Business, Butterflies, and the “Amazon Effect”

By Rosemarie Szostak, Ph.D., Nerac Analyst

Originally Published September 26, 2017

Chaos theory

Chaos theory proposes that a butterfly flapping its wings in South America can cause a tornado in Kansas. The “Amazon Effect” is when the digital marketplace grabs significant market share from brick-and-mortar stores. Like the butterfly, this ripples across the supply chain and can cause major chaos for unprepared industries.

Retailers

Retailers are looking to change their business models from traditional to e-commerce to stay competitive in our ‘generation now’ world where the better, cheaper, faster mantra is on steroids thanks to Amazon. Amazon is a consumer-driven, not product-driven company. What the customer wants now impacts the entire supply chain from fulfillment and distribution centers back to manufacturers and their suppliers.

Inventory

Inventory is not meant to languish in a warehouse somewhere to be replenished on a seasonal basis. In the Amazon model, occupied space is only for short periods of time to cut storage costs. Amazon tracks, categorizes, and optimizes its inventory by inventory demand.

The company has recently been granted a patent for predictive purchasing (US9639848, 05/02/2017). Large metadata sets with information on customers, their buying preferences, on-line shopping habits, and product reviews, are mapped, analyzed and modeled, to help drive product pricing, marketing, distribution, or acquisition decisions in real-time. Gone are the days of paper sales and supplier reports sent by snail mail. Amazon has moved the needle from data-entry to data analysis to instant track-and-adjust. Amazon continually populates its product pipeline and keeps it flowing. This is a task that is far from trivial but one that Amazon has appeared to master.

Manufacturers

For manufacturers, this change in the retail business model means that to compete, a manufacturer must also be integrated in an efficient and seamless manner.

1. Interconnection is key starting with the supplier and following through their entire supply chain to when the final product arrives at the customer’s door.
2. Operations must become as nimble in change-over as a zero-turn lawnmower, and
3. Operational bottlenecks are alleviated. This is critical when run change-outs are no-longer scheduled at set intervals, and shipments no longer go out the door at the end of the week but out the door several times a day.

Consumers are demanding low cost, high quality, and many times personalized products. And they want it now. Manufacturers who cannot contain costs and adjust to flexible operations may be left in the dust.

Amazon has focused time and effort in robotics, automation and software integration across its operations. Robotics in their warehouses and fulfillment centers alone saves them 20% in costs with significantly improved operational efficiency. It takes longer for the consumer to open the Amazon package delivered to their door than it did for a human in the fulfillment center to package it.

Suppliers

Suppliers will also feel the impact. Customer-centered e-commerce dictates how much product manufacturers need to make. Their suppliers need to work within that framework or risk losing business. Digital collaboration between suppliers and their customers is critical to ensure materials necessary for manufacturing are ready when needed.

Shipping

Shipping product from manufacturers to distribution and fulfillment centers to customers is trending to smaller units which can be disruptive to many manufacturers who are accustomed to the standard 5 pm pallet-of-pallets pick-up.

Packaging

Other things are changing too. Packaging design is key to brand recognition. Brands competed for the consumer’s eye on a shelf in traditional brick-and-mortar stores. The shelf is now a product thumbnail picture in e-commerce. The packaging is only part of the draw for the product. On-line product ratings and reviews, along with the product thumbnail, help drive whether the consumer will buy the item or not.

The World of Amazon.com

It’s not just a virtual storefront. It is a powerful search engine. Customers type in what they are looking for and the Amazon search engine populates the page with products that match. Search Engine Optimization (SEO) is now part of the tool kit for anyone selling on-line. Product ratings and number of reviews help prioritize the items shown to the consumer.

For many manufacturers and suppliers meeting the Amazon changes means embracing new ways of thinking and operating.

It is predicted that 85% of the world’s products could be available through Amazon.com in the future. If e-commerce wasn’t on the radar for your industry, you might want to rethink that. Walmart is. And now, with the purchase of the grocery chain, Whole Foods by Amazon, the food industry is sticking their toe into the water of e-commerce. How prepared are you?

How Can Nerac Help?

Nerac is a research and advisory firm that helps clients understand their business landscape from technology assessment to market understanding to intellectual property evaluation. Let us help your team identify potential opportunities, innovations and disruptive technologies that might prevent you from being ‘Amazoned.’

Call us at 860.872.7000 or click here to learn more!