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An Analysis of Supply Chain Best Practices in the Retail

Industry with Case Studies of Wal-Mart and
Amazon.com
By Colby Ronald Chiles and Marguarette Thi Dau MLOG 2005

Introduction
Wal-Mart and Amazon.com dominate the mass merchandising and internet
retailing segments of the retail industry. How do Wal-Mart and Amazon.com sustain and
reinforce their competitive advantages in these highly competitive, low-margin retail
industry segments? The answer lies in supply chain management. This research is the
retail contribution to Phase One of the Supply Chain 2020 Project at MIT. We focus on
the strategies, operating models, networks, and supply chain processes that currently
constitute excellent supply chains in the retail industry. Data for this thesis is gathered
through a literature review and interviews with industry experts, including consulting
firms, technology providers, third-party logistics firms, partner companies, and academic
sources. There are two research areas for this paper; retail industry analysis and company
case study analyses of Wal-Mart and Amazon.com. The case study analysis portion
begins by stating Wal-Mart and Amazon.com’s positions in their respective industry
segments. Then we discuss and analyze each case study company’s supply chain
strategy, design, and processes. With an understanding of each case study company’s
supply chain in place, an analysis of supply chain strategy linkage with business strategy
is performed. Finally, we discuss the commonality and transferability of Wal-Mart and
Amazon.com’s supply chain practices within the retail industry and across other
industries.

Retail Industry and Company Case Study Scope

The retail industry has an extremely broad scope. Therefore it is necessary to
reduce the scope of the analysis to specific segments of retail. This thesis focuses on two
segments of the retail industry, mass merchandising and internet retailing. In order to
perform a deep analysis of both general merchandising and internet retailing, the leading
company in each of these sub-segments is analyzed. According to annual revenues, the
leading general merchandise retailer is Wal-Mart and the leading internet retailer is
Amazon.com. This paper analyzes each of these companies.
Wal-Mart and Amazon.com service customers through different distribution
channels. Wal-Mart primarily services customers through physical retail locations and
Amazon.com services customers through an online storefront with distribution provided
by Amazon.com and partner distribution centers, as well as third-party companies. The
supply chains that support these different business models inherently require different
supply chain strategies, designs, and processes. Thus, this paper is not intended to
compare the excellence of Wal-Mart and Amazon’s supply chains relative to one another.
Rather, the aim of this paper is to identify the key components of excellent supply chains
that support physical mass merchandise retailing and internet retailing environments. We
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will identify these components through case studies of Wal-Mart and Amazon.com to
understand how their supply chains reinforce their competitive business strategies.

Retail Industry Overview

The majority of the retail industry overview focuses on mass merchandise
retailing within traditional and internet channels, where the case study companies reside.
The major executive summary topics covered for mass merchandising and internet
retailing are financial statistics, industry trends and drivers, and supply chain challenges
and opportunities.

Retail Financial Statistics

Based on the S&P General Retail Industry report that was released in May 2004,
retail sales in 2003 equated to $3.40 trillion. The industry experienced a 5.4% growth
from 2002, which was associated mostly with the growth in sales of luxury goods and
discounted goods. Retail Industry growth from 2002 to 2003 can be attributed to luxury
retailers and general merchandising or discount retailers. Wal-Mart is the world’s largest
retailer in terms of revenue.
Within retail, internet retailing has grown in conjunction with the emergence of
the internet in the mid 1990’s. Internet retail consists of multi-channel retailers that
operate physical retail stores as well as an online channel and “pure-play” internet
retailers that only sell products through websites. Forrester notes that from 1997 to 2002,
online retail sales grew at a 97% compound annual growth rate (CAGR). This growth is
reflected in the increase in sales from $2.4 billion in 1997 to $72.1 billion in 2002. The
top five products in terms of percentage of online sales to overall retail sales are
computer hardware/software, books, tickets, music/video, and consumer electronics.
Despite aggressive revenue growth, profitability has been an issue for internet retailers.
A Shop.org and Forrester Research study shows that in 2001 only 56% of internet
retailers had positive operating margins. Profitability is improving as shown by 79% of
internet retailers showing positive operating margins in 2003 (Rubin, 2003).
Amazon.com is the largest pure-play internet retailer in terms of revenue.

