File - Isacc Lara Supply Chain Management Procurement

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Amazon
Isacc Lara, Vu Le, Jordan Wallace, Kathy Tran
Professor Barbara Taylor
Supply Chain Management, OPRE 3320.001
03 December 2013
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Company/Mission Statement
Amazon was founded in 1994 with headquarters in Seattle, Washington, growing to
become a Fortune 100 company. Amazon’s mission is “to be Earth’s most customer-centric
company, where customers can find and discover anything they might want to buy online, and
endeavors to offer its customers the lowest possible prices.” Amazon considers itself to be a
customer centric company demonstrating through their values statements which include,
customer obsession, innovation, and ownership. Amazon and other sellers offer a variety of new,
refurbished, and used items in all categories to customers with quick convenience and lower
prices. Since 1995, Amazon has expanded their product selection greatly while also improving
their worldwide network of fulfillment and customer service centers. Amazon has teams all over
the world working to serve their customers at fulfillment centers providing fast and reliable
shipping as well as providing outstanding 24/7 support at customer service enters. In 2000,
Amazon platforms to other retailers and individual sellers, with over 2 million third party sellers
offering new and used selections to customers worldwide.
Executive Summary
Amazon.com is now one of the world’s largest online retailers, but it didn’t start out that
way. The company was founded in 1994 by Jeff Bezos, ex vice-president of D.E. Shaw, in
Seattle, Washington. Bezos started his venture after reading a report that projected a staggering
increase in growth on the Web. He then analyzed multiple products and finally decided selling
books over the Internet would be the most promising endeavor. Amazon.com’s success came
from the fact that unlike the brick and mortar book stores whose ability to store books was
dependent upon storage room, Amazon.com could handle a seemingly unlimited inventory of
titles. On top of that, the website was able to order directly from wholesalers and publishers
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allowing them to cut out the warehouse middleman. This step allowed Amazon.com to provide
its customers with exclusive deals and discounts not available in stores. The low prices
companied with the vast number of titles helped Amazon.com rise to the top. In 1998, with the
company being such a success, Bezos decided to enter the music business and offer customers
the ability to buy music off of the site. Soon after adding music, customers of Amazon.com were
able to buy other items such as toys and electronics. By 2002, the flood gates had opened, and
Amazon.com started offering a large array of items for consumers to search for and purchase.
The company is continually growing and adding to its portfolio of items, investments, and
endeavors.
As just stated, two of Amazon’s biggest strengths are the partnerships it has with book
producers, making it possible to offer special low prices to its customers, as well as its ability to
offer such a large variety of titles. Part of what makes those two things possible is another of its
strengths, technology. Amazon has been a technological leader and an innovator in the ecommerce world. The company has an extremely large core of technology and has tried
to patent nearly every aspect of its e-commerce architecture. Millions of dollars have been
invested to research and development of technology and to give some perspective of the
magnitude of the system, as of 2005, Amazon has the world's three largest Linux databases
(Layton). Their technology has also helped to keep Amazon as the low price leader by enabling
the company to ship directly from producers/manufactures to the customer, cutting out the
middle man and keeping prices low for the customer. This kind of innovative technology has
allowed Amazon to create an innovative set of supply chain activities and landed the company a
top spot on the Gartner Top 25 Supply Chains list multiple years in a row. This report studies
the internal and external aspects of Amazon.com’s supply chain.
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Company Structure
“[Amazon] operates in France, Germany, Japan, Italy, Spain, China, United Kingdom and
Canada. In addition, the company has a large number of fulfillment centers all around the world
which make it stand out as a company giving preference to its customers”. The global reach of
company is only Europe, China and Canada; it has “51,300 employees around the world. The
employees are working in the corporate offices, customer service centers, software development
centers and the fulfillment centers” ("Amazon Corporate Hierarchy."). Amazon hierarchy
structure is done by levels form 2-10. For some odd reason there is neither level 1 nor level 9.
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Level 2 and 3 is belongs to manual labors that work for the fulfillment centers
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Level 4 are the University graduates
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Level 5 is for program managers
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Level 6 is for senior product managers , run one particular product or feature
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Level 7 graduate degrees and are senior managers, they oversee levels 5 and 6
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Level 8 are the directors
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Level 10 are the vice presidents
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Level 11 are senior vice presidents, the oversee digital efforts
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Level 12 is reserved for Jeff Bezos the CEO and founder of Amazon
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Here is a picture of the the coroprate hirachy from the divison standpoint.
