Case Study 1: Supply Chain Process of Crocs Inc.

INTRODUCTION

Crocs, Inc. was established in 2002 in Colorado, USA and is today amongst the fastest
growing brands and companies in the world. The company started designing and
manufacturing footwear for all age groups under the Crocs brand, which are now sold in over
100 countries around the world. The Crocs brand shoes feature the proprietary closed-cell
resin, Croslite, a special kind of plastic that softens up due to the body heat of the wearer
resulting in a perfect fit and a high degree of comfort. The innovative, trade secreted
material has been considered as significantly original in the footwear industry and the shoes
unique looks and range of brightly coloured designs have made Crocs highly favoured by
people who are looking for comfortable, lightweight, slip-resistant, and odour-free footwear.
The phenomenal success of Crocs in a short span of less than 10 years has been discussed
widely, and besides the skyrocketing popularity of the shoes, one of the main reasons behind
this mindboggling growth has been the companys efficient supply chain management. Until
2006, Crocs, Inc. had the highest gross profit margin in the footwear industry at 56.5 % as
compared to 43.7 % and 47.3 % by the giants of footwear, Nike and Timberland respectively,
and the sales revenues of the company are very likely to cross the US $ 0.5 Billion.
The case study (Hoyt, D. and Silverman, A.) has discussed the astounding growth of Crocs,
Inc. and provides information on its highly flexible supply chain. Crocs showed that by being
more agile and by digressing from the traditional industry norms they could be more
successful and profitable than any other competitor (Hoyt, D. and Silverman, A., Exhibit 4,
p.18). Their efficient supply chain was an outcome of their CEO, Ronald Snyder s, vision of
meeting customers demands by creating a hyper-efficient production and supply chain
process that would enable the company to produce and supply at short notices and thereby
create a market leading advantage in the industry. The text also mentions how the firm moved
from contract manufacturing to developing a more vertically integrated organisation and
expansion through building infrastructure and become a truly global company. It seemed that
through vertical integration (Harrigan, K. R.) Crocs had developed a perfect strategy to
achieve cost leadership and differentiation (Porter, M. E., 1998) and at the same time gain a
high degree of control over their entire value chain. Not only this, but with unimaginable
growth Crocs was able to create different market segments and also take a chance to foray
into more traditional materials in footwear and increasing their competitiveness in the
industry.
However, I would like to mention that there is always scope for improvement and no strategy
is sacrosanct with the situation being faced in todays dynamic market conditions. The Crocs
supply chain has indeed been revolutionary in the footwear industry but it needs to evolve in
terms of the changes in the industry environment worldwide. The traditional and idealistic
thinking organisations have a lesser chance of survival in the long run. Changes in
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technology, production and delivery processes, consumer demands, and even government
policies require that organisations focus on their core competencies rather than having a
finger in every pie.
This paper has been structured to critically evaluate the footwear industry in generally and the
supply chain of Crocs Inc. (Appendix A) in particular and provides insights into possible
drawbacks and improvement areas in the strategy adopted by the organisation in the years
leading up to its present position. In the latter half, the paper describes my views on how
Crocs, Inc. can better their position in the footwear industry and become a more stable
competitor to its major challenges in the environment. I have used a number of theories and
models, both in analysing the system prevalent at Crocs, Inc. and in providing insights into
how they can build up on their successes and create a more stable and extended future for the
company. Of course, it cannot be claimed that this paper will provide a foolproof solution to
the issues of todays footwear industry and Crocs Inc in particular, but it does portray a
different perspective especially by providing arguments against vertical integration as a
means to achieve competitive advantage.
This paper contradicts the theoretically sound and widely accepted principle of vertical
integration to achieve competitive advantage. The paper highlights the probable drawbacks
and bottlenecks plaguing the supply chain of Crocs Inc. The paper begins with a brief
overview the footwear industry based on Porters Five Forces model (Porter, M.E., 1980) and
introduces the Crocs supply chain process. It explains how Crocs suffers from the Forrester
Effect (Forrester, J.W.) and using the 3PL (Christopher, M.) description the paper conducts a
critical analysis of the highly agile and vertically integrated supply chain environment of
Crocs. Using the Fisher and Kraljic models, I have demonstrated how the company can needs
to revise its foundation in developing a strategically sound supply chain process.
Furthermore, the Japanese philosophy of Kaizen (Imai, M.) and Kanban have been uniquely
combined and later superimposed on the Kraljic model to create an interestingly different
perception of the supply chain integration. The paper ends with recommendations adequately
supported by the above theories/models and indicates the existence of the possibility that
vertical integration may not be the best approach towards achieving competitive advantage in
a highly dynamic industry.
INDUSTRY ANALYSIS

