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 have. Initially, Amazon did not have a warehouse and purchased all books from distributors. When demand volumes were low, the distributor was a more economical source. However, as demand grew, Amazon opened its own warehouses for high-volume books. Thus, Amazon's facility costs are growing but still remain lower than for a bookstore chain. Amazon does, however, incur higher order-processing costs than a bookstore chain. At a bookstore, the customer selects the books, and only cashiers are needed to receive payment. At Amazon, no cashiers are needed, but every order is picked from the warehouse and packed for delivery. For books that are received from distributors, additional handling at Amazon adds to the cost of processing orders.
Amazon's distribution incurs higher transportation costs than a retail store. Local bookstores do not have the cost of shipments to customers, as most customers take the books with them at the time of the sale. Amazon, in contrast, incurs this cost—which represents a significant fraction of the cost of a book (as high as 100% on an inexpensive book). As demand has grown, Amazon has opened six warehouses, with more than 3 million square feet, in an effort to get close to the customer, decrease transportation costs, and improve response time (see the Global Company Profile in Chapter 12). DISCUSSION QUESTIONS
1. What are the advantages and disadvantages of selling books over the Internet? 2. If books can be downloaded online, how will Amazon's business change? 3. What other products could Amazon sell that are downloadable? 4. What do traditional bookstores have to gain from setting up an e-commerce side to complement their retail stores?
Case Two: Matthew Yachts, Inc.
Matthew Yachts, located in Montauk, Long Island, manufactured sailing yachts of all descriptions. The company had begun by building custom-designed yachts for a largely New York-based clientele. Custom-designed yachts still...