Major Customers => End Customers
It is very difficult to define who Amazon major customers because they target everyone. They
are not specific demographic, that Amazon does not target. It goes from teen to older adults. As
long as their end customer is satisfy, it is all that it cares about even if it means losing money.
Customer satisfaction and loyalty is number one priority in Amazon.
Order Process from Amazon Distribution Center/Third Party
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Customer places an order on
Amazon.com
Customer is assigned closest
of Amazon distribution
centers
Red lights at distribution
center shows worker which
products are ordered
Worker matches barcode
with order and place products
in a crate on conveyor
Crates ride through conveyor
and arrive at central point
Barcodes of products
matched with orders and are
sorted automatically into box
Barcode identifies customer
order. Boxes are packed
taped and weighed
Boxes shipped by USPS
and/or UPS
Customer receives order
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Customer places order
Order information goes to
Amazon Payments for processing
Amazon Payments holds the order
Amazon Payments validates the
order
Amazon Payments sends an order
notifcation e-mail to the seller
Amazon Payments remits funds to
the seller for the buyer's order
Seller processes the order
Seller ships the order
Buyer receives the order
Amazon Payments invites the
buyer to provide feedback about
service provided by the seller
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Customer Service Metrics
Amazon uses the following performance metrics to determine customer satisfaction:
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Perfect Order Percentage (POP)
o The percentage of orders that are perfectly accepted, processed, and fulfilled.
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Order Defect Rate (ODR)
o The percentage of orders that have received a negative feedback, an A-to-z
Guarantee claim or a service credit card chargeback. This allows Amazon to
measure overall performance with a single metric.
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Pre-fulfillment Cancellation Rate
o This measure the seller’s in-stock rate for items sold with Amazon.com.
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Late Ship Rate
o Orders ship-confirmed three or more days beyond the expected ship date are
considered to be late.
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Percentage of Orders Refunded
o High refund rates may be a sign of item stock-outs.
Defect rate and a record of in-stock fulfillment are their primary metrics used by Amazon.com.
Procurement
Amazon has a unique way of procuring products for its site. Amazon uses a mutitleveled e-commerce strategy, in which it lets almost anyone sell almost anything using its
platform. Since 2000, you can find goods listed by third-party sellers -- individuals, small
companies and retailers like Target and Toys 'R Us. In these cases, Amazon’s distribution
centers will never carry those products (Layton). The sale will go through the Amazon website
to the retailer site, where the customer actually purchase the product. In other words, the
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purchase comes out of the retailer’s warehouse and inventory but because the customer went
through the Amazon website, Amazon gets a small commission on the product. In situations like
this Amazon procures items by attracting the sellers who use the site as a platform to sell their
items. Another way Amazon procures products for the site is by going directly to the
manufacturers and striking a deal. Most of the time, in these instances, the products will be
advertised on the website but will never go to the Amazon distribution centers and instead be
shipped directly from the manufacturer to the customer. Yet another way, is for companies or
sellers to ship a certain quantity of their products to Amazon, for Amazon to store and sell. The
sellers give Amazon an inventory requirement; when the inventory drops below the required
amount, the seller is alerted and ships more to the specific Amazon distribution center. In this
case Amazon gets a cut of the sales of the products and the company or seller doesn’t have to
deal with any of the logistics of selling the items, they just ship the inventory to Amazon and
wait. The one product Amazon does produce is the Kindle e-reader. This product is produced
by Amazon and mostly manufactured in Asia. After being assembled at the plant in China, the
Kindles are shipped to the U.S. to be sold.
Inventory
Most of their information is kept secret because that makes them unique. This was what
we found about it: in the beginning, Amazon first started off with only selling books online.
Since then, the company has expanded to include a variety of products. Here is a list of some of
the products that Amazon currently offers. Most of these items are shipped directly from the
distribution centers and are the popular items that sell the most. The other not so popular
products are offered by their third party sellers.