Using the concept of Product Life Cycle (PLC) (Wasson, C.R.) (Appendix C), it could be said
that the footwear industry as a whole is at the saturation/maturity stage and is likely to
continue at this stage. Of course, it is unlikely that the demand for footwear will fall
considerably; there are chances that with the development of more durable and cheaper
products, the profitability of the industry will decline over the years. I have used the Five
Forces Model (Porter, M. E., 1980) to conduct an analysis of the global footwear market
Entry Barriers: The footwear industry seems to provide relatively easy entry for new
players. The cost advantages are low with a large number of players globally as well as
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locally. However, the manufacturers have reasonably easy access to raw materials and have
been able to achieve economies of scale through outsourcing of production. Capital
requirements are not too demanding and so are the general governmental policies. Companies
have been able to achieve propriety over designs and styles and are in a position to
consolidate their gains from the industry.
Supplier Power: Most shoes are made from similar material with Crocs being the exception
of having propriety on the Croslite material with which its shoes are made. Due to wide
availability of raw material and a large number of suppliers, larger producers have been able
to get better prices as compared to smaller players. At the same time, switching costs for the
firms are low and as a result, the supplier power is not considerable.
Threat of Substitutes: Since entry barriers are low and switching cost are low substitutes are
a constant threat in the footwear industry. Moreover, the intense competition leads to lower
prices, which affects consumer choice. Companies have to continuously bare a trade-off
between price and performance. However, large players are in a position to achieve a higher
MES (Minimum Economic Scale), which might act as a barrier for substitutes.
Buyer Power: Customers are the most powerful in this highly competitive industry. Success
is dependent on the extent of penetration in to the market and achieving a balance between
price and quality. Moreover, footwear would be termed as innovative products and are subject
to frequent changes in trends and therefore, demands of the consumers. Once again, large
players are the ones to benefit due to availability of capital and resources to respond to
market conditions. Since buyers are likely to develop brand identity and loyalty,
differentiation is very important.
Rivalry: With easy entry and exit from the industry, a large number of players in the
footwear industry are intensely competing against each other to gain maximum market share
and increase their returns. However, industry growth is low and there is constant pressure on
the firms to lower prices. Differentiation is hard to achieve and low switching costs mean that
the consumer power is high and substitutes and knock-offs might eat into market share. The
most important aspect is of efficiency in supply chain and the delivery of products to the right
place at the right time. Most large companies have been successful due to superior supply
chain processes.
The above five forces reflect that competition in the footwear industry is not related only to
the larger players. They jointly determine the industry competition and profitability and with
many commonalities amongst the players, there are very few crucial aspects that govern the
strategy formulation of these companies. Creating and developing an efficient and responsive
supply chain aimed at reducing costs seems to be one of the most vital components in the
industry.
Comparing the PLC Curve of Crocs with the industry curve, it would be wise to put Crocs at
the stage of competitive turbulence as suggested by Wasson (Appendix C). The uniqueness
of the Crocs clogs and the overwhelming popularity of the products indicate that there is
quite some time for Crocs to reach the maturity stage, even when the industry in general is
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not performing so well. Crocs Inc.s main focus has always been better supply chain
coordination and to garner opportunities to differentiate its products from those already
available in the market. Crocs seemed to have adopted a global logistics strategy
(Christopher, M.) in that it had focused factories manufacturing shoes to cater for certain
markets; its inventories were centralised and it followed a system of localisation, generic
levels of semi-finished inventories and small orders from suppliers/distributors. In order to
supplement this system, Crocs had in place capacity and capability to meet changing market
demands at short notice. In general, Crocs had a very agile supply chain process in place and
that the firm understood the customers needs and changes in the market trends. Crocs clearly
understood the dynamic nature of the footwear industry where a product might no longer be
in fashion the following year, and developed the ability to produce additional stocks in the
same season, thereby creating a competitive advantage through a more agile and market
responsive supply chain (Fisher, M., 1997). The company had maintained cordial working
relations with its retailers and distributors and they worked with stores and retailers for
promotion of their products at trades shows and public events. Ronald Snyder, the President
and CEO had aimed to achieve a simultaneous global launch of all its products right from the
beginning and had structured the organisation of the company to be sustainable in such
conditions and be able to thwart the competition before they got a chance to react. In view of
this expansion and with the aim of meeting the customers needs, Crocs decided to move
away from contract manufacturing (3PL) to a more vertically integrated organisation where
they had better control over their activities.
DISCUSSION
At this point it would be interesting to explain the situation faced by Crocs using the Forrester
(Bullwhip) Effect (Appendix D). Crocs has historically chased demand since its inception
and hence felt the need for excess capacity to react quickly to market demands. They
obviously considered its supply chain to be highly effective and in fact they did prove
themselves to be correct for a few years. Theoretically Crocs could have continued to achieve
success at this had they been able to meet all customer orders in every season.
What they failed to realise was that customer demand is rarely perfectly stable and it becomes
essential for every business to come up with accurate demand forecasts. As mentioned earlier
in the industry analysis, the customer power is very strong and it was necessary for Crocs
to stretch its perception of customer demand as far as possible. Usually, companies resort to
holding reserve stocks due to overcome forecasting errors but that is not the case with Crocs.
They believe in holding excess capacity and their ability to produce the required stock as and
when required. In my opinion they were not entirely correct! Misperceptions of the
stakeholders risk and time delays caused panic ordering by suppliers due to unfulfilled
market demand. Forecasting errors and constantly changing inventory control strictures
created variations in lead time and replenishment of stocks.

Outcome of the Forrester Effect

It seems that there was a misalignment in the corporate strategy and the supply chain strategy
adopted by Crocs. In 2002, when the company was established it was obvious that it had
centralised operations since its market was limited. As it began to grow the firm expanded
globally and chose to enter contract manufacturing and be able to make the products available
faster and economically. However, the company found that the 3PL system was not effective
and so it began to consolidate its assets and create a closely integrated organisation. In doing
so Crocs got too involved in managing the external resources and process and lost focus on
its key areas of operation and as a result this affected its competitive advantage. At this rate
Crocs is well on its way to moving into the Stuck in the Middle position (see diagram on
this page) with reduced profitability and limited alternatives for growth and survival in a
highly competitive industry. Mentioned below are some of the points that explain how Crocs
competitive advantage was affected and why it makes more sense for Crocs to implement a
3PL system rather than focus only on a vertically integrated firm.
Adopting a 3PL system: The 3PL is ideal for companies like Crocs that have wide and
complex distribution networks. It would be agreed that the distribution network and the
supply chain network of Crocs, although revolutionary in its own sense, was considerably
complex and stretched a bit too much. Their Denver facility, for example, was highly
underutilised as it catered to only the smaller retailers in the Americas and shoes were sent
there from manufacturing plants that were in Italy and China. Until recently, their
compounding activities were concentrated in Italy and that again was a highly centralised and
uneconomical.
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Porters Competitive Advantage Matrix

