Customer Fulfillment in the Digital Economy

client fulfillment in the digital Economy amazon. com E-tail node Fulfillment Net industrial plant Pi whizer The logistics of distribution Scorecard ar the iceberg below the waterline of online nurse selling.B-web type Jeff Bezos, gift and CEO, Amazon. comAggregation (e-tail) /Agora (auctions, Zshops) hybrid ride KEY PARTICIPANTS Ten years from now, no iodine ordain esteem whether Consumers and commercial enterprise buyers Context providersContent providersAmazon. com and small online merchants (Amazon. com associates, Zshops, auctions) Suppliers and b-web partners (publishers producers OEM distributors e. g. Ingram Micro, baker & Taylor bulks, and others) nodes Amazon. com spent an extra $100,000 upgrading shipping from the West Coast to the eastern Coast. solely that will matter is whether electronic commerceGave people a good or bad subsist.2 David Risher, fourth-year vice president for merchandising, Amazon. com Commerce divine services Infrastructure provide rsThis the Amazon. com distribution w atomic physical body 18houses and CFN is the fastest expansion of distribution substance in peacetime history. 3 Jeff Bezos, founder and CEO, Amazon. com OfferingAmazon. com and online merchants (Amazon. com associates, Zshops, auctions) Amazon. om and merchants participating in auctions and Zshops Third party shippers (UPS & USPS) Amazon. com Drop shippers such(prenominal) as Ingram Technology providers such as Oracle, Net Perceptions, and i2 Technologies Third party shippers (UPS, USPS) The largest online e-tailer of books, music, videos, toys, and gifts Recently expanded service offering to include auctions (March 1999) and Zshops (September 1999)an aggregation of merchants on its meshwork site Aspires to become a one-stop shop for resultion on the mesh CFN value propositionEarths largest selection of merchandise at matched prices, a validated product assortment, nd consistent guest service from folk varlet to home delivery24/7 URLht tp//www. amazon. com 360 Adelaide street W, 4th stratum Toronto, Ontario. Canada M5V 1R7 Tel 416. 979. 7899. Fax 416. 979-7616 www. digital4sight. com 2000 digital 4Sight Corp. breeding by each means, or disclosure to parties who ar not employees of digital 4Sight member organizations is prohibited. convey you for your cooperation. 1. 1 Customer Fulfillment in the digital Economy Amazon. com few barriers to entrybut one of those barriers is client fulfilment. In 199697, Amazon. com was largely alone in the e-tailing business. Now the Web is eeming with e-tailers like buy. com (which aggressively undercuts allone else, including Amazon. com), CDNow, and barnesandnoble. com. There ar also Web portal-run malls, m all of which atomic number 18 copying and offering features (like the renowned one-click shopping) that have and then far differentiated Amazon. com. Yahoos online mall offers 7,000 stores with all over four one thousand one thousand zillion items and walmart. coms mean debut in 2000 poses a signifi preemptt threat. Amazon. coms first mover advantage, e- mark equity, and initial cost advantages (stemming from neglect of investments in prime real estate for storefronts) are gradually eroding.Its margins are falling, while operating expenses from mergers and acquisitions are increasing. As of the end of 1999, Amazon. com expected to post approximately $600 one million million in losses for the year, at a time when growth in book barters is falling (from active 800% in 1997 to a low over 100% in 1999). On the plus side, node retention rates exceeded 72% in the third quarter of 1999. 8 But bonnie revenue per guest in 1998 was $98. 4, while average selling, general and administrative (SG&A) and distribution costs per customer (excluding cost of goods sold) were just about $71. 30, leading to an average last earnings loss of most 21%. Amazon. com Founder Jeff Bezos wants to transform Amazon. com into the largest and most customer-f riendly one-stop shop on the Web. already the largest online e-tailer of books, music, and videos, the troupe has expanded its product offering to include toys, gifts, and electronics, and in September 1999 launched Zshops, a new go-ahead (online flea market on Amazon. coms Web site) which offers customers universal selection. 4 Zshops empower small merchants and customers to set up online stores on the Amazon. com Web site for a monthly fee of $10, and a transaction fee of 15% of every sale.With a market capitalization of approximately $31. 