Retail Industry Trends and Drivers

The major retail industry driver in retail environments is customer behavior. In
mass merchandising and internet retailing, customers require that a wide selection of
products is available at a reasonable price. In response to customer expectations, retail
supply chain trends are primarily associated with inventory management and supplier and
retailer relationships to support on-shelf availability at a reasonable cost. The increasing
competitiveness of the retailing environment, especially for mass merchandisers, has
created an environment with very low profit margins. The response to lower profit
margins are more efficient operational processes as well as lower inventory levels to aid
in cutting overall supply chain costs. Additionally, collaborative efforts have become a
higher priority in all areas of the retailing business to globally optimize vendor to retailer
supply chains. In order to offer the most competitive price, retail companies, especially
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mass merchandisers, are competitively using their supply chains to reduce costs to the
company itself and price to the final consumer.
Drivers and trends specific to internet retailing are increasing internet retail
growth, leveraging brand awareness, maintaining competitive pricing, and strengthening
supply chain partnerships to improve selection and availability of products.
Internet retail is growing, and companies like Amazon.com are establishing brand
loyalty. In response to this growth, internet retailers have to respond with supply chains
that are scaleable to respond to increased demand. Additionally, due to the transparency
of prices and the ease of switching associated with internet browsing, internet retailers
must support product availability of a wide range of products at competitive prices. In
response to this driver, Amazon.com employs a three-echelon inventory system where
orders may be filled by Amazon.com’s distribution centers, wholesalers and suppliers, or
other third parties. Additionally, Amazon.com has partnered with a number of other
internet retailers to cross-promote product lines.

Retail Supply Chain Challenges

Like many industries, a major retail industry supply chain challenge is ensuring
that the right products get to the right places for the lowest costs. In retailing
environments, providing on-shelf availability of product is a critical success factor.
Empty shelves represent lost revenue to retailers as well as suppliers. The challenge lies
in the balancing the cost of having stock available with the cost of having inventory in the
pipeline. The opportunity is increased revenue across the entire supply chain and
retention of customers. Collaboration efforts between trading partners have arisen as a
response to the challenge of providing on-shelf availability while controlling costs.
Supply chain concepts, such as vendor managed inventory (VMI), co-managed inventory
(CMI), and collaborative, planning, forecasting, and replenishment (CPFR) attempt to
link trading partners together more deeply. Silo-management and local optimization
desires at the expense of global supply chain optimization need to be overcome in order
to allow for successful inter-company collaborative efforts.
Internet retail introduces a number of supply chain challenges. Customers expect
unlimited product selection and availability at the lowest price. In response to those
expectations network design factors regarding the location, number, and characteristics of
distribution facilities are critical to the success of internet retailers. Within internal
facilities, designing facilities and processes to support the internet retailing order profile
of a large number of orders with a smaller volume per order is a challenge in containing
costs to support profitability. Additionally, with a need to provide product availability of
a wide range of products, inventory segmentation within Amazon’s internal distribution
network and within its network of partner inventories and third-party sellers presents a
challenge. Finally, balancing service options to customers with costs is a challenge in
providing differentiated service while attempting to aggregate orders to leverage scale
and reduce fulfillment and transportation costs. Each of the retail and internet retail
supply chain challenges are discussed within the context of the Wal-Mart and
Amazon.com case studies discussed below.
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Case Study Analysis

The following section discusses Wal-Mart as a mass merchandising case study
and Amazon.com as an internet retailing case study. The case study industry position
portion provides a brief company overview with a discussion of each company’s business
strategy and relative position in their respective retail industry segment. Additionally,
detailed analyses of both Wal-Mart and Amazon.com’s supply chain strategies, designs,
operating models, supply chain processes, and improvement initiatives are conducted.