Free up resources: Crocs had a large sum of money tied up in its assets. The high ROA of
the company in 2007 at 34 % (Hoyt, D. and Silverman, A., Exhibit 4, p.18) will most likely
see a dip as the company acquires more assets in its quest to centralise its operations.
Moreover, relative to the amazing figures shown by the growth in revenue, the returns on
assets are modest. In order to meet demand at short notice, Crocs had created excess capacity
of one million pairs of shoes and that would have held up valuable financial resources of
firm. Shifting of moulds and equipment from one factory location to another was also not
very cost-effective. Moreover, with changing trends and frequent new designs the costs and
delays of developing moulds were significant. Through outsourcing, Crocs will be able to
reduce capital expenditure and the same could be put to better use in product development,
customer relationships and marketing. Even if Crocs had excess capacity, then it could easily
least it out for its own production requirements if the same was not being utilised optimally.
Cost advantage: In my opinion, Crocs lost its cost advantage by reverting back from contract
manufacturing to owned-manufacturing. The emergence of knock-offs in large numbers may
be reasoned as an outcome of this move. Crocs had outsourced its manufacturing to China
and Mexico and after a few years they had their own manufacturing facilities. However, it
seems probable to argue that in trying to achieve higher profit margins and creating a better
supply chain model, they overlooked the important facts of creating entry barriers and
maintaining their cost advantage. It can be said that the large number of knock-offs (Oakland
Tribune) have dented the uniqueness of Crocs and in spite the difference in quality the lower
price of the Crocs-duplicates have made a large number of customers switch brands. As
discussed earlier, customer power is very strong in the footwear industry and as a result,
Crocs shoes have come to be considered as a commodity rather than a differentiated product.
Core competencies: The main advantage of adopting a 3PL system is that the firm is able to
concentrate on its core competencies. Although Crocs supply chain model is considered to
be revolutionary, it does not help the company in improving and maintaining its core
6

competencies. It is a plausible argument that had Crocs not been involved in ownedmanufacturing, it could have utilised the same resources for better development of its
products and ensuring that cheap knock-offs do not harm its market share. Although there has
not been any significant change in the market share of the inventory turnover of the
companys products is lower than the industry average and its stock prices have taken a hard
beating on the stock market.
Inventory management: The inventory turnover ratio of Crocs has been considerably below
the industry average in spite of high profit margins (Hoyt, D. and Silverman, A., Exhibit 2,
p.16 and Exhibit 4, p.18). Moreover, there has been a steady rise in the levels of inventory,
which were nearly three times the total fixed assets of the company (Hoyt, D. and Silverman,
A., Exhibit 2, p.16) Although termed as highly flexible and revolutionary, the Crocs
production model and inventory management have not been able to keep up with the market
demands in recent times. It seems that the Crocs management is unwilling to adopt a more
supplier friendly system of inventory management, one that is being followed by others in the
industry. As a result, it has been facing difficulties with supplies in Europe and the US. It was
recently reported that Crocs inventory levels are well above the appropriate levels and that
this has become an issue of concern for the company (www.ap.org). It could also be said that
the Crocs supply chain, in trying to be agile was not able to be maintain its lean profile,
which led to high fixed costs and low inventory.
Another drawback that could be attributed to the supply chain model was that Crocs might be
considered as conservative to some extent. In view of the fundamental basis of being flexible
and highly responsive to market demands, Crocs was not willing to change its supply chain
model as per the requirements of the suppliers or even as per the changes in its organisational
structure. In this sense, it is comparable to the traditional approach adopted by Marks and
Spencer (Harrison, A. and Pavitt, J.).
In view of the issues that have been brought to light in the existing supply chain of Crocs
Inc., it may be suggested that Crocs carry out an internal alignment of its system and then
move towards creating better integration between the internal and the external systems.

