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Amazon supply chain model disrupts entire industry

Amazon has conditioned consumers to get goods as quickly as possible, which has affected the global supply chain industry from top to bottom, including inventory management and logistics.

By now, it's no surprise that Amazon's business model is not only disruptive but driving established businesses and business practices to extinction.

Take global supply chain, for example. The Amazon supply chain model has affected the entire supply chain and logistics industry in the same way that the retail industry has been changed utterly.

As with retail, this will produce losers that cannot match the pace of change and adapt to the Amazon supply chain model. At the same time, however, new businesses are formulating to either ride Amazon's wake or provide alternatives that try to match the changes brought on by the Amazon effect.

In that vein, there has been a lot of attention on fulfillment and how Amazon has changed consumer behavior. But what's less seen and even more important is what's happened behind the scenes that has changed supply chain behaviors significantly to both meet the demands from Amazon and compete against the tech behemoth, said Rosemary Coates, founder and president of Blue Silk Consulting, a global supply chain consultancy based in Los Gatos, Calif.

The traditional supply chain was built around companies sourcing raw materials and turning them into components or products, with production planned months and even up to a year in advance, Coates said. The process was much more predictable, and companies knew what and when they were going to produce, and the various channels they were going to use for shipping products.

Amazon snaps bullwhip on supply chain

Then Amazon came along and taught consumers to expect goods to be delivered overnight, which snapped a bullwhip effect throughout the entire supply chain. One result of such an expectation is that companies now have to invest in bigger stocks of inventory to have products ready to ship when demand increases, which also means they have to build new warehouses and implement new logistics strategies.

"[The Amazon supply chain strategy] has had an effect all the way down the supply chain," Coates said. "Production planning may be disrupted or has to switch to a build-to inventory model instead of a build the fulfillment model. That means there may be a difference in production runs -- instead of small runs that keep work in process and minimize investment to larger production runs that are going to build inventory."

The traditional supply chain model taught manufacturers to minimize inventory through methods like Kanban or just-in-time manufacturing where parts are brought to the assembly line only when needed.

It's not your grandfather's manufacturing anymore.
Rosemary CoatesFounder and president, Blue Silk Consulting

"You wanted as little as possible from an investment perspective and also to keep the line moving, to keep manufacturing moving along, so that it was a kind of a constant ongoing repetitive sort of environment," Coates said.

If they're going to be a link in Amazon's supply chain, manufacturers need to rethink where they should invest in supply chain resources. For example, they need to decide if they want to stock enough inventory in regional locations in case they need to fulfill Amazon orders, Coates said.

"There's a lot of change and rethinking in the way companies operate," she said. "It's not your grandfather's manufacturing anymore."

Transforming the logistics industry

Coates' view is seconded by Matthew Cowan, partner at Next47, a global venture capital firm backed by Siemens that focuses on emerging trends in logistics and supply chain markets.

Matthew CowanMatthew Cowan

In addition to changing manufacturing strategies, the Amazon supply chain model is completely changing the logistics industry, Cowan said.

"First and foremost, Amazon is conditioning end customers that they should get their goods delivered the same day, and may be measured in hours, instead of days," Cowan said. "This is a significant sea change overall. And frankly, if you're not Amazon today and you don't have a strategy to get products into your customers' hands that same day, you're probably going to have a significant erosion of your business."

This has paved the way for new companies that are transforming the logistics industry by creating digital supply chains with automated workflows and introducing next-generation technologies, Cowan said. There are software companies looking to help existing, large B2B firms digitize and automate legacy infrastructures. And new players like FlexPort Inc., a freight carrying and customs brokerage in San Francisco, have a native digital-centric model and so don't have the headache of managing and maintaining older tech.

"The dynamic is different in the global supply chain market, and there's a massive scale of business and operations assets that aren't going to go away," he said. "So you're going to see a mix of brand new digitally-enabled companies built from the ground up, alongside digital enabling existing infrastructure."

Disrupting procurement

The Amazon supply chain model is not only disrupting external supply chain strategies, it's also changing internal supply chain and procurement strategies, said Dana Gardner, president and principal analyst at Interarbor Solutions LLC, an enterprise analysis firm based in Gilford, NH.

The Amazon effect is allowing procurement to go outside of traditional systems, which has led to companies rethinking strategies, Gardner said.

"Like we saw in enterprise IT with AWS cloud, people started using it with their credit card, but it was under the radar," Gardner said. "But then people started to look at it more strategically and said, 'Let's evaluate this like with any other IT approach.' The same thing happens when it comes to the purchasing of goods and services -- people started using Amazon or other online retailers to purchase things ad hoc with petty cash or non-discretionary spending."

Dana GardnerDana Gardner

It makes sense for businesses, particularly SMBs, to use Amazon for purchasing because of price and efficiency gains, but Gardner cautions against handing over too much strategic activity to any one company.

"Enterprises -- whether it's manufacturing, healthcare, transportation, logistics or government -- shouldn't want to lose the competency and the strategic advantage of being in control of their purchasing, of their supply chain and logistics, and of their partners and relationships," he said. "Larger companies in particular need to be careful, and they should probably cherry-pick what they use Amazon for, but be mindful that for a large part of many businesses, how you partner, who you use in your supply chain is strategic. It's not something you outsource, even if that outsourcing is cost effective or convenient."

Ultimately, the effect of the Amazon supply chain model will be felt throughout the enterprise supply chain, Next47's Cowan said.

"The impact of Amazon is in consumer expectations -- how to efficiently run supply chains both for SMBs and global corporations, and how warehouses and physical delivery truck networks operate," he said. "It's really touching every dimension of it and it's going to continue to have a significant global impact."

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