The Lean, Mean, Amazon Machine

Amazon.com: An Innovative Business Model Creating & Capturing Value

Amazon’s core business is its global B2C online retail store Amazon.com and its key value proposition is an unprecedented online shopping experience for the consumer [1]. Amazon’s consumer-centric value creation is demonstrated by its relentless pursuit of low prices, vast SKU selection, high product availability and quality, fast delivery, and ease of use [1].  Amazon captures value as both a low-cost retailer and receives commission from third-party retailers [1].  Amazon Prime has added to this value proposition by offering unlimited free shipping and access to streaming media,  allowing Amazon to capture a more loyal consumer base and an annual $99 membership fee [1]. Used-goods sellers and advertisers also benefit from Amazon’s massive scale and generate economic value for Amazon through fees and click rates [1]. Fulfillment by Amazon creates added value for third-party vendors by outsourcing packaging and shipping to Amazon for a commission, while increasing product selection [1]. Overall, Amazon has captured immense value in its large, loyal consumer base (+245 million active users) and high growth operating cash flows and sales ($89 billion total sales in 2014) [1,8].

Robust Operations Delivering Value

Efficient Infrastructure & Workflow: Amazon has built an impressive logistics infrastructure in over 50 robust warehouses called “Fulfillment Centers” (FCs) [9]. Averaging 1M square feet, the enormous centers optimize for efficiency in managing inventory [3]. The physical and informational workflow at Amazon begins at inbounding where packages are unloaded onto a conveyor belt and products are unpacked, scanned, placed into carts, and sorted onto shelves based on a computer algorithm [4,5]. Kiva robots, acquired in 2012, bring the shelves to employees using sensors to navigate the warehouse [left image, 4]. Employees find and pick products from the shelves based on computer systems and send the items on the conveyor for packing [4, see Kiva Robot Video]. This combined machine and human process elevates supply chain quality from a Three Sigma 7% defect rate level to a Six Sigma defect-free quality level [2]. This technology has reduced the cycle time for grabbing and replacing items from 90 to 15 minutes per order, saving Amazon time and money [4]. By mastering logistics and postal distribution operations, Amazon has been able to offer same-day delivery in certain markets [9, see map].

Toyota Production System Processes: Amazon has implemented Toyota Production Systems, namely Kaizen improvement teams and andon cord defective item site-removal processes, to maximize productivity and quality [2, 5]. These practices eliminate tens of thousands of defects annually, empower front line workers, and signal real-time quality improvements to consumers [2].

Incentivized Workforce: Amazon’s employee bonus structure is well aligned with maximizing consumer value – for example, a Supply Chain manager’s bonus is based on stock-out rates so as to incentivize accountability for product availability in line with forecasted demand [5].

Data Capabilities & Utilization: Amazon’s data technology systems optimize low pricing by using an algorithm that searches the web for the lowest priced SKU every 5 seconds so as to offer the best deal [5]. Additionally, Amazon utilizes consumer data in ways that benefit its consumers: personalized product recommendations, well-informed customer service interactions, and 1-click convenient checkouts [5, 6].

Business & Operations Align to Win Long-Term

Amazon.com’s business and operations models are extremely well aligned.

The continuous workflow of the fulfillment centers and the Kiva robot technologies contribute to Amazon’s speed of service, efficient cost reduction, and high product selection – all of these competitive advantages directly enable fast deliveries, vast choice offerings, and low value pricing. Additionally, the Kaizen and andon cord processes deliver on Amazon’s consumer promise for high quality. Lastly, Amazon’s data utilization sets it apart in creating the best consumer-centric experience, by offering the lowest price, high convenience, and unique personalization.In turn, the business model captures value through a loyal, global consumer base, high growth revenues, and large operating cash flows [1].

While most business models would define profitability as a key metric of success, Amazon has reduced the importance of its margins in the short term to instead focus on heavy reinvestment in growing the business and gaining loyal consumers (see revenue and operating cash flow charts below) [1,5,7]. So long as Amazon remains lean and efficient as it continues to scale, it will be able to spread fixed costs, lower its cost structure and prices, and ultimately improve customer experience and continue to grow (see above left, CEO Bezos strategy sketch) [7]. Amazon’s strategy of establishing large market share in the short term will create high barriers to entry in the long term, and should ultimately allow for successful future performance [7].

 

 

 

 

 

 

Sources:

[1] Amazon.com Investor Relations – SEC FILINGS. (2015 January, 30). Retrieved November 28, 2015, from http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTEwMDI2NjcxJkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3.

[2] Onetto, Mark. (2014 February). When Toyota met e-commerce: Lean at Amazon. McKinsey&Co. Retrieved November 28, 2015, from http://www.mckinsey.com/insights/operations/when_toyota_met_e-commerce_lean_at_amazon

[3] A Rare Peek Inside Amazon’s Massive Wish-Fulfilling Machine. Wired. Retrieved November 28, 2015, from http://www.wired.com/2014/06/inside-amazon-warehouse/ (View images)

[4] Tam, Donna. (2014, Nov, 30). Meet Amazon’s Busiest Employee in the World: The Kiva Robot. CNET. Retrieved November 28, 2015, from http://www.cnet.com/news/meet-amazons-busiest-employee-the-kiva-robot/ (Video pasted: http://www.cnet.com/videos/meet-the-robots-making-amazon-even-faster/)

[5] Phone Interview with previous Amazon Supply Chain Manager, Keyur Patel. Completed on November 25, 2015.

[6] Madden, Sean. (2012, May, 20). How Companies Like Amazon use Big Data to make you Love them. FastCo. Retrieved November 28, 2015, from http://www.fastcodesign.com/1669551/how-companies-like-amazon-use-big-data-to-make-you-love-them

[7] Evans, Benedict. (2014, Sept. 5). Why Amazon Has No Profits (And Why it Works). Retrieved November 28, 2015, from http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works.

[8] Duryee, Tricia. (2014, May, 21). Amazon Adds 30M Customers in the Past Year. GeekWire. Retrieved November 28, 2015, from http://www.geekwire.com/2014/amazon-adds-30-million-customers-past-year/

[9] D’Onfro, Jillian. Here are all of Amazon’s warehouses in the US. Business Insider. Retrieved November 28, 2015, from http://www.businessinsider.com/how-many-fulfillment-centers-does-amazon-have-in-the-us-2015-3 (Map Image)