Tag Archives for " Amazon "

Amazon spent $28B in freight costs last year. How well are they using their advantage?

Someone asked me this question on a popular social platform. The subtext was this:

What kind of discount do you think they’ve negotiated with the major carriers (UPS, FedEx, USPS, etc.)?

I have over 12 years of operational experience and 23 years of commercial negotiation experience with freight companies on large scale global freight operations.

Even though I have no direct experience with Amazon’s freight operations (and I would not reveal any inside information, even if I did) I think I am well qualified to answer this question.

Based on my review of Amazon’s cost reports, I would first question the full details of $28 Billion freight spend. My gut feel is that all of it may not be freight bill for external freight vendors such as UPS, FedEx or USPS etc.

Moving on, irrespective of the fact how big is the external freight bill – amazon’s shipping spend is huge. One of the biggest in the world.

As such, Amazon would start with a massive advantage in the price negotiations with the vendors. There are two questions here:

1. How big? And,

2. How well Amazon uses this advantage?

Let’s start with the second question first – because I have worked with many companies who had a similar massive advtange where they formed bulk of the trade on some lanes and yet did not know how to negotiate and control freight well enough.

What went wrong?

In many cases the same company has 20 or more divisions each with its shipping department – negotiating with the same vendor on the same lane. In most cases the vendors pitched their best salesmen while the buyers thought of freight as a fixed cost (an after thought).

The net result? They were paying the retail! Or, close. Worse still, they did not know the difference. I will skip a lot of other bad news, except for the worst one – they were signing contracts which were largely one sided (favouring the freight vendors). And, as usual the contracts make all the difference in any transaction.

So how well does Amazon perform on this front?

An external point of view is that it performs very well. What is my evidence? Read these articles to get a sense:

President Trump, Amazon Should Run The USPS: Here’s Why

Trump Said Amazon Was Scamming the Post Office. His Administration Disagrees.

There are many others in the same vein. Sure it is a political hot potato now, but the facts of the case are still quite clear. Amazon is using every advantage it can. And, quite well.

Let’s spend some time on the first question.

How big is the advantage?

Everyone knows that the full truck, full plane, or full ship, or full shopping centre is very lucrative proposition for the vendor. Any operation close to its peak volume is at its most productive.

Think of what kind of rent subsidies do the anchor tenants enjoy in shopping centres, and in commercial buildings?

What kind of deals do Take-or-Pay (ToP) buyers enjoy on LNG trains where investment in each train exceeds several billions of dollars. There are countless such examples in the realms of supply chains – ranging from explosives to chemicals to gases to property to FMCG etc.

Almost all commercial operations have a bulk buyer who enjoys significant cost advantage over the retail buyers.

How do you model the advantage? How do you model the industry cost curve and pick your vendors? How do you negotiate your advantage?

All this is an art – which cannot be summarised in a few pages. You have to live it all day, every day, for years to master the art.

By all indications Amazon has mastered the art. If you have not figured it out from the foregoing discussion, then I would rather not reveal my estimate of the advantage they are likely to enjoy.

In a future post I will reveal Amazon’s achilles’ heel, which none of the big box retailers have yet identified, and which would level the playing field for them.

Why Almost Everybody is Missing the Most Important Point in Their Solution to Amazon’s Threat to Australian Retailers

Yesterday (on 2nd November 2017) I happened to briefly glance at the Australian Financial Review – the key finance newspaper in this country while I was waiting in the lobby for a meeting. No more do I  subscribe to this newspaper,  because it appears to be growing more and more out of touch with business reality, and becoming more a shill for vendors with deep advertising budgets, and small brains.  Its content  in terns of financial and economic news is excellent, but somehow the journalists seems to miss the major shift in the business models to B2B Networks.

Taking a Sword to Fight a Nuclear Missile

Yesterday’s newspaper seemed to be predominantly dedicated to a conference on e-commerce related subjects. I do not remember the specific topic of the conference, and it does not even matter because the entire debate was centered around Amazon’s entry into Australian market place, and the threat it poses to the Australian retailers and businesses.

Indeed, the organisers, and the newspaper, had identified the burning issue of the day for Australian businesses. Looking at the issues, I almost thought of subscribing to the newspaper again.

But a little more unpacking of the pages revealed that almost all the solutions on offer were marketing and sales related, or new age technology related.

