Customer Fulfillment in the Digital Economy Amazon.com E-tail Customer Fulfillment Networks Pioneer “The logistics of distribution Scorecard are the iceberg below the 1 waterline of online bookselling.” B-web type • Aggregation (e-tail) /Agora —Jeff Bezos, (auctions, Zshops) hybrid model founder and CEO, Amazon.com KEY PARTICIPANTS “Ten years from now, no one Customers • Consumers and business buyers will remember whether Context providers • Amazon.com and online Amazon.com spent an extra merchants (Amazon.com $100,000 upgrading shipping associates, Zshops, auctions) from the West Coast to the East Content providers • Amazon.com and small online merchants (Amazon.com Coast. All that will matter is associates, Zshops, auctions) whether electronic commerce • Suppliers and b-web partners gave people a good or bad (publishers; producers [OEM]; distributors e.g. Ingram Micro, experience.”2 Baker & Taylor Books, and others) —David Risher, senior vice president for Commerce services • Amazon.com and merchants merchandising, Amazon.com participating in auctions and Zshops “This [the Amazon.com • Third party shippers (UPS & USPS) distribution warehouses and Infrastructure providers • Amazon.com Drop shippers such as Ingram CFN] is the fastest expansion of • • Technology providers such as distribution capacity in Oracle, Net Perceptions, and i2 peacetime history.”3 Technologies Third party shippers (UPS, USPS) —Jeff Bezos, • founder and CEO, Amazon.com Offering • The largest online e-tailer of books, music, videos, toys, and gifts • Recently expanded service offering to include auctions (March 1999) and Zshops (September 1999)—an aggregation of merchants on its Web site • Aspires to become a one-stop shop for merchandise on the Web CFN value proposition • “Earth’s largest selection” of merchandise at competitive prices, 360 Adelaide Street W, 4th Floor a validated product assortment, Toronto, Ontario. Canada M5V 1R7 and consistent customer service Tel 416.979.7899. Fax 416.979-7616 from “home page to home www.digital4sight.com delivery”–24/7 URL • http://www.amazon.com © 2000 Digital 4Sight Corp. Reproduction by any means, or disclosure to parties who are not employees of Digital 4Sight member organizations is prohibited. Thank you for your cooperation. 1.1 Customer Fulfillment in the Digital Economy Amazon.com few barriers to entry—but one of those barriers is Amazon.com customer fulfillment. In 1996–97, Amazon.com was largely alone in the e-tailing business. Now the Web is Founder Jeff Bezos wants to transform Amazon.com into teeming with e-tailers like buy.com (which aggressively the largest and most customer-friendly one-stop shop on undercuts everyone else, including Amazon.com), the Web. Already the largest online e-tailer of books, CDNow, and barnesandnoble.com. There are also Web music, and videos, the company has expanded its portal-run malls, many of which are copying and product offering to include toys, gifts, and electronics, offering features (like the renowned “one-click and in September 1999 launched “Zshops,” a new shopping”) that have thus far differentiated initiative (online flea market on Amazon.com’s Web site) Amazon.com. Yahoo’s online mall offers 7,000 stores which offers customers “universal selection.”4 Zshops with over four million items and walmart.com’s planned empower small merchants and customers to set up debut in 2000 poses a significant threat. Amazon.com’s online stores on the Amazon.com Web site for a monthly first mover advantage, e-brand equity, and initial cost fee of $10, and a transaction fee of 1–5% of every sale. advantages (stemming from lack of investments in prime real estate for storefronts) are gradually eroding. With a market capitalization of approximately $31.4 Its margins are falling, while operating expenses from billion (as of November 1999), 12 million loyal mergers and acquisitions are increasing. As of the end of customers, 18 million items on sale, projected 1999 sales 1999, Amazon.com expected to post approximately $600 of $1.4 billion, and the most recognized brand name on million in losses for the year, at a time when growth in the Internet,5 Amazon.com aspires to become the book sales is falling (from about 800% in 1997 to a little supermall of choice for online shoppers. Its recipe over 100% in 1999). On the plus side, customer includes innovation driven by “customer obsession” and retention rates exceeded 72% in the third quarter of the ability to provide a secure, enjoyable shopping 1999.8 But average revenue per customer in 1998 was experience online, but its dominance is due to a $98.4, while average selling, general and administrative customer fulfillment process that delivers. (SG&A) and distribution costs per customer (excluding cost of goods sold) were about $71.30, leading to an A carefully orchestrated and adroitly executed “sell all, average net earnings loss of around 21%.9 carry few” strategy explains Amazon.com’s success with e-tail customer fulfillment. Its business web How has Amazon.com responded to these