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Tech & Innovation
JUL 26, 2019

The Miracle of Amazon’s Digital Supply Chain

By Dr. Jorge Calvo
pio3/sadovsky/Shutterstock.com

Amazon founder Jeff Bezos didn’t invent supply chain management, but he’s certainly proven the tremendous potential of digital platforms. Starting in 1995 as an online bookstore with a mere 20 products, Amazon has since evolved to dominate a range of traditional sectors spanning retail, toys, consumer electronics, and now even online media and entertainment channels.

Amazon is constantly expanding, averaging an annual sales growth of 30%. It recently attained the almost mythical stock market capitalization of $1 trillion. Bezos, noted for his charismatic leadership, has nurtured particular areas of his company’s culture and philosophy. Here are a few highlights:

The “Day One” Philosophy
Adopt the infinite start-up mindset of non-conformity and challenging the status quo—everything is possible.

Facing Competition Head On
Complaining is not a strategy. Don’t be distracted by the competition—make them irrelevant.

Delivery at Any Cost
Scale up quickly to achieve future economies of scale.

Innovation through Technology
Plant the seeds of technological innovation and watch them grow, including those without any short-term gain. This can still impact the company learning curve and lead to future disruptions (in Amazon’s case, AI, robots, and drones).

The Dream Team
Determine the right size for your team—sometimes, a small team is more efficient. Amazon developed a “two-pizza heuristics” rule: if you can’t feed the team with two pizzas, the team is too big.

Lessons in Failure
Never regret failure. Bezos himself said, “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.”

These words have a lot to offer businesses seeking to build a competitive, modern culture. Where Amazon truly excels, however, is in its digital supply chain capability, whether you look at it from an economic, academic, or corporate point of view.

Economic Overview

Key ratios of supply chain performance metrics and technological innovation show that Amazon maintains consistently high results. How does it achieve this? By investing 12% of its revenue in technology.

Amazon takes controlled risks. It’s often the first to experiment with new digital capabilities, and that pays off. An impressive 40% of the company’s revenue is obtained through digital services. Combining various business models within a digital platform makes it possible to sustain an operating margin greater than or equal to traditional retail giants like Walmart and Target. In growing, diversifying, and managing both the physical and virtual world, Amazon is no longer simply a retail giant, but a model hybrid company for VUCA times.

Academic Overview

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: agility, adaptability, and alignment.

Agility
Through the horizontal integration of real-time digital information flows and analytics, Amazon responds instantly to short-term changes in supply and demand. It can handle external disruptions smoothly and integrate both customers and suppliers within its information platform to reveal detailed intelligence on its customer behavior patterns. It builds inventory buffers in strategically located distribution centers, maintaining low-priced stock keeping units (SKUs), which is critical for customer retention. It also reduces lead time with its fast transport network, which includes updated contingency plans for immediate crisis management in unforeseen circumstances.

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 stays ever on the lookout for new suppliers.

Alignment
Amazon creates management incentives for continuous improvement in performance. Information for decision-making at each level is transparent and updated in real time. This not only clearly defines internal roles and KPI responsibilities, but also those of suppliers with careful segmentation of clients.

Corporate Overview

According to the Gartner Supply Chain Top 25 for 2019 and the three trends proposed by vice president advisor Stan Aronow, 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. It accomplished this through three practices:

1. Scaling up digital supply chain capabilities
Amazon uses automation in its warehouses and fulfilment centers, drones, sensor-based monitoring, augmented reality, and artificial intelligence. Basically, if it’s digitally innovative, Amazon is willing to try it to accelerate its competitive advantage.

2. Focusing on customer collaboration and service
Amazon focuses on the total customer experience by understanding how its products are used, predicting future demand and anticipating issues before they occur. Alexa voice assistants capture data through constant monitoring—Amazon is almost at the point of being able to predict what consumers need before they themselves realize it.

3. 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. Customers can track their orders and make changes right up until the moment the package is out for delivery.

A balanced approach to the digital era

In short, Amazon’s supply chain is one of the fastest and most efficient in the world. The company is committed to delivering products to customers in the shortest time possible, which pressures other retail giants throughout the world to change the way they operate. However, technology alone is not an effective driver of competitiveness.

Companies that attempt to emulate Amazon often fail because they neglect transformation of their management systems and corporate cultures. Amazon is not only part of a new digital economy—it is creating the new economy. The future is one of cyber-physical value networks and digital capabilities.

This article originally appeared in The Future Factory. It has been edited for GLOBIS Insights with permission.