Amazon improves customer service through inventory management

Case study: Amazon improvement of customer service by
improving Inventory management
Project Report
Sulaman Muhammad
Em123009
Submitted to: Dr. Mujtaba Agha
Department of Engineering Management
Muhammad Ali Jinnah University, Islamabad
June 12, 2013

Amazon improvement of customer service by improving Inventory management
Supply Chain Management Page 1
Table of Contents
1.0.Introduction ....................................................................................................................................2
2.0.Inventory Management...................................................................................................................3
3.0. How amazon warehouse work ......................................................................................................4
4.0.Amazon inventory Management....................................................................................................5
4.1.Increase no of warehouses.....................................................................................................5
4.2.Offering wide Range of Products .........................................................................................7
4.3.Purchase books directly from publisher instead of distributor..............................................9
4.4.Location & Manufacturing Postponement .........................................................................10
4.5.Inventory Outsourcing.........................................................................................................11
4.6.Selling Competitive products ..............................................................................................13
4.7.Amazon warehouse Automation .........................................................................................14
5.0.Comparison of Amazon Customer Service Satisfaction............................................................16
Bibliography ..................................................................................................................................18

1.0. Introduction:
Amazon.com, Inc. is a multinational electronic commerce company founded by Jeff Bezos in 1995.
The headquarter of the company is situated in Washington, USA. Amazon.com initially start an
online bookstore and sell books in united states and all over the world, but when their business grows
and their customers increase, they diversify their business and also start selling DVD’s, CD’s, MP3
downloads, video games, software, toys, jewelry, furniture, electronics and many more items on their
website.
Now amazon.com is the world largest e-commerce company having 51,300 employees, 152 million
active customers, annual revenue of $48 billion which is 27% more than Google and their website
www.amazon.com ranked 16th
all over the world by internet traffic.
Amazon has offices, ware houses, fulfillment centers and customer service centers across the globe in
six continents. Amazon.com ship their products to more than 200 countries. They have the world
largest database with total capacity of 7.8 terabytes, 18.5 terabytes and 24.7 terabytes respectively.
Amazon has separate websites for United Kingdom, Canada, France, Unites states, Italy, Germany,
Spain, china, Brazil, Japan and India. They are also planning to launch website in Sweden, Poland
and Netherlands.
Fig 1.0: Shows the performance of Amazonin 2012 (Source: [amazon.com Alexa, Brandz, market
capitalization as of the 5th
November 2012])

2.0. Inventory Management:
Inventory management is one of the important area of supply chain, it plays an important role to
achieve customer service goals. Amazon.com focus on all the areas of supply chain including
inventory management to improve their customer services by decreasing response time and quick
shipment of product to their customers.
Inventory management is one of the three important area of supply chain, which leads to customer
satisfaction[Ballou & Srivastava, 5th
Ed].
Fig 2.1: shows the supply chain triangle[Ballou & Srivastava, 5th
Ed].
The founder of amazon.com “Jeff Bezos” said,
“The logistics of distributions are the iceberg below the water line of online bookselling”.
From his statement it is clear that the management of logistics and inventory is not an easy job.
Especially in e-commerce business the main issue is the shipment of product from manufacturer to
customer.
Customer
service
goals
Inventory
Strategy
Transport
Strategy
Location
strategy

3.0. How amazon warehouse works:
The work in amazon warehouse continue round the clock 24 hours. On average amazon receives 42
orders per second. In 2011 on average amazon fulfill 13 million orders in 24 hours and in 2012
amazon fulfill 17 million orders in 24 hours, amazon run the process very efficiently and they have
same work process in warehouses all over the world. Following is the brake down of amazon process
in a warehouse:
1) As the product arrives in amazon warehouse a bar code tag is put on the product and then they
place it in the shelves anywhere, where space is available, they didn’t define specific places
for items but place it randomly where space is available in shelves. This maximize the space
in the warehouse.
2) Every shelf and a product inside that shelf has its own bar code use to track product inside the
warehouse.
3) Bar code scanners are used to identify the location of the product and its information and then
transmit that information and the location of product to the main computer server of
warehouse.
4) When order is received a “pick list” is generated automatically they track that product, take it
from the shelf and put in a yellow box.
5) The yellow box go to the packing section through conveyor belt, where they pack the product.
6) After packing the product they forward it to the shipment section where the product is loaded
in to truck and carried to the desired locations.
Fig 3.1: shows the yellow box on conveyor belt in amazon warehouse
Figure 3.1 shows the conveyor belt carrying a yellow box to the packing section where the product
has to be packed.

