Friday, November 3, 2017

Amazon Universe: The Evil Empire or a Brave New World of Opportunity? (And an Upside Down Sourcing World)

1. Brave New World

The Evil Empire. The 800 pound gorilla. The elephant in the room. These are but a few of the phrases used lately, to refer to Amazon, by the many who have been left to eat its dust.

So is that it? Amazon is some evil conspiracy to take everybody’s business for themselves, leaving nothing but a barren wasteland for those who fell behind.

What we commonly refer to as “Amazon” was worth $135.99 billion in revenue in 2016. Compare this to Walmart at $482.1 billion and Costco at $118.72 billion.

So what is this creature that took over our world and why did it happen?

AS proven in my last article, from an evolutionary business standpoint, Amazon did not just appear; it EVOLVED with the enabling technology. It is not the problem-it is the most successfully evolved company- THE EVOLUTION SOLUTION.

Amazon is much more than the monolithic force it appears to be. WE always use the collective “Amazon”, but there are many elements to this business. Let’s take a look:

Of the whole of global revenues in 2016, about $91 billion is from Amazon itself, selling its products directly (whether Amazon private label, or other brands selling TO Amazon); 22.99 billion was generated by the Amazon Marketplace, third party sellers selling THROUGH (not TO) Amazon; most of the balance of revenue was generated by AWS (Amazon Web Services) including Amazon fulfillment.

The Marketplace segment was comprised of more than 2 million sellers worldwide, selling their product THROUGH the website. While some reached $10 million, the raw number is $22.9 billion volume/2million sellers-$11,450 average per seller.

So this “monolith” now looks like a community where even the smallest sellers can market their product. Conversely to the world of Walmart, where a half million square feet store presents “everything”, to the detriment of local and neighborhood business, Amazon has offered the opportunity to more than 2million entrepreneurs, family businesses, small enterprises worldwide (more than 100 countries) to be successful; one cannot imagine another affordable route to success for them if not for this Marketplace.

Amazon will even warehouse and ship the goods for these small sellers (FBA-Fullfilment by Amazon).

Then, a whole new industry has evolved strictly devoted to helping these 2 million sellers manage their business- Repricers, SEOs, 3PL, even sourcing the product itself.

Not to mention the nascent industry and opportunity for other companies to copy Amazon and to build web sites based on the Amazon model just to handle overload and growing business.

Oh, and Amazon Smile has given more than $62million to various charities based on subscriber purchases.

All of a sudden the Evil Empire looks like the Happy Kingdom. Not to those who slept or failed to evolve while it was growing. Happyness is to those who have or have had the sense and foresight to benefit from this model, and all of those who benefit from the beneficiaries.

2. And An Upside Down Sourcing World

But how about sourcing? The $22.9 billion and growing of marketplace 3rd party sellers is composed of products that need to be made and delivered. Gone are the days where sourcing was about a few big companies making lots of the same thing in the same color and that was about all she wrote for the sourcing market. Now we face sourcing $22.9 billion, literally hundreds of thousands of SKUs, from 2 million different sellers (just Amazon sellers, there are more). How many SKUs do you figure that amounts to?

So the Amazon effect, as well as the effect of fast fashion like Inditex (we will deal with that in a later piece) is MORE SKU and LESS QUANTITY/SKU. So how does a factory or those in the business of sourcing for others, like Li&Fung, deal with this? Take as a given that most of these small sellers have little idea how to source and manage a product. It is not easy to switch entire industries or portions thereof from a volume-based model to a style-based model.

In a recent article in Sourcing Journal, Rick Darling, Executive Director of Li & Fung, was candid:

“Amazon quantities, Kohl’s quantities, Macy’s quantities, are all coming down per style and their SKU counts are all broadening, some more extreme than others. And that’s not being driven by their choice to control inventory, it’s being driven by consumers’ demand to get things faster, quicker and more unique than they ever had in the past,” Darling said. “And the reality is, while that’s happening and retailers buy less product and they need to do it faster and they need to do it in smaller quantities, none of us, and I will say none of us—including Li & Fung, who’s supposed to be the supply chain leader—really has a supply chain that’s been built for that.”

Clear. And True. The entire supply chain and sourcing process has been turned on its ear. EVERYTHING needs to be renewed-people, procedures, systems, factories and factory business models, transportation (less full containers for sure), logistics. All to get a product that the consumer wants quickly, and likes to see (in fashion) renewed every couple of weeks, without any compromises to quality, for the right price. Ummm..

That is a huge challenge and a huge opportunity for Amazon, especially its marketplace sellers. Amazon would be wise to open multiple sourcing offices around the globe based on the processes and technology needed to support this new world. But I dare say even Amazon has no solid processes in place to deal with this new world of sourcing.

BTW—Inditex has already figured this out. But they’re not telling us how.

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