Managing Suppliers, Inventory and Quality: the Case of Amazon 1
Inventory management systems work through using bar codes or application of RFIDs scanners. Using an inventory management software assists in time saving advantages since calculations are done and updated that allows accuracy and simplified reporting. In most cases, the purchasing sector in an organisation has records easily accessible; hence they can order extra supplies in order to maintain the optimal level of supplies. Research has indicated that an organisation that functions without a workable inventory system could be over or under purchasing. Mostly, such types of conditions in a company offer space for losses or errors (Mudambi & Schuff 2010).
It has become evident that balancing the different tasks in inventory management needs accomplishing three major aspects, first being to ensure effective timeliness that occurs in terms of acquired items that are to be included in the total inventory. Moreover, inventory management demands that owners know the time taken for materials to be moved out of inventory. Most importantly, having knowledge about the two lead times enhances the possibility of placing an order at a specified time and quantity of units to be ordered. In addition, every business should be able to determine its buffer stock. This is the additional quantity beyond minimum requirement in order to maintain optimal level of production. It is vital to note that inventory management does not only deal with documentation of raw material delivery alongside movement of materials across the processes. However, it also deals with the movement of such items as they undergo several phases of operation including work in progress stock (Johnson, Leenders & Flynn 2011). To wrap the way inventory management works, it makes it possible in preparation of records used in accessing taxes.
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In attempts to ensure effective inventory management, Amazon employs several techniques. The techniques ensure that the orders are processed as well as shipped during peak and off-peak seasons. The company applies various data collection tools in order to ensure that purchased items move through the stores as fast as possible (Mudambi & Schuff 2010).
Fitness of Just In Time (JIT) in Amazon
JIT is fit to Amazon considering that the company has perfect knowledge about its customers. The company’s website is quite interactive and enables quick customer replies and interactions. The system requires that the company avails all that customers want at the time of demand (Schwartz & Rivera 2010). The company ensures a clear relationship with its vendors in order to ensure that all the deliveries are in its stores for customer requests. Amazon produces its inventories only after the customers place their orders. JIT works effectively for the company in various aspects including reduction of inventory costs, lead time reduction, improvement of customer satisfaction and efficient manufacturing layout (Johnson, Leenders & Flynn 2011). Amazon strives to reduce the amount of idle inventory in its warehouse. That way, it is able to reduce costs incurred in the store as well as maintain surplus inventory. It is also able to eradicate risk of materials from becoming obsolete in its warehouse.
Amazon’s management has realised that huge inventories tend to tie the company finances that can otherwise be beneficial to other sections of the organisation. That way, Amazon can use those finances to develop and expand its activities. Amazon also aims at improving its customer satisfaction that is enabled effectively by JIT. Amazon ensures that customers’ voices are heard across JIT process. In that case, Amazon ensures that by reduction of lead time as well as costs that assist it to deliver products to clients faster and at decreased prices. Therefore, JIT effectively and efficiently fits Amazon.com. JIT incorporates the supply of items into the company and delivery to the clients at the point of order and that has become evident in various stores such as Kindle that has emerged as one of the most effective stores of Amazon.com (Mudambi & Schuff 2010).
Amazon also uses stock reviews technique that involves regular analysis of inventories against the future needs. That is best evident in the famous Kindle store of Amazon. The staffs in Kindle store uses inventory software to carry out the stock review. The staffs at Kindle store defines the minimum stock levels in order to carry out reorders of supplies (Muckstadt & Sapra 2010). The diagram below indicates the application of JIT in order to determine the stock levels at different times.
Always on Time
Marked to Standard
Benefits and Risks of ABC Analysis
The ABC analysis technique is also a popular technique across Amazon. The company categorizes the inventories into three groups including A that has items of high value, B that has items of moderate value and C that has items of little value. That way, category A requires constant attention whilst C is hands-off (Muckstadt & Sapra 2010). That can be used appropriately with JIT in order to determine the reorder time. The diagram below represents ABC analysis.
ABC analysis brings in benefits and risks to a company. The process boosts efficiency. That is due to the fact that it provides an opportunity to ensure tightened inventory controls. In that case, products under group A are usually strictly monitored as well as handled in order to prevent theft, waste or destruction. Moreover, utilization and demand are tracked in order enough of the items that will meet daily needs (Sorescu et.al, 2011). On the other hand, category C experiences minimum controls. That means that the company can order huge quantities on regular intervals and not concentrate on individual items (Johnson, Leenders & Flynn 2011). Lastly, category C undergoes through standard controls, but not constant. The other advantage is the identification of critical products. That forces the management to concentrate on inventory and operations and determine the vital source of money.
