Supply Chain on Amazon

Amazon started as an e-commerce book site and has now added music, toys, electronics, software, and home improvement equipment to its list of product offerings. The Amazon supply chain is longer than that of a bookstore chain such as Borders or Barnes and Noble because of the presence of an additional intermediary—the distributor. The distributor margins in the Amazon supply chain can also be viewed as an increase in cost.

However, Amazon has exploited several opportunities on the Internet to attract customers and increase revenues. Amazon uses the Internet to attract customers by offering a huge resource of millions of books. A large physical bookstore, in contrast, carries fewer than 100,000 titles. Amazon also uses the Internet to customize service to the individual. Amazon's software allows it to develop and maintain customer relations by recommending books based on customer purchase history, sending reminders at holiday time, and permitting customers to review and comment on books. New titles are quickly introduced and made available online, whereas a brick-and-mortar bookstore chain must distribute and stock the titles prior to sale. Amazon takes advantage of other Internet attributes: online ordering and 24-hour-a-day, 7-day-a-week availability. To this Amazon adds delivery to the customer's door.

Amazon uses e-commerce to lower inventory and facility costs, but processing costs and transportation costs increase. Amazon is able to decrease inventories by consolidating them in a few locations. A bookstore chain, on the other hand, must carry the title at every store. Amazon carries high-volume titles in inventory, but purchases low-volume titles from distributors in response to a customer order. This also tends to lower costs because the distributor is aggregating (consolidating) orders across bookstores in addition to Amazon.

E-commerce allows Amazon to lower facility costs because it does not need the retail infrastructure that a bookstore chain must...