{"id":24988,"date":"2017-11-15T19:01:22","date_gmt":"2017-11-16T00:01:22","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/digitization-as-amazons-competitive-advantage\/"},"modified":"2017-11-15T19:21:45","modified_gmt":"2017-11-16T00:21:45","slug":"digitization-amazons-competitive-advantage","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/digitization-amazons-competitive-advantage\/","title":{"rendered":"Digitization: Amazon\u2019s competitive advantage?"},"content":{"rendered":"

Digitization can enhance Amazon’s profitability. In the near-term and medium-term, digitization can reduce costs by streamlining its fulfillment costs and shipping costs. In the long-run, it can affect sales by better integrating, predicting, and molding user demands – perhaps better so than any competitor.<\/p>\n

This essay focuses on digitization\u2019s effect on cost-minimization in the supply chain. Figure A breaks down the impact of digitization on its supply chain, from Amazon\u2019s user data to Fulfillment Network[1]<\/a> to delivery.<\/p>\n

Figure A: Impact of Digitization on Amazon\u2019s Supply Chain<\/em><\/p>\n

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Digitization\u2019s potential to address Amazon\u2019s growing operating expenses<\/strong><\/p>\n

Amazon\u2019s operating expenses \u2013 particularly its fulfillment costs and shipping costs \u2013 have outpaced its sales. Fulfillment costs have risen from 2014 to 2016 from $10.8B to $17.6B. Relative to the growth in sales, the increase in fulfillment costs is a 1 percentage point increase (12.1% of sales to 13% of sales) \u2013 roughly $852M. While this may seem marginal, $852M represents 36% of Amazon\u2019s 2016 net income of $2.4B.[2]<\/a><\/p>\n

Similarly, Amazon\u2019s shipping costs have outstripped its growth in sales \u2013 particularly its growth in shipping revenue. Figure B highlights Amazon\u2019s growth in shipping costs. Net shipping costs have increased from $4.2B in 2014 to $7.2B in 2016, representing 43% and 19% year-over-year growth. To decrease these costs, Amazon will have to create greater efficiencies in its Fulfillment Network.<\/p>\n

Figure B: Amazon\u2019s accelerated growth in Net Shipping Cost<\/em>[3]<\/a><\/p>\n

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Current digitization efforts<\/strong><\/p>\n

To lower operating expenses, Amazon has already started to integrate its supply chain, by harnessing its vast treasure-trove of data through machine learning. [4]<\/a><\/p>\n

In a supply chain context, Amazon has primarily used digitization for demand forecasting \u2013 an effort that impacts vendor-management and inventory management. [5]<\/a> For example, Amazon is collecting user engagement data on its website to analyze and predict user demand. Based on the forecasted user demand, Amazon\u2019s Fulfillment Network may improve its management of inventory \u2013 either by reducing excess orders and\/or by giving greater lead-times to vendors for future orders (thereby reducing the probability of back-orders). Similarly, Amazon has integrated with its delivery partners to prompt user feedback and confirmation of receipt. With better customer feedback, Amazon can infer whether the user is likely to repeat purchase or return an item. In either case, faster user-feedback will better inform Amazon\u2019s marketplace development team of a need to onboard more vendors of a certain category, or onboard more delivery partners (or increase their operating capacity).<\/p>\n

Future\/ Potential recommendations<\/strong><\/p>\n

Beyond the digitization efforts Amazon has publically acknowledged, Amazon can pursue at least 3 additional initiatives.<\/p>\n

First, digitization can better inform where to build Amazon\u2019s next fulfillment centers. Digitization will provide improved forecasting on where demand will grow \u2013geographically and by category (e.g., produce vs electronics). These forecasts will help determine which location(s) are cheapest, across renting\/ ownership, implied shipping costs, and labor.<\/p>\n

Second, digitization can enhance productivity of Amazon\u2019s warehouses and manufacturing plants. Amazon can embrace products like Google X\u2019s Glass. They free workers\u2019 hands of paper, by providing real-time picking\/ manufacturing instructions from headquarters\u2019 R&D teams in workers\u2019 line of vision. Companies like DHL and GE have partnered with Glass for 15% greater operational efficiency and 34% greater productivity[6]<\/a>, respectively.<\/p>\n

Finally, Amazon can use digitization for route and inventory optimizations with delivery partners. It can integrate data (and forecasts) from partners like Waze, to change its driving routes on a real-time basis, as opposed to following prescribed \u2018optimizations\u2019 like UPS\u2019 commonly-known \u201cno left turns\u201d rule. Moreover, Amazon can harness its internal forecasts of very-near-term customer orders, to better stock its trucks \u2013 enabling a world where consumers get their orders within minutes because delivery trucks have already predicted and stocked their goods on the truck.<\/p>\n

Questions<\/strong><\/p>\n