Nothing beats a carefully crafted supply chain strategy, executed with precision and flexibility - especially for business transformations in dire circumstances. This point cannot be emphasised enough.

What people forget is that Amazon’s success is even more dependent on its incredible supply chain.

Fighting this successful behemoth without an equally effective supply chain is akin to deciding to fight against nuclear missiles with swords.

Are Australian Retailers Being Led Down A Rosy Path in Their Response to Amazon's Entry?

Most people still do not even know what supply chain really means. If you doubt me – just watch the short (1.5 minutes) video below, and conduct the experiment with 10 people you know:

 

 

Lest I leave you with a wrong conclusion, I am not deriding marketing and technology solutions, because they do have a place in the overall campaign.  But, if you get an impression from the newspaper (or the conference that seemed to dominate yesterday’s paper) that somehow you are going to outmarket Amazon just using such solutions – you better think again.

Nothing beats a carefully crafted supply chain strategy, executed with precision and flexibility – especially for business transformations in dire circumstances. This point cannot be emphasised enough.

I have written extensively in many other blog posts on how to do just that – all you have to do is explore a bit in the categories and tags on the right of this page. Some of the titles from over the year are in the image on top of this page.

For real leaders, who want to make substantial and deep positive impact – I do recommend my book The 5-STAR Business Networks.

If you have the budget, it is also worthwhile asking for a workshop based on the same material – but we only have limited slots, and already have a big backlog for that.

Five Key Cornerstones of The 5-STAR Business Network

There are five key Cornerstones of success in building and harnessing effective global business networks

So what are these 5 key cornerstones of the super networked businesses that lead to these networks being called the 5-STAR Business Networks? As an aid to memory, I have given them mnemonic names in order, shown below (see the complete structure in the book):

5 STAR Business Networks enable businesses to do these regular activities in a much better manner than would have been possible otherwise. As we will see with the help of several examples and cases studies, aided by technologies, an open collaborative mindset and a focus on the bottom line, these businesses are achieving better results through superior methods.

We will examine each of these five cornerstones of the 5 STAR Business Network in great detail in the five chapters  in the book. In this article, we will use an example of one company that is positioning itself as the super networked business of this century by using all five of these very astutely.

Amazon is a successful example of an emerging Global Business Network

 

When Amazon was founded in 1994, it was but one of the hundreds or thousands of businesses aspiring to make it big on the Internet. Just like all its peers, initially the markets and analysts were starry-eyed about Amazon’s success, and later, when the dot-com bubble burst, and the trend reversed, few people gave it much chance of success. Yet it defied the naysayers and continued to sell at PE ratios exceeding 100 on the stock markets.What is the secret of Amazon’s success? What allowed Jeff Bezos to build the largest online retailer in the world, where customers can acquire anything that they desire over the Internet?

Admittedly, the company started with a first-moved advantage in its segment: books. Amazon was one of the first major companies to sell books online.  The business was founded in 1994 and by 1995 the website was launched.  Initially, the company was exclusively an online bookstore. However, it transformed to sell millions of products to a large and valuable consumer base.  Today, the company sells everything from electronics to clothing, furniture and even food.If you had to ask this simple question to 100 people – “Who on earth today is the world’s most customer-centric corporation?”

Amazon would figure very high on the list.  Amazon has achieved low prices, a wide inventory selection, convenience, and truly gives customers what they want.  As a result, Amazon has evolved into a Fortune 500 business and continues to grow as a world-class electronic commerce platform.The company grew its annual revenue from US $19 billion in 2008 to US $24.5 billion in 2009 to US $48 Billion in 2011, all the while continuing to invest in future businesses and maintaining a healthy cash flow. How does it do this?

In an article in Forbes (April 2012) Jeff Bezos offers some tantalizing clues. Bezo’s main message is to base his strategy on tings that will not change.For Amazon, their purpose is simple: offer wider selection, lower prices and quick, dependable delivery.  Another significant lesson Bezos reveals is obsessing over customers.

Amazon starts with the customer and subsequently works its process backwards.  The company even designates specific roles performed by trained employees known as customer experience bar raisers.  This is one topic that Bezos takes exceedingly serious.

But, to some extent, every corner store does these things just as well. Why, then, is that would a corner store owner be lucky to grow his lowly sales by a couple of percentage points, while Amazon grew its sales to $48 billion from $24 billion in just 3 years.