4.0. Amazon Inventory Management:
When Jeff Bezos starts his business he wanted to offer a wide selection of books to customers and did
not want to spend his time and money in opening warehouses and managing inventories, but soon he
realize that the only way to gain the customers satisfaction and provide a better system of product
shipment, he must have to open his own warehouses and arrange inventory.
Following are the steps regarding inventory management, which amazon takes to improve customer
satisfaction:
4.1. Increase no of warehouses:
Initially amazon.com has only ten warehouses from where they fulfill the orders from all over the
world but soon they realize that the no of warehouses are very less and fulfillment of order takes
more time and this can effect customer satisfaction.
In addition they also found that the distribution of product directly from merchant to the customer can
influence customer decision to order next time. So they have to keep their own inventory and increase
the no of warehouses to maintain customer satisfaction.
Fig 4.1(a): shows the relation between response time and no of warehouses[chopra and meindl,
2007].

From the figure it is clear that when the no of warehouses increase the response time decrease, and
when the no of warehouses decrease the response time increase. So by increasing the no of
warehouses and locate them near the customer will improve response time [chopra and meindl,
2007].
So, they increase the no of warehouses and immediately add six new warehouses. So by adding more
warehouses amazon reduce the distance between warehouse and customer, hence reduce the delivery
time and transport cost. Latter on they keep increasing their warehouses and now they have more than
50 warehouses in 13 countries.
Fig4.1(b): Amazone.com warehouse interior
Problem
As by increasing the no of warehouses amazon will increase its efficiency and will decrease
fulfillment time but by increasing the no of warehouses the cost will also increase because as the
number of warehouses increase the holding cost will also increase.But at this stage amazon didn’t
care about the cost and their only focus was on improving customer satisfaction because they think if
we provide good customer service then the number of customers will increase and when number of
customers will increase then they will order more and hence, the holding cost of inventory per unit
will decrease as shown in figure 4.1 (c).

Initially the management of amazon.com take hard decisions only to provide best service in order to
increase the numbers of customers and that time they didn’t care about profit, that’s why amazon
make their first profit seven years later after the formation of company.
Fig 4.1 (c): shows the relation b/w cost/unit & inventory Quantity [Ballou & Srivastava, 5th
Ed].
From the figure 4.1 (c). It is clear that as we increase the no of quantity of inventory in a warehouse
the cost per unit of inventory decrease.
Now amazon almost receives 42 orders per second so it mean they also have to fulfill 42 orders per
second for which they need to have a lot of inventory in their ware houses, so now the quantity of
inventory in their warehouses have increased so their holding cost has decreased.
4.2. Offering wide Range of products:
Initially Amazon.com has only stock of books but soon they add every possible item in their
inventory which the customer wanted to buy. The availability of product is an important factor, if
customer need a product and that is not available in amazon stock, this can make the customer
annoying and he can go to some other source. So to overcome this problem and maintain customer
satisfaction Amazon.com added a huge verity of products in their inventory. Increasing the verity of
products increase the customer the attraction [chopra and meindl, 2007].
Now Amazon.com offers 16 main categories of products listed as follow:

1) MP3s and cloud players
2) Amazon cloud drive
3) Kindle
4) App store for Android
5) Unlimited instant videos
6) Digital games and software
7) Audio books
8) Books and magazines
9) Movies, music & games
10) Electronics & computers
11) Home, garden & tools
12) Grocery, health & beauty
13) Toys, kids & baby
14) Clothing, shoe & jewelry
15) Sports & outdoor
16) Automotive & industrial
Problem
As amazon.com has added a large verity of products in their inventory based on speculation. They
didn’t do any survey to find what the customers want, they just add every possible item in their
inventory which they think the customer want and because of this their inventory size become very
large due to which their holding cost of inventory increase.
The figure below shows the curve of holding cost

Fig 4.2: Shows the cost & inventory relation.[Ballou & Srivastava, 5th
Ed].
The quantity of inventory is directly proportional to holding cost. The holding cost increase as the no
of items in the warehouse increases [Ballou & Srivastava, 5th
Ed].
How Amazon overcome this problem
Due to large verity of products in the inventory of amazon the handling cost become very high so to
overcome this issue amazon take a decision to fulfill the order of those products directly from the
manufacturer warehouse which has low demand, and will not store such items in their own
warehouses, this will decrease the inventory of amazon, in return of which the holding cost will
decrease.
Improve forecasting
Initially amazon.com added a large verity of products in their inventory based on speculation. They
didn’t do any forecast to find what the customers will buy, they just add every possible item in their
inventory which they think the customer will buy and because of this their inventory size become
very large due to which their holding cost of inventory increase.
So to overcome this problem amazon improve their forecasting, they make forecast and come to
know that which products the customers will buy and then they add only those products in their
inventory which they think the customers will buy, so in this way they reduce their inventory due to
which the holding cost of inventory also decrease.
4.3. Purchase books directly from publisher instead of distributor:
In order to improve customer service amazon.com take another step and they decided to buy book,
Cd’s and DVD’s directly from the publisher instead of distributor. By purchasing books, cd’s and
DVD’s directly from the publisher has two benefits:
1) Amazon will get a best deal from them
2) This will shorten the time of getting the products because there will be no middle man

Fig 4.3: shows the process of amazon before and after modification.
As amazon.com will buy books directly from the publisher so they will get a good margin and will
have a best deal from them because there will be no middle man between them to get profit from
amazon. So then amazon can offer that products to their customers on a good price which leads to
customer satisfaction.
Also by purchasing products directs from the publishers will shorten the time and amazon will be
able to make the products available quickly on their sites due to which customer satisfaction will
increase.
4.4. Location& Manufacturing postponement:
Amazon.com also improve the performance of their inventory management by adopting location
postponement. Postponement is the strategy adopt by the companies to build agile supply chain. In
postponement amazon centralized their inventory in one strategic location and from that location they
supply the products to the desired locations. This process make the supply chain faster because the
inventory will stored in a centralized location and it can be quickly forwarded to any location where
required. This make the process faster which leads to customer satisfaction.
Location postponement has also another advantage that when the products are stored in the
centralized location, at that point value-adding process can also be performed.

Amazon also adopt the policy of manufacturing postponement for their non-popular products. And
they offer a huge verity in a single product, and when amazon receive the order of a specific product
than they (amazon) order to the manufacturer to manufacture the product. For example amazon offer
a huge verity of colors in at-shirt on their website but they don’t know which color of t-shirt the
customer will order and they also cannot keep all the t-shirts in their warehouse which they offer on
their site because this will increase holding cost. So the manufacturer will manufacture all the t-shirts
in white color and dye them later when order is received to amazon. In this way amazon can reduce
their holding cost and also offer a huge verity of products to their customers.
Reduce Safety stock
Amazon also reduce the safety stock in warehouses by adopting the strategy of location
postponement and improving their forecasting. So by reduction the safety stock in their warehouses
the inventory holding cost decrease.
4.5. Inventory outsourcing:
Amazon obtain a good reputation of excellent customer service by their quick responsive system.
With the passage of time the customers of amazon.com increase rapidly and it became difficult for
amazon to fulfill customer orders with the current warehouses as the no of orders increase day by day.
So first the management of amazon think to increase the no of warehouses but they already have a lot
of warehouses, and they also know that by adding more warehouses they have to bear a huge cost,
because the no of warehouses are directly proportional to the cost.
Fig 4.5(a): shows the relation between cost and warehouses[chopra and meindl, 2007].