Wal-Mart Case Study

Wal-Mart is considered a mass merchandiser and is the top retailer in the world in
terms of annual revenue. Wal-Mart’s business strategy is to provide “Every Day Low
Prices” or EDLP for all of its products and services. Wal-Mart does not guarantee the
lowest prices in the market. However, they do guarantee that their overall prices are
consistently lower than most retailers. Other retailers utilize promotions to temporarily
lower prices below those of Wal-Mart. Another strategy that Wal-Mart has followed
since its inception is to build Wal-Mart stores in smaller communities. The advantages of
this strategy are lower infrastructure investment costs and lower wages to set up mass
merchandise stores in those communities. The disadvantages of being in small
communities are the inbound and outbound distribution costs and convincing suppliers to
support stores that are out of their distribution network.
In January of 2004 (end of their 2003 fiscal year) Wal-Mart reported
approximately $256 billion in revenue, making it the highest grossing retailer in the
world. The 2004 10-K Form reports that Wal-Mart employs approximately 1.5 million
people. Wal-Mart’s three business units are Wal-Mart Stores, SAM’S CLUB, and their
International retailing business. Within
Wal-Mart Stores, there are three Figure 1Segmented
Segmented Revenue by Business Unit
Revenue by Business Unit
Revenue in $ billions

different types of retailing facilities; (in millions)

Discount Stores, Supercenters, which
International,
include general merchandise and a full $47.60 , 19%
line of grocery, and Neighborhood
Markets. SAM’S CLUB was conceived SAM'S CLUB,
$34.50 , 13% Wal-Mart
as a modification of the European Stores,
hypermarket, and sells products in bulk $174.20 , 68%

quantities. In the International business

unit, Wal-Mart has grown through
mergers and acquisitions. Through its different business units, Wal-Mart aims to provide
a wide variety of products under one location for a low price. This thesis focuses on the
supply chain process for Discount Stores only.

Wal-Mart Supply Chain Network and Processes

Wal-Mart operates 1478 Discount Stores in the US and has a store presence in all
50 States. Wal-Mart’s US supply chain network has 90 distribution centers (DC) total,
with each holding particular product segments and product types. Wal-Mart utilizes a
private fleet for short-haul shipments, which include some inbound and all outbound
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transportation from DCs. According to Wal-Mart’s 10-K Form, 20% of shipments are
made directly from vendors to Wal-Mart Stores and 80% of store replenishments go
through the DC process. When each Discount Store orders products from vendors, the
orders are aggregated by vendor in order to take advantage of risk pooling, allowing
vendors to only forecast aggregated store demand instead of individual store demand.
Wal-Mart uses a system called Inforem to automate their replenishment process for their
retail stores. The following figure is a general overview of the flow of products from
vendors to Wal-Mart stores.
Wal-Mart
Figure Replenishment
2 Wal-Mart Process Overview
Replenishment Process Overview

After vendors receive orders from Wal-Mart, Retail Link, a proprietary supply
chain visibility tool, takes the vendor ship point information and determines a routing
schedule based on cost. If products are not being shipped directly to stores, the two
possible destinations are either to a Wal-Mart DC or to Wal-Mart center points. Center
points are facilities that deconsolidate full truck loads from vendors and aggregate those
products with products from other vendors for outbound distribution to Wal-Mart DCs.
This is done to lower transportation costs and better utilize assets through achieving scale
on inbound and outbound transportation. From the DC, products are then sent to Wal-
Mart stores. The three types of replenishment processes that Wal-Mart utilizes are
explained in more detail in the following section.