Amazon achieves high marks on all five key cornerstones of success of Global Business Networks

Let us take a more in-depth look behind the curtains.

Jeff Bezos, on the record, said that you have to be willing to be misunderstood for long periods of time.  While several of Amazon’s designs look like a bust at first, if the new idea makes strategic sense to him, Bezos goes for it knowing full well that people will initially misconstrue the design. In general, this is what innovation is – people are going to misunderstand it because it is new. Overall, the business philosophy is rather simple: make online shopping simple and suitable so that the customer does not think twice about buying instantly with one click (Anders, George. “Jeff Bezos’s Top 10 Leadership Lessons.” Forbes. 4 Apr. 2012).

The complexity lies in how this simple business philosophy is translated into consistent action, resulting in nearly a billion customer visits a year. There is nothing simple in the complex execution of this simple business philosophy. Therein lies the dilemma of the modern business world – the quest for simplicity at the highest level, underpinned by the highest level of sophistication reminiscent of Nano-technology under the hood.

Almost all successful businesses do this dance of 5-STAR business network well, but Amazon does it exceptionally well on almost all 5 fronts. There are many other businesses – well-known ones – that could be a poster child for the emerging trend of global business networks we showcase in the book The 5-Star Business Network. However, no one is more successful, more visible, has higher potential and is more assured of its role in this revolution. That is why Amazon is a prime example of the 5 STAR Business Networks, demonstrating FAR Innovation, $t$ Efficiency, TOP, APP, and lastly, ROM.

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Who is going to win the battle of Titans (Apple, Amazon & Google)

As everybody knows, three giants in the tech and software world have amassed an incomparable power in recent years from their networks and their strategies. With a vast range of products, they have stitched up the market amongst themselves. But what are the strengths and weaknesses of each giant?

What are the deep business and supply chain implications of the battle of these Titans?

Each one of them is a Business-to-Business Network in its own way with excellent partners and supply chain participants. Apple has its own ecosystem, which is not just their customers, but also thousands of programmers and app developers as well as millions of sellers on iTunes. That is Apple‘s biggest strength.

The same goes for Amazon, with an ecosystem including a very large customer base as well as thousands of sellers that sell their products on their website.

On the other hand, almost everybody uses Google as a search engine, which means they have the largest market share now in the mobile operating systems with Android. Google also owns YouTube and many other digital properties. Each one of them has a formidable Supply Chain, Business-to-Business Network or Supply Network in its own right.

Yet now, all three of them are facing problems in different ways.

Apple is facing problems because its success has always been based on creating the next big product, especially if you look at Apple’s history (iPod à iPhone à iPad). Now, Apple is launching the new Apple watch, which is not a very successful product in my mind. IPhone 6 is obviously just a minor update of the previous successful iPhone. That is where Apple is currently failing. However, they are creating some really innovative services such as Apple-Pay, which allows you to use your mobile as a NFC-based payment option, and Apple-SIM, which allows you to roam at a very low cost in foreign countries.

Apple continues to profit from past supply chain and product successes, and sits on top of huge pile of cash. Amazon, on the other hand, does not make much profit, although it has a very high growth rate of revenue (it grew by around $24 billion in two years) and still growing.

Source: http://time.com/money/3656571/apple-amazon-google/

But they invested in a number of things, which did not turn out that well. This type of experimentation is in the DNA of the company, and at the moment, it is not a big problem, at least not yet. Nonetheless, a couple of these investment, noted by analysts and commentators, have raised red flags in my mind. Amazon Fresh seems to be a resurrection of the business model of an failed company called Webvan, which invested $1 billion in this field and went bankrupt in two years.

Source: http://knowledge.wharton.upenn.edu/article/webvan-finds-that-shopping-for-food-online-hasnt-clicked-with-consumers/

Amazon also continues to invest in expanding its business in India, which is a very competitive environment. With local market players who know the local characteristics much better, and a chaotic marketplace, this is perhaps the most uncertain field for Amazon in my view. The competition may not even be from other B2C e-commerce companies; every man with a mobile phone and a bicycle is a potential competitor. Amazon persists in investing in these two markets.