From the figure4.5(a), it is clear that by increasing the number of warehouses will cause a direct
effect on the cost and as the number of warehouses increase the cost will also increase[chopra and
meindl, 2007].
So instead of bearing a huge cost, the management of amazon decided to outsource their inventory.
This was a big risk for amazon to outsource their inventory because they had a good reputation in
managing inventory and they don’t want to lose their customers.
The owner of amazon Jeff Bezos said that inventory is not our core business so we have to outsource
our inventory and focus on our main objective. Outsourcing the inventory has several benefits like:
1. Better and faster delivery of product
2. Less amount of inventory has to be managed in warehouse, this will reduce holding cost
3. Allow organization to focus on the main goal
4. Obtained professional logistics services
5. Increase of revenue
Amazon take a smart decision and they decided not to outsource the best seller products but only
outsource those products which has less demand. They decided that the inventory of popular products
will manage internally and non-popular products will be outsourced. So amazon outsource their
inventory and keep their focus on e-commerce. This result in increase in revenue and fast shipping in
turn of which the customer service improved.
Amazon also handle orders through drop shipment, they contract with some of the leading companies
for logistics and shipment like Ingram Micro and Cell Star. Ingram micro is the largest whole sale
dealer of computer, hardware and laptops and also provide logistics services. Sell star handle the
logistics of cell phones. So amazon.com contract with these companies for logistics and shipment.
Ingram micro ship computer hardware and laptop for amazon and cell star ship cell phone for
amazon. The drop shipment model was very successful for amazon because it reduce the holding cost
and logistics cost of amazon.

Fig 4.5(b): shows the process of drop shipping
4.6. Selling competitive products:
Amazon.com take a decision to sell the products of their competitors on their site. This will give
several advantages to amazon. First it will give a wide range of products to their customers. Amazon
increasing the range of products for their customers could increase variability as well as availability.
The availability of product is one of the important factor which could influence customer satisfaction
[Heim & Sinha, 2001].As they will offer competitive products so customers will not look for other
sites to find the product.
Secondly, amazon allow customers to access much information about the product including price etc.
so the customer can compare the price offered by amazon and their competitors, and as amazon is
trying to offer the product to their customer on low price as much as possible and that’s why the
amazon did not have to promote their low price because the customers can compare the price of
amazon.com with their competitors on amazon website.

Fig 4.6: shows the price of amazon and its comparison with their competitors (source: [Wells Fargo
& Company])
As amazon offer the product on a reasonable price as compared to their competitors and provide
complete information about the price of their products andalso show the price of same product
offered by their competitors, so customers found amazon cheaper, which leads to customer
satisfaction.
And amazon did not keep the product of their competitors in their own inventory, but when order
received they shipped that product directly from the inventory of their competitors, so the
amazon.com did not bear the holding cost.
4.7. Amazon warehouse automation:
As the no of customers of amazon.com increase day by day and it was getting hard to fulfill the
orders quickly in the ware houses, so the management of amazon decided to make their warehouses
fully automated. Because this will decrease fulfillment time which will leads to customer satisfaction.
The average number of people working in a good warehouse are about 30-40 in a single shift to run
the process fairly but the figure will be doubled if they want to earn high customer ratting. But
increase in the no of labor will increase labor cost.
So to overcome this problem, reduce labor cost and fulfill the order quickly the amazon decided to
make their warehouses fully automated by using kiva system in their warehouses. This robotic system
cut down the time by 60-80% because the robots don’t work in shifts nor they need brake nor they get
paid hourly. The people working in the warehouse can make a mistake but the kiva robots works on
programing so the percentage of error is almost zero. So by applying kiva system in their warehouses
amazon decrease the fulfillment time and increase the customer satisfaction.