List of some of its products
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Books
Movie, music and games
Computer and electronics
Home and garden
Grocery, health and beauty
Clothing, shoes and jewelry
Sport and outdoors
Tools, and auto parts
They have also acquired companies that have helped its product line grow. Amazon owns
companies like Zappos.com, the famous online shoe store. Here is a list that depicts some of the
acquisitions / investments that were made just in the year 2009. Most of the companies are run
by their own CEO and not run by Amazon. This acquisition has also helped Amazon because
they can integrate their supply chain with these companies and just ship their products from their
warehouses rather than Amazon distribution centers. By doing this, it has lowered inventory cost.
Acquired Companies
2007
2008
2009
Digital
photo
Animoto
Foodista
Shelfari
Lexcycle
Abebooks
Talkmarket
Brilliance
Engien Yard Snaptell
Audio
Audible.com Zappos
By acquiring companies, it has helped Amazon in expanding its product line and using other
company’s facilities for storage. The company has also partnered up with a lot of big merchant
retailers like Sears. Third party sellers are another way they have some such inventory, basically
any seller can make an account and sell through Amazon. This is called Fulfillment by Amazon
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helps third party sellers from managing payment to storing inventory on their warehouses.
“Third-party sales has been increasing steadily (39% of Amazon’s total paid units in Q4 2012
were sold by third-party sellers)” (Payments).they also can send their inventory to Amazon
fulfillment centers. This means that Amazon needs to carry fewer inventories in general and
earn more money through commotion, which they charge a percent of the total sale. This has also
helped Amazon to keep its price at a competitive advantage against its competitors; Amazon has
a very different way of shelving inventory it does not organize it, it basically just put up by
random in a way that optimized their storage space rather than sorting through an organizing it .
“Amazon’s warehousing system is that it relies on something described as “"Chaotic
Storage”” where products are shelved at random, and because items are stored randomly rather
than categorically there’s a more efficient use of shelf space” (Adscam). They keep part of their
stuff in 80 of fulfillment centers. Their entire fulfillments are equipped with special automation
that allow the company to store, locate and delivery products to its customers. This helps move
inventory that has been sold to a lot quicker from when it gets ordered till it gets shipped from a
carrier. Some of the software that Amazon uses to keep track of inventory and its products like
order, inventory and warehousing management system. Amazon is planning on moving into
P&G, which is called Amazon Flex. “Amazon Flex [is] an arrangement whereby this online
retail giant is taking up a chunk of square footage inside a major consumer packaged goods
supplier’s distribution center and packaging, labeling and shipping staples like toilet paper,
diapers and shampoo directly to consumers who order them online” (Andel). By doing this,
Amazon would lower down inventory cost within their warehouse and also it would never stock
out within those products and get the product quicker to the customer. Another way the company
is lowering cost is by constantly trying to improve their distribution centers into moving
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inventory quicker. Experts also say that “keep investing heavily in its technology and building its
distribution capabilities (it invested $3.8 Billion on purchasing property and software in 2012) to
grow revenue (Payment). The company has being doing so and it has recently acquired “Kiva,
makers of those robots used in goods-to-person order fulfillment operations. This not only made
fulfillment more efficient in Amazon’s own DCs, but it controlled who else would have access to
this technology” (Andel).Over the last few years Amazon’s inventory turnover percentage has
been decreasing slightly. As you can see in this graph below, it has higher inventory turnover
compared to its competitors.
Inventory Turnover
12
10
8
6
4
2
0
2012
2011
2010
2009
Amazon
8.34
9.1
9.89
10.63
Walmart
9
9.08
8.7
8.34
BestBuy
7.33
6.61
6.56
6.08
As you can see, Amazon has been doing pretty well compared to its competitors but their
inventory turnover has been decreasing through the past years.
