Module 4 Summative assessment 4.1
MODULE 4
SUMMATIVE ASSESSMENT 4.1
MODEL ANSWER
150 MARKS
THIS ASSESSMENT COVERS:
UNIT 336681 – PROCESSING CUSTOMER ORDERS
UNIT 336740 - ANALYSE LOGISTICS SYSTEMS AND IMPLEMENT APPROPRIATE STRATEGIC PLANS
Please read the following case study consisting of TWO articles and answer the 6
questions that follow.
ARTICLE #1
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2382
Fit for the Holidays: Amazon Is Shaping Up and Shipping Out
Published: November 11, 2009 in Knowledge@Wharton
For the past few weeks, Amazon watchers have seen a flurry of activity. In mid-October, the world's
largest online retailer launched same-day shipping in seven major U.S. cities and expanded its free
shipping offers in other parts of the world. It has also unveiled an easier-to-use online checkout
system called PayPhrase and introduced virtual private cloud computing to enable corporate clients
to connect their existing infrastructure to Amazon's computer resources. Then there's a new global
marketing push for an upgraded version of the Kindle -- the company's much-talked-about e-book
reader -- so that customers around the world can use 3G wireless technology for faster
downloading, among other things.
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Amazon certainly isn't fighting for survival like other companies that have been battered by the
economic downturn. Indeed, for the first nine months of the year, the company reported revenue of
$15 billion, up from $12.5 billion for the same period a year ago, and net income of $518 million, up
from $420 million. Perhaps more impressive is that the Seattle-based company's free cash flow
increased 98% to $1.9 billion for the previous 12 months through September, compared with $0.97
billion for the same period in 2008.
Of course, Amazon isn't the only company vying for the wallets of today's cost-conscious
consumers. Competition -- from both online and offline retailers -- is intensifying as rivals try to
nibble away at Amazon's market lead. Nowhere has this been more evident than during a recent titfor-tat "price war" between Amazon and its offline rivals, which have been cutting prices on
bestselling books and DVDs. In the case of DVDs, when Walmart introduced a $10 price for certain
popular titles, Amazon and Target quickly matched that number. Walmart shot back by lowering the
price by another cent to $9.99.
Amazon has been largely dismissive of the price war. When asked about it during the company's
third quarter earnings conference call in October, Amazon's CFO Thomas J. Szkutak said, "[Pricing
has] been very competitive since the day we launched." But it is increasingly clear that the company
can't stand still, and it needs to continue to diminish the barriers between online and offline
shopping by playing up its expertise in key parts of its supply chain, while adopting offline growth
strategies, experts say.
Caught in a Web
The good news for Amazon is that, in many respects, it is confronting competitors from a position of
strength. For one thing, e-commerce in general is growing. Even though the U.S. Census Bureau
notes e-commerce accounts for only 3.6% of total retail sales in the country -- up from 1% in 2001 -online purchases grew 2.2% in the second quarter of this year, while total retail sales fell 0.4%.
"What's startling is not the magnitude of e-commerce sales relative to overall retail sales, but the
growth rate," says Marshall Fisher, professor of operations and information management at
Wharton.
This holiday season is likely to show more gains for Amazon and online retailing. Forrester
Research estimates that online retail sales during the holiday shopping season in the U.S will reach
$45 billion, up 8% from a year ago. During the 2008 season, online retail sales grew 5%, despite the
recession. The National Retail Federation is forecasting a 1% decline in overall holiday sales.
Much of the growth can be attributed to improvements in the online shopping experience in recent
years. In fact, e-commerce has come of age to such an extent that the lines between online and
offline shopping are blurring. "There's no longer a dichotomy between the online and offline
consumer," says Wharton marketing professor Jerry Wind. "It's the same person. The consumer
doesn't distinguish between offline and online purchases."
Indeed, the largest e-commerce companies tend to be retailers that also have physical stores.
According to Chicago-based trade publication Internet Retailer, Amazon is the top company in
terms of online sales, but hot on its heels are many online counterparts of bricks-and-mortar stores
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such as Staples, Office Depot and Sears.
On a WhimWhat's striking about the recent price wars is the extent to which Amazon is now viewed
as a threat to bricks-and-mortar giants like Walmart. "It's great to see Amazon and Walmart
increasingly used in the same sentence," says Peter Fader, a Wharton marketing professor.
According to Kendall Whitehouse, director of new media at Wharton, Amazon has been
systematically counterattacking physical retailers by addressing any perceived disadvantages it may
have as an online retailer. "Amazon is enhancing the online shopping experience to close the gap
with physical retailers," he says. A case in point: It allows consumers to leaf through many of its
books or preview music easily online before making a purchase.