Wal-Mart Replenishment Processes: Warehouse, Assembly, Direct-

to-Store
In the warehouse replenishment process, products are first stored at the warehouse
level and then distributed to different retail stores. This is a relatively standard retail
supply chain process, where vendors deliver products to retailer warehouses, products are
stored in inventory until requested by retail stores, and orders to replenish stores are
fulfilled from distribution center inventory. The types of products that go through the
warehouse replenishment process are products that are in high demand and have high
margins. In other words, on-shelf availability for these products is very important to
Wal-Mart, and thus safety stock inventory is required.
In the assembly replenishment process, products flow through the supply chain
via a modified form of crossdocking. Products arrive at the DC pre-allocated for specific
stores and are batched for delivery to those stores. In other words, the assembly process
is similar to the warehouse, except that the assembly process does not require that
products are stored in inventory. The product types that flow through the assembly
replenishment process are products that are not highly demanded with low price margins.
With these characteristics, there is no need for a high safety stock level or a need to store
a staple stock of this inventory in the DC. Wal-Mart is currently evaluating initiatives to
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extend the assembly process to a larger portion of its product line, which is discussed
later in this summary as a Wal-Mart supply chain initiative. The following diagram
shows how products flow through distribution centers via the assembly process.
Figure 4 Wal-Mart Assembly Process

The last replenishment process for Wal-Mart stores is shipments directly from
vendors to stores. Products that are shipped directly from vendors are done so for various
reasons. Generally, the products that flow through this type of replenishment process are
products that are not easy to store and are highly demanded. For example, dog food is
highly demanded, requires significant shelf space, and attracts rodents. This process
allows Wal-Mart to better utilize DC storage space and allow high velocity product to
flow through the supply chain directly to retail stores. In order for this process to be
successful, Wal-Mart and its vendors must collaborate intimately with one another to
ensure that all Wal-Mart stores are stocked to meet customer demand.

Wal-Mart Supply Chain Initiatives

With the reputation of always aiming for supply chain cost reduction in support of
its EDLP strategy, Wal-Mart is continuously launching supply chain initiatives and
transformations. The major supply chain initiatives discovered through industry expert
interviews are applying the pick-to-pallet process to discount stores, implementing post-
receipt allocation for outbound distribution process, applying changing the replenishment
processes for products with different profiles.
Pick to pallet is a replenishment concept used for Wal-Mart’s perishable goods,
where each pallet that is delivered to a retail outlet contains items that belong to one aisle.
This process is being considered for implementation in discount stores in order to reduce
in store shelf replenishment costs.
In post-receipt allocation, stock keeping units (SKUs) that flow through the
assembly process are not dedicated to stores until they have been received into the DC.
Previously, if demand changed during the lead time that it took products to be delivered
from vendors to stores, the amount of inventory allocated to each store did not change.
With post-receipt allocation, a reallocation of inventory takes place when products arrive
at the DC. This is a method of postponement that allows Wal-Mart to have more
flexibility to ensure the proper allocation of inventory to stores, supporting on-shelf
availability and preventing inventory overages. It is not until the products are received
and an analysis is done as to where the SKUs are needed most, that the products are
batched for outbound distribution to stores.
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Figure 5 Process Differentiation Based on

A shift in the product flow Product
Process Differentiation Characteristics
Based on Product Characteristics
according to product and demand High
Supply
profiles is depicted by the cube to the Low
Variability
right. By shifting the replenishment Warehouse
Flow Products
processes based on volume, supply High
and Keep Low
Safety Stock
Products and
Keep High

Volume
Safety Stock
variability, and demand variability, the
overall level of safety stock and Assembly Warehouse
Products and
Replenishment
inventory in the system will be reduced. Low and Keep Low
Safety Stock
Keep High
Safety Stock

Under this new paradigm, most of the Low High

products that are high in volume, which Demand Variability
is the general characteristic for Wal-
Mart products, will theoretically continuously flow into the stores at a frequent rate.