This could be much more harmful to Amazon than their mobile phones or other hardware devices that they keep creating every few months. They are losing money on those but for a purpose: they are trying to lock customers into the Amazon Network. Nevertheless, these products will never replace iPhones/iPads or equivalent Samsung products and will always be number two in customers’ minds.

The question is: Where is Amazon’s next platform for growth?

Amazon’s “unsexy” B2B business, a “$8 trillion bet”, has been growing silently in the background, perhaps making it eight times bigger than Alibaba and the biggest 5-STAR Business Network on earth.

 

AmzonSupplyAmazonSupply, a wholesale and distribution hub, started in 2005 and has grown to carry 2.2 million products, ranging from office equipment to industrial components, materials and more. After nearly 15 years of languishing on the wayside, the B2B exchanges are finally coming true, slowly.

Already, wholesalers are whispering about the threats from AmazonSupply; although many specialty wholesalers and distributors are somewhat confident that their turf is safe from the giant’s claws due to their highly segmented market.

Nonetheless, AmazonSupply, Alibaba, or B2B exchanges, could become so powerful that they will suck small players into their enormous vacuum of suppliers. The process can even accelerate if trust keeping mechanisms are built into B2B exchanges.

Seller and buyer ratings, as well as seller/buyer protection seen on sites such as eBay and PayPal are not enough to cover the sheer size of B2B transactions. Even the current rating system on Alibaba will not suffice, should this attractive market grow in the years to come.

Source: Will Alibaba and its 40 million accomplices ride roughshod over Corporate America?

Looking at Google, basically revenues of advertisements relating to search engine are stagnating/saturating. Fake clicks are being identified much more easily. People are becoming more careful of what they are spending on online advertisements. Android and YouTube are two engines of growth for Google. Google has declared a strategy of continuing investment in its YouTube products

It is easy to argue that Apple has the best chance of leading the pack in 5 years’ time depending on what kind of new hardware they manage to create in the next 2-3 years. Google and Amazon are probably equal second depending on whether Amazon succeeds in its strategy to capture Business-to-Business markets or whether Google manages to monetise YouTube as much as they can.

Equally likely, new competitors might emerge on the horizon – like superUber! That will be very interesting to see.

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VIVEK SOOD:

ABOUT VIVEK SOOD:

Vivek is the Global Supply Chain Strategist and Author who works globally with large and mid-size corporations to FIX their Business-to-Business Networks in order to their multiply profits.

In that last 14 years he created several new breakthroughs in Supply Chain – including business transformations led by SCM 3.0. His more than 400 projects have spanned approximately 84 countries on five continents, with clients ranging from fortune 500 companies to innovative green technology companies.

Get free extracts of his books and see why thousands of executives at the world’s leading corporations trust Global Supply Chain Group to build brilliant business-to-business network strategy.

We are rapidly growing and hiring. Exceptional (world’s best) Outsourcing Experts, Logisticians, Strategists and Supply Chain should contact me directly.

Follow Vivek here and @GlobalSupplyCG

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If you are a HR professional, recruitment or HR consultant – and you think your clients might benefit from these insights about business transformations – feel free to forward this blog series via email or linkedin. The nature of your industry is changing rapidly as a result of forces mentioned in this article.

No Matter Which Way You Look At It – The New Amazon Smartphone Is A Dud

Why?

As a strategy – it is doing what Apple did with iTunes more than a decade ago – build a walled garden for your customers to play within.

The strategy rests on two assumptions – first, that the customers will not find a jailbreak, and the second that you have built a strong enough unique proposition to lure and keep the customers in.

Both those assumptions are flawed in this case.

First, if the hardware is good enough to attract the trendy users and pioneers undoubtedly jailbreaks will emerge.

But, that is a big if.

Besides OIS (optical image stabilization for the camera), there is little in terms of hardware to recommend the phone.

Sure, you could read a book in sunlight even while wearing sun-glasses – but how many people do that on a 4.7 inch screen.

Many of these features will be a lot more useful in a tablet – giving further boost to the kindle platform – which is really a platform more suited to Amazon than to Apple or Samsung.

As a tactic – it is merely a defensive move against being locked out by other smartphone creator. If Amazon thinks it will hand its customers a shopping machine that will fill its coffers with orders – it will have to think twice.

While no one made huge losses by underestimating the public intelligence – Amazon may not profit a lot from this move either. The key question is this – does this product enable Amazon to build a new business network, or help it significantly strengthen its existing business network to an extent that it will provide competitive advantage?