"There's one-click shopping, all your information on file and recommendations," says Fader. "By
jumping into these efforts early, Amazon has created a system that entices the shopper to buy more
goods at every turn."
He adds that as consumers continue tightening their belts, it's more important than ever for all types
of retailers to garner what are known as marginal sales, or the extra items tossed into shopping
baskets on a whim. Physical retailers accomplish this by placing innovative displays in key areas of
their stores, such as at the end of an aisle or near cash registers. Walmart and Target can sell
DVDs and books below cost based on the assumption that consumers will also pick up a few other
items once they are in a store.
But Amazon, too, is "playing the old customer walk-in game," according to Fader, and there are
multiple levers it can pull to extract more purchases from its customers. This could mean, for
example, enticing a customer who is online to buy Stephen King's Under the Dome to shop further
by displaying reviews of other novels by the author. However, Fader adds, "what's unclear is how
much more Amazon can replicate the impulse buying and general shopping experience of physical
stores." He points out that some goods such as clothes, shoes and food often need to be handled
before a purchase.
Special DeliveryWhile Amazon's enhancements to the shopping experience have been important for
the company's success so far, its strength in the future will hinge on its supply chain and fulfillment
capabilities, and the continuation of popular pricing strategies, say e-commerce experts. For
instance, Zappos, an online footwear company recently acquired by Amazon, is known among its
loyal customers for its free two-way shipping policy that enables them to return any items they don't
want at no extra cost. Amazon.co.uk, meanwhile, has also had a free delivery policy in place for
some time now, and recently announced that it would continue that policy.
A big advantage for Amazon, however, is that it manages and ships not only its own inventory, but
also that of other retailers such as Eddie Bauer and Target, giving it an economy of scale that
dwarfs its rivals. As it stands, Amazon can currently ship some 10 million products, compared with
Walmart's 500,000, according to Internet Retailer. "As Amazon offers same-day, second-day and
other fulfillment options, it competes with bricks-and-mortar companies more and more," says
Serguei Netessine, professor of operations and information management at Wharton.
Using a technique called "drop shipping," Amazon also has real-time links to manufacturers, which
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ship goods directly to consumers on the Internet company's behalf. "Amazon can offer 10 million
products, but may not stock them all. The company forwards an order to a manufacturer, which gets
the product to customers. Amazon keeps the most popular products in inventory, but uses a mix of
techniques to deliver goods," Netessine notes.
Fisher adds that Amazon's supply chain is hard for the likes of Walmart to replicate. For instance,
delivering CDs, books and shoes to individual consumers requires different skills than shipping
truckloads of goods to stores. "Getting single units sent to a house is a vastly different game than
shipping to stores."
For the most part, many bricks-and-mortar retailers have integrated physical and online supply
chains and work with fewer vendors. For them, it's simply not efficient to deal with as many
suppliers as Amazon does. "Amazon's competitors have decided to manage online inventory like
they do in the physical world," says Netessine. But that could ultimately be to their detriment.
"Walmart.com largely has the 500,000 products it sells in the stores. If it continues this way, it will
never catch up [with Amazon]." It's no surprise, then, that Walmart's online unit recently announced
plans to launch a third-party network so other retailers can sell their wares via its website.
Branching OutAnother way that Amazon is racing ahead of its offline rivals is by diversifying its
revenue streams. One example is Amazon Web Services (AWS), which was launched a few years
ago to provide storage and computing services to corporate customers. For a relatively small fee,
corporate customers can get access to Amazon's information technology infrastructure over the
Internet. "If you have a real business but do not want to invest in IT, you could do a lot with AWS,"
says Xavier Dreze, a former Wharton marketing professor who is now at UCLA.
For Amazon, revenue from AWS is one way for it to recoup its IT investments, which, according to
Netessine, account for about 7% of the company's overhead costs. For the first nine months of
2009, Amazon spent $890 million on technology and content, compared with $755 million for the
same period a year ago.
And then there's Amazon's expansion into digital distribution. Two years ago, the company
launched the first version of its Kindle device that could download content from Amazon's e-book
store with 360,000 titles. In February this year, the company unveiled the second version of the
Kindle and in June announced the Kindle DX, which has a 9.7-inch screen rather the six-inch
screen of earlier models and is designed for textbooks. While the company hasn't divulged sales
data for the Kindle, CEO Jeff Bezos boasted in October that the device is the "number-one
bestselling item by both unit sales and dollars -- not just in our electronics store but across all
product categories on Amazon.com."
