The Amazon Effect & Your Supply Chain: What to Know

By November 12, 2018 Contract Negotiation, Invoice Auditing, News

Amazon has changed commerce forever. It has disrupted the way that people shop. The days where you had to physically walk into a store to find the item you want to purchase are gone. Customers are now able to order items 24/7 using a variety of devices available at their fingertips – smartphones, tablets, laptops and even voice-activated personal assistants, such as Amazon Alexa. This is called the “Amazon Effect.”

By disrupting the way that people shop, Amazon has created a ripple effect that extends far beyond individual customer experiences and affects the entire retail industry as a whole. But what about your supply chain?

Understanding the Amazon Effect

Amazon has grown to generate $61 billion in revenue to date, and holds the title of “world’s largest online retailer.” The company, which was started out of the founder’s garage when he was 30 years old, has redefined the buying experience for consumers. E-commerce accounts for approximately 10 percent of United States retail sales. What’s more, Amazon accounts for 53 percent of the growth of online shopping. In fact, one study showed that more than half of all new product searches start on Amazon. When a customer has a purchasing need, he or she looks to Amazon first to compare prices, read customer reviews and gather information.

The “Amazon Effect” is a general term, describing the changes in customer habits and expectations due to the popularity of Amazon. Thanks to Amazon, shopping has never been easier than it is today. A person can think of a product that he or she needs, and have that product on its way to their home within seconds. The time to receive that product is also shrinking from weeks to a matter of a couple days and even 24 hours. The hard work of visiting multiple stores and wasting an afternoon shopping is eliminated. Areas around expectations for shipping, convenience, and pricing have all been influenced by the rise of Amazon as well. What’s more is that Amazon is no longer only operating in virtual space, but it’s also expanded to brick-and-mortar stores with the acquisition of large retailer Whole Foods.

In addition, Amazon launched their “Amazon Key” service in 2017. This service for Prime members brings the shipping experience to new levels with the ability to allow delivery drivers to drop packages inside a customer’s home. Users purchase a kit, which costs about $250 and includes a security camera and compatible smart lock.

While it might have been acceptable to place an order and wait a week for delivery in the past, the Amazon Effect has changed that. Customers now expect packages faster than ever. Plus, not only do customers expect quick delivery, but they also want delivery charges to be eliminated. These expectations place additional pressure on retailers and their supply chain.

The Role of Amazon Prime in the Amazon Effect

The Amazon Effect started out with free shipping, which allowed no-cost shipping on items priced higher than $25. But this was only the start. While initially competing retailers only had to deal with free shipping, after Amazon Prime rolled out, they had to deal with fast, two-day shipping as well.

The market response to Prime was overwhelmingly positive, and membership now includes more than 100 million subscribers. The membership offers everything from free movies and music to books and fast two-day shipping. In the age of instant gratification, two-day shipping was a huge success, and it wasn’t long before it had become the gold standard by which customers compared all retailers. In some cases, the ability to access faster shipping is the tipping point when customers are deciding between two different retailers.

In fact, more than 90 percent of respondents say that shoppers are “significantly less likely” or “somewhat less likely” to purchase without free shipping. What’s more is that 45 percent of customers admit to abandoning their carts due to shipping costs that are tacked on at the end of a transaction, which is nearly half of all shoppers.

A promise of fast delivery translates to a supply chain that must be highly efficient. One way in which Amazon does this is to move inventory closer to metropolitan areas. Recently, Amazon made efforts to position inventory in locations within 100 to 200 miles of major metro areas to help meet the promise of fast shipping. This has a trickle-down effect in many areas, including how much inventory to keep on hand at multiple locations.

Creating the 24/7 Experience & The Supply Chain To Support It

A few decades ago, people shopped when stores were open, but this expectation has drastically changed with the rise of Amazon and smartphones. Customers are operating in an “always on” environment and are fiercely tethered to their devices. The majority of people (71 percent) who own smartphones sleep with them nearby. What’s more, 57 percent say they use their phones at least once per hour when they’re awake.

With this always-on environment, customers expect their favorite retailers to serve them long after doors close. A 24/7 shopping environment is the norm. If a customer places an order that is promised in two days, he or she expects it to be there in two days — or faster — and has little tolerance for delays in receipt. These changing expectations have placed intense pressure on the supply chain.