4 billion (as of November 1999), 12 million loyal customers, 18 million items on sale, projected 1999 gross revenue of $1. 4 billion, and the most recognized cross name on the Internet,5 Amazon. com aspires to become the crackmall of choice for online shoppers. Its recipe includes innovation driven by customer arrested development and the ability to provide a secure, enjoyable shopping experience online, but its dominance is due to a custome r foregatherment exercise that delivers. A carefully orchestrated and adroitly executed sell all, mountainalise few strategy explains Amazon. coms success ith e-tail customer fulfillment. Its business web (b-web) (for books) includes Ingram Book Group and Baker & Taylor, the two largest book wholesalers in the US, as well as dozens of others. In 1998, Amazon. com obtained 60% of its books through and through Ingram, which operates seven strategically located US storage warehouses. Amazon. com pays Ingram a wholesale markup a few percentage points in a extravagantlyer place the publishers price for its drop shipping services. 6 How has Amazon. com responded to these formidable challenges? First, to increase revenue per customer, Amazon. com added product lines or capabilities practically every six weeks in 1999.In February, the smart set bought 46% of drugstore. com. The following month, it launched online auctions. It bought a 35% stake in homegrocer. com in May, 54% of pe ts. com in June, and 49% of gear. com in July. The Zshops and All Product attend (a search the Web service) hatchways have moved it even closer to its goal of providing earths largest selection. For Amazon. com, the Zshops initiative is 8090% megascopicmargin rich, since its marginal costs for providing one-click shopping and credit card collection on Zshops is nearly zero. In 1999, Amazon. com opened five new automated distribution centers of its own in the US (this is in ddition to two centers already operational in Seattle and Delaware). The intent is to improve declining margins in a cutthroat business (e. g. by sourcing books directly from publishers), lessen dependence on Ingram and other distributors, and extend and control its online fulfillment process to enhance emulous advantage. Amazon. com now offers its customers akin to b reading day shipping (in the US) on most items. In the 1999 holiday season, the telephoner sent more(prenominal) packagesperhaps in unnec essary of 15 millionto more people than any other e-tailer or mail-order seller in the country. 7 Amazon. coms leadership in customer fulfillment etworking (CFN) will be critical to its success as the landlord of the largest shopping mall on the Web. Second, its customer fulfillment networking (CFN) strategy is designed to increase gross margins by sourcing directly from publishers and other producers, or else than from wholesalers (e. g. distributors like Ingram) who provide drop shipping for a premium. Amazon. com will also reduce costs per sale by cross-docking orders (books, electronics, and toys all in one order) at the warehouse closest to the customer through progressive demand forecasting and optimization issues from i2 Technologies. 10 melodic line contextE-tailing is fast becoming a crowded grocery with 1. 2 2000 digital 4Sight Corp. Reproduction by any means, or disclosure to parties who are not employees of digital 4Sight member organizations is prohibited. thank you for your cooperation. Customer Fulfillment in the Digital Economy Amazon. com So, what are the implications of Amazon. coms struggle into more warehouses for better customer fulfillment? While the investment in five additional warehouses has been massive (in excess of $200 million), it enables same or next day fulfillment in most cases operate great customer satisfaction and loyalty, and higher evenues and emoluments per customer. It also lowers operating expenses and empowers Amazon. com to respond to pressures from Wall Street for profits. The strategy appears to be paying off5. 69 million unique Web users (excluding its 12 million registered customers) shopped at Amazon. com in the 1999 holiday season (an 81% increase over 1998), with average spending per customer of $128 (a 30% increase over 1998). 14 However, maintaining stock in seven warehouses also increases neckcloth carrying costs, which the company will deprivation to balance and control through efficient custom er fulfillment cookery and execution. 