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How the Amazon Supply Chain Works


The Amazon supply chain is an astounding achievement in retail logistics. The Bezos machine is continually optimizing every link in the chain to make good on their promise of customer satisfaction – and their goal of becoming the preferred retailer in America and beyond.

This goal is actually also a key driving force behind the continual development of the Amazon supply chain. As the retail giant has responded to growth, it has never failed to invest in service expansion to both support this growth and fuel more.

Here’s how this monster strategy works, combining a warehousing network, multi-tier inventory management and supreme transportation all supported by the latest technologies along with smart manufacturing and pricing strategies.

Amazon Supply Chain Tier 1: Warehousing

Location

As the first tier of the Amazon supply chain, the multi-tier inventory system rests on aggregating stock in well-placed distribution centers. Located mostly near large metropolitan areas and other population centers, inventory is calculatedly spread among them to ensure that supply can always meet demand. To fill in the gaps between these hubs, smaller warehouses are also erected to make sure that orders are delivered fast, regardless of the item purchased.

As of this writing, Amazon has a network of 493 warehouses worldwide standing on approximately 180 square million feet. This is all in line with the push marketing strategy that the company applies to held inventory. The more Amazon can promote items in their warehouses, the more they can sell, and so they need a wide network to get these items to customers faster.

This expert warehousing strategy puts distribution control in Amazon’s hands so they can get orders to customers anywhere in the world faster with less expense.

Organization

Efficiency is key, and Amazon’s warehouses are optimized to make operations as fast and reliable as possible. Every warehouse has five unique storage areas that enable workers and pick-and-pack robots to locate and move products almost instantly.

Amazon also calculatedly distributes different types of inventory to remain efficient. Its own warehouses hold frequently purchased items with shorter delivery windows to better serve customers, for instance. The storage and distribution of less popular products, on the other hand, is outsourced. Amazon also outsources the storage of products with storage costs that exceed marginal returns on sales.

Amazon Supply Chain Tier 2: Delivery

Distribution

This second tier in the Amazon supply chain is founded on the pull marketing strategy. Amazon has worked hard to build supreme customer loyalty, of which timely delivery is a major component.

In addition to its own warehouses, Amazon maintains a network of partner distribution centers and wholesalers. This way, whenever an order cannot be fulfilled from its own distribution centers, Amazon can easily depend on them to supply the required products.

Fulfillment

Adding to its own sales, Amazon has amassed a large segment composed of third party sellers, publishers, vendors, and manufacturers. Amazon attracts them with its superior supply chain system, securing their business as it provides reliable, reasonably priced full-service fulfillment for customer orders.

Options

One unique component that works to further strengthen the Amazon supply chain is all the available delivery options. It all stems from customers having the ability to choose faster delivery times.

Amazon has tested and applied several delivery methods all in the effort to get products to customers’ doorsteps faster. This includes the company’s partnered carriers, the Delivery Service Partners Program, bike delivery, and drones. This system optimizes delivery by taking into account the fastest option as well as extending options to areas not covered by traditional delivery services.

Case in Point:  Whole Foods

Amazon supply chain

When Amazon acquired Whole Foods in June of 2017, it wasn’t just about finally being able to expand into the grocery sphere. It was a tactical move, as is everything with Amazon.

Amazon supply chain expertise is just what Whole Foods needed to become exceedingly more profitable. One of the grocery chain’s biggest problems was holding too much inventory onsite. They wanted to have everything a customer would possibly ask for on hand, but it just slowed everything down.

Amazon implemented the Just-In-Time inventory management system at Whole Foods, making the whole process leaner. Moreover, it has freed up a lot of physical space. This could at least partially fill the need for forward warehouses as Amazon builds out a more profitable home delivery network.

Amazon Supply Chain Secret #1: Technology

Amazon has always embraced technology to make everything it does more efficient. The company has never shied away from investing in any automation that would make its supply chain work better and faster, and cut down on costs over the long term.

Inventory

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Amazon employs automation and robotic solutions for inventory storage and pick and pack operations. They believe so fully in this strategy that they established Amazon Robotics out of their 2012 Kiva Robots $775 million acquisition. Amazon now uses an estimated 100,000 robots in different facilities around the world. The increased productivity enjoyed has made the investment more than worthwhile.