In the e-reader market, Amazon also faces a showdown with physical retailers. While Sony is
distributing its own device through Walmart and Target, William Lynch, president of Barnes &
Noble.com, said in a statement that the company will use its retail footprint in the U.S. to sell its ereader, called Nook. "Customers can see, touch and hold Nook," he said. "Our 40,000 booksellers
are ready to help customers discover how easy it is to download and read eBooks on Nook."
Fader predicts that the Kindle will ultimately struggle because consumers will want to access
content from multiple devices. Amazon's attempts to branch out into more digital distribution make
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sense, but the jury is still out. "Amazon is trying to hedge its bets but hasn't particularly succeeded
with efforts like MP3 and movie downloads," he says.
The Enemy WithinAmazon's fiercest rival in the future, however, probably won't be a bricks-andmortar business, but an online behemoth: Google. The search giant has a number of e-commerce
services, including Google Checkout which is a rival to eBay's PayPal and Amazon Payments
service. In early November, Google launched a service called Commerce Search, which will give
retailers tools to make it easier to find products. That aligns with Google's overall strategy to
organize information about inventory, product availability and pricing, according to Fisher.
Fader points out that ultimately, both Amazon and Google want to be viewed as the gatekeepers of
e-commerce. Which one succeeds remains to be seen, but Amazon has its work cut out. "Google is
a potential threat," Fader says. Adds Fisher: "Google is likely to be an orchestrator of e-commerce.
To some extent Amazon is that, but Google has the eyeballs, and once you have that you can
attach anything to it.... Google could sell anything it wants."
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ARTICLE #2
Supply chain: Amazon is changing the rules of the game
By Bob Trebilcock, Executive Editor
December 14, 2012
I did something online the other day that I don’t often do. But heck, if you’re honest,
you’ve probably done it too. I bought a Christmas gift on Amazon. After all, it ‘tis the
season for online shopping.
My real interest in the world’s biggest online retailer isn’t just that they had the
DVD’s I wanted for my brother-in-law. Rather, it’s how Amazon continues to
change the game for retailers. A few Christmases ago, they set the retail world on
its backside with the introduction of free shipping – regardless of the fact that it
costs Amazon, and everyone else, something to provide that service for free. More
recently, Walmart announced that it plans to offer same-day shipment of online
orders in select markets. You have to assume it’s an effort to keep up with
Amazon’s move in that direction.
In fact, Amazon is dictating the rules of the game that other retailers have to play
by. In the view of Jim Tompkins, president of Tompkins International and one of the
sharpest observers of our industry, its going to have a profound impact on retail
distribution and retailers in general. “Retail is at a crossroads,” Tompkins says.
“The reality is that Amazon is so big that they are now mandating what the
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customer satisfaction requirements are for everyone, even if you don’t think that
you compete with Amazon.”
Tompkins has been blogging about the Amazon effect in recent months. As
examples of how Amazon is redefining the retail game, he points out that most
shoppers expect free shipping. They expect free returns. And unless you live in the
plains of North Dakota, you expect your order to show up in a day or two. Or faster.
Those customer expectations are reshaping how companies design their networks
and operate their distribution centres. “In the old days, we looked at the
transportation costs, inventory carrying costs, the taxes and a couple of other
factors to come up with a network of DCs to service customers in a set of zip
codes,” says Tompkins. “Now, we realize that how much we sell in a given area,
like San Francisco, is dependent on the level of service we can provide in an area.”
After all, Amazon is investing like crazy to get closer and closer to its customers
and provide faster and faster service.
Tompkins, for one, has been tracking the way Amazon is building out its network.
The company, he says, is building tens of millions of square footage of DC space.
More and more of that space is near major metropolitan areas. “In 2004, 38% of
Amazon’s fulfilment capacity was less than 200 miles from a major metropolitan
area,” he says. “If you look at what Amazon is building today, 79% of its DCs are
within 200 miles of a major metropolitan area.”
“For anyone who doesn’t get it, Amazon is absolutely going to same day delivery in
major markets,” Tompkins adds. “It’ll be next day delivery in secondary markets
and two day delivery in tertiary markets. If you’re going to do six days to North
Dakota, you’re dead.”
For those of us in the materials handling industry, it’s a potential godsend.
Amazon’s competitors are in an arms race to try to keep pace. To that end,
Tompkins offers a few pieces of advice. “Retailers need a strategy that addresses
four areas,” he says, adding that its probably tough to match Amazon in those four
areas.
Price: Can you beat Amazon on price? For most, that’s hard to do, just as it was
once hard to beat Walmart on price alone.