2000 Digital 4Sight Corp. Reproduction by any means, or disclosure to parties who are not employees of Digital 4Sight member organizations is prohibited. Thank you for your cooperation. Less compelling High Complex*E-BRAND AS BARRIER TO ENTRY E-CUSTOMER EXPECTATIONS AMAZON. COM (Circa 2001) Landlord of largest Web supermall Universal selection, one-stop shopping, and same day customer fulfillment = competitive advantage receiptss $2. 7 Billion (est. ) Registered Customers 19. 5 MM Items Offered 18 MM AMAZON. COM (1998) Book E-tailer Investment in brand building Customer fulfillment largely outsourced to Ingram and Baker & Taylor taxs $610 MM Registered Customers 12 MM Books Offered2. 5 MM Low Low This strategic shift ( enroll 1) makes sense because Amazon. coms e-brand will be a less compelling barrier to entry beyond 2000, compared to its customized, collaborative, and integrated online fulfillment capability for orders of one. harmonize to Andrew N. Westland, Amazon. coms vice president of warehousing, transportation and engineering, it would risk losing its competitive advantage from its pioneering and modernistic one-to-one customer fulfillment excellence if it hired another company to handle distribution.As he points out, we would be the teacher and then they would offer those services to our competitors. 13 Designed and built for online order fulfillment, Amazon. coms CFN and warehouse distribution carcass is among the first of its kind (another is Webvan). As such, it confers competitive first mover and learning carousal advantage. ONLINE PRODUCT ASSORTMENT Amazon. coms business model consists of two different but complementary revenue, pricing, and profit models. In the case of auctions and Zshops, relatively small topline revenues (at least as of the end of 1999) domiciliate high gross and operating margins.In contrast, for the traditional e-tailing model, lower gross and operating margins offset high top line revenues. 11 The company wants to utilize both models cross-sell the high margin Zshops/auctions offering to its registered e-tailing customers (immediately enhancing both revenue and profits per customer), and cut the cost of sales and operating expenses through efficient customer fulfillment. High Simple Third, its strategy of providing hassle-free, same or next day fulfillment on most items will enhance customer satisfaction and loyalty, driving restate business, referrals, and increased market share.CUSTOMER FULFILLMENT AS CORE-COMPETENCE High * Complexity of product assortment implies both high breadth and depth of product lines offered. strain 1. Amazon. coms strategic shift from book e-tailer to landlord of Web super mall. 12 Value proposition Amazon. coms value proposition is earths largest selection24/7, at a competitive price. The worlds most customer-centric company gives its customers what they want (universal selection), how they want it (in one consolidated pa ckage), and when they want it (same or next-day by the year 2000), by orchestrating an enjoyable acquire experience at the front end and einforcing it with seamless fulfillment at the top end. Bezos, who describes his team members as customer obsessgenetic pioneers,15 mint take credit for numerous innovations, including customer recognition and one-click shopping, free book reviews, recommendations (suggestive selling), barter for Circles (best seller list by region, country, company, and industry), All Product Search (shop the Web), free e-greetings, Auctions, Zshops, and seamless customer fulfillment. Each of these has been a first on the Web, and competitors have copied most of them. Recent innovations include a system that lets shoppers ut together a big order and then send each item, tagged with an single(a) message, to a different individual and address (September 1999) a wish listmuch like a wedding registrythat lets people tell the world what gifts they want to receive and an Amazon. com anywhere initiative with dash (announced December 8, 1999) that facilitates wireless shopping through Sprint PCS Internet-enabled smart cellular phones. 16 1. 