Supply Chain Planning and Optimization Harish Abbott Program Manager, Strategic Planning & Optimization Amazon.com Informs/Dash – May. 4, 2003

What you will hear Amazon.com Supply Chain Planning and Optimization Broad selection and best customer experience Products, platform, and fulfillment network Amazon.com supply chain Supply Chain Planning and Optimization Operations Research applications Real time fulfillment optimization Facilities location models

Be The First Place People Come to Look for *Anything* Amazon.com Earth’s Biggest Selection The place where people can find, discover, and buy anything they want to buy online Earth’s Most Customer-Centric Company Start with the customer and work backward Be The First Place People Come to Look for *Anything*

One Platform - Countries / Products / Services US UK DE FR JP CA Books Music DVD/Video Video Games Software Electronics Marketplace Toys Tools Kitchen Baby Books Music DVD/Video Video Games Software Electronics Marketplace Toys Books Music DVD/Video Video Games Software Electronics Marketplace Books Music DVD/Video Video Games Software Books Music DVD/Video Video Games Software Books Music DVD/Video P A R T N E R S: Borders, Target.com, Toys-R-Us, Office Depot Fulfillment / Customer Service / Technology

Amazon.com Platform driving sales for partners Customer Experience Scale, Reach Partners More Customers Amazon.com Brand Customers Technology Know-How Fulfillment Benefits Build for Partners and Customers

The Objective: Leadership at Every Point Growth - The Drivers Our Virtual Cycle Growth Selection Traffic Customer Experience Sellers Lower Cost Structure Lower Prices The Objective: Leadership at Every Point

Growth and Operating Expenses Revenue ($M) Operating Expense

Amazon.com Supply Chain Physical Store Amazon.com HQ / Distribution Centers Stores Inventory Different Business, Less Capital, More Speed

Amazon.com Supply Chain AMZN FC’s Inject to Hub Manufacturers/ Publishers Customers Carrier Hub Carrier Hub Distributors Carrier Network (Airborne, FedEx, UPS, USPS) Drop-Ship Partners Multiple fulfillment methods and optimization opportunities

Amazon.com Fulfillment Network AMZN Fulfillment Drop Ship Transportation Hub .

Operations Research at Amazon.com Forecasting Inventory management Merchandising Network planning Facility location models Capacity planning Product allocation and transportation optimization Drop ship planning & forecasting Real time fulfillment Strategic and tactical decision support Space management models Fulfillment center process optimization Picking Sorting

Real Time Fulfillment Optimization Given the state of the supply chain at order time, determine the minimum cost method of fulfilling each customer order while meeting customer expectations. Why? Optimize economics for each order Balance network (labor and inventory) Meet or exceed customer expectations Provide immediate order promises ship promise delivery date

Real Time Fulfillment Example Scenario: A customer in Los Angeles orders 2 books, one of which is in stock within the Amazon network, but the other is only available at the distributors. Book Title RNO TUL SDF LEX PHL IBRO IBFW IBLV IBEW The Complete Winnie the Pooh 20 8 10 15 83 95 80 5 Beatrix Potter’s Nursery Rhyme Book 40 Fulfillment Options Transportation D Product Margin Handling Total Cost Source Nursery Rhymes from distributor and ship both from RNO together $ 2.50 $ 0.90 $ 1.90 $ 5.30 Ship one book from RNO and drop ship the other from IBRO $ 2.25 + $ 2.90 $ 1.30 + $ 0.75 $ 8.10 Drop ship both books from IBRO $ 3.25 $ 1.80 $ 1.00 $ 6.05 All costs have been perturbed, preserving only order of magnitude of tradeoffs. Complexity Challenges Real time – 500 milliseconds Problem size: Larger orders: 2n-1 shipments More drop ship locations Modeling Challenges Uncertainty Will the sourced book arrive on time? What should we do if it doesn’t? What is the value of faster delivery?

Uncertainty Modeling Current State Next Steps Deterministic assignment problem with manipulated data Safety factor on arrival times and delivery times Recourse actions not considered during assignment Safety factors optimized offline Tradeoff service level and cost Next Steps Improve performance to handle complexity Enhance model using stochastic space time Expand network: additional drop shippers, more supply chain visibility More accurate promises Incorporate uncertainty directly Increase visibility upstream Improve prediction of downstream systems actions Manage the fulfillment plan over time as status of information changes When should we take action?

Full Case, Non Conveyable Facility Location Full Case, Non Conveyable Products (FC/NC) Big and bulky (Kitchen, Toys, Electronics..) Ships in its own box Offsite Manual processing Low overhead and lead time for commissioning FC/NC Items can be modeled separately Optimal number and location of fulfillment centers for FC/NC Items and respective demand allocations. Q4 demand surge Injection lanes Inventory availability

Model & Implementation Constrained facility location model Binary variables for injection lanes Transferred to business users Configuration Files Data Files/DB Zone and Rates Data Shipping Module Data Generation Module Optimization Model Output Files Results Interpreter Scheduler

Data – Example Capacity constraint : 400 FC-NC Units/FC/day Demand Density(Units/sq mile) Distribution Forecasted Demand on Peak Day (FC-NC) Capacity constraint : 400 FC-NC Units/FC/day Injection lanes Minimum of 70 units (per FC/day) Minimum line haul $50/line haul $0.12/unit/mile (for each line haul )

Impact of additional nodes on fulfillment cost

Summary Amazon supply chain is very broad Scalable optimization solutions critical to success OR helps design and maintain lower cost structure Real time fulfillment optimization Scalability and complexity driving new methods Enhance model to explicitly incorporate uncertainty Facility location models for fc/nc Engineering enables quick capacity expansion Optimization pinpoints the best location for expansion