Selection: Can you offer more selection? As with price, that’s increasingly hard to
do given that Amazon stocks deep and works with partners that carry what it does
not carry.
Experience: Can you beat them on experience? Amazon invented this type of
retailing.
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Convenience: It may be hard to get product to a customer as fast as Amazon.
While those appear to give Amazon a daunting edge, Tompkins thinks brick and
mortar retailers have some strengths if they can figure out how to turn their stores
into an asset. “If I can give customers a reason to come into my store and offer
online shopping as well, I have a competitive weapon,” says Tompkins. He points
out that Walmart is adopting that strategy. Along with offering every day low prices,
Walmart is creating small convenience locations and turning its stores into online
pickup points. “They’re not making as much margin as if you just bought it off the
shelf in the store,” he says. “But they’re intelligently making money on everything.”
Moving forward, Tompkins adds, retailers will have to rethink how and where they
distribute product and what those distribution centers look like inside the four walls.
“Supply chain is taking on a whole new role with respect to retailers,” he says. “It’s
no longer just about cost reduction. The supply chain is the vehicle that delivers the
company’s strategy to the customer.”
“It’s a whole new game,” he adds.
To learn more, you can watch Tompkins’ video blog on the Amazon Effect.
About the Author
Bob Trebilcock
Executive Editor
Bob Trebilcock, executive editor, has covered materials handling, technology and
supply chain topics for Modern Materials Handling since 1984. A graduate of
Bowling Green State University, Trebilcock lives in Keene, NH. He can be reached
at 603-357-0484 and robert.trebilcock@myfairpoint.net
Please answer the following 6 questions:
1. What conclusions can you draw about the way Amazon evaluate and execute the fundamental order
process? (10 marks)
2. What conclusions can you draw about the way Amazon evaluates and executes the distribution
process? (10 marks)
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3. How would you analyse Amazon’s operation and the way they use the key concepts in distribution? (30
marks)
4. How would you analyse logistic systems of Amazon? (30 marks)
5. What areas would you recommend areas for improvement? (30 marks)
6. How would you develop and implement strategic plans for Amazon to develop into Africa? (40 marks)
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MODEL ANSWER
Answer to be weighted 80/20, where 80 percent is knowledge based and 20% the learner’s own
interpretation.
1. Student to identify and evaluate the principles of the ordering process to reflect how they
facilitate the make-up of a perfect order.
The student must evaluate the various types of documentation used in the order processing to
determine their purpose and requirement for completion.
The student must analyse the ways in which various orders are generated to reflect their impact
on the order process.
The student must assess the functions of each order type to determine their uses in specific
contexts.
The student must generate the full range of orders based on given information and in accordance
with their uses.
2. The student must evaluate and execute the distribution process to reflect the requirements of
sales and service level agreements on the distribution process.
The student must evaluate distribution conditions to reflect their impact on distribution activities
(distribution conditions include but not limited to lead time, payment terms and INCO terms)
The student must make recommendations on how conditions and terms can be addressed to
facilitate the success of the distribution process.
The student must execute the distribution process in accordance with the purpose INCO terms
and its implications on risk management.
The student must identify and evaluate the INCO terms to reflect their impact on the buyer/seller
relationship.
The student must describe the process of the different role-players used in the distribution
process in accordance with the requirements of the Incoterms.
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3. The student must analyse key concepts in distribution to reflect how these impact on the
distribution process (key concepts include but are not limited to available on hand, available to
promise, Capable to promise, back order rules, back orders, fair share allocation and fair share).
The student must calculate various availabilities to reflect its uses in distribution.
The student must use back order rules to reflect their uses in order processing.
4. The student must analyse logistics systems to determine their role within the supply chain
The student must evaluate logistics systems to identify and determine the activities that form an
integral part of logistics.
The student must assess the inter-relationships between logistics and the other elements in the
supply chain to determine their influence on the supply chain.
The student must evaluate key logistics performance indicators to reflect their uses in monitoring
processes.
5. The student must apply various analysis techniques to determine the effectiveness of the
logistics system.
The student must identify and articulate problems and opportunities to reflect their association
with typical logistics systems.
The student must interpret results of the analysis.
The student must make recommendations in terms of best practices for the functioning of
logistics systems.
6. The student must organise the recommended areas for improvement to determine whether all
logistics problems have been addressed.
The student must examine potential solutions to the problems to verify that they should be
included in a strategic plan.
The student must articulate and communicate the implications of these solutions on the rest of
the supply chain to all role-players.
The student must develop strategic plans to include identified solutions to improve the operation
of logistics within the supply chain.
The student must recommend strategic plans to enhance the achievement of the supply chain
objectives.
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