3 Customer Fulfillment in the Digital Economy Amazon. com 1 Customer places order credit card treat for payment 4 E-Customer All items picked, packed and assembled at nearest warehouse & shipped ia UPS or US postal Service 5 Order delivered from the nearest warehouse via UPS/USPS AMAZON. COM WAREHOUSE WWW Electronics OEM Amazon. coms servers in Seattle take forecasting visibility and optimization through i2s Supply stove OptimizationSoftware 2 Customer order parsed out to appropriate suppliers (if not stocked in Amazon. com warehouse). Books sourced from Ingram or other book publisher harmony company LEGEND Inventory Information 3 Producers dispatch goods to Amazon. com warehouse. Figure 2. Amazon. coms customer fulfillment network (CFN)circa 2000. CFN strategy Amazon. com is a CFN pioneer. Its innovat ive CFN trategy enables truthful dynamic commerce that provides a customized experience to not only fulfill, but also create demandprofitably, and in real-time. This is a virtuous one shot agnize through integrating of the customer relationship management applications with the order fulfillment applications and its b-web, as well as intelligent and dynamic demand-supply synchronization. It is rendered possible by the following CFN value drivers Business processes and applications Sourcing multiple line items from disparate suppliers and assembling them to a customers order and specifications for same/next day fulfillment involves ramatically greater logistics and supply chain complexity than delivering huge pallets from warehouses to shelf spaces (brick-and-mortar retail). driving and intelligent personalization that ensures dynamic content interjection and cross-selling (enhancing revenues and profits per customer) while matching the customers demands with Amazon. coms fu lfillment abilities Virtual integration crosswise the b-web (from customer to supplier and warehouses) that ensures synchronicity across business processes, delivering intelligent and profitable order fulfillment Dynamic demand and supply planning and ptimization to minimize inventory carrying and transportation costs and reduce cycle times, trey factorsselling an expanded selection of products online (Amazon. com offers 18 million items), the need to move a large muckle of small parcels, and rising customer expectationscombine to put new pressures on order fulfillment systems. According to Toby Link, CEO of e-Toys, Inventory management is the great ecommerce business process that no one seems to inhabit much about. It is the true barrier to entry. 17 Amazon. com, which has depended largely on a drop shipping and just-in-time written text for books with 1. 4 aximizing profit and service levels Maximum visibility and responsiveness to supply and demand variability and anomalies through dynamic exception notification (e. g. an electronic alert signal if something goes wrong) 2000 Digital 4Sight Corp. Reproduction by any means, or disclosure to parties who are not employees of Digital 4Sight member organizations is prohibited. Thank you for your cooperation. Customer Fulfillment in the Digital Economy Amazon. com Order Management System (OMS) Credit card entropy verification, e-ordering (if needed), reconcilliation of shipping and customer charges Inventory Management System (IMS)Which items and categories to stock, where and in what quantities? What is available and what needs to be ordered? I2s subscribe Optimizer Inventory turnover data by product, category, country, region, state, industry, and so forth I2s Available to Promise (ATP) Can we fulfill these orders profitably? Oracle data traveling bag of products and consumer profiles All Product Search What are customers looking for? Customer Orders What are they buying? Warehouse & Transportation Manag ement System (WMS & TMS) Pick, pack and ship orders most efficiently & profitably Purchase Circles (Best seller listing by country, region, industry or company)WWW E-Customer New Customer Profile Who are the e-customers (demographics, etc. )? What are their preferences? Suggested Selling (Cross-sell and Net Perceptions up-sell profitable, Collaborative Filtering in-stock items that What items and categories of customers want) products are customers likely to buy based on parity? a nagement (CRM) Decision Support, S upply Chain Planning & Execution Customer Relationship M Figure 3. Amazon. coms suite of CFN applications. 