Manufacturing
Amazon.com has a unique way of selling products. As discussed previously, the site gets
its products by providing a platform for third party sellers as well as from working deals with
outside manufactures. Amazon itself does not manufacture the vast array of products for sale on
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the site by itself. The one product Amazon does manufacture is the Amazon Kindle. The Kindle
e-reader’s competitive advantage is its innovative e-paper display. The key components to the epaper display are the lighting and the “ink” which is actually tiny microcapsule beads used in its
electrophoretic display. The special ink is designed and manufactured by a company in
Cambridge, Massachusetts called E Ink. This special “ink” is imperative to the uniqueness of the
product but a majority of the value added manufacturing is done in Asia. This is in part because
these Asian companies are the only ones who can produce these special technological parts. The
display, for example, is the most expensive part of the Kindle and is in the hands of an Asian
manufacturer. Taiwan’s Prime View International produces the special patterned sheet of glass
that works with the beads that E Ink produces. Another part of the Kindle is the wireless
broadband data module. This is supplied by a company called San Diego-based Novatel
Wireless but is made in Korea. The Kindle also requires a CDMA chip, which like a majority of
the chips used in electronics, is designed in the United States but manufactured in “chip
foundries” in countries such as Taiwan, Singapore, and China (Shih). These chips are also
packaged in Asia then shipped to the U.S. The Kindle also uses a lithium-polymer battery,
which is being manufactured in Asia as well. For the newer edition of the Kindle, the Kindle
Fire, Amazon has recently partnered with Quanta to assemble the e-reader (Hoffelder). Quanta,
a Chinese company, takes the various produced parts, assembles the product, and then ships it to
the U.S. to be sold. For some of the other products sold on the website, that are not produced by
Amazon itself, Amazon works directly with the manufacturers allowing their products to be sold
directly to the customers.
Logistics Facilities Network
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Amazon has been increasing their fulfillment centers and are mostly located around
metropolitan areas near large cities. This is because of “massive volume of product[s] it sells
24/7/365, Amazon maintains 80 enormous warehousing and fulfillment centers scattered around
the known universe” (Halkias). The company “spends about $200 million a year on business
technology, last year launched a business unit to resell its Web-commerce and back-end
fulfillment services to retailers. And it continues to seek technical advantages in its supply chain”
(Bacheldor). Amazon plans it to be within hours away of most major cities in order to provide
“one-day service to more markets. Today, orders must be placed before noon in Seattle and as
early as 7 a.m. in Chicago for purchases to be delivered the same day (Halkias). This can only
happen if every order is within hour’s drive of major cities and most popular product must be
kept in each warehouse at all times. “Many analysts assume that with more warehouses,
Amazon’s distribution and fulfillment costs will reduce as it will be able to service orders
locally, thus reducing shipping costs” (Payment). Here is a map showing where the current
locations of distribution centers are in the United States.
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Amazon will keep adding more distribution facilities until it is within every market reach.
Where the fulfillment centers are place are based on the population of the major cities in the
United States. There one state where Amazon has not placed a fulfillment centers and that place
Florida.
Transportation
Amazon has constantly been growing and outpacing ecommerce at large. Two ideas
contribute to this accelerated rate of growth. The welcoming of third party sellers as well as
implementing long-term free shipping programs have both solidified this progression.
Fulfillment by Amazon (FBA) tagline is “you sell it, we ship it.” Amazon has built fulfillment
centers (FCs) around the country with the goal to bring products closer to customers with the
intention of significantly reducing fulfillment costs. With less ground and distance between
product and customer, the result will be a decrease in transportation costs. Retailers opt to the
FBA program, allowing Amazon’s FCs all around to store the products. The first step is for
sellers to send products to Amazon whether it is new or used. Next Amazon will store the
product in the network of FCs. Third, customers will order on Amazon.com or possible other
sales through Amazon’s fulfillment program. Once an order is made, Amazon will pick,
package, and ship the item to the final destination. Lastly Amazon will take care of the customer
service related issues and take full responsibility dealing with inquires, refunds, and returns. For
continuous efforts for supply chain efficiencies, Amazon launched Transportation Central for
carriers engaged by Amazon vendors to move freight to Amazon fulfillment centers. The goal is
to reduce the time vendors need to schedule an appointment to the Amazon fulfillment center as
well as allow a standard process from now on. This allows for more organization and quicker
movement for delivery. Also, customers will be eligible for free shipping for orders over $35,
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and as well Amazon Prime, paying an annual fee of $79 a year which is cheaper for students. For
domestic standard, the buyer will receive the order within 4-14 business days from shipment
date. As for domestic expedited, the buyer will receive the order within 2-6 business days after
shipment. Amazon transportation carriers are United State Postal Service, United Parcel Service,
and FedEx. U.S Postal Service and Amazon.com Inc. recently negotiated a service agreement
together. Now on Sundays, USPS began delivering Amazon packages to residential homes in
New York and Los Angeles. The USPS relies on sales of postages, packages, and services to
fund the operations. If successful, USPS intends to add on more markets such as Dallas,
Houston, New Orleans, and Phoenix. USPS doesn’t intend on hiring more employees nor to pay
overtime for the deliveries.