Wal-Mart Business Strategy and Supply Chain Strategy Linkage

As mentioned previously, Wal-Mart’s overall business strategy is to provide
Every Day Low Prices (EDLP) to customers. Wal-Mart’s supply chain strategy supports
its business strategy to ensure on-shelf availability of a variety of products in a
convenient location at low prices. Wal-Mart’s operating model based on efficient flow-
through distribution processes supports the business strategy, through finding a balance
between customer service levels, supply chain efficiency, and asset utilization. The
supply chain enablers of EDLP are capital investments that facilitate vendor
collaboration, which then supports differentiation in supply chain processes. The capital
investments, such as the private fleet and IT investments, aid in cutting costs within the
supply chain. Retail Link is a supply chain visibility tool developed to facilitate supply
chain partner collaboration. Wal-Mart invested $4 billion to develop this application
(Arnold & Fernie, 2000). The three major functions of Retail Link are to store data, to
share data with vendors, and to aid in shipment routing assignments. Wal-Mart’s
continued investment in IT is seen through its RFID initiatives. Wal-Mart is currently
driving the adoption of RFID technology through supplier mandates. RFID promises the
next generation of barcode technology to provide automated data capture to further
streamline Wal-Mart’s processes and vendor compliance initiatives. In addition to
technology, trust and cooperation are essential for Wal-Mart to develop collaborative
relationships with vendors, such as vendor managed inventory (VMI) and co-managed
inventory (CMI). In order to persuade vendors to make decisions and take actions that
are beneficial to Wal-Mart, Wal-Mart has made their profitability and business strategy
attached to the performance of their suppliers. Therefore, suppliers are expected to
continuously improve their supply chain and organization because their business with
Wal-Mart is for the most part, essential to their survival. Through its IT capabilities,
private trucking fleet, and vendor-retailer collaboration efforts, Wal-Mart is able to apply
differentiating supply chain processes to its products. Wal-Mart’s segmentation of
products into warehouse, assembly, and direct-to-store replenishment processes shows
their understanding and dedication to ongoing operational efficiency and innovation,
while maintaining or improving service.
The diagram on the following page graphically depicts the three factors discussed
above, within the context of the Wal-Mart Operating Model. Wal-Mart’s distribution
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Figure 6 Wal-Mart’s Strategy and Supply
Chain Enablers
processes can not be copied
effectively without developing the
Operational
integrated capabilities that Wal- Objectives
CUSTOMER
SERVICE LEVEL
Mart has in place. The integrated (arrow size indicates
relative importance to
nature of Wal-Mart’s investments, EDLP, for example
Supply Chain Efficiency
operational efficiency, is the most important EDLP
collaboration and compliance, and factor)
SUPPLY
culture comprise a supply chain CHAIN
ASSET
UTILIZATION
EFFICIENCY
strategy that supports the EDLP
business strategy to create lasting PROCESS DIFFERENTIATION
EDLP
competitive advantage. Enablers VENDOR COLLABORATION
IT CAPABILITIES

Amazon.com Case Study

Amazon.com started as an online bookseller, but has expanded into a wide variety
of media, electronics, and other general merchandise categories in support of its business
strategy. Amazon’s 2003 Annual Report states that their mission is to offer “Earth’s
biggest selection” and to be “Earth’s most customer-centric company, where customers
can find and discover anything they want to buy.” Specifically stated, their business
strategy is to “offer customers low prices, convenience, and a wide selection of
merchandise.”
Amazon.com’s revenue grew from
$2.72 billion in 2000 to $6.92 billion in Figure 7Amazon.com
Amazon.comNet Income 2000-2004
Net Income 2000-2004
2004. Amazon has also seen an 1
Net Income in $Billions

improvement in net income during this 0.5

period, with net income going from negative 0

$1.41 billion in 2001 to $588 million in -0.5

-1
2004. Net income for 2004 is inflated by a
-1.5
one-time $233 million deferred tax asset due
-2
to previous operating losses. As of the 2000 2001 2002
Fiscal Year
2003 2004

fourth quarter of 2004, Amazon employed

more than 9000 people. The two major
business units by which Amazon.com financial metrics are segmented are North America
and International. In 2004, 56% of revenues were from North America, and 44% of
revenues were from the International business unit. As of 2004, Media accounts for 74%
of overall sales. Electronics and other general merchandise and Other revenues account
for 24% and 2% respectively.

