# Lecture 9-10: Network Design - Fulfillment Strategies (Amazon/Walmart) **Date:** August 4-5 **Duration:** 2 sessions × 1.5 hours **Instructor:** Prof. Vivek Farias ---- manuel: look like portfolio - correlation? dim: how to think about - track what demand looks like (fill inventory based on online demand - can be ); investments pass gains to sales agent sandra: two trips of sales agent (can't transfer inventory); giving more inventory - when'd you want ⭐️sun~sat: replenishment is end of sat: tradeoff certainty vs midway of time? i like where your head is heading. why should we do more thanmon, su capex of runnig is 10million (15b $) - pay for smarter will payoff delayed 2-phase distribution works (savings from printing, other savings from freeing printing capacity) energy provider - (purchase; pay much more - hoarding) buy my stuff and sell (option market - ) cheap and can return (broader assortment, ) steph: it knows me, so i'm confident that i'd like that cristina: speed ## Aug 5 - amazon is compelling to buyers. assortment, data, subscription, delivery, review (prevent analysis paralysis using paradox of choice theory), building on modularized capability such as one click checkout - selling book, - chose bookstore with the vision of collecting data to learn how customers behave online - ⭐️high conviction from day 1. founders are obsessed (elon, jeff) - long term plans (no detail is small) - amazon is terrifying as it's conviction behind long term execution. evolution and development; they had luck that eventually made them successful, - major supply chain decision variables - location of warehouse, raw material suppliers, localization, promise time (standardize process), import location (port - eastern vs western; port of LA), - number of vehicles, dispatching, routing, intelligence investment (prediction, prescription) ⭐️may be better to claasify before eliciting answer distribution is last epoch, close to city as possible centralized: less inventory, pool risk, economies of decentralized: hub spoke (derek thinks solve key delivery time) - experiment in tail for free A100-B10-C1000 deliver faster to consumers as they have stores amazon curate product, selection system, more time, omni channel, curate products - walmart can figure out the right thing (cheap way of making) segmentation walmart has more money than time small things aren't gonna move consumer behavior 🗣️skill: WOULD LIKE TO REMOVE TEMU - CONFOUNDER OF OUR DISCUSSION last mile liquidity is expensive do it faster and you have stores that's why amazon bought wholefood (2017) price, assortment, customer experience, speed partnered with chile ---- ## Learning Objectives - Understand supply chain network design principles - Analyze centralization vs. decentralization trade-offs - Evaluate different fulfillment strategies in retail/e-commerce - Apply network design concepts to competitive strategy ## Case Studies - **Primary Case:** [[Lec9_Amazon_com_s_European_Distribution_Strategy.pdf]] (SKIM) ## Required Readings ### External Articles 1. **[Shopify-Deliverr Acquisition](https://finance.yahoo.com/news/shopify-completes-acquisition-deliverr-expand-200500915.html)** - **Key Points:** - Shopify acquired Deliverr to compete with Amazon's fulfillment network - Focus on faster shipping for independent merchants - Building alternative to Amazon FBA (Fulfillment by Amazon) - Strategic importance of fulfillment infrastructure 2. **[Walmart 2-Hour Delivery Strategy](https://www.supplychaindive.com/news/walmart-2-hour-delivery-last-mile/577183/)** - **Key Points:** - Walmart leveraging store network for rapid delivery - Store-as-fulfillment-center model - Competition with Amazon Prime delivery speeds - Last-mile delivery optimization 3. **[Target Tech-Enabled Store Fulfillment](https://www.supplychaindive.com/news/Target-tech-store-based-fulfillment-scale/573452/)** - **Key Points:** - Technology investment in store-based fulfillment - Ship-from-store capabilities - Inventory visibility across channels - Omnichannel fulfillment strategy ## Key Concepts ### Network Design Fundamentals - **Facility Location:** Where to place distribution centers - **Capacity Planning:** How much capacity at each facility - **Service Coverage:** Geographic reach and service levels - **Cost Optimization:** Balance of fixed and variable costs ### Trade-off Analysis 1. **Centralization vs. Decentralization** 2. **Cost vs. Service Level** 3. **Inventory vs. Transportation** 4. **Flexibility vs. Efficiency** ### Supply Chain Network Types - **Direct Shipment:** Manufacturer to customer - **Hub-and-Spoke:** Central distribution with regional delivery - **Cross-Docking:** Minimal storage, rapid transfer - **Multi-Echelon:** Multiple levels of distribution centers ## Amazon's Network Evolution ### Historical Development 1. **Early Stage:** Limited geographic presence 2. **National Expansion:** Cross-country distribution centers 3. **Regional Focus:** Faster delivery through proximity 4. **Local Fulfillment:** Same-day and instant delivery ### Current Network Architecture - **Fulfillment Centers:** Large automated warehouses - **Sortation Centers:** Package consolidation and routing - **Delivery Stations:** Last-mile distribution points - **Prime Air:** Drone delivery infrastructure (experimental) ### Competitive Advantages - **Scale:** Massive network investment - **Technology:** Automation and AI optimization - **Data:** Customer behavior and demand patterns - **Integration:** Seamless customer experience ## Walmart's Response Strategy ### Store-Based Fulfillment - **4,700+ Stores:** Existing infrastructure advantage - **Local Inventory:** Items already close to customers - **Curbside Pickup:** No delivery cost for customers - **2-Hour