An analysis of Amazon’s digital supply chain
The Future Factory sits down with Dr. Jorge Calvo, Professor Strategy, Operations and Industry 4.0 at GLOBIS University in Japan to uncover the characteristics of Amazon’s Digital Supply Chain capability.
Jeff Bezos - Amazon’s founder, didn’t invent supply chain management, but he was able to envision the tremendous potential of a new, digital platform. Starting in 1995 as an online bookstore with a mere 20 products, Amazon evolved to dominate a range of traditional sectors, spanning retail, toys, consumer electronics and now even online media and entertainment channels. Its ability to manage the complexities of physical and digital value chains is simply profound.
The result is that Amazon is constantly expanding, with an annual sales growth of 30%, it recently attained the mythical stock market capitalisation of 1 trillion dollars. Bezos, noted for his charismatic leadership, occasionally provides insights into Amazon’s culture and philosophy, which can be summarised in the following:
Day One: The infinite start-up mindset of non-conformity and challenging the status quo, where everything is possible.
Complaining is not a strategy: Don’t be distracted by the competition, make them irrelevant.
Put yourself in you customer’s shoes: By implementing intensive customer segmentation.
Analytics: Amazon obsesses over performance measures under the ethos of “you can’t manage what can’t be measured.”
Deliver at any cost: By scaling up quickly to achieve future economies of scale.
Plant the seeds of technological innovation and watch them grow: Amazon invests in many technologies that don’t bring about any short-term gain, but improve its innovation learning curve to lead future disruptions: AI, robots, drones.
Build the dream team: A small team is more efficient. To determine the right size of each team, Amazon has developed a “2-Pizza Heuristics” rule. If it requires more than 2 pizzas to feed it, the team is too big.
Learn to improvise: Amazon asks its employees to implement action plans when something unforeseen happens outside their comfort zone, all with no additional budget.
Never regret failure: “I didn’t think I’d regret trying and failing. And I suspected I would always be haunted by a decision to not try at all” Jeff Bezos.
The truth is that Amazon also excels in terms of its digital supply chain capability. Let’s analyse this through three different approaches, all with rigorous criteria:
When analysing key ratios of supply chain performance metrics and technological innovation, it is evident that Amazon maintains consistently high results. How does it achieve this? By investing 12% of its revenue in technology, Amazon takes controlled risks in being the first to experiment with new digital capabilities. The reward is that 40% of its revenue is obtained through digital services and in combining various business models within a digital platform, Amazon sustains an operating margin equal to or even greater than the traditional retail giants Walmart and Target. In growing, diversifying and managing both the physical and virtual world, Amazon is no longer simply a retail giant, but a reference hybrid company in times of high volatility, uncertainty, complexity and ambiguity (VUCA).
Graphs 1-3 compare Amazon with several companies renowned for their excellent supply chain management in retail and consumer products including Walmart, Target, P&G and Colgate Palmolive. Graph 1 illustrates that Amazon’s revenue growth is far above all the other top companies in the consumption and retail supply chain. Graph 2 demonstrates it achieves a ROA that is higher than retail companies but lower than consumer companies due to its continued expansion and diversification, but which is improving year by year as its operations consolidate. Graph 3 depicts Amazon has achieved a ROI noticeably below that of Colgate Palmolive. Bezos’ fixation with managing each link in the supply chain as a KPI-driven high-performance unit and allowing a degree of improvisation in turn with bottom-up leadership is beginning to yield excellent results comparative to a majority of the companies analysed.
