TOPIC: INVENTORY MANAGEMENT IN AMAZON

Lecturer: Mr. Do Tien Minh

Course: TECHNOLOGY AND

OPERATIONS MANAGEMENT

Class: CityU10E

Student: Chu Thi Khanh Linh (CA10-130)

Le Thi Ngoc Anh (CA10-012)

Nguyen Thi Thuy Linh (CA10-137)

Nguyen Phuong Uyen (CA10-172)

Bui Thi Thuy Ngan (CA10-065)

 Table of Contents
I. Introduction.......................................................................................................................1
1.1. General information...................................................................................................1
1.2. Major business activities.............................................................................................1
1.3. Organization management structure...........................................................................2
1.4. Business performance.................................................................................................3
II. Managing inventory.............................................................................................................6
2.1. ABC analysis...................................................................................................................6
2.2. Record Accuracy at Amazon.........................................................................................10
2.3. Cycle Counting at Amazon............................................................................................11
III. Inventory models..............................................................................................................12
3.1. Holding, Ordering, and Setup Costs..............................................................................12
3.2. Inventory Models..........................................................................................................15
IV. Conclusions......................................................................................................................16
4.1. Strengths......................................................................................................................16
4.2. Limitations....................................................................................................................17
4.3. Lesson learned............................................................................................................17

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 I. Introduction

I.1. General information

- Amazon, founded in 1994 by Jeff Bezos, is an American multinational
technology company specializing in e-commerce, cloud computing,
digital streaming, and artificial intelligence. Amazon is one of the
largest technology companies in the world, with leading revenue and
market capitalization.

- In May 1997, Amazon went public. The following year, the company
also began selling video games, consumer electronics, home appliances,
software, games, and toys.

- In 2002, the corporation founded Amazon Web Services (AWS), which

provides data on website popularity, Internet traffic patterns, and other
statistics to marketers and developers.

- In 2015, through market capitalization, Amazon surpassed Walmart and

became the most valuable retailer in the United States.

- In 2017, Amazon acquired Whole Foods Market for $13.4 billion, which
significantly increased Amazon's presence as a brick-and-mortar retailer.

- In 2021, Amazon founder Jeff Bezos stepped down as CEO to take on

the role of executive chairman of Amazon and focus on new product
development. The CEO position was then given to Andy Jassy, Jeff
Bezos' right-hand man.

I.2. Major business activities

Amazon's business is based on the Internet and e-commerce, completely focused on

customers with its own logistics system, and in which any individual or company,
small or large, can sell their products through a 100% optimized and easy-to-use
platform where you can manage everything related to your account, brand and
products.

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Amazon has invested in many different industries, but the main areas they are
focusing on include:

● Technology: Amazon invests heavily in the information technology

sector, including servers, cloud, artificial intelligence and machine
learning.

● E-commerce: Amazon is one of the largest retailers in the world, with

online sales services ranging from books, electronics, food to household
goods and many other types of goods.

● Cloud Services: Amazon Web Services (AWS) provides cloud services,

including storage, computing, databases, machine learning, and more,
for businesses and individuals.

● Media and Entertainment: Amazon has expanded into the media and
entertainment space, including the production of film, television, and
video content through services like Amazon Prime Video.

● Healthcare: Amazon has begun expanding into the health and healthcare
space, including medical technology development services, as well as
medical and drug delivery services.

● Artificial Intelligence and Automation: Amazon is investing in research

and development in artificial intelligence and automation to improve its
processes and services.

Amazon's most important product is arguably its AWS (Amazon Web Services)
service. AWS is a comprehensive cloud computing platform that offers a wide range
of services such as virtual servers, data storage, databases, machine learning, artificial
intelligence, Internet of Things (IoT), and many more. AWS is not only a major
source of revenue for Amazon, but also one of the pioneers and leaders in the field of
cloud computing globally.

I.3. Organization management structure

- Organization chart

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Amazon is a largely hierarchical organization that combines functional teams and
geographic divisions. The most powerful part of Amazon’s organizational structure is
its global functional teams. Each major business function has its own dedicated team
headed by an executive-level manager.

- Human resource structure

Amazon’s hierarchy is represented as a global system with clear lines of authority that
greatly influence the company’s operations. Jeff Bezos exercises ultimate control over
all executives and senior managers. These in turn impose directives through the areas
under their control at their own discretion or at the direction of Jeff Bezos. These
directives impact all relevant offices of the company around the world.