Information Systems
Amazon.com utilizes the Customer Relationship Management (CRM) system. Data,
efficiency, and customer service are Amazon.com competitive differentiators. Amazon.com uses
effective data storage and proper data analysis to undertake sales, marketing and business
services. The main points of client relations that have made Amazon.com into an internet
business model are:
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Basic Elements
S&S Process (Search & Sale)
Post-Sale
Basic Elements
The basic elements are recommendation algorithm and website usability.
Recommendation algorithm is a fundamental element for offering fitting recommendations, and
website usability simplifies the procedure of acquiring additional products. These two basic
elements allow Amazon.com customers to see a variety of product options and in turn introduces
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more cross-selling. Customers buy, comment or just easily visit the website, and Amazon.com
can make satisfactory recommendations.
S&S Process
During the search & sale process, the user receives suggestions for products that were
looked at but not bought, and also products related to those items purchased by a different user.
Because of this, a customer can save time and/or is shown another product that may also be
needed.
Post-Sale
Amazon saves the e-mail of users and mails offers and recommendations based on the
data retrieved from the customer’s past experience on Amazon.com
Uniqueness
According to SCM World, the leading global community of supply chain practitioners,
Amazon is more widely admired compared to competitors. Amazon came out on top with 3 out
of the 4 supply chain attributes that survey participants took place in. Those three included
agility, collaboration, and execution. Agility was the ability to quickly lower cost amount with
types of production and delivery to improve overall operational performance in volatile settings.
Collaboration was the ability to solve systematic operational problems with organizational
boundaries. Lastly, execution involved consistency and reliable delivery within budget expenses.
Amazon has a very direct supply chain impact, helping to contribute to their uniqueness.
Amazon has huge fulfillment space, aggressive shipping charge policies, push for same day
delivery in some markets, and just continuous innovation pushing for other retailers and services
to keep up.
Competition
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Amazon is in a battle with Apple in the fast growing market of technology with tablet
devices and digital content. The major rival product includes the Kindle Fire and Ipad. Other
competition includes Ebay, Walmart, Google, and Facebook as well. Amazon is rumored to
possibly roll out with a smartphone to cut into Apple’s iPhone market share while challenging
Android smartphones too. Amazon’s smartphone could be an alternative to a low cost, low profit
gadget, profiting from sale of Amazon merchandise and e-books, games, and applications.
Current/Future Challenges
One of Amazon’s newest product is the Kindle Fire HDX tablet, which uses Mayday ondemand video customer support feature. The feature is on the setting menu, available 24 hours a
day and year round. A window pops up showing a support agent, being able to talk, draw on the
screen, or even take control of the screen themselves. With the 24/7 service, Mayday will not be
able to solve any kind of Internet connection issue. Having support people available anytime
could work out great for customers, but very expensive for Amazon. Although if Mayday is able
to be a selling point and help reduce returns, the investment and gamble could be well worth it.
Recently, CEO Jeff Bezos revealed a plan for Amazon Prime Air which are little drones that can
carry items from the warehouse to a front door within 30 minutes. To turn such an ambitious
concept into reality, much work is ahead of them. The Octopters will need much battery life
which will be the toughest problem to figure out. Also, once the package is in the air, how can
they stop people from stealing the product? Bezos states, “I don’t want anyone to think this is
just around the corner, this is years of additional work from this point.”
Recommendations for Potential Improvement
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Keep doing what they have been doing all along.
Amazon store
Stop making the kindle
Expand global reach
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Better packaging with electronic
Watch out for over expanding
Summary – Jordan
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Bibliography
"Amazon.com Help: Order Timeline." Amazon.com Help: Order Timeline. Amazon.com, n.d.
Web. 15 Oct. 2013.
"Customer Metrics." Amazon.com Help:. Amazon.com, n.d. Web. 15 Oct. 2013.
"Customer Metrics Scorecard FAQ." Amazon.com Help:. Amazon.com, n.d. Web. 15 Oct. 2013.
"SAP and Amazon Web Services." SAP and Amazon Web Services. Aws.amazon.com, n.d. Web.