RECOMMENDATIONS
In my opinion, what is required to be done is to achieve better integration of the supply chain
at Crocs Inc. On applying the Kraljic Model, I observed that Crocs needs to have a balance
between vertical and horizontal integration rather than being on a single extreme. Assuming
that the production process and the raw material required by Crocs to produce its clogs are
relatively simple.
Of course, this is only an illustration and this is what my seriously limited knowledge in shoe
making could conjure in terms of the Kraljic matrix for Crocs. Notwithstanding this
ignorance, it can be noted that the Leverage Items and the Strategic items are likely to affect
Crocs Inc. more than the items on the bottom row. Consequently, it may be recommended
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that Crocs strives to achieve vertical integration on the items on the top row and similarly, it
may outsource/contract-out the Non-critical and Bottleneck items. In doing so, Crocs should
be careful in selecting the suppliers for its raw materials and be able to achieve competitive
pricing. As for the machinery and equipment, the firm might find it more suitable to procure
it on behalf of the contract manufacturer rather than relying on the latter. Strategically, it
should try and find suppliers for leverage items that are closer to the manufacturing facilities
otherwise, the transportation costs of raw materials might outweigh the benefits of the same.
On the other hand, Strategic items should be kept under the direct control of the Crocs
management as the moulds and compounding are the two key advantages that Crocs has over
its competitors. Non-critical items like colours and replacement parts should be given to 3PL
organisations and so should the bottle neck items. Point to be noted here is that since the
actual production of the products can be outsourced to countries with low labour costs, the
labour is termed as a bottleneck item. Similarly, warehousing would become the contract
manufacturers worry and Crocs need keep only limited warehousing facilities under its
direct control.
Other improvements in the supply chain could be brought about by adopting the Kaizen and
Kanban system in conjunction. This is not to say that these could act as replacements or
alternatives to the Kraljic model. Where the Kraljic model shows us an approach to supply
chain integration, Kaizen and Kanban (HBR on Supply Chain Management) provide us the
means to maintain and continuously improve the supply chain process. Kaizen (Imai, M.) is
based on five basic elements (Teamwork, self-discipline, high morale, quality and
suggestions for improvement), and provides three key factors that will help Crocs achieve
reduced wastage and inefficiency, improved internal working environment and
standardisation across the whole organisation. On the other hand, there is a need to establish a
demand-driven supply chain capable of reacting to actual customer requirements, which can
be met through the concept of Kanban. Considering the successful implementation of this
model by Wal-Mart, Crocs can establish an EPOS system to regulate replenishment and
delivery from the distribution centres to the stores and from the suppliers to the Crocs
distribution centres. This creates a more accurate and clear picture of customer demand and
inventory management throughout the supply chain. This can create better inventory
positioning at lower costs and an IT based infrastructure providing flexibility and higher
value for the customers. These two methods offers the right solution for Crocs to work
towards a supply chain system that is agile as well as lean, which is a better balance than the
current system that is highly agile and less lean. GE had a similar process in place which was
known as the Quick Response Program (Bartlett, C.A. and Wozny, M.), and it helped GE cut
down production cycle in half and reduce inventory costs by more than 20%. The financial
implications for Crocs by implementing the prescribed system are evident.
Furthermore, I can superimpose the Kaizen-Kanban combine on to the Karljic matrix and it
may be inferred that Crocs needs to be lean for the processes it controls itself (Leverage and
Strategic items) and be agile for the items that are being outsourced (Non-critical and
bottleneck items). Besides the above, rather than depending on its own estimates of stocks,
Crocs can use the Kanban system to provide a more accurate and real-time information about
8

replenishment schedules, which will improve the efficiency of the production and inventory
management processes.
Another important area where I feel Crocs Inc. could have faltered is in their ability to
distinguish their products as either innovative or functional (Fisher, M.) (Appendix E).
According to Fisher, it is very important to match the supply chain with the type of product
that the company has. And based on this type, the supply chain of the firm will be efficient or
responsive. This is similar to what I have mentioned earlier in relation to the Kaizen and
Kanban system and their correlation to the Lean and Agile supply chain systems. However,
the underlying area according to Fishers model is the classification of the product. I would
like to agree with Fisher here and elaborate this more specifically concerning the Crocs
supply chain process. As recommended earlier, Crocs should aim to achieve a combined
vertical and horizontal integration; vertically integrated for the critical and strategic processes
and horizontally integrated for the non-critical and bottleneck processes. Similarly, Fishers
model applies here in that the final product of Crocs Inc., their shoes, will be the innovative
product, characterised by changing fashion trends, consumer demands, and new designs and
therefore, Crocs should adopt a more responsive supply chain (may also be termed as Agile).
On the other hand, the critical and strategic processes involving the procurement of its secret
raw materials and moulds would be mentioned under functional products. As a result, Crocs
should develop a more efficient supply chain for these products.
In relating this to the changes required in Crocs supply chain management it can be termed
as the need for incremental change rather than undertaking transformational change. It is,
after all, a change in the work culture of Crocs that is being suggested here and the aspect of
change management cannot be overlooked at this point. If Ron Snyder is himself not
convinced about this need for change he will not be able to implement the same through the
organisation. It makes me consider that applying the Eight Steps of Leading Change (Kotter,
J.P.) would bring about a wonderfully methodical implementation plan of the proposed
incremental change in the supply chain process at Crocs Inc.

CONCLUSION

As seen from the above discussion, Crocs revolutionary supply chain might have been so
only for a short period of time. The current strategy at Crocs Inc. has led to inefficient
production and excessive inventory due to inaccurate forecasts of customer demand. To add
to this, the Forrester effect explained above leads to stock-outs, sub-optimal utilisation of
resources, poor customer service and financial costs all along the supply chain. To stretch this
a bit further, the damage to the stakeholder image and loss of loyalty can lead to greater
losses for the organisation.
9

Of course, the company has continued to show increasing profit quarter after quarter but it
has lost the faith of the stockholders in the market and with increasing competition, Crocs
needs to alter its stance. The focus on core competencies, demand-driven supply chain and
adding value to the end user is what Crocs needs to work at to improve its market position.
Taking cues from Porter, it would be wise for Ron Snyder to rework Crocs approach towards
gaining a competitive advantage through a Hybrid supply chain process combining both
agility and leanness. Although Crocs did eventually shift to an IT based inventory
management and planning process, it could have performed much better had it implemented
this earlier. Moreover, referring back to Kotter, the change in corporate culture is also an area
which Crocs could benefit from by being more flexible and reactive to market trends and
consumer/supplier requirements.
Finally, it may seem like a wild jumble of words in explaining the complex structure of the
supply chain process. But this is the reality. It must be appreciated that supply chains cover
multifarious activities and processes and with ever increasing developments in technology
and methodologies, it is more likely to get even more challenging in the days ahead. From the
above discussion, I would sound wise in admitting that there cannot be a one single solution
to all the supply chain worries at Crocs Inc. or for any organisation for that matter, especially
in a dynamic industry like footwear. It is also easy to argue that the prevailing supply chain of
Crocs is successful, merely based on the fact that Crocs Inc. is still performing better than its
competitors and has shown consistent growth in the last few years. The bottom line here is to
be able to understand the unpredictable nature of the industrial environment and how
important it becomes for every firm to strike a balance between all internal and external
processes. There is little doubt that most managers around the world are continuously trying
to improve their supply chain efficiencies and controlling costs. However, the question
remains as to how many of these managers are taking into consideration the end user; the
consumer, and actually attempting to arrive at more accurate forecasts?
The following extract throws light on the importance of forecasting in inventory management
and supply chain efficiency for Crocs and explains why the contents of the preceding pages
makes sense.
The 10Q Detective questions the ability of management to calculate sufficient inventory
levels, as the company failed to anticipate the higher-than-expected demand for the
Mammoth (new fleece-lined Crocs) during the holidays (and had to air freight in a good deal
of products, resulting in some gross margin pressure).
However, should Crocs miscalculate demand for its footwear, the carrying costs of bloated
inventory levels-warehousing, distribution, work-in-progress and finished goods-will come
back to haunt management, especially if prices start to fall (customer discounts or forced
liquidation of excess inventories) for some of its fad footwear.
Source: http://seekingalpha.com, David J. Phillips, Crocs: Bloated Inventory Caused Stock
Slide, 10Q Detective.

