Operations Management at Amazon - Essay Example

Operations Management at Amazon This report details an analysis of the operations management at Amazon, focusing on key aspects of its operations strategy, including strategy conception, evolution, challenges, and execution/delivery. The paper also discusses two vital aspects of those operations, specifically the nature and challenges of Amazon’s inventory management and process design. The insights relate to how its operations strategy flows from its overall strategy of deriving large profits from moving large amounts of virtual and physical products at very low margins, via operational excellence and loyalty initiatives centering on Amazon Prime (Rao 2014; Baer 2014; Mohammed 2014). Table of Contents Abstract 2 I. Overview, Literature Review 4 II. Amazon Operations Management 6 III. Inventory Management and Process Design 8 IV Evaluation in Light of the Literature 9 V. Conclusion, Recommendations 9 1References 11 I. Overview, Literature Review This paper details the conception, development, support, and delivery of operations management at Amazon, focusing on the aspects relating to the strategy and performance of the operation, as well as inventory management and process design aspects of its operations. Amazon of course refers to the e-commerce giant that has become synonymous with online retailing and has become a juggernaut in that regard, selling an increasingly wide range of physical and virtual products ranging from books to music, software, consumer electronics, apps, and many other products via its own platforms and devices, and via external devices such as mobile devices and traditional computing devices across the globe. Its base of operations is in the United States. Apps and Kindle devices are among its most prominent access points to its services and platforms, together with its web properties, which also serve as portals for the sale and promotion of its own products and services alongside the products and services of third party sellers and providers. Among its service offerings meanwhile, are cloud computing services via its Amazon Web Service or AWS, credit card services which are co-brand offerings, subscriptions to digital content, and publishing services (Google 2015), through its two subsidiaries, the North America subsidiary serving that part of the world, and the International subsidiary for territories outside of the United States and Canada (Reuters 2015). Their programs allow for content creators to sell their content via Amazon properties online, including content created by writers, musicians, makers of films, and developers of software and mobile applications. Its Kindle Direct Publishing is platform for self-publishing that allows writers to publish their own work directly using the platform, and to distribute that published content via Kindle and Amazon’s web properties as well (Yahoo! 2015; Coyle 2014; Hallam 2014;). The centerpiece of its operations platform is arguably Amazon Prime, which allows for the free shipping of ordered products and content ordered from Amazon properties, in exchange for an annually-renewed membership, with fees (Campione 2015; Goodkind 2015). The Amazon Prime program also allows subscribers access to its various digital content, including movies streamed online, TV programs, publishing services, and access to books via its Kindle devices (D’Onfro 2014; Thompson 2014; Grant 2014). Amazon was founded in 1994 and has its headquarters in Seattle, USA (Yahoo! 2015). A large part of the discussion that follows on strategy, and inventory and supply management centers on Amazon’s orders fulfillment and its Amazon Prime strategy initiatives (Mohammed 2014; Mourdoukoutas 2014). The operations management literature as it pertains to the new economy admits to the need to update academic understanding of the kind of operations management issues that new economy players like e-commerce firms face, in an environment where the pace of change is fast and the Internet provides new opportunities and challenges for growth (Hayes 2000). Literature by the middle of the past decade continued to advance this idea, and has progressed in terms of a more nuanced understanding of how products, the supply chain, and the processes in the so-called information economy differs in their relationships to each other in comparison to the bricks and mortar world (Karmakar and Apte 2007). This is in concert with emerging new ideas relating to the need to make operations management more sustainable in the new age (Kleindorfer et al. 2005), and the possibilities present in harnessing new technologies in order to advance new ways of managing operations for different firms, including those with heavy presence online (Ipeirotis et al. 2010). Such literature provides a backdrop for a renewed understanding of the complexities and the challenges facing new economy firms such as Amazon as it tries to be successful with radically different business models, leveraging the Internet and new mobile platforms and advances in logistics and other aspects of operations management to be successful moving forward. This paper examines various aspects of Amazon operations strategy formulation and implementation, and those that relate to inventory management and process design, en route to gaining insights into what works for Amazon and how it can improve on those (Rao 2014). II. Amazon Operations Management The Amazon business has two essential sides. One side is the front-facing web and mobile properties, mainly the websites and apps, and the other being its portals and platforms consisting of its Amazon Prime, Kindle, streaming services, its cloud computing services, and its orders fulfillment services at the back. This other half is arguably at the heart of what differentiates Amazon from the others, even as it is a formidable undertaking from the point of view of operations (Graham 2013). Essentially, what Amazon is trying to do is to excel t the operations side while maintaining very low margins on its products, in order to excel at cost management at this operations side and to realize profits from large volumes of sold goods (Johnson 2010). This is the rationale too, on closer inspection for its overall business strategy and its long-term investments in the operations infrastructure