Amazon.com’s European Distribution Strategy

IEM 5763 SUPPLY CHAIN STRATEGY CASE STUDY #5 – SPRING 2010 DUE: TUESDAY, MARCH 2 2010 16:00

“Amazon.com’s European Distribution Strategy” By: 1: Kedar Bobhate 2: Rohit Harikrishnan 3: Kaustubh Ranade

Q 2 Consider the following supply chains. For each one, list specific advantages of centralized and decentralized management, and centralized and local facilities: Ans: MILK & DAIRY PRODUCTS Centralized Management: • Transshipment of products may be possible and the products with closer expiry date may be transshipped and consumed rather than go wasted. • Optimization of logistics activities can be achieved as most of the distribution resources are owned by the manufacturer. • Fewer inventories held at retailer. Easier to implement FIFO strategy for the perishable product at DC level. Decentralized Management • Increased accuracy of forecasts since forecasting activities are performed based on local factors, thus reducing the risk of expiration. • Each stage is more committed to sales as the cost of unsold expired product will be borne by the inventory holder thus adding more incentive to sales. • Easier to implement FIFO strategy for the perishable product at the retailer level. Central Facilities: • Central facilities are not advisable in this case as the products are of a perishable nature and may not sustain the longer lead times required for shipping. Also the supply of raw material (MILK) is decentralized. Local facilities: • Can optimally utilize the supply of raw material from local vendors. • Shorter lead times in line with nature of the product which is advantageous as the possibility of keeping higher safety stocks is improbable.

a. NEWSPAPER Centralized Management: • Compliments the highly coordinated distribution required for this type of product. • Distribution resources can be managed optimally. • Returns (Outdated newspapers) can be efficiently managed. Decentralized Management • It is advisable not to implement decentralized system as each edition of a newspaper is generally processed at a single location. Central facilities: • A central printing and distribution facility for each edition is beneficial as the processing requires large volumes and publishing time of each product (Newspaper) has to be same. • It is easy to maintain accuracy of news in each product (Each Print of the newspaper). Local facilities: • Lower lead times will enable to cover the news till the latest moment. • Lower delivery costs are involved.

b. MP3 PLAYERS Centralized Management: • Risk pooling strategy can be effectively implemented. • Global optimization of supply chain is possible. • Transshipment can be implemented with centralized information sharing. • For internet buying options, door to door distribution can be optimized. • Very little probability of Bullwhip effect. Decentralized Management: • Easier to understand the local trends followed in each area based on which an effective marketing strategy can be planned. • Product segregation is possible which can lead to quantity discounts for warehouses and retailer. Central facilities: • Lower holding cost due to risk pooling. • Lower safety stocks requirement. • Lower manufacturing cost as production of electronic equipment requires precision manufacturing instruments which are expensive. Local facilities: • High service level due to proximity to customer. • Each DC covers a specific area which reduces the delivery costs.

c. CARS Centralized Management: • Considerably low overhead costs in centralized management as point of sales data is available to the manufacturer. • Overall profits in the supply chain can be maximized. Decentralized Management: • Dealers can take advantage of Customer Search process by maintaining higher inventory. • Local discount offers by the dealers which many times play a significant role in customers decision, can be managed efficiently by each individual dealer. Central facilities: • Lower impact of demand variation and forecasting inaccuracies. • Risk pooling can be effectively implemented reducing the overall inventory holding costs in the system. • Economy of scale can be obtained in manufacturing operations as all the manufacturing can be done at a single facility. Local facilities: • Reduced lead time will improve the service level. • Lower transportation costs as the facilities will be located near the DC and retailers.

d. JEANS

Centralized Management: • Information sharing will enable the manufacturer to tap the changing trends immediately. • Point of sales information will be readily available. • Seasonal variation in demand can be managed with proper planning at the central level. Decentralized Management: • The warehouse managers will be more knowledgeable about the local trends and thus can plan strategies based on the same. • Retailer discounts can be managed effectively. Centralized Facilities: • Less safety stocks need to be maintained reducing the inventory holding costs. • Lower overhead costs at the centralized facility. Local Facilities: • As Jeans are low cost-high demand item, inventory holding cost is a minor issue. • Lower transportation costs as each facility can cater to the concerned area. • Demand variation can be managed effectively due shorter lead times. Q8 a. What expansion options should Amazon Europe select? Expand into other countries? Launch Marketplace activities? Ans: As discussed in detail in Q 8 b., Amazon Europe should adopt having DCs in each of the three current countries in conjunction with an integrated inventory management system and a common integrated IT interface. This will allow for an ease of expansion into other European countries. In order to maintain global leadership expansion into other European countries like Italy, Austria, Switzerland, Belgium and Luxembourg is eminent. Expansion options that Amazon Europe needs to consider: •

Initiate extensive market research in each of the targeted countries. This will help Amazon to generate a fair idea about demand, market size, competitors, etc.

