Monday, January 20, 2014

Amazon knows what you want… before you know!

Companies “duel and fight” against competitors to achieve a dominant position on the market.
In order for their supply chain (SC) to be effective, companies must accurately estimate customers’ expectations, so that their SC performance can be made consistent with such expectations As shown in the graph below, companies decide the strategy of their SCM based on the characteristics of customers’ demand, and specifically on its degree of uncertainty: a responsive supply chain is fit for an uncertain demand, as its strength resides in adapting quickly to an evolving demand, while an efficient supply chain, which aims at lowering costs, is a better fit for a certain demand.

Market research represents a fundamental aspect of estimating customers’ expectations. Therefore, companies invest a considerable amount of money in collecting as much data as possible on customers’ demand, in order to reduce the uncertainty around it. One of these companies, Amazon, makes of customers’ data one of its main strategic advantages over the competitors. As this article suggests, Amazon has just “gained a new patent for "anticipatory shipping," a system that allows Amazon to send items to shipping hubs in areas where it believes said item will sell well.” Amazon bases selling projections not only on actual purchases, but also “on previous searches and purchases, wish lists, and how long the user's cursor hovers over an item online.” The amount of data that Amazon is collecting about its users is truly unprecedented. Together with the obvious data regarding items purchased and personal information (such as name and address), technology allows for the quick and cheap collection of metadata as well (day, time and place of Internet navigation or transactions, type of machine used while visiting the website, preferred browser, list of items seen, preferences of the user and, if she connects via Facebook or advertises her purchases on social media, preferences of her friends, and so on), which contribute to generate richer and more detailed user profiles. The estimation of demand can thus be quite accurate, and when it works well, customers  will receive the desired product more quickly and their level of satisfaction and loyalty to the company will increase. The flipside, of course, is that predictions of demand may be incorrect and “such a scenario might lead to unwanted deliveries and even returns, but Amazon seems willing to take the hit.”

The strategy that Amazon wants to focus on may be valid because it reduces delivery times and makes the whole delivery process more efficient, but if demand is uncertain, estimates may be considerably off and packages may have to be shipped back, with an avoidable waste of money. 

Do you think Amazon can predict demand accurately enough to profitably rely on efficiency (rather than responsiveness) in their SC? Besides, will customers be happy to know that even information on where they hover their mouse is being collected, stored and used strategically for the profit of company? What do you think?

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