20 Ingram and Baker & Taylor, has now primarily moved to a from-stock hybrid model (that also includes the other options) with its seven US warehouses. In ddition to enlarging its Seattle and Delaware warehouses in 1999, the company has invested over $200 million to lease five distribution and warehousing facilities in Fernley, Nevada Coffeyville, Kansas Campbellsvi lle and Louisville, Kentucky and McDonough, Georgia. of Digital Equipment Alpha Servers and Netscape Commerce Servers built around an Oracle database server and Oracle Financials Enterprise Resource Planning (ERP) system. 21 According to Jeff Bezos, 80% of the companys investment in software development since its founding in 1994 has not gone into its famously user-friendly screens, but to back-office logistics. 2 In 1998, two-thirds of Amazon. coms 2,100 employees worked on customer fulfillment. 22 These seven warehouses, comprising 3. 5 million square feet of total space, will ensure fulfillment in 2448 hours in most cases in the US. 18 The CFN comprising Amazon. coms warehouses, b-web of suppliers and drop shippers, and end-to-end integration is specifically designed for online retail from the ground up (i. e. , shipping merchandise item by item to individual customers). 19 It is one of only a handful of such networks. Amazon. com developed most of its own front end e-commerce a pplications, including page design and rder management systems (OMS). The acquisition and incorporation of Junglee, a highly sophisticated XML-based shopping bot, forms the basis of Amazon. coms New Product Search application. It sourced its highly acclaimed suggested selling collaborative filtering software from Net Perceptions and recently acquired a Supply Chain Planning and Optimization package from i2 Technologies. 24 All other softwareincluding middleware and the much-praised and patent one-click shopping applicationis customized for Amazon. com or proprietary, and zealously guarded for competitive advantage. Amazon. coms CFN, including its network of istribution centers, is illustrated in figure 2 figure 3 shows CFN applications deployed. Amazon. coms initial hardware and software consisted 2000 Digital 4Sight Corp. Reproduction by any means, or disclosure to parties who are not employees of Digital 4Sight member organizations is prohibited. Thank you for your cooperation. 1 . 5 Customer Fulfillment in the Digital Economy Amazon. com Amazon. com is in the process of integrating its b-web (suppliers, distributors, and customers) with its supply chain planning (SCP) and ERP, as well as management systems for orders (OMS), inventory (IMS), warehouse WMS), and transportation (TMS) (figures 2 and 3). This strategy will lead to intelligent demand forecasting, optimization, and profitable distribution execution. The customer relationship management (CRM) suite at the front end, which consists of one-to-one personalization and collaborative filtering from Net Perceptions and Amazon. coms own order management system (OMS), works in sync with i2s Supply Chain Planning, Optimization (SCPO) and Decision Support Systems (DSS) at the back end. These form a virtuous cycle that creates profitable demand while delivering a customized buying experience in real-time, as well as ntelligent, profitable fulfillment that ensures customer satisfaction and referrals. Figure 3 p resents a conjecture of how the applications work to deliver intelligent end-to-end order fulfillment This is a true sense and respond CFN based on Amazon. coms move towards a real-time inventory solution (if the customer can order it, it is available, and can be shipped) to drive customer loyalty, revenues, referrals, and profitability. Data is gathered initially from the customer to form a customer profile in the Oracle database. Information on items customers are looking for, and ctually buy, is gathered through the All Product Search function and customer orders, respectively. Data from All Product Search drives the categories and product lines that Amazon. com keeps adding to its colossal assortment. The buying data is queried to yield inventory turnover (for every item) by zip code, state, country, business, company, and industry. The inventory turnover data is used to stratify Amazon. coms inventory on an A, B, C basis (e. g. A items could be best sellers, B items have medium turnover, and C items are one-off orders). The inventory turnover data (XML tagged by zip ode) is fed back to the customer by way of Purchase Circles (best-seller listing) to seduce the customer into buying the item. As well, data from the customer profile and introductory buying patterns are mined (using collaborative filtering from Net Perceptions) to predict affinities among customers and products. This enables real-time suggestive selling recommendations (the right suggestions to the right buyer at the right timeright now) relevant to each customers buying objectives. These recommendations convert browsers into buyers, increase revenue and profits per customer, and stimulate repeat buying. 