Amazon Strategy Europe

Situation overview

In 2003, Amazon Europe was faced with the challenge of restructuring it's distribution network in order to meet growth demands. After five years of operations through three independently run organizations in the UK, Germany, and France, the company recognized the need to adapt it's business structure and positioning in the markets. Although many areas of the supply chain had already been optimized, there was significant room for further improvement. The European markets were expanding rapidly, and it was certain that the current structure would not be sufficient, even in the near future.

Amazon's objective in Europe

The original goal, set in 2002 at the US headquarters, was for Amazon Europe to "catch up" with the US operations by 2007. In order to reach the objective, three key measures were considered for implementation: expand the product offering (similar to the US range); realize new Marketplace activities (Amazon's platform for additional business sectors); introduce Amazon in additional European markets.

In considering one or more of the above options, the company was also faced with the task of determining the level of centralization for its activities. Depending on the specific construction of the network, there would be potential to bundle tasks which were being performed individually in each of the existing markets. The key would be to find the balance between utilizing synergies for efficiency and keeping sufficient flexibility in each country in order to tailor to market specifics.

Amazon's development in the U.S. as a model

Speed, simplicity, and enjoyment for the customer were the initial drivers for Amazon in the US in 1995, and upon its rapid success it soon claimed to be the "Earth's Biggest Bookstore". Inventories were kept at low levels, as the company depended on wholesalers to carry stock and supply books upon request. Soon there were direct relations with publishers, and although they proved not to be as efficient as the wholesales with regard to supply, their discounts were slightly higher. Typical order fulfilment times for Amazon customers ranged from four to seven days.

In the first three years of the company's existence, the Distribution Center capacities expanded, the number of titles in stock grew, and major investments were made in logistics (particularly back office). Delivery times were reduced and customer service was improved as a result of the expansion. As competion continued to intensify, Amazon pursued a massive growth strategy - in product selection as well as in physical infrastructure (6 additional DC's were opened). Similar supplier agreements were established for added product lines as was common for books, but by the end of 1999, the goal to "deliver at any cost" had countered this and many of the other cost-saving strategic tactics.

The next major focus for Amazon in the US market was to optimize its network operations. For the following three years, cost reductions were to be realized in stocking and shipping activities, while quality and service were improved. Processes specific to location, quantity, efficiency, and timing were streamlined with the assistance of IT systems and supplier integration. Drop shipping was implemented, as well as a technique termed "postal injection", both resulting in faster delivery to end customers. Parallel to these improvements, supplier relations were revamped and new partner alliances were created, which led to further cost savings and an extended product range.

In seven years, Amazon had grown from an internet bookseller based out of a small warehouse in Seattle, Washington to a premier supplier of a wide range of consumer goods via a network of major distribution outlets. One of the key factors to their success was the ability to adapt structually to changing demands of the market, while constantly improving the level of service to end customers. This was to serve as a model for pending modifications in the European distribution network.

Evaluation of alternatives for Europe

While it would be simple to apply similar tactics in Europe as were employed in the US market, it was soon clear that many of the factors which allowed for certain change in the US were not in place or available in Europe. Specific examples will be provided in the following descriptions of network restructuring alternatives.

In general, the European market was faced with a comparable situation as in the US - which products to offer, where to stock items in order to provide efficient delivery while keeping costs at a minimum, how to improve supplier relations, and of course what level of (de-)centralization to employ. One option would be to centralize operations in one of the current facilities, i.e. the UK, where all products for all markets would be procured, stored, packed, billed, and shipped. Marketplace activities would also be run at the EU headquarters, and regardless which new markets were to be entered, they would be served via the UK. Though this strategy certainly has advantages with regard to lower overhead costs, simplified internal communication, and increased bargaining power due to higher allocation volumes, the disadvantages would not be outweighed. Considering only the difficulties already encountered in attempting to coordinate national postal carriers for a trustworthy delivery service to international customers, the option to centralize delivery from the UK to all European markets would be a step in the wrong direction. This was a clear difference to the US market, where there was only one postal service serving the entire nation. Express delivery would further complicate matters, as European markets varied with regard to provider and service, another problem not encountered in the US. Since delivery time and quality are crucial to success at Amazon, this restructuring option was quickly eliminated from the list of alternatives.

The division of Europe into North/South or East/West sectors, to be served by two Distribution Centers, would likely reduce delivery times in many markets and eliminate some of the difficulties associated with the single DC alternative. Compared to the current structure, cost savings could be achieved and activities could be bundled according to regional demands or opportunities (i.e. legal or financial flexibility). This structure would emulate the solution realized in the initial growth period in the US, where a DC was located on each coast, however there would be similar problems as noted above with the coordination of national postal