Amazon.com Operating Model, Supply Chain Network, and Processes

The pure-play internet retail model uses a website as a virtual store through which
products are sold to customers. There are several variations to this model that
Amazon.com utilizes to support its strategy. The Amazon.com as seller model is a model
where a user places orders through the Amazon.com website, or the website of a
Syndicated Stores partner, and Amazon.com is responsible for the technology, inventory,
and fulfillment of the order. An example of a Syndicated Stores member is Borders.com.
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The Amazon.com as intermediary model, comprised of its Merchants@ and Marketplace

programs, utilizes third-party sellers to own inventory and distribute products to
customers. The Merchant.com program represents Amazon.com as a full-service e-
commerce provider, where Amazon.com provides technology and fulfillment services for
other retailers. The retailers remain responsible for merchandising and maintain
ownership of inventory in Amazon.com distribution centers. An example Merchant.com
customer is Target.com. These operating model variations allow Amazon.com to offer a
wide selection and product availability through one or more of its models, while
containing operating costs.
As a pure-play internet retailer, Amazon.com has zero retail outlets. All sales are
generated through the virtual stores created by the Amazon.com website and affiliate
websites. Amazon.com operates eight leased distribution centers throughout the United
States. Location decisions are made based on proximity to customer concentrated areas
and tax implications. Processes in Amazon.com’s distribution centers vary by the
product mix in the facility. Products that are easily sortable and conveyable are stored in
highly automated facilities. Most of the items in the media product category fall into the
sortable, conveyable category as products are relatively small, have a small variation in
dimensions, and can easily be transported on conveyors and sorted by people or
equipment. Products that are large or have irregular dimensions are stored in less
automated facilities. Amazon.com operates a number of transportation hubs that they
refer to as injection points. Amazon.com aggregates orders at a DC level that are going
to heavily concentrated customer areas, and contracts lower cost long-haul carriers to
deliver products to transportation hubs. In the hub, orders are routed to parcel carriers
who are responsible for last-mile delivery. This process creates economies of scale and
lowers overall transportation costs. A final part of their supply chain network is the
utilization of supply chain partners to deliver orders directly to customers. These partners
include book distributors, publishers, manufacturers, and independent third-party sellers.
Shipments from these partners bypass the Amazon.com internal distribution center
network.
Amazon.com has competed on selection with traditional retailers since its
inception. Amazon.com is able to support this selection through its multi-tier inventory
network. The first tier within the
supply chain network is the Figure 8 Amazon.com Multi-Tier Inventory Model
Amazon.com’s Multi-Tier Inventory Model
Amazon.com distribution center
network. Traditional retailers require
product to be available at retail stores
to achieve a sale. Amazon.com is able
to aggregate inventory through
distribution centers and partner
inventories to provide a wide selection
of products. The second-tier in the
inventory model is composed of
wholesaler and partner DCs. This tier
includes drop shippers such as Ingram
Book Distributors, Baker and Taylor,
and other book distributors. This
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prevents the Amazon.com customer from experiencing a stock-out for an item that
Amazon.com carries but currently does not have in its own stock, and also allows
Amazon.com to offer items that it does not carry in inventory. Publishers, manufacturers,
vendors, and third-party sellers comprise the third-tier in the Amazon.com multi-tier
inventory model. Products sourced from these entities enable Amazon.com to improve
margins, as Amazon.com is not responsible for inventory or fulfillment, thus the
incremental cost to fill the order is very small. The graphical representation of
Amazon.com’s three-tier inventory model is shown to the right.

Amazon.com Supply Chain Initiatives

This section highlights some current initiatives and research that Amazon.com is
supporting to drive continuous improvement in its supply chain. Initiatives include
improving the costs associated with order sourcing, driving efficiency and capacity
improvements in distribution centers, and leveraging their scale and service window to
reduce costs.
Currently, when a customer orders from Amazon.com, the website integrates with
Amazon.com’s order sourcing engine to determine real-time which warehouse should
ship the order. Research is currently being performed to determine the savings associated
with re-evaluating the sourcing decision in a one to two-day window. The re-evaluation
provides more data over which to optimize the solution aimed at lowering transportation
costs through minimizing the number of packages shipped. Sophisticated operations
research models and IT capabilities need to be developed to implement these decisions at
scale to reduce fulfillment and transportation costs without compromising the promised
delivery date to the customer.
Improving operations performance through efforts to model more efficient storage
techniques, sortation mechanisms, and capacity planning is another initiative. Processes
to perform more effective SKU and order profiling for more efficient outbound
processing and capacity planning have recently been the subject of research.
Additionally, analyzing the outbound distribution process to determine the optimal
picking and sortation strategy based on product and order profiles aims to further
improve operational efficiency and improve margins.
An ongoing Amazon.com initiative is creating and leveraging scale within its
supply chain through batching, which results in reduced fulfillment and transportation
costs. Amazon.com offers customers the option to self-select the level of service they
desire. Free shipping is an option on most orders over $25. The customer tradeoff is a
longer delivery lead time. Amazon.com leverages this increased lead time to better plan
distribution processes and transportation to batch orders for efficient picking or
transportation hub processing.

