From Scratch: Amazon Keeps Supply Chain Close To Home

"When we think about how we're going to grow our company, we focus on price, selection, and availability," says Jeffrey Wilke, senior VP of worldwide operations at Amazon.com Inc. "All three depend critically on the supply chain."

Amazon has one of the most-sophisticated supply-chain systems in the world, and it was all built from scratch. Homemade applications handle nearly every aspect of its supply chain: warehouse management, transportation management, inbound and outbound shipping, demand forecasts, inventory planning, and more. "We don't have any legacy systems," Wilke says. "That's a clear advantage."

In the last four years, Amazon has worked to minimize the need for human intervention in its supply-chain processes, such as manually inputting sales forecasts into an inventory-management system. Today, Amazon's supply-chain apps communicate in real time, a rarity when most companies have to integrate a variety of software tools and manual processes, such as phone and fax orders. "We've reached a point where computers do what they're supposed to do," Wilke says.

Amazon's supply chain is so tightly integrated that when an online customer buys a couple of books and a CD, the order-management system communicates with inventory- and warehouse-management systems to find the optimal distribution center or centers for fulfilling the order. The customer knows in less than a minute how long it will take to ship the items and whether they will come in one package or separately.

Amazon, which 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. For instance, certain Amazon applications can use radio-frequency identification technology, and the online retailer will turn on the capability when it's needed, Wilke says. "RFID is most useful when you have one of a number of conditions: if you have poor inventory accuracy, if you have a high shrink rate, or if you have a need for more real-time information." RFID isn't a priority because those aren't problems for Amazon today.

"RFID will add the most value to us when it's used on every item," rather than on cases and pallets, as Wal-Mart Stores Inc. and Target Corp. are planning. "Then we'll just position the antennas in our operations."

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