I.4. Business performance

- Revenue:

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The chart shows a steady increase in revenue over the three-year period from 2021 to
2023. Revenue grew from $469.822 billion in 2021 to $513.983 billion in 2022,
followed by a further increase to $574.785 billion in 2023. This suggests a positive
and upward trend in the company's financial performance.

- Operating costs

The chart depicts a gradual but consistent growth in operating costs from 2021 to
2023. While the rate of increase fluctuated slightly between years, the overall
trajectory indicates a positive trend. The company experienced a notable increase in
operating costs from 2022 to 2023

- Profits

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The company's profits experienced a significant increase from 2021 to 2022, reaching
$225.152 billion. This was followed by another substantial growth in 2023, with
profits hitting $270.046 billion. This indicates a strong upward trend in the company's
financial performance over the past three years.

- ROA, ROE

Significant Decline in ROA: The ROA, which measures a company's profitability

relative to its total assets, has experienced a sharp decline from 8.98% in 2021 to a
negative value of -1.98% in 2022. This indicates a substantial deterioration in
Amazon's efficiency in utilizing its assets to generate profits. A negative ROA
suggests that the company is losing money on its assets. Recovery in ROA but still

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Below 2021 Levels: In 2023, the ROA rebounded to 6.22%, indicating some
improvement. However, it remains significantly below the 2021 level, suggesting that
the company still faces challenges in optimizing its asset utilization.

The ROE, which measures a company's profitability relative to shareholders' equity,

also experienced a decline from 27.98% in 2021 to -0.63% in 2022. This suggests that
the company's ability to generate profits from the investments made by its
shareholders has weakened considerably. However, in 2023, the ROE recovered to
17.19%, indicating a partial recovery.

II. Managing inventory

2.1. ABC analysis

ABC classification is a method Amazon uses to categorize its inventory based on the
significance of each item to overall revenue, following the Pareto Principle. This
classification allows Amazon to prioritize higher-value, higher-demand items while
allocating fewer resources to less critical products.

Category A: High-Demand, High-Value Items

● Examples of Products:

○ Electronics such as laptops, smartphones, and tablets.

○ Popular household items like kitchen appliances, detergents, and

cleaning supplies.

○ High-selling books, video games, and fitness equipment.

○ Amazon-branded products, such as Echo devices, Fire tablets, and

Kindle e-readers.

● Management Strategy:

○ Inventory Control: Amazon keeps these items in accessible locations

within fulfillment centers to ensure quick picking and packing.

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 ○ Frequent Restocking: To prevent stockouts, Category A items are
replenished regularly, based on advanced demand forecasting that uses
machine learning to predict customer purchase patterns.

○ Automated Monitoring: Amazon uses real-time inventory tracking

systems, with frequent updates, to ensure stock accuracy and reduce
delays for these high-demand products.

● Statistics:

○ While exact internal data on Amazon’s ABC classifications aren’t

publicly disclosed, high-demand items are estimated to make up around
20% of Amazon’s total product assortment, potentially accounting for
up to 80% of the total revenue (Chopra & Meindl, 2020).

○ Amazon’s own products (e.g., Alexa-enabled devices) frequently rank in

Category A, as these are priority products with high sales volume, and
they are heavily promoted during Amazon sales events, such as Prime
Day (Business Insider, 2023; Insider Intelligence, 2024).

Category B: Moderate-Demand, Moderate-Value Items

● Examples of Products:

○ Seasonal items, such as holiday decorations and outdoor equipment.

○ Mid-range electronics accessories like headphones, chargers, and cases.

○ Home improvement tools and smaller appliances, such as blenders or

coffee makers, which have steady but moderate demand.

○ Branded clothing items that may not be in Amazon’s top-selling

categories but still contribute significantly to the overall assortment.

● Management Strategy:

○ Flexible Stock Levels: Stocking levels for Category B items are often
adjusted seasonally or based on observed demand patterns, reducing
excess inventory while still maintaining a buffer.

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 ○ Moderate Monitoring: These items undergo regular but less frequent
inventory checks than Category A items.

○ Strategic Placement: Category B products are stored in accessible areas

but may be slightly further from the primary picking zones than
Category A items, balancing efficiency with storage costs.

● Statistics:

○ Category B items likely represent around 15-25% of Amazon’s total

stock, contributing 10-15% of total revenue (ClicData, 2023; Finale
Inventory, 2023).

○ Amazon’s demand forecasting system considers these items’ historical

trends, predicting peaks and dips to maintain optimal stock levels
without creating excess (ClicData, 2023; Finale Inventory, 2023).

Category C: Low-Demand, Low-Value Items (Long-Tail Products)

● Examples of Products:

○ Niche books, less popular video games, or rare music records.