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Appendix A
Supply Chain of Crocs Inc. (recreated)

Adapted from Hoyt, D. And Silverman, A. (2007), Crocs: Revolutionizing an Industrys

Supply Chain Model for Competitive Advantage, Stanford Graduate School of Business, and
Case GS-57.

Appendix B
Porters Five Forces Framework for Industry Analysis

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Source: www.valuebasedmanagement.net

Appendix C
Product Life Cycle Stages (Wasson)

Source: www.altera.com

References:

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1. Christopher, M. (2005) Logistics and Supply Chain Management-Creating Value-Adding

Networks, 3rd edition, Pearson Education.
2. Forrester, J. W. (1961) Industrial Dynamics, MIT Press.
3. Harrigan, K. R. (2003) Vertical Integration, Outsourcing and Corporate Strategy, Beard
Books.
4. Harrison, A. and Pavitt, J., New Supply Chain Strategies at Old M & S, Cases in
Operations Management, 3rd Edition (2002), FT Prentice Hall, pp. 64-68.
5. Imai, M. (1986) Kaizen: The key to Japans competitive success, 1st edition, McGraw-Hill,
NY.
6. Kotter, J. P. (1996) Leading Change, 1st edition, Harvard Business School Press.
7. Porter, M. E. (1980) Competitive Strategy, The Free Press, New York
8. Porter, M. E. (1998) Competitive Advantage-Creating and sustaining superior
performance, The Free Press New York.
9. Wasson, C. R. (1974) Dynamic competitive strategy and product life cycles, Challenge
Books.
Journals and Articles:
10. Bartlett, C. A. and Wozny, M. (2005) GEs Two-Decade Transformation: Jack Welchs
Leadership, Harvard Business Review, 9-399-150, May 3, 2005.
11. Fisher, M. (1997) What is the right Supply Chain for your product? Harvard Business
Review, Mar/Apr 97.
12. Hoyt, D. And Silverman, A. (2007) Crocs: Revolutionizing an Industrys Supply Chain
Model for Competitive Advantage, Stanford Graduate School of Business, Case GS-57.
13. Kraljic, P. (1983) Purchasing must become Supply Management, Harvard Business
Review, Sep/Oct 83, Vol. 61 Issue 5, pp 109-117.
Internet Sources:
14. http://articles.moneycentral.msn.com
15. http://money.aol.com
16. www.crocs.com

Other References:

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17. Harrison, A. and New, C. (2002) The role of coherent supply chain strategy and
performance management in achieving competitive advantage: an international survey,
Journal of the Operational Research Society, Vol. 53, No. 3, pp. 263-271.
18. Harvard Business Review on Supply Chain Management (2006), Harvard Business
School Press.
19. Johnson, E. M. And Pyke D. F., Integration and Globalization in the Age of e-Business,
21st Century Management: A Reference Handbook (2008), Sage Publications.
20. Taylor, D. (1997) Global Cases in Logistics and Supply Chain Management, Thomson.

Case Study 2: Systematic Problem Solving (Six Sigma) to Solve an Actual Problem in a
Car Manufacturing Industry
Introduction
The great pioneer companies like GE, Motorola, American express, are just some of the
successful companies which have taken benefits of six sigma in recent years that brings them
incredible increase in profits and market share.
Industries in our country special car manufacturing industry are passing critical era. They
must prepare themselves as soon as possible to enter world of competitive market. So they
have to increase quality to worldwide level and decrease the costs to reach economical scale
in production. They can use six sigma tools as a key to reach these targets. This can be done
by defining improvement projects with a very systematic phase through problem solving (as
we have six sigma).
1. Define Phase:

In order to clarify present situation, complete information about noise of cars has been
gathered by gemba investigations and measurements, which became the basis of project
definition.
14

In define phase, team working scope, team members and champions, targets and CTQ is
defined. In Fig.1 the main charter of project, which included mentioned information, has been
shown.

Fig.1
The main controllable characteristic of this project (y) is the negative score of whole defects
are regarding to noise of vehicle, which is measured by third level auditor (IDRO).

2. Measurement phase:

Regarding to final audits information (the audit which represents customer view and is done
after commercialization of car. this process is doing in car manufacturing of Iran officially by
IDRO ), it is shown that level of internal and external noise of car is above Iran Khodros
standard limits.
Based on present information, it is clear that the sigma level of process is ZERO.
In early analysis, three modules which are noise source in cars, has been distinguished:
1. Internal noise of car
2. External noise of car
3. Under body noise

15

Because of numerous sources of causing noise in cars, 32 subprojects have been defined to
decrease and control the noise problems in 405. For this aim all projects must have been
started and improved simultaneously.
The start date of projects is mid September and the predicted duration was 6 month.
The most important sources of noise in 405 cars can be narrowed down to:

1. Fuel tanks door

2. Side windows
3. Parcel shelf
4. Dashboard
5. Drivers seat
6. Trunk door
3. Analyse phase:
For analyzing each important source of defect, which mentioned before (7 items), has been
analyzed separately and using brain storming and gemba investigation. 5M of defect have
been drawn. (One sample has been presented in Fig.2 for noise of front drivers seat).

