Monday, October 14, 2013

Vendor Flex - Amazon's Innovative Logistics Strategy

Internet retail (e-commerce) boomed in the 90's and businesses have transitioned from brick and mortar stores to online sales channel. Businesses such as eBay and Amazon have taken this e-commerce to the next level by providing a marketplace in itself for a variety of products including groceries, textbooks, peripherals, home and gardening and even kitchen items, which were hard to imagine having been sold outside a traditional store. Amazon is trying to increase its share of retail products such as soaps, groceries, food products, cosmetics online and in such a move it is experimenting with a logistics system - 'Vendor Flex'. [Article is here].

The Vendor Flex system is characterized by:
  • Amazon has some workforce at P&G warehouses.
  • This workforce manages orders for P&G products at that warehouses which includes:
    • maintaining inventory (replenishment and count),
    • packing and shipping out.
Vendor Flex helps Amazon by
    1. reducing cost,
    2. reducing shipping lead-times to customers,
    3. increasing average number of orders per day.
Vendor Flex helps P&G by
    1. reducing cost to manage inventory,
    2. reducing cost to ship to Amazon,
    3. information sharing by Amazon about demand (mitigates the bullwhip effect, Lee, Padmanabhan and Wang 1997)
    4. increase in sales.
Walmart employs a similar system however it does the opposite, it has a Vendor Managed Inventory System where vendors such as Coca-cola manage their product's inventory at Walmart. Amazon has moved up the supply chain by managing inventory at its supplier P&G. At the core of any GOOD inventory management system is an ERP system that is able to record and transmit information about orders (sales) and inventory. The strategies of Walmart and Amazon should be highly different from a supply chain perspective since Amazon is a pull system for consumer demand (it gets demand and then it ships to customers like Dell) and on the other hand Walmart has a push system for consumer demand where consumers typically visit the store and make purchase decisions and Walmart procures products before this.

Amazon is already inside or in talks to enter the warehouses of companies including Seventh Generation Inc., Kimberly Clark Corp.  and Georgia Pacific Corp.. [Article is here] It will be interesting to see if other online retail firms adopt Vendor Flex and will it be a success for Amazon? Vendor Flex looks promising but will it stand the trust of time and ever evolving consumer needs?

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