Stanford Professor Hau L. Lee’s famous Harvard Business Review article “The Triple-A Supply Chain” laid the foundations for three characteristics that supply chains must exhibit. This criteria can assess if Amazon’s digital supply chain belongs to the superior Triple-A category and whether it is ready to face future challenges:
Agility: Through the horizontal integration of real-time digital information flows and analytics, Amazon responds instantly to short-term changes in demand and supply. It can handle external disruptions smoothly and integrates both customers and suppliers within its information platform to reveal detailed intelligence on its customer behaviour patterns. It builds inventory buffers in strategically located distribution centres, maintaining enough stock keeping units (SKU) that are low-priced and critical for customer retention. It also minimises higher value SKUs and reduces their lead time by distributing them through its fast transport network. The Amazon Private Airport relies on both local and regional logistics partners to increase its network and last mile efficiency. It maintains updated contingency plans for crisis management and can react immediately to unforeseen circumstances under the principle of “delivery at any cost.”
Adaptability: Amazon constantly adjusts its supply chain design to adapt to market and macroeconomic structural changes, modifying its strategy in terms of value chain, products and technologies. It manages an enormous amount of real-time data to monitor the performance of all the links in its network and is constantly looking for new suppliers.
Alignment: Amazon creates management incentives for continuous improvement in performance. Information needed for decision-making at each level is transparent, accessible and updated in real-time. It not only clearly defines internal roles and their KPI-related responsibilities, but also those of suppliers, with careful segmentation of clients.
According to the Gartner Supply Chain Top 25 for 2019 and the three trends proposed by Stan Aronow, a Vice President Advisor, Amazon has achieved a Gartner Top-Five Composite Score for the last nine consecutive years. This is a milestone only achieved by four other companies: Apple, P&G, McDonald’s and Unilever. So how has it accomplished this?
Scaling up its digital supply chain capabilities: Amazon uses robotics automation in its warehouses and fulfilment centres, drones, sensor-based monitoring, augmented reality and artificial intelligence. Everything that is digitally innovative, Amazon is willing to try, thereby accelerating its competitive advantage.
Focusing on customer collaboration and service as an experience: Amazon focuses on the total customer experience by understanding customers’ use of products, predicting future demand and anticipating issues before they even happen. The entire range of Alexa voice assistants capture data through their constant monitoring and Amazon is almost at the point of being able to predict what consumers need before they themselves realise it.
Implementing visibility and traceability across the entire supply chain: Amazon operates a digital business ecosystem to be more predictive, resilient and responsive to any supply chain disruption. It provides customers with high traceability so that they can track their orders and make changes right up until the moment the package is out for delivery.
According to a Gartner report published on May 15, 2019, Amazon has managed to change the face of retail business by implementing bold supply chain strategies, deploying innovative technologies, operating an extensive network of warehouses, multilevel inventory management and an excellent transport system. With these capabilities, Amazon’s supply chain is one of the fastest and most efficient in the world. Amazon is continuing with its efforts to deliver products to customers in the shortest time possible, which adds pressure to other retail giants throughout the world, changing the way organisations think about the speed at which their supply chains and services operate.
Technology alone is not the driver of competitiveness and companies that attempt to emulate Amazon fail to do so by not being able to transform their management systems and corporate cultures in line with the new, digital economy. Meanwhile, Amazon is not only part of the new economy, it is creating the new economy - the economy of cyber-physical value networks and digital capabilities. This is the most impressive aspect about Amazon’s digital supply chain and for Amazon, every day, is Day One.
Gartner (2019). The Gartner Supply Chain Top 25 for 2019. Retrieved from https://www.gartner.com/en/doc/3913625-the-gartner-supply-chain-top-25-for-2019
Isidore, C. (2019, May 16). Warren Buffett's Berkshire Hathaway just made a $900 million bet on Amazon. Retrieved from https://edition.cnn.com/2019/05/16/investing/buffett-amazon/index.html
Lee, H. L. (2004). The triple-A supply chain. Harvard Business Review. Retrieved from http://file.seekpart.com/keywordpdf/2010/12/22/2010122294137780.pdf
Macrotrends (2019). Amazon ROA 2006-2019 | AMZN. Retrieved from https://www.macrotrends.net/stocks/charts/AMZN/amazon/roa