Fig.2

After investigating potential causes of the most repetitive defects, repetitive root causes are
known and related corrective action has been considered to be followed up in next phases.
4. Improvement phase:
16

Knowing potential and practical root causes based on brainstorming, fish bone diagrams, and
also gemba investigations, Leaded us to real repetitive causes which need to be corrected and
solved. So related corrective action has been defined.
Sample of action plans for noise of front seat has been presented in Fig.3
SEAT ACTION PLAN
1

Decreasing the loosing tolerance in recliner of seat

SAPCO

Adding a specific tat around the foam of seat to decrease the

rubbing noise

SAPCO

3.

Defining and applying proper welding point in joint venture of two

parts of
seat for decreasing metal parts contacts

SAPCO

4.

Define and apply proper gap between seat cover and its structure

SAPCO

Cutting down the stopper slider of seat

R&D

Decreasing noise of fuel regulator (CNG)

SAPCO

Fig. 3

5. Control phase:
In the beginning of this project the negative score (based on defect per unit) was 1.053, the
target of noise in 405 cars was 0.2, but using systematic problem solving with support of
managers reached us to 0.15 DPU.

Conclusion

In this paper application of a systematic problem solving has briefly explained which resulted
in noticeable improvement of a defect situation (noise of 405 cars). This has been done with
the help of DMAIC tools.
The sigma level of this defect has increased wonderfully from zero to 2.175 and so the
negative score from 1.053 has been decreased to 0.15 (below the target of 0.2 of project). In
summary, it can be claimed that application of six sigma can help us to reach enormous
redaction in cost (based on redaction of level of reworks and scrubs which is the logical result
of a decreasing defects). Improvement in product and process quality level and so sup rising
improvement in profit making and share of markets. These are essential items for companies
survival in present competitive world.
17

Beside standardization and publication of case studies can help trainings and spreading the
six sigma knowledge application in learning organization .

Refrences:
1-Hidetoshi Shibata (2003) "ProblemSolving: Definition, terminology, and patterns"
2- Raskin, Andy, A Higher Plane of Problem Solving. TRIZ Journal, June 2003, Vol. 4,
Issue 5, p. 54
3- Darrell L., Mann, "Better technology forecasting using systematic innovation methods",
Technological Forecasting & Social Change Journal, Vol. 70, pp 779- 795. 2003.
4-Kane,V.E(1986)"Process Capability Index"Journal of Quality Technology,Vol,18.

Case Study 3:
Inventory Management at Amazon.com

Amazon has grown admirably from its initial beginnings as a small online bookseller to a
giant superstore company. During this process of rapid growth, it has incurred significant
losses and it becomes more expose to a greater competition and threats. Cutting costs and
achieving profitability remain Amazons greatest challenges. However, there are key factors
such as a strong brand, providing customers with outstanding value and a superior shopping
experience, massive sales volume and realizing economies of scale which contribute a lot to
the success of this company.
Founded as Cadabra.com by Jeff Bezos in 1994, Amazon.com was launched in 1995. It is an
American electronic commerce company based in Seattle, Washington. It is one of the first
major companies to sell goods over the Internet and one of the most recognized and respected
online businesses. It has become the number one online retailer by steadily building its
reputation and brand, beginning its operation in July of 1995.
Moreover, it has expanded from its existing business of selling books to selling a wide variety
of products such as DVDs, music CDs, computer software, video games, electronics, apparel,
furniture, food and more (Wikipedia 2006). Similarly, Amazon aside from its domestically
18

shared market also set up four other separate online stores in the United Kingdom, France and
Japan, thus shipping globally on selected products.

Analysis

Swot Analysis
Strengths:
1. Customer Relationship Management (CRM) and Information Technology (IT) support
Amazon's business strategy. The company carefully records data on customer buyer
behavior. This enables them to offer to individual specific items, or bundles of items,
based upon preferences demonstrated through purchases or items visited.
2. Amazon is a huge global brand. It is recognizable for two main reasons. It was one of
the original dotcoms, and over the last decade it has developed a customer base of
around 30 million people. It was an early exploiter of online technologies for ecommerce, which made it one of the first online retailers. It has built on nits early
successes with books, and now has product categories that include electronics, toys
and games, DIY and more.
3. Product diversification from books and CD/DVD markets has provided additional
customers in other product areas and indicates strategic movement to grow the
business through new customer bases
4. Strong distribution channel
5. Negative cash cycle
6. Low prices

Weakness:
1. Amazon are dependent on external delivery companies to carry out the delivery
function of the interface with the customer which can lead to uncontrollable service
level problems and potential cost increases in line with the wider transportation
industry such as rising fuel and increased vehicle taxation. If these costs are not
absorbed they are passed back to the consumer both with potential negative effects.
2. As Amazon adds new categories to its business, it risks damaging its brand. Amazon
is the number one retailer for books; diversification may lead to losses and decrease in
brand value.
19

3. The company may at some point need to reconsider its strategy of offering free
shipping to customers. It is a fair strategy since one could visit a more local retailer,
and pay no costs. However the shipping costs could be up to $500m, and such a high
figure would undoubtedly erode profits.
4. No region based sites.

