Amazon: A role model for supply chain innovation in the wake of digitalization
Given that Amazon is an e-commerce company focused on fast, friction-less delivery, there are few better ways to examine digitalization and the supply chain than to look at Amazon. According to company executives, Amazon is singularly focused on consumers answering affirmatively to the following two questions: “Do you have what I want, and can you get it to me when I need it?” (Robischon, 2017). Amazon cares about digitalization and supply chain not only because they have been critical to the company’s success, but also because they are the source of the company’s core value propositions.
In my mind, Amazon is focused on 3 main themes for supply chain innovation: the interaction of digital and brick and mortar, data analytics, and automation in fulfillment. Amazon’s focus on the interaction of digital and brick and mortar has been made obvious by the sheer number of brick and mortar concepts they are testing and/or building out. Amazon’s largest move into brick and mortar was the acquisition of Whole Foods this year, but there are several other initiatives in the works. Amazon is currently testing a concept called “Amazon Go,” a grocery store with “no lines and no checkout.” Customers can check into the store with an app, add items to their digital shopping cart by picking them off the shelf, and pay automatically by walking out of the store (Amazon.com, Inc, 2017). Other concepts include “Amazon Books” and the “Amazon Treasure Truck” (Amazon.com, Inc, 2017), (Amazon.com, 2017). All of these ventures into brick and mortar give consumers immediate access to product without having to wait for delivery, create a space for consumers to touch and feel Amazon products, and provide valuable data to Amazon about consumer shopping behavior (Petro, 2017), (Taylor, 2017).
Amazon has been and will continue to be focused on data analytics to inform the supply chain. Amazon’s digital platforms allow Amazon to collect a wealth of data about their customer’s shopping habits. Amazon’s goal is not only to know what their customer wants, but to predict that need in advance. For example, Amazon has a patent on predictive shipping in which a product is sent to a warehouse to anticipate a customer’s order so that it can be delivered faster (Lomas, 2014). Also, over 25% of Amazon’s revenue is from cross-selling or up-selling techniques based on past customer browsing and purchase history (Cohn, 2015). As more consumers shop through Amazon.com and other channels (Alexa, dash buttons, new brick and mortar locations), better data can inform the supply chain to get the right products to customers faster.
Amazon is also focusing on automation to optimize the supply chain. One example is Amazon Prime Air, a delivery system that will allow Amazon to deliver packages under 5 pounds in 30 minutes or less using drones (Amazon.com, 2017). It could be a more scalable way to build Amazon Prime Now, which has so far been in select geographies with a limited product assortment.
Amazon has been pushing the boundaries of supply chain innovation and has taken the digitalization megatrend head on. However, I was surprised to read that one change Amazon has made to Whole Foods since the acquisition is to lessen the amount of local products offered in stores (Taylor, 2017). Localization is a trend that has been widely discussed among academics and business people alike (the HBR posted an article about localization back in 2006) (Rigby, 2006). In the wake of digitalization, localization has become even more important. Amazon, with its focus on customer shopping behavior as well as its function as a marketplace is positioned well to ride the wave of this trend. Amazon could sell local items and allow consumers to discover these items through its marketplace. It could quickly respond to customer demand for these items through data analytics, and deliver products to the customer using its well established fulfillment network.
Although Amazon seems to be well positioned for the future, it is yet to be seen how widely Amazon will expand its brick and mortar stores and how successful they will be at merging the digital with the physical shopping worlds. Will they struggle with the same difficulties that other brick and mortar retailers face or be savvy enough to bring together the best of both the digital and physical channels for a seamless customer experience? Amazon’s continued success will also be affected by competitive retailers’ responses to the current environment. Will existing retailers effectively react or will Amazon take over retail as we know it?
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Works Cited
Amazon.com. (2017). Prime Air. Retrieved from Amazon: https://www.amazon.com/p/feature/6grqshfrw4gz7tv
Amazon.com. (2017). Treasure Truck. Retrieved from Amazon: https://www.amazon.com/b?node=15020057011
Amazon.com, Inc. (2017). Amazon Books. Retrieved from Amazon: https://www.amazon.com/b?node=13270229011
Amazon.com, Inc. (2017). Amazon Go. Retrieved from Amazon.com: https://www.amazon.com/b?node=16008589011
Cohn, C. (2015, May 5). A Beginner’s Guide To Upselling And Cross-Selling. Retrieved from Forbes: https://www.forbes.com/sites/chuckcohn/2015/05/15/a-beginners-guide-to-upselling-and-cross-selling/#6ad7826e2912
Lomas, N. (2014, January 18). Amazon Patents “Anticipatory” Shipping — To Start Sending Stuff Before You’ve Bought It. Retrieved from Tech Crunch: https://techcrunch.com/2014/01/18/amazon-pre-ships/
Petro, G. (2017, August 2). Investing. Retrieved from Forbes: https://www.forbes.com/sites/gregpetro/2017/08/02/amazons-acquisition-of-whole-foods-is-about-two-things-data-and-product/
Rigby, V. V. (2006, April). Localization: The Revolution in Consumer Markets. Retrieved from Harvard Business Review: https://hbr.org/2006/04/localization-the-revolution-in-consumer-markets
Robischon, N. (2017, February 13). Most Innovative Companies. Retrieved from Fast Company: https://www.fastcompany.com/3067455/why-amazon-is-the-worlds-most-innovative-company-of-2017
Shen, L. (2017, May 15). Finance. Retrieved from Fortune: http://fortune.com/2017/05/15/amazon-stock-20-years-ipo/
Taylor, K. (2017, September 21). Here are all the changes Amazon is making to Whole Foods. Retrieved from Business Insider: http://www.businessinsider.com/amazon-changes-whole-foods-2017-9/#whole-foods-has-already-cut-prices-1
Amazon has indeed been moving at the speed of light in terms of supply chain innovation- a fact that has left many of its competitors (and even those who never thought they’d be competing with Amazon one day) worried about a potential monopoly in the B2C space : in a report from October 2017, McKinsey sees the banks of the future at the center of the consumer ecosystem, placing them in direct competition with Amazon and its likes (https://www.mckinsey.com/industries/financial-services/our-insights/remaking-the-bank-for-an-ecosystem-world). Are fears of Amazon justified? It depends on how penetrated Amazon is in each market. In countries where Amazon has high penetration (i.e., the US), it is difficult to see an incumbent player threaten the customer ecosystem. However, in countries where Amazon is not as present today, there is an opportunity for local players to collect proprietary data, build data infrastructures, and become more entrenched in its customer lives (for example, Tenscent’s WeChat in Asia).