If the competitors you are thinking about are Walmart, or Costco, then the answer would be a qualified yes. Qualified because the device merely shaves off a few milliseconds off an activity that the customers might engage in – online price comparison of the goods on shelves.

Yet – how can the customer be sure that Amazon is giving them the best price on the net?

However, for most of the buyers of the device, the competitors for Amazon will be other on-line retailers and that is not a good news for Amazon. With the price differential between Amazon and many brick and mortar stores fast disappearing, savvy customers already know that they have to search beyond Amazon – perhaps in Nile (or eBay) – to get the best deals!

When it comes to digital content – it is a different question altogether.

That battlefield is full of old corpses, and, new lines are not yet clearly drawn. Perhaps there is some hope in Prime, after all – we can only wait and watch.

Finally, I will not comment on the execution because everyone has their own opinions on whether turtlenecks or jeans or both look cool. It probably does not matter – yet people can write tomes on this alone.

Will Alibaba and its 40 million accomplices ride roughshod over Corporate America?

Now that all the factories have moved to China (or some such places as Vietnam, Bangladesh, Taiwan), and all the customers have moved to the PC (or some such places as mobile phones or tablets) what will happen to all the middlemen?

The retailers, the wholesalers, the shopping centres, the warehouse parks, the dealers, the brands, the long established cosy relationships, the long martini lunches, the twice weekly afternoon golf games and the executive chefs in the board rooms?

Many people are asking this question in many different ways. While the scenario above has not fully transpired yet, and, may indeed never transpire in such a stark detail, many companies are starting to ask “what if that happens”.

Consider, for instance, all the happenings at Alibaba. The Chinese e-commerce giant went public in the US with an IPO that stirred the world at large and the online retailing world in particular. If you are wondering about the reason, then look at the numbers below. As per Wall Street Journal

In 2013, the combined transaction volume of Taobao and another Alibaba-run shopping site called Tmall reached $240 billion, says a person with knowledge of the figure.

The total is more than double the size of Amazon.com Inc, triple the size of eBay and one-third larger than the value of all the transactions last year at the two U.S.-based e-commerce giants combined.

People stood up to take notice only when there were widely reported news reports that just in one day (the Chinese version of Black Friday), Alibaba achieved nearly $5.75 billion in sales (on just one of its website), which was three times more sales than the entire country of USA achieved on Black Friday.

Reportedly, almost the entire valuation of Yahoo is based on the value of the shares it holds in Alibaba.com.

More such amazing facts are available from this report on Business Insider. As per The Economist, analysts predict that the Alibaba IPO will value the company somewhere between $55 billion and more than $120 billion.

That would make it the most valuable 5-STAR Business Network on earth – with transactions reportedly surpassing $1 Trillion a year soon.

Lately, Alibaba has partnered with US company ShopRunner to bring American goods to China. It has also been active in “shopping” for lucrative relationships with retailers, buying shares instead of acquiring the whole business.

This is obviously only the beginning of its full potential – although B2B exchanges have been in the offing for nearly 15 years now. Many are warning that as B2B exchanges mature into adulthood, they could easily start to restructure the whole global supply chains. No wonder the entire media world is going gaga over Alibaba’s prospects.

Even those who recognise the hype cannot help but wonder if the sad state of retail is somehow connected to the seemingly unstoppable Alibaba force and the trend it heralds. For example, one highly respected fellow blogger (Steven Dennis) recently stated in his blog,

As a former Sears senior executive I’ve followed the once mighty brand’s journey from mediocrity to bad to just plain sad. What a long strange trip it’s been.

When I left in late 2003 we were gaining traction in our core full-line department store business and piloting several important growth initiatives. To be fair, whether we could pull off the necessary transformation was highly questionable. But one thing is now certain. The subsequent actions taken under a decade of Eddie Lampert’s leadership have assured the retailer’s demise.

So, what will happen to the retailers, the shopping malls, the brands and the dealers? Will Alibaba, and its Chinese direct suppliers kill all these? Not so fast! While e-commerce is changing the face of corporate America, there are many reasons Alibaba will not be as successful as projected by the alarmists.

Firstly, there is another company to think about – a home-grown version of it. A yet unknown part of Amazon is AmazonSupply.