However, ABC analysis suffers the risk of undersupply and oversupply of items. That is due to the fact that it is based on money values instead of quantity of items throughout the inventory cycle. Therefore, there is a huge risk of the company running out of items in category B and C that are also essential. The other risk is loss. That happens due to the fact that items in category B and C are less valuable than those in A. However, that does not mean that items in B and C have no value at all. That way, in case a company uses ABC analysis in paying decreased attention to items that it perceives to be of little value, then there is a risk of loss. That is to say that excess stocks tend to be in danger of obsolescence and damage. Therefore, ABC analysis can pose Amazon to various problems with its inventory (Muckstadt & Sapra 2010). Despite the fact that it monitors its high-valued items and earns great profits from them, it should also concentrate on monitoring its low-valued items in order to avoid various risks such as loss and ineffective supply (Muller 2011).
The inventory management techniques are effective and enable Amazon to remain ahead of its competitors such as eBay. Through JIT, the company is able to minimize on space usage since it does not need to maintain large stocks in its warehouses. Most importantly, it reduces its expenses that can occur through errors in stock management due to the fact that it has developed software to carry out stock reviews and not the manual way of stock reviews. The techniques also enhance direct delivery of products to customers due to direct and quick shipments enabled by effective inventory management techniques. That enables Amazon to remain competitive in the retail business (Mudambi & Schuff 2010).
- Quality Management Theories
To manage the quality of their products and services in order to meet the customer’s expectations and needs, Amazon implemented Lean approach and Six Sigma approach to improve their quality management.
1.1 Lean Approach
The term “lean” was used to describe the Toyota company’s production management system. It is a theory that focuses on maximizing the customer’s value by reducing the wasted business process. For example, it attempts to cut down the time length between the ordering and shipment of a product or provide satisfied service for the ordering and shipping process. (Pojasek, 2003) By eliminating wasted processes during the production process or service process, it will reduce the cycle time, and eventually reduce the costs of quality that includes internal and external failure costs.
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1.2 Six Sigma
Amazon also teaches their staff to use Six Sigma as the approach to improve their management system. Six Sigma is a team-structured theory that helped Amazon to select the greatest employees and create an active and systematical management process. They also use the DMAIC (define, measure, analyze, improve and control) model of Six Sigma to review and identify the defects that caused the inefficient business process. For example, in a result that this model helped Amazon improved their inventory-record accuracy that could help Amazon to be able make plan of producing enough products and will avoid customer’s waiting time. It will ultimately make Amazon have a better management of production and services. (Marx, 2005)
- Management of Product Quality
2.1 Quality of Design
One of the components of product quality is the quality of the product’s design. The Amazon produces and sell products that includes Kindle, Kindle TV, and Kindle phone. Using Kindle as the example, Amazon launched the first Kindle e-reader in 2007. After that, Amazon continued to design and produce the improved Kindle e-readers that are thinner, lighter and with more memory. In 2011, Amazon also launched a new Kindle that is no longer with a keyboard on its body, but a touch-screen keyboard instead. Kindle with the new design is easier to hold and more like a real book. In today, the newest version of Kindle is the Kindle Paperwhite that is only around 206 g with 6-inch screen, with built-in light and a battery lasts weeks on a single charge, and it can hold over 1000 e-books. The newest Kindle can also connect to internet via 3G network and Wi-Fi. (Amazon, 2013) Amazon’s final goal is to make the customer experience of Kindle to be better than the real book. In 2011, Amazon also launched the Kindle Fire tablet to satisfy customers various needs that people can use it to watch movies, play games, surf the internet and also can read books and picture books. Amazon was kept trying to develop the product to have better image quality, and have different sizes to satisfy the customers’ different requires.
2.2 Product: Quality of Conformance
Another component of product quality is the quality of conformance that is if the product’s design and functions are effective and conform to the specifications and values of products.
Using Kindle as the example, the specification and values of the Kindle is that it allows people to entertain and study via a light weight device. Therefore, Kindle e-reader should provide satisfied reading experience to the customer. To control the reading quality of Kindle, Amazon has a Kindle content quality technology team that is specified for control and development of Kindle e-reader’s reading quality. The team tests and make sure the quality of the content and get feedback from end users. When users found there is an error in the e-book content they can report it via Kindle.
Sometimes, products could be failed to deliver the effectiveness of the functions of the products. The Amazon uses strategies and policies such as one year free limited-warrant and free return within one month for the Kindle e-reader. Also, the Mayday Button on the Kindle Fire HDX that is a on-device tech support to be able solve the user’s problem at any time. (Amazon, 2014) Amazon aims to provide efficient and convenience services to make up the unsatisfactory of products quality.