I was surprised to read that since the acquisition of Whole Foods, Amazon has decreased the number of local goods offered. However, after reflecting, it makes sense for Amazon to do this, and focus on large brands in order to produce scale and exert more power over those companies that distribute through it. With this in mind, I believe that the cycle repeats itself, with local players retaining their niche, while large players (aka Amazon) expand their presence.
Meanwhile, retailers are likely to retain their “brick and mortar” dominance in the short term. I say this as adoption of the technologically driven “Amazon Go” model is likely to take time, as has shopping on mobile phones or even shopping online. However, as adoption increases, legacy brick and mortar retail will have to focus on retaining trust and offering quality customer service to compete with the likes of Amazon.
Lexie, thank you for the structured essay observing 3 very complex but synergetic directions of Amazon development.
Answering on your astonishment about non-local brands I would like to assume that they try to achieve 3 effects through working with global brands: A. broader geographical scale + following unified assortment for different locations; B. mutually beneficial higher profits; C. lower inventory by using existing global player’s supply chain.
Point A at the very beginning leads to simple client customer analytics and higher level of prediction quality (what also affect on point C as well). Point B takes into account initial higher profits/revenues of global players as well as sufficient number of higher-profit-channels for local players (while preparing my essay I have some calls with HBS alumni and they mentioned that Amazon Fresh has requested up to 50% markup). Point C is pretty straight forward – levels of goods which can be written off are higher for bigger players and that’s why they can afford keep it on the balance at their facilities till the last moment with further selling to any small retailer with 30%-50% discount.
Thinking on seamless experience – I sure that it is one of the biggest head aches for offline retailers right now. They try to introduce “know your client” programs using customer cards/memberships but most of these technologies are already outdated and not for millennials. I see one more direction for Amazon in providing this data for third party retailers for some fee as well as providing this data for initial manufacturer on win-win basis.
Amazon is uniquely positioned to innovate in supply chain digitalization. In particular, their integration of brick and mortar with online is fascinating – clearly, every retailer must operate in multiple channels, as being online only or brick and mortar only both have their disadvantages. As Amazon navigates the brick and mortar space, they will face different challenges than legacy brick and mortar retailers. In particular, the last-mile logistical piece and real estate footprint are challenges that Amazon is still exploring on how to best integrate into their existing system. This is clear in their acquisition of Whole Foods, which puts them closer to the customer in attractive markets. I’m of the belief that Amazon will take over retail (and everything else) as we know it, given Bezos’ strong track record of expanding successfully into a wide variety of segments that seem unrelated at first glance (e.g., retailing and cloud are two very different businesses).
Amazon will take over retail as we know it. Frankly, I think they already have. In aggregation, the three ideas you highlighted are a different business model than traditional retail. You pose a great question about localization. It’s unclear to me that local producers have the scale to keep prices as low as Amazon would like. The costs to this technological approach to retail makes the cost to the retailer (ex. raw goods) much higher at AMZN than at a typical grocery or department store. However by squeezing suppliers (national suppliers with scale and price flexibility) they’re easily able to compete on price while delivering on their core competency, convenience.
Thank you, Lexie, your article is very interesting and very easy to read.
I personally think that Amazon will also win in the offline retail market mainly because of the fact that Amazon is an expert on data monetization.
As you mentioned, Amazon can generate over 25% of its revenue from cross-selling or up-selling techniques based on past customer online browsing and online purchase history. Imagine how much more information Amazon will be able to collect from its brick and mortar store. Covering both offline and online shopping will offer Amazon 360 degree information of a customer. Amazon will be able to know how much the customers make, where do they live, where do they shop, who do they shop with, and much more. Having huge amount of data will enable Amazon to provide very attractive offers to customers, generating more revenue for the company. The scale of data utilization is not achievable by small brick-and-mortar store without online Amazon’s scale of online presence.