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The Amazon Supply Chain Revolution, Part I

By Joe Shamir6 Sep 2016

Did you know the Amazon revolution actually began 30 years ago. At the time, retailers were rarely known for their investment in innovation and technology, but Wal-Mart went against the grain in the 1990’s when it introduced the idea of high service level to customers at a low cost. High service levels—in the physical space—meant offering a wide range of products with very high availability. Wal-Mart also pioneered the concept of service level agreements with suppliers, in exchange for promises of high-volume purchases. These strategic vendor partnerships drove streamlined, integrated supply networks. They led the way in providing vendors with point-of-sale (POS) data via RetailLink, so they could view demand as it unfolded to better meet their service agreements.

Amazon is now driving the next retailing revolution. The online colossus is blazing this trail by offering customers low-cost service time—that is, rapid fulfillment times at low cost. In the past, consumers could get courier shipment of product to the home, but it was a costly luxury. Today, Amazon Prime Now offers customers in major cities 1-2 hour and same or next day delivery. Amazon is using their economies of scale logistical efficiency to drive e-commerce faster delivery customer service improvement.

The concept of premium service at an additional cost is waning; same or next-day delivery is becoming standard even for industrial goods. Many companies’ business models are being upended by this new revolution, engineered by Amazon.

It’s not simply the e-commerce aspect of Amazon’s operations; other companies provide platforms for e-commerce. The upheaval is from the combination of e-commerce with low-cost customer service time, which makes it difficult for companies not as efficient as Amazon to survive—and why Amazon pockets minimal margins to keep funding the outlays that extend its dominant position.

The Amazon revolution is not only a threat to direct retail competitors, but to market access itself for all types of companies. Many vendors today can actually achieve higher margins by selling through Amazon than through their own channels. Gradually through its investments in high efficiency to increase low-cost rapid service times, Amazon is becoming the dominant platform for access to the market—which it is now attempting to extend from the consumer space to the industrial realm.

Today’s retail mantra is to fill the customer request when he wants it, where he wants it, and how he wants it, and that there will always be somebody who can provide this service and grab the sale. This drives multichannel. Amazon has begun creating a physical local presence, while traditional retailers launched e-commerce sites. The multichannel challenge also means multiple delivery alternatives.

The pressure on supply chains to support this model—without service snafus, inventory outages or overages, and margin destruction—is significant. It means supply chains must change from product-centric to customer-centric. Because demand keeps shifting, the supply chain must also change as a function of time, as demand pivots from one channel to another.

Retail organizations tend to be dominated by Merchandising, which is about assortment, new product introductions and on-shelf availability and by Purchasing who negotiates the best deals and does the buying. This “Brick and Mortar” approach views supply chain as an operational cost center delivering on-time to stores from Distribution Center inventory, rather than as a strategic value-generating function.

This thinking has to change in order to create new fulfilment models to compete for the multichannel customer. In the next blog we will discuss how such chains operate, powered by advanced planning and inventory optimization, and supported by analytics.

Click here to read our next blog on the related topic – The Amazon Revolution, Part II: Tuning Your Multichannel Supply Chain to Compete

Subscribe to the Supply Chain Planning Blog

Keep up with the latest trends, research, and insights about supply chain planning, demand forecasting and inventory optimization.