Delivery:** Competitive with Amazon Prime ### Supply Chain Integration - **Omnichannel:** Seamless online-offline experience - **Inventory Pooling:** Share stock across channels - **Local Sourcing:** Leverage existing supplier relationships - **Cost Advantage:** Lower investment than new DC network ## Target's Differentiation ### Technology-Enabled Stores - **Ship-from-Store:** Any store can fulfill online orders - **Buy Online, Pick Up in Store (BOPIS):** Convenience option - **Same-Day Delivery:** Through Shipt acquisition - **Drive-Up Service:** Contactless fulfillment ### Strategic Positioning - **Urban Focus:** Smaller format stores in cities - **Style Leadership:** Differentiation through design - **Technology Integration:** Digital-physical convergence ## Discussion Questions for Class ### Question 1: Amazon's European Strategy **Prompt:** Consider the following three options of designing Amazon's European distribution network: a. Keep the status quo (three decentralized DCs serving each country independently) b. Keep the existing DCs but centralize the management of them by possibly allowing a DC in one country to fulfill orders in another c. Combine all DCs into a single DC serving multiple countries What are the pros and cons of each strategy? What are the benefits and challenges of centralization? **Analysis Framework:** #### Option A: Status Quo (Decentralized) **Pros:** - Fast local delivery - Regulatory compliance easier - Language/cultural adaptation - Lower transportation costs within country **Cons:** - Higher inventory costs (no pooling) - Duplicated overhead - Limited product variety per DC - Inefficient capacity utilization #### Option B: Centralized Management **Pros:** - Risk pooling benefits - Better demand allocation - Economies of scale in purchasing - Flexibility in fulfillment **Cons:** - Increased complexity - Cross-border shipping costs - Customs and regulatory issues - Technology integration challenges #### Option C: Single European DC **Pros:** - Maximum pooling benefits - Lowest total inventory - Simplified operations - Scale economies **Cons:** - Longest delivery times - High transportation costs - Single point of failure - Regulatory complications ### Question 2: Competitive Response **Prompt:** What can WMT (Walmart) and TGT (Target) do to compete with AMZN (Amazon)? **Strategic Options:** #### Walmart Strategies: - **Leverage Store Network:** 4,700+ locations as fulfillment centers - **Grocery Integration:** Click-and-collect for grocery - **Price Competition:** Everyday low prices advantage - **Local Delivery:** Rapid fulfillment from nearby stores #### Target Strategies: - **Urban Strategy:** Small format stores in cities - **Style Differentiation:** Design-focused products - **Technology Investment:** Enhanced digital capabilities - **Partnership Strategy:** Collaborate with other retailers #### Common Approaches: - **Omnichannel Integration:** Seamless online-offline - **Last-Mile Innovation:** Drones, autonomous vehicles - **Subscription Services:** Compete with Prime - **Marketplace Development:** Third-party sellers ## Quantitative Analysis ### Network Optimization Models - **Facility Location Models:** P-median, P-center problems - **Transportation Models:** Minimum cost flow - **Service Level Constraints:** Coverage requirements - **Capacity Planning:** Economies of scale analysis ### Cost Structure Analysis - **Fixed Costs:** Facility investment and overhead - **Variable Costs:** Transportation and handling - **Inventory Costs:** Safety stock and cycle stock - **Service Costs:** Premium delivery options ### Performance Metrics - **Delivery Time:** Average and 95th percentile - **Fill Rate:** Order completion percentage - **Cost per Shipment:** Total fulfillment cost - **Inventory Turnover:** Asset efficiency ## Strategic Implications ### Competitive Dynamics - **First-Mover Advantage:** Amazon's early investment - **Network Effects:** Customer and seller attraction - **Scale Requirements:** Minimum viable network size - **Technology Arms Race:** Automation and AI ### Industry Transformation - **Customer Expectations:** Faster, cheaper delivery - **Supply Chain Reconfiguration:** Network redesign - **Technology Adoption:** Automation and robotics - **Sustainability Concerns:** Environmental impact ### Future Trends - **Autonomous Delivery:** Drones and robots - **Micro-Fulfillment:** Local storage facilities - **Predictive Shipping:** Pre-positioning inventory - **Circular Economy:** Reverse logistics integration ## Key Takeaways - **Strategic Message:** Explores the strategic choice between a decentralized (country-specific) and a centralized distribution network, balancing inventory costs, transportation costs, and customer service levels. - **Network Effects:** Supply chain network design creates competitive advantages that are difficult to replicate. - **Technology Enablement:** Modern fulfillment networks require sophisticated technology integration. - **Customer Centricity:** Network design must support evolving customer expectations. ## Preparation for Next Class - Review supply chain resilience concepts - Read [[Lec11_Nokias_Supply_Chain_Management]] - Consider risk management in global supply chains ## Recitation Support - **August 4:** Yedioth debrief and Littlefield simulation game introduction - **Focus:** Network design principles and simulation strategy - **Simulation Preparation:** Team formation and initial strategy development ## Teaching Notes - Use real-world examples to illustrate concepts - Emphasize strategic implications of network design decisions - Connect to previous inventory and capacity concepts - Prepare students for supply chain risk management topics - Highlight the competitive dynamics in retail fulfillment