necessarily to build out its backend so to speak, to compete with the likes of Walmart and to beat Wal-Mart at its own bricks and mortars game. Operations management therefore can be construed as this long-term strategy at cost excellence, service delivery excellence, ability to fulfill orders for a wide range of products, and all the while locking in its customers to its platforms for serving up digital and physical goods and services via loyalty programs such as Amazon Prime. Amazon Prime is a subscription service that essentially allows customers to buy the goods at the cheapest prices and without the need to spend for getting the products and services, as the delivery is free (Baer 2014). Operationally, this has tremendous implications in terms of execution of an operations strategy. This means investing long-term on physical warehouses, and logistics infrastructures to ensure that the delivery costs to Amazon are not so high as to make the whole business model unprofitable. Operationally therefore, the strategy is to build out this orders fulfillment infrastructure at the back to match the promises of Prime and the intensive marketing and provision of platforms for the creation of content and the marketing of Amazon’s platforms at the front. In terms of overall strategy for the operations side, it is to excel at cost and to be able to leverage the massive investments in orders fulfillment infrastructures through large volumes of orders over time, by a loyal customer base that is locked in to Amazon services and platforms via superior services, low costs, and easy and quick access to those services and platforms. On the investment side of the operations too, this has implications for how long-term the investments in orders fulfillment infrastructure are, and how this in turn affects the short-term profitability of Amazon. Viewed another way, the operations strategy at Amazon is about investing in a long-term play to become a very efficient operator of an orders fulfillment infrastructure. This is cost leadership strategy that hinges on the right execution for success. The high operations bar set by Amazon Prime may be construed as the benchmark of how well or how badly Amazon executes on this operations strategy (Rao 2011; Onetto 2014). III. Inventory Management and Process Design This chapter discusses two vital elements of operations management at Amazon, and these are process design and inventory management. As earlier discussed, the operations strategy at Amazon hinges on making its orders fulfillment processes the most cost-efficient, to realize profits on such small margins. The other half of this business model of course is making the process capable of ramping up to take in large volumes of orders. The large volumes are of course designed to ensure that profits can be had from such thin margins as well. In the context of Prime, customers pay a flat fee in exchange for free deliveries for a year. In the case of its virtual products, such as content, digital books, software, and cloud computing services, there are no physical goods to worry about, and so process design considerations and inventory management considerations do not include building out physical warehouses and physical logistics processes and infrastructures. The processes are all resident and implemented within the cloud, or online, residing in the workflows within the software platforms for managing orders and ensuring the design of optimal processes from the time the customer makes an order via his phone for instance, to the time the customer gets his e-book downloaded into his Kindle. This is just an example. The same processes can be scaled up and ramped up as necessary, with no need to ramp up investments in physical infrastructures. On the other hand, in the case of physical products that pass through the Amazon supply chain, there are various process design considerations and some of those relate to processes for managing inventories too (Graham 2013). The literature discusses various aspects of process designs for Amazon that relate to its fulfillment warehouses for instance. Initially Amazon had experimented with processes that were automated as much as possible, with some initial success. However, as the variety of goods increased, and the volumes increased, process design became a much more complex exercise, necessitating the need for human workers to manage more complex tasks, and requiring the need to rethink orders fulfillment to meet the promises made by Amazon Prime. The lesson in process design seems to be that efficiency drives, making the use of such efficiency paradigms as six sigma and the best practices of Toyota for instance, have to be coupled with more pragmatic process design concerns relating to the complexity of the products being handled, among other things. Process design at Amazon therefore cannot be a simple and static process, but one that has to continue to evolve as Amazon evolves (Rao 2011; Onetto 2014). IV Evaluation in Light of the Literature The preceding discussion confirms the findings in the literature relating to the new and complex challenges facing e-commerce plays like Amazon, especially with regard to how its radically different strategy of optimizing operations efficiencies to execute a volume strategy in the online retail space needs new ways of managing operations. These new ways need to impute the opportunities provided by new technologies, but at the same time be mindful of the pitfalls of relying on old ways of thinking in order to solve problems that are unique to Amazon (Rao 2011; Karmakar and Apte 2007). V. Conclusion, Recommendations One can see that aspects of process design, are intertwined with inventory management concerns. This is the case for inventory management considerations for digital content, for example, as those relate to the relative ease of handling virtual inventory on the one hand and the opposing difficulty and complexity of managing physical inventories. Here aspects of operations relate to optimizing warehouses and processes for managing inventories from the supplier to the warehouses, as well as those aspects of inventory management relating to the handling of physical goods at the fulfillment centers at Amazon (Rao 2014). 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