Opportunities:
1. Online retailing is still not matured in India, it can tap the market.
2. There are also opportunities for Amazon to build collaborations with the public sector.
For example the company announced a deal with the British Library, London, in
2004. The benefit is that customers can search for rare or antique books. The library's
catalogue of published works is now on the Amazon website, meaning it has details of
more than 2.5m books on the site.
3. Growth of internet users in the next five years, predominantly in the international

market.
4. E-commerce expansion in Asia and the Pacific

Threats:
1. Increasing transportation costs will directly impact delivery charges to customers - as
these costs are not absorbed into the direct business but paid to a third party it is
assumed these will be directly passed onto the consumer which can have a negative
impact to brand perception from the consumer viewpoint.
2. Competition will increase due to the low barriers to entry in the market: offline
companies are coming online
3. Low economic performance of world economy
4. The products that Amazon sells tend to be bought as gifts, especially at Christmas.
This means that there is an element of seasonality to the business. However, by
trading in overseas markets in different cultures such seasonality may not be
enduring.
5. Hackers problem

Industrial Analysis

20

Five forces model which was proposed by Michael Porter, provides a robust and time-tested
framework for analyzing any industry, reflected in the strength of the five forces (industry
competitors, potential entrants, and threat of substitutes, power of buyers and power of
suppliers). The collective strength of the five forces determines the ultimate profit potential in
an industry.
Barriers to Entry
Threat of entry is considered medium to low. Being the first mover in online bookstore
industry, Amazon would be the best example of what amateur firms would be faced. The
factor that separates Amazon from the inexperienced firms is its 8-year capital intensive and
continuous upgrade of services through acquisitions and alliances, nurturing the commissionbased associate websites, and endless technology development and innovation. Imitating
such would also require relationship building which is difficult when relationship is already
established by the first mover, or in the case of untapped technology partners, requires
significant capital and strategic plan proposals to move the other party. In both cases, known
industry players would be the benchmark requiring the deal a considerable amount of time
and money impractical for the new player.
The book retail industry has very high barriers to entry. The capital requirements necessary to
establish a bricks and mortar bookstore would be virtually impossible for a newcomer.
Consumers know the big name players. High product awareness and large marketing budgets
make it very difficult for new entrants to enter into this industry.
Inter firm Rivalry
Competitive rivalry is medium to high. There are numerous industry players; however, they
can be considered niche (eBay) and overly diversified (Yahoo!) competitors of a diversified
industry firm like Amazon. As a result, a head-to-head competition exists against Barneys
(who is backed by retail stores) and Price line (who has the highest employee per revenue
contribution in the industry) created strategic group together with Amazon. Adding the flame
of intensified rivalry is the high fixed and storage costs of the industry since firms needed to
stock inventory in their warehouses for ready delivery of an order. Competitors also have
little product differentiation, except for auctioned product maybe and other exclusive rights of
players to sell suppliers products, making customer switching costs low.
Looking at the entire book retail industry, competition is quite diverse. A consumer could
purchase books from a bricks and mortar store, which could be a large chain, a non-book
retail store, or a small independent store. A consumer could also choose to buy their books
on-line. With the onset of Internet bookstores, price is even more of a factor in consumer
book purchasing.
Buyer power
Buyer power is higher when buyers have more choices. Businesses are forced to add value to
their products and services to get loyalty. Many loyalty programs include excellent services
that customers demand on-line. Customers want to solve their problems and many times they
21

are more successful on-line than on-phone. Also, we see internet savvy businesses springing
up offering more valuable goods and services at lower costs. Now with the advent of eBay,
many people are assuming roles as drop shippers. Individuals can have a thriving business
selling goods of larger companies without having to carry inventory.
Supplier power
Supplier power is higher when buyers have fewer choices from whom to buy. As mentioned
earlier, drop shipping has increased the amount of suppliers available. All an individual has to
do is form an agreement to sell products for the company. The company takes care of all the
logistics. The same is true of associates programs that amazon.com and google.com offer.
Associates allow a webmaster to earn money by recommending products from others. This
increases supplier offerings.
Threat of substitute
Threat of substitute products or services is high when there are many product alternatives.
This is different than having many suppliers. Examples of alternatives are exchanging brand
names, substituting credit card capabilities, and looking at better values from cheaper
sources. The internet allows this with the "global economy". We can substitute product by
purchasing from companies overseas where labor, services and products are cheaper, but of
comparable quality.
Online Marketing

Competition today in the online retail business is fierce, and Amazon.com has some of the
toughest competition in the World. Among the most prominent competition are Barnes &
Noble and Time Warner publishing which although is new to the scene, has an abundance of
capital to back its venture into the online retail book business. "Independent bookstores are
rapidly disappearing amid the dominance of superstores such as Borders and Barnes &
Noble.. As recent as five years ago, there were over 5,500 independent bookstores in the
United States. Presently, there are only approximately 3,300 according to a Book Industry
Study Group Inc. report.

Online marketing domains

The four major online marketing domains are shown in figure given below
Targeted to
consumers

Targeted
to
businesse

22

Initiated
by
business
Initiated by
consumers

Business to consumer (B2C)

It is selling goods and services to final consumers. Todays consumers can buy almost
anything online from- clothing, kitchen gadgets and airline tickets to computers and cars.
According to the Associated Chambers of Commerce and Industry of India (Assocham),
Delhi e-shoppers Population was 20 percent in 2006-07, in Mumbai it was 24 percent with
maximum e-shopping taking place in electronic gadgets, apparel and design purchases,
railways, and air and movie tickets. As more and more people find their way onto the web.
The population of online consumers is becoming more main stream and diverse. The web
now offers marketers a palette of different kind of consumers seeking different kinds of
consumers
seeking
B2C
B2B
different kinds
of
online
experience.
Internet
(business to
(business to
consumers
differ
from
traditional
offline
Consumer)
business)
consumers in
their
C2C
C2B
approaches in
buying and in
(consumer to
(consumer to
their response
in marketing.
In the internet
exchange
Consumer
business)
process
customers
initiate and control the contact. Consumers compare prices, visits different sites and then do
purchasing.
This type is used by many online companies like- Amazon.com, GAP.
Business to Business (B2B)
B2B marketers use B2b web sites, e-mail, online product catalogue, online trading networks,
and other online resources to reach new business customers, serve current customers more
effectively and obtain buying efficiencies and better prices.
Most major B2B marketers now offer product information, customer purchasing and
customer support services online. For example- corporate buyers can visit sun Microsystems
web site (www.sun.com), select detailed descriptions of suns products and solutions request
sales and service information. Another example is of CISCO it takes 80% of its order online.
23