Amazon.com Business Strategy and Supply Chain Strategy Linkage

Amazon.com’s business strategy is to compete on selection, convenience, and
price. Amazon.com’s operating model variations, multi-tier inventory network, and
efficient distribution center processes support Amazon.com’s strategy of selection,
convenience, and price. Amazon.com’s primary supply chain focus is in providing
customer service excellence through product availability and self-selection of service.
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The combination of customer service, supply chain efficiency, and asset utilization
allows Amazon.com to provide the service and convenience on which they compete at a
competitive price.
Amazon.com leverages scale, scope, and service windows to support their
operational goals of product availability, efficiency, and asset utilization in support of the
Amazon.com business strategy. Unlike traditional retailers, Amazon.com does not have
the opportunity for scale in fulfillment and transportation on a per order basis. This
requires Amazon.com to be innovative in developing initiatives and refining processes to
leverage scale. Amazon.com creates picking scale efficiencies in its distribution centers
by batching multiple orders for aggregated picking. Additionally, Amazon.com creates
transportation scale by batching multiple orders going to a heavily concentrated customer
area to be able to utilize less expensive transportation for long-haul transportation as
opposed to their parcel carrier partners. Amazon.com leverages scope through its various
operating models that allow drop shippers, other retailers, and independent third parties to
sell merchandise to its customers through its Merchants@, Marketplace, and
Merchant.com programs. The scope of partnerships enables Amazon.com to offer
millions of products without prohibitive facility investment or inventory costs. Service is
the final component to Amazon.com’s supply chain strategy. The customer service
experience during the online browsing and purchasing process is part of what
differentiates Amazon.com from other online competitors. In addition to the front-end
experience, Amazon.com incorporates its service initiatives to improve supply chain
performance, such as managing service windows by offering free shipment for a longer
lead time to create supply chain efficiencies.
Porter (1996) discusses a set of activities that fit and reinforce one another as
essential to sustaining long-term
competitive advantage. Figure 9 Amazon.com Business Strategy and Supply Chain Model
Amazon.com utilizes scale, scope,
and service in an integrated manner
to ensure product availability and
drive down supply chain costs to
provide the selection, convenience,
and low price experience on which
they compete. Amazon.com’s
initiatives in achieving economies
of scale in fulfillment and
transportation are supported and
reinforced by service window
management initiatives. These initiatives lead to lower costs for Amazon.com that can be
utilized to improve profits or pass savings onto customers through lower prices. Scope
and service fit together to allow a customer to find a vast selection of merchandise on
Amazon.com with seamless fulfillment. This supports Amazon.com’s goal of customer-
centricity and convenience from the front-end shopping experience through final delivery
of product. As the scale of volume sales grows and the scope of selection through
partners grows, Amazon.com’s supply chain supports the business goals of continued
growth and improved profitability.
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Wal-Mart and Amazon.com Supply Chain Commonality