25 2s demand planner uses the inventory turnover and buying data to dynamically anticipate customer needs by accurately predicting customer demand on an ongoing basis. By integrating these with i2s available-to-promise (ATP) inventory management and distribution systems, Amazon. com e nsures that B-web organization Amazon. coms b-web is an Aggregation (e-tail) and Agora (auctions and Zshops) hybrid model power by its CFN. Win-win b-web relationships and electronic integration with suppliers, distributors, publishers, producers, and software and hardware providers account for Amazon. coms winning experience and fulfillment.These partners contribute portentously to, and derive benefits from, its success. In addition to large and assured revenue streams, learning from this e-tailing and CFN pioneer assures competitive advantage in the high velocity arena of e-commerce. In book e-tailing, for instance, Amazon. com ties Ingrams inventory data to its customer interface. This gives Amazon. com available-to-promise (ATP) capabilities that lets customers know when they can expect to receive their merchandise. As soon as an order comes in, Amazon. com sends it to Ingram electronically (if it doesnt carry the ordered item) Ingram then ships the rder, usually the same or ne xt day, to Amazon. coms customer fulfillment center for cross-docking and shipping via UPS/USPS. Key lessons Four factors explain Amazon. coms in success e-tailing 1. 6 it maintains an optimum inventory of its most ordered books, CDs, videos, toys, and electronics in its warehouses for in-stock fulfillment. Continuous reconciliation of order and inventory data via the ATP function enables Amazon. com to commit to lead times on its Web site that it can profitably fulfill. Distributors like Ingram will drop ship one-off items (C), or Amazon. com will order them (through theOMS) on a just-in-time basis from other suppliers for cross docking at its warehouse closest to the customer (figure 2). Intelligent distribution, warehousing (WMS), and transportation (TMS) optimization ensures that Amazon. com picks, packs, and transports orders for delivery, via US Postal Service (60% of orders) or UPS (40% of orders), from buy button to customer doorstep 2448 hours for in-stock items, and wit hin seven long time for others, in the US. 26 First, it translated its customer-centric understanding of market need into an easy-to-use, intuitive buying experience that pleases customers and drives evenues and referrals 2000 Digital 4Sight Corp. Reproduction by any means, or disclosure to parties who are not employees of Digital 4Sight member organizations is prohibited. Thank you for your cooperation. Customer Fulfillment in the Digital Economy Amazon. com Second, Amazon. com invested tens of millions of dollars in building the most valuable brand on the Web Third, Amazon. com built loyalty and barriers to entry by investing in innovative technology solutions such as suggested selling from Net Perceptions, Supply Chain Optimization (i2), Purchase Circles, and All Product Search, and integrating them into a irtuous cycle for dynamic commerce Fourth, and arguably most important, Amazon. coms commitment to fulfillment has translated into deep and effective b-web relationships with distributors and suppliers like Ingram and a core competency in one-to-one inventory management and distribution Thanks to these four factors, Amazon. com forecasts a customer base of 22. 3 million and revenues of $3. 