Predictive shipping and unmanned drones are made more prominent in the news agenda.

Meanwhile, Amazon’s “unsexy” B2B business, a “$8 trillion bet”, has been growing silently in the background, perhaps making it eight times bigger than Alibaba and the biggest 5-STAR Business Network on earth.

will-alibaba-amazonAmazonSupply, a wholesale and distribution hub, started in 2005 and has grown to carry 2.2 million products, ranging from office equipment to industrial components, materials and more.

After nearly 15 years of languishing on the wayside, the B2B exchanges are finally coming true, slowly. Already, wholesalers are whispering about the threats from AmazonSupply; although many specialty wholesalers and distributors are somewhat confident that their turf is safe from the giant’s claws due to their highly segmented market.

Nonetheless, nobody knows what will happen in future.

AmazonSupply, Alibaba, or B2B exchanges, could become so powerful that they will suck small players into their enormous vacuum of suppliers. The process can even accelerate if trust keeping mechanisms are built into B2B exchanges. Seller and buyer ratings, as well as seller/buyer protection seen on sites such as eBay and PayPal are not enough to cover the sheer size of B2B transactions.

Even the current rating system on Alibaba will not suffice, should this attractive market grow in the years to come.

The current trust keeping mechanism in international trade is Letter of Credits, which has been around for hundreds of years.

It is defined by Investopedia as: “A letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.”

To keep up with the pace of change, new supply chain finance mechanisms must evolve, something that can deal with the increasingly globalised supply chains. Only with sustained focus on supply chain finance, can B2B exchanges morph into true 5-STAR Business Networks.

While traditional sources of supply chain finance have a vested interest in keeping the status quo, new supply chain finance mechanisms have been slow to emerge and remain an opportunity for the likes of Amazon, PayPal and Alibaba. If they crack that nut, the rest is open slather.

Once these mechanisms break through, the face of global supply chains and global commerce will change for good.

EBay and Amazon beware, Alibaba’s coming IPO means time to protect home turf

Australia leads the way to Globalisation with triple FTA with Asia’s big threeThe world’s biggest e-commerce company is set to go public in the world’s biggest retail market, the latter is true at least for now. Alibaba announced its decision to “commence the process of an initial public offering in the United States” on Sunday.

After last year’s failed attempt to persuade Hong Kong, Alibaba turned to the US for what set to be the biggest IPO since Facebook’s 2012 feat.

The Chinese giant will work with Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc. in finalising the IPO, which could launch as early as April.

“Alibaba has evolved from a company selling two dozen items back in 1999 to a truly 5-star business network, with a transaction volume bigger than Amazon and eBay combined in 2012.

The essence of Alibaba’s success lies in its super network, connecting millions of consumers, retailers and suppliers. Its value addition strategy has moved beyond synergy and into something known as value synchronicity”, said Vivek Sood – CEO of Global Supply Chain Group.

Analysts expect the e-commerce giant to raise around US$15 billion, making it the top 4 biggest IPOs ever behind Visa, General Motors and Facebook.

The company also signaled its intention to list in China. “Should circumstances permit in the future, we will be constructive toward extending our public status in the China capital market in order to share our growth with the people of China”, Alibaba said in a statement.

Worth as much as US$200 billion, behind Google in the Internet field, Alibaba boasts annual profits five times those of Amazon last year after increasing its revenue by 61% and gross profits by 71%.

Serving more than six million retailers and 300 million consumers worldwide, Alibaba’s empire extends beyond its well-known e-retail operations on Taobao and Tmall sites.

The company also has its affiliate payment system Alipay, comparable to EBay’s PayPal, as well as financial services, logistics, mobile phone operating systems and TV set top boxes.

“China will soon become the world’s biggest retail market and Alibaba’s US IPO will lay a crucial springboard to gain a bigger share of the pie in China, which is currently 5%.

Amazon, whilst still upheld as a prime example of a 5-star business network, should level up or risk being outwitted in the game,” said Sood – the author of widely acclaimed book “The 5-Star Business Network”.

Sheer number of consumers, and their increasing purchasing power provides the fuel to Alibaba machine. Combine these numbers with the fact that in most cases Alibaba is not replacing a traditional business model, but rather creating blue ocean new business models and you can see the immense potential of the company. Now combine that with the access to the producers and understanding of production economics and you can truly see a challenging behemoth emerging.