formidable (b-web) (for books) includes Ingram Book Group and challenges? Baker & Taylor, the two largest book wholesalers in the US, as well as dozens of others. In 1998, Amazon.com First, to increase revenue per customer, Amazon.com obtained 60% of its books through Ingram, which added product lines or capabilities practically every six operates seven strategically located US warehouses. weeks in 1999. In February, the company bought 46% of Amazon.com pays Ingram a wholesale markup a few drugstore.com. The following month, it launched online percentage points above the publisher’s price for its auctions. It bought a 35% stake in homegrocer.com in drop shipping services.6 May, 54% of pets.com in June, and 49% of gear.com in July. The Zshops and All Product Search (a “search the In 1999, Amazon.com opened five new automated Web” service) initiatives have moved it even closer to its distribution centers of its own in the US (this is in goal of providing “earth’s largest selection.” For addition to two centers already operational in Seattle Amazon.com, the Zshops initiative is 80–90% gross- and Delaware). The intent is to improve declining margin rich, since its marginal costs for providing margins in a cutthroat business (e.g. by sourcing books one-click shopping and credit card collection on Zshops directly from publishers), lessen dependence on Ingram is nearly zero. and other distributors, and extend and control its online fulfillment process to enhance competitive advantage. Second, its customer fulfillment networking (CFN) Amazon.com now offers its customers same to next day strategy is designed to increase gross margins by shipping (in the US) on most items. In the 1999 holiday sourcing directly from publishers and other season, the company sent more packages—perhaps in producers, rather than from wholesalers (e.g. excess of 15 million—to more people than any other distributors like Ingram) who provide drop shipping e-tailer or mail-order retailer in the country.7 for a premium. Amazon.com will also reduce costs Amazon.com’s leadership in customer fulfillment per sale by cross-docking orders (books, electronics, networking (CFN) will be critical to its success as the and toys all in one order) at the warehouse closest to landlord of the largest shopping mall on the Web. the customer through state-of-the-art demand forecasting and optimization solutions from i2 Business context Technologies.10 E-tailing is fast becoming a crowded marketplace with © 2000 Digital 4Sight Corp. Reproduction by any means, or disclosure to parties who are not employees of Digital 4Sight member organizations is prohibited. Thank you for your cooperation. 1.2 Customer Fulfillment in the Digital Economy Amazon.com Third, its strategy of providing hassle-free, same or next HighE-BRAND AS BARRIER TO ENTRY Less compelling day fulfillment on most items will enhance customer AMAZON.COM (Circa 2001) satisfaction and loyalty, driving repeat business, High • Landlord of largest Web referrals, and increased market share. supermall • Universal selection, one-stop shopping, and same day customer Amazon.com’s business model consists of two different fulfillment = competitive but complementary revenue, pricing, and profit models. advantage • Revenues: $2.7 Billion (est.) In the case of auctions and Zshops, relatively small • Registered Customers: 19.5 MM topline revenues (at least as of the end of 1999) • Items Offered: >18 MM contribute high gross and operating margins. In contrast, for the traditional e-tailing model, lower gross 11 AMAZON.COM (1998) and operating margins offset high topline revenues. • Book E-tailer The company wants to utilize both models: cross-sell • Investment in brand building the high margin Zshops/auctions offering to its • Customer fulfillment largely outsourced to Ingram and registered e-tailing customers (immediately enhancing Baker & Taylor E-CUSTOMER EXPECTATIONS both revenue and profits per customer), and cut the cost ONLINE PRODUCT ASSORTMENT • Revenues: $610 MM • Registered Customers: 12 MM of sales and operating expenses through efficient • Books Offered: 2.5 MM customer fulfillment. Low This strategic shift (figure 1) makes sense because Simple Complex* Low CUSTOMER FULFILLMENT AS CORE-COMPETENCE High Amazon.com’s e-brand will be a less compelling barrier * Complexity of product assortment implies both high breadth and depth of product lines offered. to entry beyond 2000, compared to its customized, collaborative, and integrated online fulfillment Figure 1. Amazon.com’s strategic shift: from book e-tailer to landlord of capability for “orders of one.” According to Andrew N. Web super mall.12 Westland, Amazon.com’s vice president of warehousing, transportation and engineering, it would risk losing its Value proposition competitive advantage from its pioneering and Amazon.com’s value proposition is “earth’s largest innovative one-to-one customer fulfillment excellence if selection—24/7, at a competitive price.” The world’s it hired another company to handle distribution.