OMIS 3710 Chapter 7: Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud

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Operations Management and Information System
OMIS 3710
Henry Kim

Chapter 7: Amazon: An Empire Stretching from Cardboard Box to Kindle to Cloud Why Study Amazon?  Amazon is the largest online retailer and has expanded to dozens of categories beyond books. As much of the firm’s media business (books, music, video) becomes digital, the Kindle business (which has expanded to tablet, set-top box, and smartphone) is a conduit for retaining existing businesses and for growing additional advantages. And the firm’s AWS cloud computing business is one of the largest players in that category.  Amazon takes a relatively long view with respect to investing in initiatives and its commitment to grow profitable businesses. The roughly seven-year timeline is a difficult one for public companies to maintain amid the pressure for consistent quarterly profits.  Amazon’s profitability has varied widely, and analysts continue to struggle to interpret the firm’s future. However, studying Amazon will reveal important concepts and issues related to business and technology. The Emperor of E-Commerce:  Fulfilment Operations o Amazon’s sophisticated fulfillment operations speed products into and out of inventory, reinforcing brand strength through speed, selection, and low prices. o The Flywheel  Three pillars driving growth:  Selection  Low Prices  Customer Experience (convenience) o Amazon Warehouse Robots  Cash Conversion o Rapid inventory turnover and long payment terms enable Amazon to consistently post a negative cash conversion cycle. The firm sells products and collects money from customers in most cases before it has paid suppliers for these products. o Cash Conversion Cycle:  Period between distributing funds and collecting cash for a given operation. o Amazon has a NEGATIVE CCC because it collects cash from customers BEFORE distributing funds to its suppliers. o The cost structure for online retailers can be far less than that of offline counterparts that service similarly sized markets. Savings can come from employee costs, inventory, energy usage, land, and other facilities related expenses. o Offline vs. Online Retail Efficiencies  Offline  Turnover o 3 times / year o avg. book in store 121 days o Book on shelf 68+ days after paying suppliers  Inventory o shelf & warehouse stock o 30% returns  Online  Turnover o 16 times / year o avg. book in house 22 days o avg. 28 days of float / title  Inventory o all warehouse stock o few returns  Size and Scale o Amazon’s scale is a significant asset. Scale gives Amazon additional bargaining leverage with suppliers, and it allows the firm to offer cheaper prices in many categories than nearly every other firm, online or off. Scale through multiple warehouses allows Amazon to offer more products, a greater product selection, and same-day delivery for urban areas near warehouses. Amazon financials suggest that the firm is deferring profitability due to its increased investment in capital expenditures such as its warehouse and data center buildout. o Around 40 percent of products sold on Amazon are offerings sold through Amazon Marketplace by third parties. Amazon gets a cut of each sale, maintains its control of the customer interface, and r
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