○ Specialized tools or parts, such as replacement screws, adapters, or

mechanical parts.

○ Hobby items, such as specific crafting tools or limited-edition

collectibles, with sporadic demand.

○ Niche household items, like particular cleaning products or cookware,

that have limited appeal.

● Management Strategy:

○ Minimal Stock Levels: Amazon may keep only one or two units of these
products in stock or rely on third-party sellers through the Fulfilled by
Amazon (FBA) service to maintain availability without holding the
inventory directly.

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 ○ Infrequent Reordering: Reordering for Category C items happens on an
as-needed basis, often triggered by customer purchases rather than
routine restocking.

○ Cost-Effective Storage: These items are typically stored in less

accessible locations in the warehouse or handled directly by FBA
sellers, which helps Amazon reduce storage costs and operational
expenses.

● Statistics:

○ Category C items are estimated to make up around 50-60% of Amazon’s

inventory catalog but may contribute only 5-10% of the revenue.

○ This “long-tail” inventory strategy allows Amazon to fulfill niche

demands, enhancing customer satisfaction without burdening Amazon’s
direct inventory management system (ClearSpider, 2024; Finale
Inventory,2023 )

Strategic Insights and Impacts on Amazon’s Inventory

● High Inventory Turnover for Category A: Amazon’s sophisticated inventory

turnover rates, especially for Category A items, align with industry reports that
show Amazon’s turnover ratio is around 8-10 times per year—meaning these
items move quickly from storage to shipment (Muharremoglu, 2023; Amazon
Science, 2023).

● Operational Efficiency: According to estimates, Amazon’s approach to

inventory, including its ABC analysis, has contributed to reducing costs by
approximately 5-10% annually due to optimized stock levels, efficient
warehousing, and reduced labor (Amazon Science, 2023).

● Customer Satisfaction: By ensuring stock availability for Category A and B

items, Amazon enhances its customer experience, maintaining its high
customer satisfaction score, which frequently exceeds 80% according to
surveys (RockContent, 2023).

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2.2. Record Accuracy at Amazon
Record accuracy is essential to avoid the problems associated with stock
discrepancies, which can lead to stockouts, overstock situations, or incorrect
deliveries. For Amazon, high record accuracy is necessary to support its rapid
fulfillment goals, as errors in inventory records can slow down order processing,
increase costs, and damage customer trust.

● Methods of Ensuring Record Accuracy:

○ Barcode and RFID Scanning: Every item in Amazon’s inventory is

tagged with a barcode or RFID chip, allowing items to be scanned at
each point in the fulfillment process. This automated system reduces
human errors and keeps digital records in sync with physical inventory.

○ Real-Time Data Synchronization: Amazon’s inventory management

system updates in real time whenever an item is moved, packed, or
shipped. This continuous update process prevents lag between physical
and recorded stock levels, keeping accuracy high.

○ Warehouse Robotics (e.g., Kiva robots): Amazon employs robotics for

sorting, locating, and moving items within its warehouses. These robots
help minimize human errors associated with manually moving items and
reduce the likelihood of misplaced stock.

○ Machine Learning Algorithms: Amazon uses machine learning to

predict demand and detect potential discrepancies between recorded and
actual stock. These algorithms flag items that may have accuracy issues
or are frequently miscounted, allowing targeted reviews to keep records
precise.

● Statistics on Record Accuracy:

○ While exact record accuracy percentages are not public, Amazon’s

system is believed to maintain accuracy levels above 99% in its
fulfillment centers due to its real-time monitoring and automated
tracking systems (NetSuite, 2021; Amazon Science, 2023).

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 ○ Amazon’s error rate for fulfillment, largely due to precise inventory
control, is reported to be exceptionally low—helping keep customer
satisfaction high with fewer order issues (NetSuite, 2021; Amazon
Science, 2023).

2.3. Cycle Counting at Amazon

Rather than performing a full inventory count, which is costly and disruptive, Amazon
uses cycle counting to audit inventory continuously. Cycle counting involves counting
selected items on a rotating schedule, enabling Amazon to detect and correct
discrepancies frequently without interrupting operations.

● Implementation of Cycle Counting:

○ Automated and Regular Checks for High-Value Items: Amazon

typically applies cycle counting to high-priority items (Category A)
more frequently than to lower-priority items. For these items, cycle
counts may be performed daily or weekly, often through automated
scans.

