Fundamentals of Management 6th Edition by Ricky Griffin

Exercise 23

Amazon Rekindles Its Flair for Technology
As you probably know, selling things online-online retailing, or e-tailing -is the only thing that Amazon.com does. Unlike online rivals, such as Barnes Noble.com or Walmart.com, Amazon has no roof over its head-no bricks-and-mortar presence to anchor its online presence. The seller and its customers interact by website, e-mail, or phone. Behind the website, however, is one of the largest direct-to-consumer distribution operations in the world.
Founded in 1995 as a bookseller, Amazon does pretty well these days-nearly $5 billion in sales for the second quarter of 2009-but it's had its ups and downs. Early investors believed that the promise of online business outweighed the risks associated with the new type of enterprise, but it wasn't long before giddy expectation gave way to more sober assessment, as soaring costs kept pace with expanding sales and wiped out profits. That's when Amazon diversified its range of product offerings, adding toys, music, electronics, software, and household goods. Expansion continued to eat into profits, and the company had to make huge investments in infrastructure and IT before it finally went into the black in 2002.
Though fairly commonplace among today's online enterprises, Amazon's business model was revolutionary for its time. There was no need to open stores in high-rent shopping areas, and the company was free to choose locations for distribution centers based on cost and convenience to transportation facilities. Amazon's seven distribution centers stock thousands of popular items, but many of the goods that consumers buy through Amazon are in fact "drop-shipped" directly from the manufacturer. Amazon, therefore, can offer a multitude of products without incurring high inventory expenses, and because the middleman has been eliminated, delivery times are faster.
In addition, much of the work at Amazon facilities is automated. Workers use simple, menu-driven computer programs to access and monitor customer orders. Goods are then picked from the shelves and placed in a vast system of automated chutes and bins that bundles them appropriately. At one point, Amazon had tried to minimize shipping costs by bundling all items for shipment to a single address into one package. Now, however, the system relies on a more effective sorting algorithm that calculates optimal package size to both protect items and reduce costs. Automated scanners track the progress of every order, and automated boxers and labelers prepare goods for shipping.
Software, of course, is an important part of Amazon's operations because better systems hold down labor costs, increase accuracy and speed, enhance the customer experience, and support effective planning. Supply chain software, for example, uses a complex formula to choose which goods should be carried in distribution centers and which should be drop-shipped. Yet another algorithm constantly recalculates item popularity ratings to choose which goods to store in the most-frequented sections of warehouses.
Amazon is also a pioneer in the development of several operations technologies:
• "One-click" buying allows customers to make final purchases with a single mouse click. (The process is patented and licensed to other companies.)
• Amazon was one of the first online retailers to let customers post online product reviews, which not only boost sales but also contribute to a sense of community among users.
• Customers can review their order histories, create wish and favorites lists, share information with friends, receive personalized recommendations and gift-giving reminders, and tag items with customized category data.
Amazon's operations software is so popular with other firms that the company has launched a feature called Amazon Web Services, which allows independent programmers and merchants to access Amazon's library of software and adapt it for their own use. The library is free unless the "borrower" intends to sell through Amazon, in which case there's a 15 percent commission on each sale. The service has proven so popular that 22 percent of Amazon's sales are now conducted by other merchants. In February 2009, as part of Amazon Web Services, Amazon launched Amazon SimpleDB, a system that allows businesses to store and quickly retrieve simple data. Some companies already rely on Amazon's expertise to manage their websites. Target and Office Depot, for instance, contract their online presence to Amazon.
And now-for consumers-there's Kindle, which, ironically, hearkens back to Amazon's origins as a bookseller. Developed by an Amazon subsidiary called Lab126, Kindle is a software-hardware platform for reading electronic print material. The first-generation Kindle device came out at the very end of 2007 and was aimed primarily at readers of books, who Amazon founder and CEO Jeff Bezos promptly labeled "the last bastion of analog." "The vision [of Kindle]," he hastened to add, "is that you should be able to get any book-not just any book in print, but any book that's ever been in print-on this device in less than a minute."
By the end of 2008, Amazon had more than 275,000 titles available for download, but Kindle is designed to handle much more than books. With this device, which doesn't require a computer, Amazon allows you not only to download 1,500 books, but also even to subscribe to newspapers and magazines, which will automatically be downloaded as soon as new issues go to press. You can search for material through Google, follow links from blogs and other webpages, jot down notes on the page you're reading, and even capture selected passages with the equivalent of an electric highlighter. Kindle 2 and Kindle DX, each with larger displays and other new and improved features, arrived in early 2009, and there's also a Kindle for iPhone.
Eight months after its release, Amazon had sold nearly $100 million worth of Kindles, and by the end of the year, amid speculation that it was the iPod of the book world, the Kindle had sold double its projected sales figure (and equaled sales of the iPod in its first year of release). Analysts expect sales of $1.2 billion to $1.4 billion by 2010, which would amount to about 4 percent of Amazon's yearly revenue.
Give three or four examples of ways in which Amazon's operations contribute to high productivity.