- Quality of Services
Quality management is not only about products but also including services. The Online Return Center of Amazon provides a simple guide of returning products and allows customers to return the Amazon products. Amazon is also a internet marketplace that allows third party sellers to sell products. Separate to Online Return Center, for people who purchased products form the third-party seller, the A-to-Z Guarantee Claim is established for customers to make compliant on the unsatisfied experience. In addition, the feedback system of Amazon allows every customer to rate the seller and products, it helps other customers to choose products and sellers. Amazon always claim that one of their business’s competitive advantages is fast delivery. Since 2013, Amazon provided Sunday delivery in some cities in the U.S. They also have their own fast delivery system in UK and China. (Amazon, 2013) By doing this, Amazon can control their delivery services more efficient and avoid limitation of the other delivery company’s services. Lastly, Amazon also has Amazon Prime to make customer pay for a VIP service that including faster delivery. This is an attempt of services or production differentiation, to provide different services for different customers in order to meed the different customer’s values.
The management of quality is aim to meet the customer’s expectations and needs, therefore the best way to determine if quality management is effective is to test the customer’s satisfaction. On the Amazon website, 18005 customers rated Kindle Paperwhite that 12925 of them rated Kindle 5 out of 5. For Kindle Fire HDX, 13708 customers rated the product and 8578 of them rated the product 5 out of 5. It has lower customer satisfaction than the Kindle e-reader. But, Amazon’s Kindle Fire has occupied 33% of the Android tablet market. (S.Hill, 2014)
In the table 4.1 above is the customer satisfaction index comparison form in Internet retail industry, (American Customer Satisfaction Index, 2014) it shows that Amazon achieved 88 out of 100 for customer satisfaction. Amazon beats its major competitors such as eBay and Netflix. From the past records, it shows that Amazon is in fact, a leading business constantly achieve high satisfaction of customers. The Internet retail service the Amazon provided has achieved a remarkable result.
(Table 4.1, source: American Customer Satisfaction Index, 2014)
Even though the Amazon has achieved a good result on customer satisfaction, there are still many challenges the Amazon need to overcome. The most significant problem is that 40% third-party sellers are not affiliated with the Amazon. Amazon has no control on the quality of this 40% sellers’ products. Reported by Risen (2013), in 2013, Johnson & Johnson discovered some third-party sellers on the Amazon were selling damaged and expired products. This threats the Amazon’s product quality management, and implied the major problems all C2C Internet retail businesses are facing.
There are also some complaints on Amazon’s products such as the Kindle Fire tablet. Hills (2014) states out the 12 most common problems of the Kindle Fire tablet that including keyboard typing inaccuracy, purple or blue haze on the screen and the difficulty of connecting to computer. But, not only Kindle fire, all other tablets have their own problems due to technologies are still not mature.
- Theoretical knowledge on quality management
Quality management is not only about the quality of production but also including the quality of the service the businesses provide. Through the study of how does Amazon manage the quality, it shows that quality management cannot exist alone but connects with other management as a whole. To be able manage the product’s quality; A company needs a systematical management strategy to control its inventory and suppliers in order to improve the customer’s satisfaction.
- Amazon 2013, Amazon.com, Amazon, viewed 10 September 2014, http://www.amazon.com/
- American Customer Satisfaction Index 2014, ‘American Customer Satisfaction Index 2000-2013, Benchmarks By Industry: Internet Retail ’, Table, American Customer Satisfaction, Ann Arbor, viewed 12 September 2014, http://index.php?option=com_content&view=article &id=147&catid=&Itemid=212&i=Internet+Retail/
- Hill, S 2014, ‘12 Major Kindle Fire Problems, And How To Fix Them’, Digital Treands, viewed 11 September 2014, http://www.digitaltrends.com/mobile/kindle-fire-hd-problems/
- Johnson, PF., Leenders, MR., & Flynn, AE 2011, Purchasing and supply management. McGraw-Hill/Irwin, Boston, MA.
- Marx, M 2005, ‘Six Sigma at Amazon.com’, iSixSigma Blog, web log post, 9 December, viewed 11 September 2014, http://www.isixsigma.com/community/blogs/six-sigma-amazoncom/
- Muckstadt, J. A., & Sapra, A 2010, Principles of inventory management. Springer, New York, NY.
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- Muller, M 2011, Essentials of inventory management. AMACOM Div American Mgmt Assn, New York, NY.
- Pojasek, R 2003, ‘Lean, Six Sigma, and the Systems Approach: Management Initiatives for Process’, Environmental Quality Management, vol.13, issue. 2, pp. 85-92.
- Risen, T 2013, ‘Johnson & Johnson Challenges Amazon on Product Quality ’, U.S.News & World Report, viewed 13 September 2014, http://www.usnews.com/news/articles/2013/11/1 1/johnson--johnson-challenges-amazon-on-product-quality/
- Schwartz, JD., & Rivera, DE 2010, “A process control approach to tactical inventory management in production-inventory systems”. International Journal of Production Economics, 125(1), 111-124.
- Sorescu, A., Frambach, RT., Singh, J., Rangaswamy, A., & Bridges, C 2011, “Innovations in retail business models”. Journal of Retailing, 87, S3-S16.