15 billion by 2002. The companys strategic investments in its warehouses, technology, and b-web integration (CFN) to enable reliable and accurate same or next day customer fulfillment are a key part of its first mover dvantage and a significant barrier to entry. Amazon. com can strategically leverage this killer app CFN in a number of ways26 First, Amazon. com can offer excess capacity in its warehouses to Zshops merchants on a fee for fulfillment basis. This would accrue considerable marginal revenues for a significantly lower marginal cost incurred. Second, by installing Web-enabled buying kiosks (as well as interactional television sets and wireless Webenabled devices like PDAs) at high traffic areas in malls, office buildings, and other locations, it can mov e its Web buying experience to the real world for ess Web-savvy customers. Third, and perhaps most radical and innovative, Amazon. com can build free customer buying portals for each of its registered, loyal customers. For an incremental cost, Amazon. com can create customized buying pages (similar to Dells Premier Pages for its business-to-business customers) that will allow customers to go online and enter their buying requirements as needed. Amazon. com can then deliver the items it carries, and turn over remaining orders to its Amazon. com associates, Zshops, or other b-web affiliates for fulfillment. Arindam (Andy) De 2000 Digital 4Sight Corp.Reproduction by any means, or disclosure to parties who are not employees of Digital 4Sight member organizations is prohibited. Thank you for your cooperation. 1. 7 Customer Fulfillment in the Digital Economy Amazon. com Amazon. com Key Performance Indicators (see Table 1 and figures 4a to 4f) Table 1. Comparison of 1998 cognitive operat ion Amazon. com, Barnes & Noble, and Borders. 28 117. 8 million US adults, or 60% of the adult population, recognize the Amazon. com brand name, make it the most recognized brand name on the Web, followed by Priceline and e-Bay. 29 Amazon. com, with a low customer acquisition cost of around $2930 compared with $109 for a new e-tailer) and a customer retention rate of over 72%31 enjoys huge competitive advantage in terms of repeat revenue streams and significant growth in its customer base. Analysts estimate that Amazon. coms customer base will be about 22. 3 million users by 2002 (figure 4a). 32 With an average revenue per user of $141. 25 (figure 4b), this would translate into $3. 15 billion in revenues. Gross margins over the same period would increase from 22% in 1999 to about 25% in 2002. 1. 8 Amazon. com, with $610 million in sales in 1998 and revenue growth of 230% (June 1998June 1999), had ero days of receivables, 23 days of inventory, 87 days of payables (figure 4c) an d a positive gap in finance cycle(figure 4d) of 64 days. 33 This implies that Amazon. com, unlike its competitors, is actually financing working capital with cash flow from suppliers. Amazon. coms revenue per employee (1998) was $290,476 (figure 4e) and revenue per dollar of fixed assets (figure 4f) was $20. 47 (appreciably higher than the competition). Figures 4e and 4f show an interesting correlation between Amazon. coms market capitalization of $31. 40 billion and its revenue per employee and revenue per dollar of fixed ssets, against the competition. This whitethorn help explain the significant upward disparity in market capitalization enjoyed by the company vis-a-vis its clicks-and-mortar competitors. 2000 Digital 4Sight Corp. Reproduction by any means, or disclosure to parties who are not employees of Digital 4Sight member organizations is prohibited. Thank you for your cooperation. Customer Fulfillment in the Digital Economy Amazon. com REVENUES ($ MILLIONS) 19,500 22,300 $3, 150 20 $2,700 2500 16,500 2000 13,300 15 $2,100 1500 10 $1,403 1000 6,200 Total revenue per user Annual net income per user $127. 27 Gross margins $138. 6 25% 25 $105. 49 90 $98. 39 22% 22% 21% 21% 20 60 15 30 10 0 ($8. 08) 5 500 30 $141. 25 cxx $ PER USER 3000 $150 NUMBER OF REGISTERED USERS (MILLIONS) Revenues ($millions) Number of registered users (millions) GROSS MARGINS (%) 25 $3500 $610 -30 ($19. 57) ($20. 09) 5 ($36. 73) ($45. 37) 0 1998 1999 2000E 2001E -60 2002E Figure 4a. Amazon. com Revenues & number of registered users (19982000). 34 0 1998 1999 2000E 2001E 2002E Figure 4b. Amazon. com Revenues & net income per user, registered users and gross margins (19982002). 35 80 64 INVENTORY perturbation OR CASH-TO-CASH CYCLE 60 Inventory turnover (1998) Gap in finance cycle (1998) Revenue growth (1998-99) 400% 40 20 16. 14 0 -20 300 2. 4 AMAZON. COM 1. 83 B&N BORDERS 230. 1% 200 -40 -60 -80 100 (80) 6. 3% -100 Figure 4c. Book retail Age of receivables, payables, and inventory ( 1998). 36 2000 Digital 4Sight Corp. Reproduction by any means, or disclosure to parties who are not employees of Digital 4Sight member organizations is prohibited. Thank you for your cooperation. REVENUE GROWTH (%) 0 (90) 14. 