Amazon is an example of exceptional effectiveness at driving alignment between the business and operating models (please note that this post refers solely to Amazon’s e-commerce business). By developing superior supply-chain management, building strong relationships with vendors and distributors, and providing a seamless online experience for shoppers, Amazon has created (and captured) significant value for all players involved, on its way to become the world’s biggest online retailer.
Business Model: Creating value with ‘Long-Tail’, Low Price, and Fast Delivery Service
Founded in 1995 as an online bookstore, Amazon.com has expended over the years to offer the “Earth’s Biggest Selection” of products available, including (among others) music, movies, electronics and household goods[1]. From its inception, the company adopted a ‘long-tail’ strategy[2] under which ‘hit items’ were offered alongside a wide selection of ‘non-hit items’, i.e. items that are non-frequently searched for and sold in small quantities. While other online bookstores limited their offerings to their own inventory items, Amazon’s seller marketplace allowed it to offer books – new or used – from any partner bookstore without having to hold inventory, and for only a small markup. As a result, Amazon has been able to offer highly competitive prices for consumers and attract vast online traffic, which translated into increased sales volume for vendors. Furthermore, the company’s explicit ‘zero profits’ strategy[3] has allowed it to re-invest its revenue in improving its supply chain infrastructure, which in turn reduced costs, price to end-consumer, and delivery time, resulting in increased customer satisfaction[4].
Operating Model: Inventory and Superior Supply Chain Management
To support its long-tail, low price, fast delivery business, Amazon ships orders to consumers in two ways:
- ‘Non-hit /long-tail items’ are usually shipped directly from the vendor’s warehouse, releasing Amazon from the need to stock slower-selling products, thus assuring that it only maintain fast inventory turnover. Under this method, advertising and shipping costs are incurred solely by the vendor. This allows Amazon to expand its available product selection online without a corresponding increase in overhead costs[5].
- ‘Hit items‘ (i.e. more frequently sold products) are usually shipped to consumers from one of Amazon’s 168 distribution centers around the world[6]. Amazon’s extensive investment in warehouse management technology and automation[7], along with its ability to leverage economies of scale, allow it to ship “the right products in the right quantity to the right place at the right time” while reducing costs for both the company and its customers. Under this supply chain method, vendors have complete control over which products to store at Amazon’s distribution centers. To optimize their decisions, Amazons provides vendors with advanced online inventory management tools and analytics, which take into account factors such the speed of inventory turnover, market prices and seasonality[8]. Products stored at Amazon are eligible for Amazon Prime (a two-day delivery shipping), and consequently rank higher on Amazon’s website search-results, further increasing the chance of a purchase. Distribution center locations are chosen based on proximity to customers, to reduce delivery time to minimum. Products shipped by Amazon are delivered by UPS, the U.S. Postal Service or other delivery services. Recently, however, the company indicated its desire to increase its control over the ‘last mile delivery’ to the customer, which would allow it to further reduce costs and delivery time (with the aim to reach same-day-delivery as an operation standard). As part of these efforts, Amazon plans to launch its own shipping network “sometime in 2016”[9], and has already launched Amazon Flex – a new, on-demand service that pays part-time drivers in exchange for delivering packages[10] (similar to Uber, which reduced the cost of traveling by taxi).
Complete Alignment:
Amazon’s operating model is fascinating as it demonstrates how a world leading company can optimize every step of its supply chain management – from relations with vendors to last-mile delivery – in order to increase customer value. By continually innovating (now considering delivery with drones![11]), driving constant improvements, and maintaining strong relations with its vendors and distributors, Amazon has created great value for consumers, vendors, distributors, its own shareholders (in the form of increase in share value), and the economy as a whole. The company’s business and operating models are highly aligned – focusing on cost reduction and providing a viable solution for a ‘long-tail’ need that was not addressed prior to Amazon’s existence.
Resources:
[1] Analysis of Amazon’s Business Model, Eric Noren, July 8th 2013 (http://www.digitalbusinessmodelguru.com/2013/07/analysis-of-amazon-business-model.html)
[2] http://www.newmarketsadvisors.com/blog/bid/36296/Long-tail-business-models-Amazon-on-offense-and-defense
[3] ‘Former Amazon Employee Explains How The Company’s Business Model Really Works’, Jay Yarow, Oct. 28 2013, see: http://www.businessinsider.com/amazons-profits-what-people-dont-understand-2013-10
[4] Nolan, footnote 2.
[5] http://www.investopedia.com/articles/investing/061215/difference-between-amazon-and-alibabas-business-models.asp
[6] See MWPVL International: Amazon Global Fulfillment Center Network http://www.mwpvl.com/html/amazon_com.html
[7] Amazon’s inventory management secrets, by Nancy Master on Tue, Nov 27, 2012 http://www.rfgen.com/blog/bid/246924/Amazon-s-inventory-management-secrets)
[8] http://services.amazon.com/fulfillment-by-amazon/benefits.htm
[9] ‘Amazon may be secretly building a team that will help it replace FedEx and UPS’
http://www.businessinsider.com/amazon-building-in-house-delivery-team-2015-10
[10] ‘Amazon will now pay you to deliver packages’, The Verge, By Amar Toor on September 29, 2015, http://www.theverge.com/2015/9/29/9413787/amazon-flex-package-delivery-seattle
[11] http://dealnews.com/features/Amazon-Gives-Us-a-Peek-at-Actual-Delivery-Drones-in-This-New-Video/1536571.html