Wal-Mart and Amazon.com are very different companies. Wal-Mart is the largest
retailer in the world with thousands of retail store locations where customers select
product from store shelves for purchase. Amazon.com is the largest internet retailer in
the world, serving individual customers with product deliveries from their own
distribution centers and through partner inventories. Despite their differences between
Wal-Mart and Amazon.com, both share common principles in utilizing supply chain
management to support their business strategies. Both Wal-Mart and Amazon.com focus
on the one-stop shopping experience, whether it is through on-shelf availability at the
store level or having products within the distribution network available for delivery to
online retail customers. Additionally, the two companies focus on operational efficiency
to lower costs and then pass those savings onto customers in order to promote growth.
Also, they both understand the importance of profiling to balance supply chain initiatives
of lowering costs while maintaining a high level of service. Finally, the success of their
supply chain is due to using their IT capabilities for better visibility and efficient process
enablement, vendor collaboration initiatives, and the ability to leverage scale. These
themes show that although Wal-Mart and Amazon.com have different operating models,
supply chain themes regarding on-shelf availability, operational efficiency, process
profiling, partner collaboration, IT capabilities, and leveraging scale are common to both
companies.

Wal-Mart and Amazon.com Supply Chain Transferability

This section discusses the potential transferability of Wal-Mart and Amazon.com
supply chain practices between the two companies, the retail industry, and other
industries. Wal-Mart’s deep relationships with vendors with supply chain visibility,
vendor managed inventory, and co-managed inventory are principles that Amazon.com
could apply in streamlining their various operating models. Amazon.com’s consignment
inventory, as illustrated through drop shipments from book wholesalers directly to
customers, is a principle that Wal-Mart could apply to further enhance their vendor
relationships. Currently, Wal-Mart only performs consignment inventory for a limited
amount of products. The increased visibility offered by RFID could help support Wal-
Mart in vendor compliance and processes associated with consignment inventory.
Focusing on channel optimization, process differentiation by product type, and
“maestro” emergence (De Graves, 2004) are supply chain trends shown by Wal-Mart and
Amazon.com that are transferable within the retail industry and to other industries. Wal-
Mart’s supplier management innovations have changed traditional retailer and supplier
responsibilities, shifting responsibilities to those that can perform activities more
efficiently and cost-effectively, in order to benefit the entire supply chain. Wal-Mart’s
successes with global optimization illustrate the opportunity for the proliferation of
overall channel optimization among other industries. Product profiling and process
differentiation by product demand and physical characteristics can benefit other retailers
as well as companies in other industries. Understanding which products can flow through
the supply chain without being stored in inventory has helped Wal-Mart create and
sustain its competitive advantage. Amazon.com’s use of profiling and use of batch
processes for efficient outbound distribution helps reduce their cost and allows them to
 Chiles and Dau 13 of 14

operate a profitable internet retailing model. Finally, the emergence of “maestros” in the
retail industry, presents an opportunity for retailers and companies in other industries.
Maestros are third-party companies that coordinate relationships between smaller
suppliers and larger wholesalers or retailers. Maestros are emerging to assist smaller
suppliers with selling to Wal-Mart, managing Retail Link data, and providing better
service to Wal-Mart. Amazon.com’s intermediary model, where third-parties sell to
Amazon.com customers is an example of Amazon.com as a virtual trading company.
These companies can help retailers as well as companies in non-vertically integrated
industries such as automotive or high-tech in partner selection and collaboration.

Conclusion
Wal-Mart and Amazon.com compete in similar ways. Selection, convenience,
and price are both essential to these companies. Although their strategies are similar,
Wal-Mart’s primary operational goal is supply chain efficiency to drive costs down and
support their every day low price (EDLP) strategy. Amazon.com’s primary operational
goal is to provide a high level of service, where a customer can always find the product
for which they are browsing, and self-select the level of delivery service and cost they are
willing to incur. Additionally, Wal-Mart and Amazon.com’s different operating models
require different supply chain structures and processes to support their initiatives. Wal-
Mart’s capital investments in information technology and infrastructure, relationships
with vendors, and commitment to process efficiency through product profile analysis
support the efficiency, service, and asset utilization goals that they strive to balance.
Amazon.com’s use of scale, scope, and service through unique operating models,
partnerships, and supply chain process efficiencies enables them to provide selection,
convenience, and competitive pricing. Both these companies achieve supply chain
excellence through focusing supply chain initiatives on specific goals that support and
reinforce their long-term competitive business strategies.
 Chiles and Dau 14 of 14

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