5% 0 Figure 4d. Book retail Revenue growth (June 19981999) vs. inventory turnover & gap in finance cycle (1998). 37 1. 9 Customer Fulfillment in the Digital EconomyAmazon. com $350,000 300,000 $35 Revenue per employee (1998) Market capitalization ($ billions) $30 Revenue per $ of fixed assets (1998) $35 Market capitalization ($ billions) $31. 41 25 $30 $31. 41 $30 $20 200,000 $15 150,000 100,000 $103,641 $10 $95,404 50,000 0 $20 15 $15 10 $10 $5. 89 $1. 21 $0 $25 $20. 47 5 $5 $1. 64 20 $1. 64 0 $5. 26 MARKET CAPITALIZATION ($ BILLIONS) $25 REVENUE PER $ OF FIXED ASSETS ($) 250,000 MARKET CAPITALIZATION ($ BILLIONS) REVENUE PER EMPLOYEE $290,476 $5 $1. 21 $0 AMAZON. COM B&N BORDERS Figure 4e. Book retail Revenue per employee (1998) and market cap (November 1999 ). 38Figure 4f. Book retail Revenue per $ of fixed assets (1998) and market cap (November 1999). 39 1. Anthony Bianco, Virtual Bookstores Start to Get Real, Business Week, 27 October 1998. 2. Saul Hansell, Amazons Risky Christmas, The New York Times, 28 November 1999. 3. Ibid. 4. Jeff Bezos quoted by Stefani Eads, Is Amazon Shopping for Profits in its Zshops? Business Week, 12 October 1999. 5. According to Opinion Research Corp. , 117. 8 million Americans, or 60% of the US adult population, recognizes the Amazon brand name, making it the most valuable brand name on the Web. 6. Anthony Bianco, op. cit. 7.Saul Hansell, op. cit. 8. As quoted in SS Investor integrity Research Report on Amazon, December 1999. 9. depth psychology and estimates by Lauren specify Levitan, analyst, Banc Boston Robertson Stevens, August 1999. 10. Jeanne Lee. i2 Learns What Not to Say When Talking to Analysts, Fortune, 29 March 1999. 11. Jeff Bezos, quoted in an interview with Robert D. Hof, Business Week, 31 May 1999. 12. Strategy map based on Digital 4Sight psychoanalysis of Amazons etailing strategy. 13. Saul Hansell, op. cit. 14. Media Metrix numbers quoted in Amazon, e-Bay Get Most Holiday Visitors, Los Angeles Times (Home Edition), 4 January 2000. 5. Jeff Bezos quoted by Chip Bayersin The Inner Bezos, Wired, (March 1999). 16. Amazon press release from its Web site, URL http//www. hoovers. com/cgi-bin/offsite? url= http//www. amazon. com/exec/obidos/subst/misc/investorrelations/investor-faq. hypertext mark-up language/002-5319771-2477605. 17. John Evan Frook, Missing Link Emerges Inventory Management, Internetweek, 9 March 1998. 18. Bob Tedeschi, Many Internet Companies experience Focused on Attracting Customers. The Bigger challenge Is Fulfilling Orders, The New York Times, 27 September 1999. 19. Katrina Booker, Amazon vs. Everybody, Fortune, 8 November 1999 120. 20.Digital 4Sight hypothesis based on secondary research. 21. Customer case study on Oracles Web site, URL http//w ww. oracle. com/customers/ss/amazon_ss. html. 22. Anthony Bianco. op. cit. 23. Mary Beth Grover, Lost in Cyberspace, Forbes, 8 March 1999. 24. Jeanne Lee, op. cit. 25. Product data from Net Perceptions Web site. URLhttp//www. netperceptions. com/product/home/0,,1091, 00. html. 26. Michael Krantz, Cruising Inside Amazon, Time, (December 1999). 27. Digital 4Sight analysis of Amazon. coms e-tailing strategy. 28. Digital 4Sight Financial dimension Analysis based on P&L and balance sheet data sourced from www. oovers. com. 1. 10 2000 Digital 4Sight Corp. Reproduction by any means, or disclosure to parties who are not employees of Digital 4Sight member organizations is prohibited. Thank you for your cooperation. Customer Fulfillment in the Digital Economy Amazon. com 29. Opinion Research Corp. survey quoted in Equity Research Report on Amazon, SS Investor, December 1999. 30. McKinsey & Company Data quoted in Online Customer Acquisition cost Business 2. 0, (November 1999) 16-17. 31. As q uoted in Equity Research Report on Amazon. com,SS Investor, December 1999. 32.Analysis and estimates by Lauren get to Levitan, op. cit. 33. Gap in Finance Cycle = Days of Payables (Days of Receivables + Days in Inventory). 34. Analysis and estimates by Lauren Cook Levitan, op. cit. 35. Digital 4Sight Financial Ratio Analysis, op. cit. 36. Ibid. 37. Ibid. 38. Ibid. 39. Ibid. 360 Adelaide Street W, 4th Floor Toronto, Ontario. Canada M5V 1R7 Tel 416. 979. 7899. Fax 416. 979-7616 www. digital4sight. com 2000 Digital 4Sight Corp. Reproduction by any means, or disclosure to parties who are not employees of Digital 4Sight member organizations is prohibited. Thank you for your cooperation. 1. 11