Amazon supply chain model disrupts entire industry

From TechTarget:

By now, it’s no surprise that Amazon’s business model is not only disruptive but driving established businesses and business practices to extinction.

Take global supply chain, for example. The Amazon supply chain model has affected the entire supply chain and logistics industry in the same way that the retail industry has been changed utterly.

As with retail, this will produce losers that cannot match the pace of change and adapt to the Amazon supply chain model. At the same time, however, new businesses are formulating to either ride Amazon’s wake or provide alternatives that try to match the changes brought on by the Amazon effect.

In that vein, there has been a lot of attention on fulfillment and how Amazon has changed consumer behavior. But what’s less seen and even more important is what’s happened behind the scenes that has changed supply chain behaviors significantly to both meet the demands from Amazon and compete against the tech behemoth, said Rosemary Coates, founder and president of Blue Silk Consulting, a global supply chain consultancy based in Los Gatos, Calif.

The traditional supply chain was built around companies sourcing raw materials and turning them into components or products, with production planned months and even up to a year in advance, Coates said. The process was much more predictable, and companies knew what and when they were going to produce, and the various channels they were going to use for shipping products.

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Then Amazon came along and taught consumers to expect goods to be delivered overnight, which snapped a bullwhip effect throughout the entire supply chain. One result of such an expectation is that companies now have to invest in bigger stocks of inventory to have products ready to ship when demand increases, which also means they have to build new warehouses and implement new logistics strategies.

“[The Amazon supply chain strategy] has had an effect all the way down the supply chain,” Coates said. “Production planning may be disrupted or has to switch to a build-to inventory model instead of a build the fulfillment model. That means there may be a difference in production runs — instead of small runs that keep work in process and minimize investment to larger production runs that are going to build inventory.”

The traditional supply chain model taught manufacturers to minimize inventory through methods like Kanban or just-in-time manufacturing where parts are brought to the assembly line only when needed.

“You wanted as little as possible from an investment perspective and also to keep the line moving, to keep manufacturing moving along, so that it was a kind of a constant ongoing repetitive sort of environment,” Coates said.

If they’re going to be a link in Amazon’s supply chain, manufacturers need to rethink where they should invest in supply chain resources. For example, they need to decide if they want to stock enough inventory in regional locations in case they need to fulfill Amazon orders, Coates said.

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In addition to changing manufacturing strategies, the Amazon supply chain model is completely changing the logistics industry, Cowan said.

“First and foremost, Amazon is conditioning end customers that they should get their goods delivered the same day, and may be measured in hours, instead of days,” Cowan said. “This is a significant sea change overall. And frankly, if you’re not Amazon today and you don’t have a strategy to get products into your customers’ hands that same day, you’re probably going to have a significant erosion of your business.”

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The Amazon effect is allowing procurement to go outside of traditional systems, which has led to companies rethinking strategies, Gardner said.

“Like we saw in enterprise IT with AWS cloud, people started using it with their credit card, but it was under the radar,” Gardner said. “But then people started to look at it more strategically and said, ‘Let’s evaluate this like with any other IT approach.’ The same thing happens when it comes to the purchasing of goods and services — people started using Amazon or other online retailers to purchase things ad hoc with petty cash or non-discretionary spending.”

It makes sense for businesses, particularly SMBs, to use Amazon for purchasing because of price and efficiency gains, but Gardner cautions against handing over too much strategic activity to any one company.

Link to the rest at TechTarget