It remains to be seen whether Amazon’s consumer understanding will trounce the above advantages that Alibaba enjoys.

Amazon’s Drones – How Viable?

Amazon is known for its bold moves, innovation and customer centric thinking. Just yesterday it released a video of drone delivery of customer purchases from its warehouse and fulfilment centre which became the talk of the town. Regulatory and technological issues apart, I will only take a supply chain perspective in this blog to examine the economic and operational constraints this might face. At this point I have not made up my mind whether I think it is a viable option from operational and strategic viewpoint. Firstly, let us examine the volume of service required. We do not have an estimate of how many packages will be delivered by drones, but we know that Amazon’s annual revenue is approximately $48 Billion, and growing fast. I noted in my book The 5-STAR Business Network that amazon nearly doubled its revenue in 3 years. That is an exceptional growth rate, and shows no sign of abating. By the time drone service is released sometimes in 2015 or beyond, Amazon would have increased its revenues to nearly Amazon’s Drones – How Viable?double again – say $96 Billion per year. 5-star-color-book-coverSale value of a transaction ranges from $5 for a cheap paperback to several thousands of dollars for fashion and electronics. It will be interesting to see the transaction value distribution at Amazon, but for this discussion an average sale value per transaction estimate is sufficient. If the average transaction value is say approximately $100 then the company is making $48 Billion divided by $100 = 480 Million transactions per year now. By the time delivery with drones is in place it will be making double that, say 1 Billion transactions per year. Now Amazon already makes deliveries on Saturdays, so the total number of delivery days in a year will be approximately 300 days. That will amount to nearly 3.3 Million deliveries per day. Not all deliveries will need to be made by drones because only a few customers (say 10%) will opt for this high price, high value service. Depending on the price, and urgency the customers will make their own decisions, but it is likely that if the service is high prices most customers (90%) will opt to wait for the regular post deliveries. Here we have not yet considered capital costs of buying the drones, operational costs of housing and running them, and maintenance costs of upkeep of these drones. Neither have we considered the capital costs of retooling the warehouses to allow drones to operate. Why? Because pricing formula at Amazon is based not just on costs but also on what the market will bear, and the competitive landscape. At the same time Amazon will want to price the service at a level sufficiently low so that the volumes are strong enough to strategically make it a viable offering, yet prices sufficiently high so that the volumes are not so high that impose operational constraints in the warehouses. With a targeted 10% of the package volume to be delivered by drones, Amazon will be looking to make around 330,000 drone deliveries a way. Given the short range of these battery powered drones, Amazon will likely need many more than its nearly 21 delivery centres around the USA. The plans are still not clear, but if the number of such delivery centres increases to about 40, each delivery centre will be making 8,250 drone deliveries a day. With say half an hour to and from the delivery location, and 16 hour operations – each drone can make around 12-15 (say 14) deliveries a day. That means each delivery centre will need 600 drones for operations besides spare ones for maintenance, back-up and queuing. Now try to imagine a fulfilment centre with 600 drones buzzing in and out 16 hours a day. Do you think it is a viable operation? Email me with your views on info@globalscgroup.com