Fig 4.7: shows Kiva robots driving shelves
These robots can carry load up to 3000 ponds. The robot has max velocity of 1.3 meters/s. They use
onboard camera which read the sticker of barcodes on the floor of warehouse. The computer server
communicate wirelessly with the robots and give direction to robots.

5.0. Comparison of Amazon customer satisfaction:
The management of amazon.com always try their best to fully satisfy their customers. They make
changes in their process with time to time, to make it easy, cheap, accessible and quick. Jeff Bezos
the founder of company himself focus on customer satisfaction.
Jeff Bezos says:
“Be afraid of our customers, because those are the folks who have the money. Our competitors are
never going to send us money”.
“If you do build a great experience, customers tell each other about that. Word of mouth is very
powerful”.
“If you make customers unhappy on the internet, they can each tell 6,000 friends”.
From these it is clear that how much the management of amazon.com is worried about customer
satisfaction, that’s why they focus on customer satisfaction from the very first day and now they have
successfully achieve their target of customer satisfaction.
Amazon stand 1st
in customer satisfaction from last several years and beat companies like Apple, Wal
mart, FedEx, DHL, American Airlines, Delta airlines,Nokia, McDonald’s, KFC, pizza hut, Domino’s
pizza, Dell, IBM, HP, Bank of America and Citi bank [Zobgy International, 2012].
The ranking of Amazon.com by different organizations with respect to customer satisfaction are as
follow:
In 2008 Amazon.com stand first in ranking by the survey of American Consumers Satisfaction
Index (ACSI), 2008.
In 2009 Amazon.com stand first in ranking by the survey of Customer service champs from
business week, 2009.
In 2010 Amazon.com stand first in ranking by the survey of Foresee E-retail
satisfactionIndex, 2010.
In 2011 Amazon.com stand first in ranking by the survey of NRF foundation, 2011.
In 2011 Amazon.com stand first in ranking by the survey of Temkin Group, 2011.
In 2012 Amazon.com stand first in ranking by the survey of Foresee E-Retail Satisfaction
Index, 2012.

In 2012 amazon.com stand first in ranking by the survey of Zobgy International, 2012.
From the surveys above it is clear that amazon.com has successfully achieve their goal of customer
satisfaction. And they are still continuously improving their inventory management in order to
increase the customer satisfaction more and more.

Bibliography
Books:
Ronald H. Ballou & Samir K. Srivastava, 2007
Business logistics / Supply Chain Management, 5th
Ed.
Sunil Chopra & Peter Meindl, 2007
Supply chain Management: strategies, Planning & operation3rd
Ed.
Gregory R. Heim & Kingshuk K. Sinha, 2011
A taxonomic Analysis of Electronic food Retailers.
Websites:
http://www.fabernovel.com/en/works/97-amazon-com-the-hidden-empire
http://www.scribd.com/doc/20695369/case-study-report-on-inventory-management-at-
Amazon-com
http://www.slideshare.net/AnujSharma4/study-of-inventory-management-of-amazoncom-
12733801
http://www.chegg.com/homework-help/questions-and-answers/amazon-supply-chainamazon-
s-supply-chain-management-edge-companies-shopping-experience-com-q1707443
http://www.amazonstrategies.com/2012/03/an-inside-perspective-on-amazons-purchase-of-
kiva-systems.html
http://news.cnet.com/8301-1023_3-20050445-93.html
http://www.forbes.com/sites/prospernow/2012/08/28/amazon-1-in-customer-service-but-will-
this-lead-to-sustainable-loyalty/
http://money.msn.com/investing/the-complete-company-rankings-2012.aspx
http://www.forbes.com/2008/02/20/service-consumers-retail-biz-cx_tvr_0220service.html
http://www.amazonstrategies.com/2013/05/amazon-upgrades-offer-listing-page-olp.html
http://www.rfgen.com/blog/bid/246924/Amazon-s-inventory-management-secrets
http://www.the-whole-truth.co.uk/chaotic-storage-system/

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