○ Targeted Counting for Risk-Prone Items: Amazon’s machine learning

models identify “at-risk” items—those with a history of frequent
discrepancies or high movement rates. These items are prioritized for
more frequent cycle counting, enabling quick resolution of any record
inaccuracies.

○ Counting Zones: Amazon’s fulfillment centers are divided into zones for
efficient management, and cycle counting is organized based on zones.
This allows Amazon to audit inventory in smaller, manageable sections,
reducing disruption and increasing accuracy.

● Statistics and Outcomes:

○ According to logistics studies, companies using cycle counting generally

see inventory accuracy improvements of around 10-15%. With
Amazon’s robust automated systems, its cycle counting process likely

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 maintains accuracy levels well above the industry standard (LMA-
Consulting Group, 2015; Anderson, 2024).

○ Cycle counting has contributed to Amazon’s reputation for fast, reliable

deliveries. High record accuracy through cycle counting supports
Amazon’s 1- to 2-day delivery guarantees, reducing the chances of
missing stock and delayed shipments (LMA-Consulting Group, 2015;
Anderson, 2024).

● Continuous Feedback and Improvement: Amazon’s cycle counting data feeds

back into its inventory management algorithms, helping to refine and adjust
strategies for specific products. Over time, this feedback loop improves both
accuracy and operational efficiency.

III. Inventory models

3.1. Holding, Ordering, and Setup Costs

3.1.1. Holding cost:

● Warehouse Costs:

○ Rent or Building Depreciation: For leased warehouses, rental costs are

significant; for self-owned warehouses, asset depreciation costs are
included.

○ Operating Costs: This includes electricity, water, cooling systems, and

other utilities.

○ Taxes and Insurance: Property taxes and insurance costs for

infrastructure and goods.

● Material Handling Costs:

○ Handling Equipment: Investments in equipment like conveyors, Kiva

robots, forklifts, and automation systems.

○ Equipment Operating Costs: This includes power consumption,

maintenance, and repair costs.

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 ○ Material Consumption Costs: Costs for packaging materials and product
protection.

● Labor Costs:

○ Receiving and Warehousing Staff: Labor costs associated with

receiving, inspecting, and storing goods.

○ Security and Protection: Costs for maintaining security and safety within
the warehouse.

○ Training and Development: Investments in training employees to

improve work efficiency.

● Investment Costs:

○ Capital Borrowing Costs: Interest paid on loans used to purchase

inventory.

○ Inventory Tax and Insurance: Costs related to safeguarding the value of

goods against risks like fire, theft, or natural disasters.

○ Opportunity Cost of Capital: The capital locked in inventory cannot be

used for other investments.

● Shrinkage and Obsolescence Losses:

○ Shrinkage: Losses due to theft, damage, or management errors.

○ Obsolescence: Goods lose value due to market trend changes, especially

critical in technology and fashion sectors.

● Application in Amazon’s Management:

○ Automation Technology: Using robots and intelligent warehouse

management systems to increase efficiency and reduce labor costs.

○ Forecasting and Data Analysis: Using AI and big data analytics to

forecast demand, minimizing excess inventory.

○ Flexible Supply Chain Management: Adopting the Just-In-Time (JIT)

model and collaborating closely with suppliers to optimize inventory.

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 ○ Fulfillment by Amazon (FBA) Program: Shifting a portion of storage
costs to third-party sellers.

3.1.2. Ordering cost

● Processing Costs from Suppliers:

○ Order Management: Time and resources dedicated to creating,

confirming, and tracking orders.

○ Supplier Negotiation and Management: Costs related to maintaining

relationships with thousands of suppliers worldwide.

● Inbound Shipping Costs:

○ Transporting Goods to Warehouses: Cost of transporting goods from

suppliers to Amazon’s distribution centers.

○ Customs and Import Taxes: Amazon must pay these fees for imported
goods.

● Inspection and Receiving Costs:

○ Quality Control: Ensuring received goods meet quality and quantity

standards.

○ Document Handling: Costs associated with processing invoices,

documentation, and other administrative procedures.

Managing and Optimizing Amazon’s Ordering Costs:

● Close Collaboration with Suppliers:

○ Vendor-Managed Inventory (VMI): Allows suppliers to manage

inventory at Amazon’s warehouses, reducing ordering costs.

○ Strategic Partnership Programs: Building long-term partnerships for

better prices and favorable conditions.

● Optimizing the Logistics Network:

○ Consolidation Centers: Using consolidation centers to optimize inbound

shipping.

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 ○ Cross-Docking: Reducing storage time by moving goods directly from
receiving areas to shipping areas.