Amazon and the 5 STARS

We already defined the importance and features of a successful business network, through the necessity of 5 key cornerstones – Fire-Aim-Ready Innovation, $eed-to-$tore Efficiency, Transaction Optimisation Profitability, Advanced Product Phasing, and Results-focused Outsourcing and Modularisation – in the previous article. Now let us prove it by taking an example, which reflects their necessity. Amazon is a perfect example of company applying these five characteristics efficiently, which led the company to an undeniable success. Jeff Bezos, Amazon’s founder, knew how to use them to its benefits. This success enabled Jeff Bezos to “build the largest online retailer in the world, where customers can acquire anything that they desire over the Internet”, said Vivek Sood in The 5-STAR Business Network, when exposing Amazon’s success. The company, through a very efficient and smart strategy, managed to achieve low prices, a wide inventory choice, convenience, and customer satisfaction. This was possible because Amazon’s strategy was based on the 5 cornerstones of successful business networks. The main advantages for customers provided by Amazon were low prices and quick delivery. In fact, customers could get their product very fast by ordering on Amazon.com than any other website. Then, Amazon was far beyond its competitors, and this has been made possible thanks to its thoughtful strategy. First, innovation was very important, especially in terms of designs, and especially at this time because there were only the first fruits of the e-commerce. In fact, online commerce was kind of innovation itself for Amazon, because it enabled people to get whatever they wanted online. Besides, the fast delivery was a result of $eed-to-$tore efficiency: by using efficiently the supply network, Amazon could give satisfaction to customers faster than competitors, which pushed the company towards the leaderships, about the online commerce. Jeff Bezos once said, “Life’s too short to hang out with people who aren’t resourceful”, a sentence that speaks for itself. It shows that Amazon knew how to choose the right partners and benefit from all the resources of its supply network. In fact, there is no point in collaborating with suppliers that do not offer the best results. Provider selection is very important despite the number of them available on the market. Then, Amazon is very good at Transaction Optimisation Profitability, and this is what made the company so profitable, and created a virtuous circle. About Advanced Product Phasing, it is obvious that Amazon was also very good. In fact, if you look at the evolution of the products sold by Amazon, you can easily notice the logical evolution, which follows the innovation and product life cycle. Finally, Results-focused Outsourcing and Modularisation have also played an important role in Amazon’s success. In fact, according to Vivek Sood, “Outsourcing and Modularisation form key underpinning of Amazon’s ability to act”. Services are outsourced in a very efficient manner for the company to achieve better results. In effect, this is a results-oriented outsourcing. Besides, IT services and logistics services are both chosen according to a result-oriented process and they work in a results-oriented environment too. The data driven approach is mainly responsible for that, and it was very helpful to have this approach for Amazon. Indeed, data are very important when building a global business network, and it will be the basis of provider selection especially, so data collection cannot be neglected. by Anais lelong

HP will bear the brunt of Chromebook 11 charger overheating fiasco and subsequent sales halt on Amazon and Best Buy; Google will also be affected

Sydney, 13 November 2013

Latest developments in the unfolding saga of sales halt of HP Chromebook 11 have seen both the key retail outlets now pulling it off the shelf following customer complaints of overheating chargers. HP is asking the existing owners of the product to use ‘any other Underwriters Laboratories-listed micro-USB charger’ with the product.

Chromebook 11 was launched for $279 with much fanfare by HP and Google last month and was strategically placed for sale at Best Buy and Amazon. Despite the high expectations, the reviews found performance issues with the trackpad. An HP spokesperson – Sheila_Watson – posted on their blog:

‘Google and HP are pausing sales of the HP Chromebook 11 after receiving a small number of user reports that some chargers included with the device have been damaged due to over-heating during use. We are working with the Consumer Product Safety Commission to identify the appropriate corrective action, and will provide additional information and instructions as soon as we can.

In the meantime, customers who have purchased an HP Chromebook 11 should not use the original charger provided with the product. In the interim they may continue using their HP Chromebook 11 with any other Underwriters Laboratories-listed micro-USB charger, for example one provided with a tablet or smartphone. We apologize for the inconvenience.’

A similar statement was also posted on the Google Chrome Blog by Caesar Sengupta, VP, Product Management.

Frequently well made products are let down by peripheral accessories manufactured by third party suppliers that are part of the business networks of large corporations. This is not the first time HP has been let down by its supply chain partners noted Vivek Sood –author of the book “Move Beyond the Traditional Supply Chains: The 5-STAR Business Networks”. In the past there were instances in 2008 when up to 24 HP laptop models were affected by the NVIDIA chipsets overheating. Both Dell and HP were affected in that instance. In another instance Sony manufactured batteries that overheated during use in Dell laptops, affecting the results of both companies.

“It is critical that companies choose their supply networks diligently, and test the products rigorously before releasing them in the market. The recall and sales halts do not only affect the company reputation but also its financial results. Chromebook 11 is not yet a major part of HP’s product portfolio, yet this fiasco will adversely affect the business network relationship between HP and Google for several product planning cycles”

 

said Vivek Sood

HP will bear the brunt of this sales halt, not only because of its deeper involvement in production and supply of the product, but also because of its history of similar problems in the past. However, Google will also be adversely affected due to its supply chain and business network relationship with HP in this case. While it is impossible to predict the total impact at this early stage, as a preliminary estimate 2%-4% overall switch in market share can be expected over the holiday period, as a result.

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