Automating this huge network is a smart move particularly because it is getting increasingly difficult to find warehouse workers. Ecommerce has pushed the demand up, but fewer people are willing to take such jobs. This also means that a wage increase is imminent.

By investing in robotics early on to automate warehouse operations, Amazon has stayed ahead of the game, and ahead of rising costs.

Delivery

Though the move has raised more than a few eyebrows and earned more than its share of sniggers, Amazon has been pushing for the use of drones to deliver packages. This Amazon Prime Air program aims to enable 30-minute deliveries in selected population hubs.

Amazon supply chain

Relay

Relay is the Amazon trucking app that was designed to streamline Amazon warehouse deliveries. Drivers enter their cargo information so get a simple QR code that gets them through Amazon’s gates faster. It also helps Amazon streamline by giving them an idea of where all their deliveries are at any given time so they can be perfectly prepared.

Optimization in this area also helps the larger warehousing and delivery systems by providing additional data in a convenient format that the company can use in their calculations.

Relay is not yet very widely used, but may just be one step in a larger move towards a freight matching service to further optimize inventory movements.

Dash

The Dash Button was introduced on the market before the Whole Food acquisition, but fits in very nicely with the retail giant’s plans to use technology and it’s sophisticated supply chain system to win market share from Walmart.

This small wireless device allows Amazon customers to reorder pre-selected items over Wi-Fi at the click of a button. The vision is to make shopping on Amazon even more convenient, pulling in more customers and sales. A single Dash device is linked to a specific brand, and costs $4.99. After a customer purchases using Dash for the first time, however, they get a $4.99 instant credit, like a refund for the device.

Amazon Supply Chain Secret #2: Manufacturing

Amazon supply chain

Amazon began as a go-between for book sellers and avid readers. It soon started selling its own products, however, and now owns many of its own brands. Third-party sellers are still welcome on the marketplace, but Amazon has been slowly squeezing many sellers out (intentionally or not).

Amazon has been manufacturing and white-labeling many of the more popular products on the marketplace, providing cheaper options to customers while increasing their own profits. This keeps everything in-house, completing the product lifecycle. They get visibility from procurement to end customer delivery. There’s no better way to keep costs down and profits high.

Amazon Supply Chain Secret #3: Pricing

Amazon has efficiently analyzed its customer base and segmented it based on a smart price differentiation strategy. They appeal to different segments by offering different delivery options for a corresponding price. By further categorizing Prime and non-Prime members, they can gather more data to further increase their fulfilment agility. Amazon must maintain their ability to respond to dynamic fluctuations in demand, and this segmentations helps them balance out wider and narrower shipping windows, keeping everything flowing smoothly.

Remaining lean is an essential part of the Amazon supply chain strategy. The company understand that too much inventory raises storage costs and slows fulfillment down. To better control how much stock is sent to fulfillment centers, Amazon charges higher long-term storage fees. This encourages sellers to send in just enough inventory to meet demand and helps Amazon keep costs down.

What’s Next for the Amazon Supply Chain?

Amazon supply chain

Despite big plans to build a second headquarters, the company has never shifted focus from supply chain management. This above anything else has raised Amazon to world class levels as a major source of sustainable competitive advantage.

Amazon may just have the most innovative and best-optimized supply chain in the world today. And that’s because they never stop implementing improvements, sparing no expense in the process.

So what’s next for Amazon?

In-House Fleet

Amazon has tried to implement several different solutions to its last-mile delivery problem. The most recent is the company’s plan to build out its own delivery fleet. The goal is to eliminate the hassles that they have experienced year after year dealing with inadequate performance from partnered carriers. It’s a big problem, because these delivery agents are the only faces the customers see. Delivery issues are damaging Amazon’s reputation.

Needing more than help from smaller regional couriers, independent delivery fleets and their own private delivery trucks, Amazon is breaking ground for their air cargo hub a week from today. The Cincinnati / Northern Kentucky Airport hub will be a 2-million-square-foot facility.

Amazon has also recently been getting more involved in handling and clearing shipments from Chinese retailers though Customs. It gives them more control over incoming inventory and reduces its outsourcing costs.

We may also soon see Amazon as another name on the list of couriers that retailers outside of the online marketplace can choose to deliver customer orders.

Julia ValdezHow the Amazon Supply Chain Works
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