Retailers may have previously batched orders together and shipped them during efficient times throughout the week pre-Amazon Effect. But in today’s lightning-speed environment, more retailers must have continuous shipments going out all day to expedite receipt times and keep customers happy. Managing the Amazon Effect involves producing efficiencies and cost savings through warehousing, disruption, and transportation.

The supply chain must be nimble and employ good technology that makes the process for delivery more efficient and creates more dependable and delightful customer experiences. In fact, many companies have added an entirely new position to the C-suite — the chief supply chain officer. This role is dedicated to managing these challenges, further highlighting the importance of the changes today and in the future.

This 24/7 experience also requires shipping a larger volume of products directly to the customers rather than shipping pallets to stores, and this is costlier and more complicated. In addition, new methods for inventory organization are required, since customers require products fast. Software is being used to keep up with these intense demands and fulfill multiple online orders efficiently, including programs that handle automation, scanners and even artificial intelligence.

Succeeding in the environment requires a supply chain that is agile, uses data efficiently, and has analytics in place that transforms data into decision-making information. The right tools allow companies to more efficiently manage supply chains and meet the intense demands created by the Amazon Effect.

The Challenges Associated With Achieving Speedy Deliveries

There are many challenges in the supply chain to work out when responding to the Amazon Effect. Customer expectations have evolved to the point where faster is better, and customer expectations are tied closely to the results. Loyalty is the currency of shopping, and creating the right experiences allows retailers to cash in. Creating this loyalty through providing faster shipping, however, affects many parts of the supply chain, including the following:

Small lots must be produced. Resellers must build large warehouses to store more inventory and figure out how to fill orders faster. Additionally, machine changeovers must be faster to accommodate a faster demand schedule.

Procurement is affected. The way in which materials are purchased much be changed. Procurement must respond faster to manufacturing needs and get the products manufacturers need at a faster pace in order to meet aggressive delivery demands.

Faster delivery systems must be put into place. The demand for faster deliveries transfers to carriers that must pick up items quicker and deliver them sooner. Inventory turn times must be quicker, and an expanded logistics network with higher levels of safety stock is required.

Using the same old supply chain strategy leads to stagnant growth. Retailers that want to compete with the Amazon Effect can’t use the same old operations but instead must update every part of their supply chain to be more responsive and flexible in order to respond to rapidly evolving demands, starting with achieving a better understanding of customer demands.  

The Supply Chain & Customer Wants

The Amazon Effect isn’t a fixed target, but instead is moving and constantly changing. Keeping up isn’t only about responding to what customers want today, but it is also about how their demands might change in the future.

Accomplishing this successfully requires asking the right questions to get to know customers and their changing expectations. The Harvard Business Review recommends asking the following questions.

  • What types of products do consumers want?
  • How much are they willing to spend?
  • How does the product differ from similar products?
  • How can we improve the shopping experience beyond that of Amazon?
  • Will consumers respond to marketing?
  • What type of marketing campaign will work?
  • Which brands have used this style of campaign before?
  • What were the results?
  • What conversion rate would be necessary to meet profit margins?
  • Will we match local competitor pricing?
  • What shipping options are available?  

Once you answer these questions, you can create a strategy that helps you get ahead of the competition. Equally important, you can create a supply chain foundation that delivers the products that customers want most.

For example, expedited shipping is an important feature to customers today, but what will be their needs in the future? One example of this is Amazon’s new delivery model in which the carrier brings the package inside the home. What is next for your customers? Once you figure this out, you can figure out how to position the supply chain.

Oftentimes, technology provides the answer. For example, if the goal is fast shipping, you can reduce transportation spending by using invoice audit software that helps identify where you are overspending and saves money in order to provide customers with a more seamless experience. Enhanced visibility into your freight and parcel shipping spending enables you to make better and more cost-saving decisions.

Improving the Customer Experience Through the Supply Chain

One of Amazon’s strong points is its technology. Technology that adds personalization and technology that gets products from screen to front porch quickly is key to customers. This requires companies to invest in the technology side of their businesses and not shy away from testing new innovations.

Companies must design new and improved processes and think creatively about the future and what their customers will demand not only today, but also in the next decade. The key isn’t keeping up with the Amazon Effect; rather, it’s staying one step ahead. Using technology to accomplish this allows you to position your company to thrive in the future and continue earning more revenue in a fiercely competitive retail environment.

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