise of software users. Since they provide it as a PaaS, it can be assumed that Amazon uses their own custom-made supply chain management software. It allows them to stay ahead of mistakes, modify orders, communicate across various media channels, and automate shipping.
Robotic Process Automation (RPA) and Autonomous Mobile Robots (AMR)
Amazon currently uses Robotic Process Automation (RPA) and Autonomous Mobile Robots (AMR). However, these technologies could be pushed even further and become a real game-changer for Amazon’s operations, having an enormous impact on their supply chain. Their RPA allows them to cut costs, eliminate keying errors, speed up processes, and link applications. It allows Amazon to work with structured data to automate an existing manual task or process with minimal process re-engineering and avoid significant system integration projects and specific new major application deployments. It would help situations like the Coronavirus pandemic to further reduce reliance on human labor and better handle future shocks to the supply chain. Many of Amazon’s warehouses are robotized, but not at 100%. AMR could be a solution to optimize the picking process and allow the company to decreasingly rely on human resources.
Amazon is using drones and, very soon, a fleet of driverless vehicles. Both these technologies will help Amazon lower costs by decreasing the amount of human intervention and, in the case of drones, give more access to remote and hard-to-reach rural areas.
Virtual and Augmented Reality
Other interesting emerging technologies that could change Amazon’s supply chain are virtual and augmented reality. It could allow supply chain businesses to enhance employee and customer digital experiences. They allow enhanced logistics and warehousing and better purchasing choices to leverage product visualization or store layout and planning.
Blockchain is a powerful emerging technology that Amazon already uses and provides third-parties as a service. This technology can provide more traceability and security regarding invoices and shipments, which can take several months to process. It can also assist companies by managing contracts and agreements and monitoring financial transactions and products.
A significant technology that is disrupting businesses and manufacturing worldwide is 3D printing, and Amazon may have an opportunity to benefit from it. An order could be placed on Amazon, one of several roving delivery trucks could receive the order, print the 3D goods in the truck, and then drop off the ordered products inside the delivery time frame.
RFID is a well-established technology, however, it is increasingly being used to transform environments into technologically ubiquitous spaces. Amazon already uses this technology in much of its operations, however, as technology evolves, RFID can be further enhanced to integrate with new and innovative technologies. Its benefits are that active and passive RFID tags provide data on items to which they are attached. Internet-connected trackers use long-range networks to let companies track specific items throughout their delivery journeys. Satellite trackers provide location data on an item anywhere on the planet, even in areas that do not have cellular coverage. Bluetooth tags and beacons also offer tracking data in smaller, more confined areas. Near-field communication (NFC) tags, based on RFID standards, allow workers to use their mobile devices as readers for the NFC tags, which provides an advantage over RFID tags and readers.
Future Challenges and Recommendations
Amazon’s supply chain is a fluid network machine that works harmoniously thanks to its excellent management of intermediaries, infrastructure, and the advanced technology used to make all actors in the chain communicate and work together efficiently. For Amazon to continue optimizing their operations, they need to develop sophisticated operations research models and IT capabilities to implement decisions at scale, allowing operations to reduce fulfillment and transportation costs without compromising the promised delivery date to the customer.
They could significantly improve deliveries to smaller islands, like in the Azorean archipelago, which is done through local third-party delivery services. These freight transporters do not usually make many trips between the mainland and the islands, and it may take many weeks before customers receive their orders, which would have otherwise only taken a few days. They also need to invest more heavily in figuring out how to make their operations more sustainable than they are at the moment, to be able to maintain and even increase their massive brand equity and comply with present and future governmental regulations.
Disclaimer: This analysis was originally written for my MBA academic report done in September 2020 for the module “Systems and operations management”.
MWPVL International (2020). Amazon Distribution Network Strategy | MWPVL International. [online] Mwpvl.com. Available at: https://mwpvl.com/html/amazon_com.html [Accessed 27 Sep. 2020].
Slack, N., Brandon-Jones, A. and Johnston, R. (2015a). Operations management. Harlow: Pearson, p.468.
Slack, N., Brandon-Jones, A. and Johnston, R. (2015b). Operations management. Harlow: Pearson, p.433.
Analysis of Amazon’s operations including supply chain structure, management, distribution, logistics and the role of emerging technologies in the company’s approach to supply chain as well as the importance IoT plays in their competitive advantage.