Question

BUSINESS CASE

Amazon’s Invasion of the Bots

If you like instant tastebud gratification and live in one of the growing list of cities with Amazon’s one-hour restaurant delivery, life has become so much more gratifying. And if you live in one of the many locations where Amazon offers same-day delivery of merchandise, you may wait longer than an hour, but your goods will arrive at your doorstep that day.

We can thank Amazon’s army of Kiva robots for the speedy deliveries. These robots spend their days hauling very tall shelves of merchandise, weighing up to 700 pounds, to human “pickers” who assemble orders and to human “stockers” who sort incoming inventory.

By 2017 Amazon had more than 85,000 robots working in its 20 fulfillment centers, to help with distribution of the 5 billion items it shipped that year. Before the arrival of bots, human employees did this tedious work, often walking 10 to 15 miles daily, carrying heavy loads. Without humans walking miles to the merchandise, warehouse operations have become much more efficient. In addition, because robots don’t need aisles between shelves like people do, there’s more room for merchandise storage in Amazon’s fulfillment centers.

Over the past 20 years, Amazon has invested an enormous amount of money perfecting its warehouse management and order fulfillment operations to satisfy customers’ desire to receive their items quickly. The company’s spokesperson, Phil Hardin, explains the widespread use of robots this way: “It’s an investment that has implications for a lot of elements of our cost structure. It has been a great innovation for us, . . . and we think it makes our warehouses more productive.”

Analysts estimate that by using robots, Amazon has saved 48% of its costs of fulfilling an order. By late 2017 it was estimated that robots accounted for 20% of Amazon’s workforce.

And Amazon’s competitors have definitely noticed. More companies, particularly other big-name retailers like Staples and Walmart, are using robotic systems for fast order fulfillment to compete with Amazon’s speedy delivery times. However, with Amazon’s huge advantage, it remains to be seen whether these other retailers can catch up.

QUESTIONS FOR THOUGHT

1. Describe the shift in Amazon’s cost structure based on the concepts from this section. Is Amazon on a short-run or long-run cost curve? What are the relevant returns to scale in Amazon’s operations?
2. What are the pros and cons of Amazon’s strategy?
3. What advantage does a robotic system give Amazon over its rivals? How likely is it that they will catch up with Amazon? What market factors does it depend upon?

Answer 1

Amazon shifted from a variable cost structure to a fixed cost structure with investing more in warehouse management. This is done mainly by using robotic systems.

Thus we can say that Amazon is on a long run cost curve. There is a change in the proportion of fixed factors in the process.

Amazon will be experiencing increasing returns to scale. This is because the productivity has increased more than the proportionate increase in inputs.

The benefits of such a strategy is that

• it reduces the cost of the operations.
• It increases the productivity.
• Saves time. Roberts can do the job much faster and do not require any leave.

The drawbacks of the strategy are

• It reduces the employment opportunities- more people get unemployed with the introduction of robotic systems.

In fulfilling an order Amazon have saved 48% of the cost. This is the advantage that Amazon's strategy have over the rivals.

It is less likely that the other retailers may catch up with Amazon because it has many advantages. Amazon got more time for attracting the customers and winning their hearts. The brand is deeply embedded in the customers mind and it is very difficult to change the mindset of the people.

The rivals need to change their strategy and attract more customers inorder to catch up with Amazon. They have to offer the products to the customers in such a way that they are greatly satisfied.