15. Oct. 2013.
Adinolfi, Joseph. "Terms Of Deal For US Postal Service (USPS) To Deliver Amazon (AMZN)
Packages Not Revealed By USPS Or Amazon." International Business Times. IBTimes,
14 Nov. 2013. Web. 03 Dec. 2013.
Bort, Julie. "SAP Brings Its Lightning-Fast Database, Hana, To Amazon's Cloud." Business
Insider. Businessinsider.com, n.d. Web. 15 Oct. 2013.
ChannelAdvisor. "A Deep Dive into Amazon's Global Shipping & Fulfillment Network." –
Supply Chain 24/7. N.p., 21 July 2013. Web.
Constine, Josh. "Amazon Faces High-Stakes Challenge In Scaling Mayday On-Demand
Support." TechCrunch. TechCrunch, 25 Sept. 2013. Web. 03 Dec. 2013.
Denning, Steve. "Why Amazon Can't Make A Kindle In the USA." Forbes. Forbes Magazine, 17
Aug. 2011. Web. 29 Oct. 2013.
Dixit, Puneet. "Four Looming Factors That Could Threaten Amazon's Profits." Business Insider.
Business Insider, Inc, 28 Mar. 2013. Web. 23 Sept. 2013.
Halkias, Maria. "Immerse Yourself in a New Experience." The Dallas Morning News. The
Dallas Morning News Inc, 30 Jan. 2013. Web. 29 Oct. 2013.
Hoffelder, Nate. "New Kindle Fire Reportedly Being Assembled." The Digital Reader. N.p., 05
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Jul 2012. Web. 1 Dec 2013. <http://www.the-digital-reader.com/2012/07/05/new-kindlefire-reportedly-being-assembled/
Layton, Julia. "How Amazon Works." HowStuffWorks. N.p.. Web. 29 Nov 2013.
<http://money.howstuffworks.com/amazon1.htm>.
Lessin, Jessica. “Apple vs. Google vs. Facebook vs. Amazon.” WSJ, 25 Dec. 2012. Web. 03 Dec.
2013.
Noguchi, Yuki. "Moving In With Manufacturers, Amazon Delivers A New Approach."NPR.
NPR, 28 Oct. 2013. Web. 29 Oct. 2013.
Roberston, Adi. "The Verge." The Verge. The Verge, 02 Dec. 2013. Web. 03 Dec. 2013.
"SAP and Amazon Web Services." SAP and Amazon Web Services. Aws.amazon.com,
n.d. Web. 15 Oct. 2013.
Shih, Willy. "The U.S. Can't Manufacture the Kindle and That's a Problem." HBR Blog Network.
Harvard Business Review, 13 Oct 2009. Web. 29 Nov. 2013.
<http://blogs.hbr.org/2009/10/the-us-cant-manufacture-the-ki/>.
"Shipping Rates and Services." Amazon.com Help:. Amazon, n.d. Web. 03 Dec. 2013.
Strickland, Jonathan, and Bernadette Johnson. "How the Amazon Kindle Works." How Stuff
Works. N.p.. Web. 29 Oct 2013.
"Transportation Central." Transportation Central. Amazon, 2013. Web. 03 Dec. 2013.
Trebilcock, Bob. "Supply Chain: Amazon Is Changing the Rules of the Game." MMH.com.
Modern Material Handling, 14 Dec. 2012. Web.
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Team Contributions
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Company (&Division) – Kathy
Executive Summary – Jordan
Vision/Mission – Kathy
Company Structure – Isacc
Major Customers – Isacc
Supply Chain Diagram – Vu
Order processing – Vu
o How performed
o Customer Service Metrics
Procurement – Jordan
o Type/Structure
o Supplier Information
Inventory – Isacc
o Strategy
o What types
o Where stocked
Manufacturing – Jordan
o Strategy
o What
o Where
Logistics Facilities Network – Isacc
o Locations
o Types/Functions
Transportation Methods –Kathy
o Information Systems – Vu
Uniqueness – Kathy
o What key factors make their supply chain one of the best
Competition – Kathy
Current/Future Challenges – Kathy
Recommendations for Potential Improvement – Isacc
Summary – Jordan
Bibliography / What team member did what part – Vu
PowerPoint contributions: Kathy, Jordan, Isacc and Vu
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