Evolution of Retail Supply Chains
S. Chopra
Kellogg School of Management
11/24/2014
S. Chopra / Transportation Summit
1
Evolution of Retailing
How We Bought Books in the U.S.
2010
11/24/2014
S. Chopra / Transportation Summit
2
Evolution of Retailing
How We Rented Movies
2010
11/24/2014
S. Chopra / Transportation Summit
3
Evolution of Retailing
How We Purchased Electronics
2009
11/24/2014
S. Chopra / Transportation Summit
4
Amazon Shops for Real Estate in NYC
David Streitfeld and Charles Bagli, 10/9/2014
Amazon is taking over an entire building on 34th street across
from the Empire State Building,…
The retailer has no brick-and-mortar presence in Manhattan, or,
for that matter, anywhere else. So the deal ignited intense
speculation that perhaps Amazon was going to do something
that has been endlessly rumored: open an old-fashioned store.
11/24/2014
S. Chopra / Transportation Summit
5
Some Comparisons in Diamond Retailing
11/24/2014
S. Chopra / Transportation Summit
6
Some Comparisons in Diamond Retailing (2012)
Hard to be in the middle
Low Cost / Price
Gross Profit
SG&A
Inventory Turns (COGS)
PP&E Turns
Gross Profit
SG&A
Inventory Turns (COGS)
PP&E Turns
18.8%
15.7%
9.76
50.63
51.5%
48.4%
1.22
15.29
High Margin: Customer willing to pay
Gross Profit
SG&A
Inventory Turns (COGS)
PP&E Turns
11/24/2014
59.0%
39.6%
0.72
4.75
S. Chopra / Transportation Summit
7
Centralization vs. Decentralization
Slow Moving
Unpredictable
{High value}
11/24/2014
Centralized
Inventories
Decentralized Inventories
Low cost
Customer willing to pay
premium?
S. Chopra / Transportation Summit
8
Online vs. Brick-and-Mortar (contd.)
# of DCs: 76
Net Income: -39 million
Gross Profit
SG&A
Inventory Turns (COGS)
PP&E Turns
24.7%
23.6%
7.67
8.65
# of stores: 622
Net Income: 2.8 billion
Gross Profit
SG&A
Inventory Turns (COGS)
PP&E Turns
12.6%
9.6%
11.65
7.56
Why does Costco have a lower cost structure than Amazon even though it is decentralized?
11/24/2014
S. Chopra / Transportation Summit
9
Comparing Costco and Amazon
My Costco list included the following: Huggies diapers, Tide powder, Bounty paper towels,
Swiffer refills, Clorox wipes, Ziploc sandwich bags and enough Duracell batteries to power
multiple electronic devices for many months.
There was also Dove soap, Lubriderm lotion, Tampax, Mach 3 Turbo razor blades and enough
house brand ibuprofen to kill off hundreds of headaches, among other things.
“Adding it Up: Amazon Ship vs. Costco Shop” by Ron Lieber, New York Times, March 4, 2011
11/24/2014
S. Chopra / Transportation Summit
10
Comparing Costco and Amazon
So what does that 15 percent discount (through the Amazon subscription) get
you? My sample basket of goods, enough for a three-month supply for a family
of four, cost $251 at Amazon. At Costco, it was $208, representing a 17 percent
savings.
Costco was tied or cheaper on every item, occasionally by a lot. Amazon, for
instance, isn’t competitive on large containers of cleaning liquids of various
sorts, since it’s just too expensive to ship those sorts of things.
“Adding it Up: Amazon Ship vs. Costco Shop” by Ron Lieber, New York Times, March 4, 2011
11/24/2014
S. Chopra / Transportation Summit
11
How Many Diapers Does Costco Sell?
How many of each of the following does Costco sell:
Huggies diapers, Tide powder, Bounty paper towels, Swiffer refills, Clorox
wipes, Ziploc sandwich bags
All are fast moving, predictable products.
11/24/2014
S. Chopra / Transportation Summit
12
Centralization vs. Decentralization (contd.)
Gross Profit
SG&A
Inventory Turns (COGS)
PP&E Turns
24.7%
23.6%
7.67
8.65
Gross Profit
SG&A
Inventory Turns (COGS)
PP&E Turns
Outbound shipping costs matter (especially
for fast moving products) – 8.4% of sales
12.6%
9.6%
11.65
7.56
Fast moving products need
fewer days of inventory
Why does Costco have a lower cost structure than Amazon even though it is decentralized?
11/24/2014
S. Chopra / Transportation Summit
13
Amazon Annual Reports – 2010 to
2012
Supplemental Information
Supplemental information about shipping results is as follows (in millions):
Year Ended December 31,
2012
2011
2010
Shipping Activity:
Shipping revenue
$ 2,280
$ 1,552
$ 1,193
Outbound shipping costs
(5,134)
(3,989)
(2,579)
Net shipping cost
$(2,854)
$(2,437)
$(1,386)
Percent of Net Sales:
Shipping revenue
Outbound shipping costs
Net shipping cost
11/24/2014
3.7%
(8.4)
(4.7)%
3.2%
(8.3)
(5.1)%
3.5%
(7.5)
(4.0)%
2012 UPS Annual revenues = $54,127
Amazon outbound shipping cost = 10% of
UPS annual revenues!!
S. Chopra / Transportation Summit
14
Centralization vs. Decentralization: The danger
of the middle path
Centralized
Inventories
Decentralized Inventories
Fast Moving Predictable
{Low value}
Customer willing Low cost
to pay premium?
Slow Moving Unpredictable
{High value}
Low cost
Customer willing to pay
premium?
Amazon customers currently
pay little premium for fast
moving products
11/24/2014
S. Chopra / Transportation Summit
15
How Could Omni-Channel Supply Chains
Function?
Centralized Inventories
Decentralized Inventories
Fast Moving Predictable
{Low value}
Customer willing to pay
premium?
Low cost
Slow Moving Unpredictable
{High value}
Low cost
Customer willing to pay
premium?
• How to explain the success of Apple retail and the failure of Gateway country stores?
• How to explain the failure of blockbuster and the success of both Netflix and Redbox?
• Should Amazon open retail stores? If so, how should it use them?
11/24/2014
S. Chopra / Transportation Summit
16