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They should certainly contemplate expansion into countries like Italy, Netherlands, Sweden, etc where a great potential for sales exist.

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They should collaborate with national players for entering the foreign markets.

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In order to cater to smaller countries (Central Europe) they can maintain common DC and also implement trans-shipment options.

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To cater to smaller customer bases they can setup marketing / sales offices for different countries. Here they can create websites and archives catering to local (national) demand. Requested titles can then be sourced from the nearest DC.

While Amazon is currently live in the EU markets of France, Germany and Great Britain, they should contemplate expanding to a wider audience by introducing the concept of a ‘marketplace’. “‘Marketplace’ is defined as a cluster of countries with a single catalog and served by a single DC.” The current DC in France could expand into a cluster containing France, Belgium and Luxembourg. In turn,

Germany could become a cluster that contains Germany, Austria, and Switzerland. The British installation could encompass all of Great Britain and Ireland. In addition to the above mentioned clusters, Amazon can further introduce DCs for additional clusters with Italy catering to Southeast European countries like Hungary, Greece, and Bulgaria; Poland catering to the Czech Republic, Ukraine & Belarus and Sweden managing the Scandinavian countries like Norway, Finland, etc. thus enveloping the entire European Union. Setting up Amazon.com as a centre for third-party marketplace activities involving various private dealers would also be a proposal worth considering. It will enable third-party sellers to offer their goods alongside Amazon’s offerings. This will result in increased viewership of the site as well increased customer base. Q8 b. What distribution network configuration should Amazon Europe adopt? Ans: Current strategy: At the moment, Amazon has independent units working separately for each of the 3 Countries i.e. United Kingdom, France and Germany. The company however envisions operational rationalization and cost savings by aggregating infrastructure and services across Europe. They have an option to either go in for a centralized system or a decentralized one. There are however various strategies that the company can contemplate adopting as their distribution network configuration: 1. Single EDN-Centralized Distribution network with a central DC. 2. Keeping current DCs and adopting transshipment under a centralized management system. 3.

Separate DCs and decentralized management for North and South Europe respectively.

Discussed below are the Advantages and Disadvantages of each of these strategies in order to arrive at the best possible solution. 1.

Single EDN-Centralized Distribution network with a central DC:

Advantages:  Reduction in total inventory costs.  Reduction in demand variation across the supply chain on the account of a single central DC.  Reduction in cost of multi-item orders on account of order pooling.  Mitigation of demand-supply mismatch.  Mitigation of the Bullwhip effect because of an increase in information sharing.  Easier integration of the supply chain.  Ease of implementation. Disadvantages:  Increase in lead times to customers and thus reduction in Service Levels.  Increased distance of suppliers and customers to the central DC resulting in an increase in outbound and inbound transportation cost.  Loose flexibility by not being able to meet varying needs of a diversified customer base across Europe.  Requires new investment altogether for setting up new infrastructure. 2. Keeping current DCs and adopting transshipment under a centralized management system:

Advantages:  Reduction in demand variability across the supply chain due to virtual pooling.  Reduction in total inventory and associated costs.  Mitigation of demand-supply mismatch.  Mitigation of the Bullwhip effect.  No need for new infrastructure.  Flexibility due to load balancing across separate DCs.  Reduces risk of relying on a single DC.  Ease of expansion to other countries. Disadvantages:  Combined inventory greater than that of a single DC.  Higher complexity in coordination and need for sophisticated IT tools.  Increase in lead times to customers in some cases. 3. Two Separate DCs and decentralized management for North and South Europe respectively:  Combines the disadvantages of both the aforementioned strategies and fails to capture many significant advantages. Summary: Based on all the pros and cons of the above strategies, one can conclude that keeping the DCs in each of the three target countries in conjunction with an integrated inventory management system and virtually having just a single supply chain allows us to collate the advantages of location and lead time pooling without considerable increase in distances between customer and supplier combined with a negligible decrease in service levels (lead times to customers). Thus Amazon will be able to simultaneously exploit the commercial advantages mentioned above to the fullest, decrease inventory to a large extent and reduce transportation costs drastically. Thus it would be advisable that Amazon implement a Centralized management system along with the three existing DCs and a common integrated IT interface.