3.1.3. Setup cost

● Warehouse Preparation: Costs related to organizing, sorting, and preparing

storage space for new products. This ensures efficient storage, easy access, and
reduced order processing time.

● System Setup: Costs of configuring warehouse management and operational

systems to handle new products or special promotions. Amazon needs to
update software, integrate data, and adjust processes to meet new business
demands.

● Employee Training: Training costs for staff on handling and managing new
products or operational changes. This includes training on new technology,
safety protocols, and efficient working methods.

3.2. Inventory Models

Amazon likely uses various inventory models to determine optimal stock levels. These
models consider factors like demand variability, lead times, and holding costs.

Some potential models include: Economic Order Quantity (EOQ), Just-In-Time (JIT),
Safety Stock.

 Basic economic order quantity (EOQ) model

While Amazon doesn't publicly disclose its exact inventory management strategies,
it's reasonable to assume they employ a combination of advanced techniques,
including the EOQ model, to optimize their vast inventory. Amazon uses the EOQ
model to manage its inventory effectively. By calculating the EOQ, Amazon can
determine the most cost-effective quantity of an item to order at a given time. This
helps the company to minimize its inventory costs while ensuring that it can meet
customer demand. Here's how they might apply EOQ:

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 + Demand Forecasting: Amazon uses machine learning algorithms and historical
data to predict future demand for different products. This helps the company to
determine how much stock to order and when to order it.

+ Cost Minimization: The EOQ model helps Amazon to minimize its total
inventory costs. By ordering the optimal quantity of stock, the company can
reduce its holding and ordering costs.

+ Customer Satisfaction: By ensuring that it has the right amount of stock,

Amazon can meet customer demand and avoid stockouts. This helps to
improve customer satisfaction and loyalty.

 Just-In-Time (JIT):
Aims to minimize inventory levels by producing or procuring goods only as needed.
For products sourced from manufacturers or suppliers, Amazon works with partners to
ensure that goods are delivered on time to its fulfillment centers. Instead of purchasing
large quantities in advance, Amazon often places smaller, more frequent orders based
on real-time demand. This allows the company to avoid tying up too much capital in
inventory.

 Stock Protection for Popular Items:

For high-demand products or items with unpredictable demand, Amazon uses safety
stock or buffer inventory to ensure that stockouts don’t occur. The level of safety
stock varies by product type and is adjusted based on the expected variability in
demand and lead time.

IV. Conclusions

4.1. Strengths
● Optimize overall costs

EOQ helps Amazon optimize the amount of stock ordered to balance ordering costs
and storage costs, thereby reducing overall inventory costs. This is especially useful
for Amazon, which has a large order volume and a diverse product portfolio.

● Resource Optimization
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EOQ and ABC Analysis help Amazon adjust optimal order quantities and prioritize
resources for important products. With ABC Analysis, Amazon categorizes products
into groups A, B, and C, ensuring that high-value, high-demand products are always
available.

● Continuous and accurate inventory

Using Record Accuracy and Cycle Counting helps ensure that actual inventory
quantities always match data, thereby supporting efficient inventory management and
replenishment ordering.

● Efficiency and flexibility in the supply chain

Combining EOQ and ABC Analysis with automation allows Amazon to easily plan
supply and adjust to actual demand

4.2. Limitations
● High complexity in management

With very large and complex product portfolios, maintaining both EOQ and
ABC Analysis can require a lot of resources and robust management systems,
especially when it comes to detailed analysis and management.

● Depends on the accuracy of demand forecasts

EOQ and ABC Analysis work well when demand forecasts are accurate.
However, when demand changes suddenly, Amazon can have difficulty
adjusting inventory, especially for less popular products (B and C categories).

● Requires investment in technology and human resources

The combination of multiple methods requires strong automation systems and a

large workforce to ensure the process is accurate and continuous. This also
leads to higher operating costs.

4.3. Lesson learned

● Apply automation and data analytics:

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Improve efficiency by using automation and big data analytics, ensuring that
processes from EOQ, ABC Analysis, to Record Accuracy and Cycle Counting are
synchronized and operated automatically.

● Prioritize checking high-value products:

Cycle Counting should focus more on products in group A in ABC Analysis, as these
are high-value products and need to be maintained in stock.

● Increase training and team development:

Managing complex processes requires highly skilled human resources. Investing in

training and team development is necessary to ensure the process is accurate and
efficient.

● Implement flexible monitoring and adjustment:

To cope with fluctuations in market demand, Amazon should combine EOQ and ABC
Analysis with flexible demand forecasting methods, to quickly adjust inventory levels
when needed.

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