Consumer to Consumers (C2C)

Much consumer to consumer online marketing and communication occurs on the web
between interested parties over a wide range of products and subjects. In some cases the
internet provider the internet provides an excellent means by which consumers can buy or
exchange goods or information directly with one another. For example- Amazon.com
auctions, e-bay.
Consumers to Business (C2B)
The final online marketing domain is consumer to business online marketing. With the help
of internet consumers find it easier to communicate with the companies. Most companies
now invite prospects and customers to send in suggestions and questions via company
websites. Beyond this rather than waiting for invitation consumers can search out sellers on
the web learn about their offers, initiate purchase and give feedback.
Types of online marketing
Companies of all types are now marketing online. Two types of online marketers are there:1. Click only companies
2. Click and mortar companies

Click only companies

Click only companies come in many shapes and sizes. They include e -tailors, dot- comes that
sell products and services directly to final buyers via the internet. Examples- Amazon.com.
The click only companies also include search engines and portals such as yahoo and Google,
which started as search engines and later added services such as news, weather forecast, stock
reports, entertainment etc. The hype surrounding such click-only web business reached
astronomical levels during the dot-com gold rush of the late 1990s, when avid investors
drove dot-com stock prices to dizzying heights. However the investing frenzies collapsed in
the year2000, and many high- flying, overvalued dot coms came crashing back to the earth.
Click and- mortar companies
As the internet grew established bricks- and-mortar companies realized that to compete
effectively with online competitors they had to online themselves. Thus, many one-time
brick-and mortar companies are now prospering as click-and-mortar companies. For
example-office depots more than 1,000 office- supply superstores rack up annual sales of
$13.5 billion in more than 23 countries but you might be surprised to learn that office depots
fastest recent growth has come not from its traditional brick-and mortar channels ,but
from the internet.

24

Inventory management
When Bezos started his venture, he aimed at hassle free operations. He wanted to offer his
customers a wide selection of books, but did not want to spend time and money on opening
stores and warehouses and in dealing with the inventory. He however realized that the only
way to satisfy customers and at the same time make sure that Amazon enjoyed the benefits of
time and cost efficiency was to maintain its own warehouse. Building warehouses and
operating them was a very tough decision for Bezos. Each warehouse cost him around $ 50
million and in order to get the money, Amazon issued $ 2 billion as bonds.

In 1999, Amazon added six warehouses in Fernley, Nevada, Coffeyville, Kansas,

Campbellsville/ Kentucky, Lexington, Kentucky, McDonough, Georgia and Grand Forks,
North Dakota. On the whole Amazon had ten warehouses. In the same year Amazon
increased its worldwide warehousing capacity from 300,000 square feet to over five million
square feet. Since Amazon ordered books and other products from warehouses only after the
customers had agreed to buy them the return rate was only 0.25 percent compared to the
return rate of 30 percent in many segments of the online retail industry.

Amazons warehouses which was a quarter-mile long yards wide stored millions of books,
CDs, toys and hardware. They were very well maintained and completely computerized. In
fact the number of lines of code used by Amazons warehouses was the same as the number
used by its website. Whenever a customer placed an order a series of automated events
followed which made inventory management easier.
When a customer ordered a book from Amazon his invoice mentioned the title of the book
followed by a barcode. This was a code of numbers such as 6-5-4 which indicated the books
location in the warehouse. Computers sent signals to the workers wireless receivers telling
those items had to be picked off the shelves. The workers decided the order in which the
items had to be picked and then verified the weight of each product.
These products were kept in a green crate which contained orders of different customers,
when this got filled they were placed on conveyor belt and sent to central point. Here the
barcodes were matched with the order numbers to find out who would receive each item.
Then they were packed and parceled. Most of the orders were shipped either through the
United States postal service or United States parcel service whichever is located nearer.

In the holiday season of 1999, Amazon was determined not to disappoint any customer who
visited its site for his holiday shopping. Accordingly Bezos decided to stock the stores with
every possible item that customers were likely to buy. Although this strategy was appreciated
but Bezos faced a lot of problems.
25

It was then Bezos realized the importance of Inventory Management and decided to reduce
the size of inventories, this was made possible by managing the warehouses efficiently.
Amazon made careful decisions about which products to buy from where. Then the company
decided to manage distributing channels. An important decision was taken was buying of
books, CDs videos etc. directly from publishers rather than from distributors. They upgraded
the software and also tried split shipments.

Amazon also tried to cut down its expenses. It decided to outsource some of its routine
activities so that it could concentrate better on its core activities. It partnered with other
companies for shipping the inventory. So, while the partners shipped the items, Amazon
leveraged on its e-commerce expertise. It revamped the layout of its warehouses making it
easier for the company to locate and sort customers. By doing this it managed to save all the
expenses related to filling and shipping orders. Improved inventory management helped
Amazon to get net profit of $ 5 million in the fourth quarter of 2001 after accumulating a
deficit of $2.86 billion in seven years since its launch in 1995.
Inventory outsourcing

Outsourcing is subcontracting a service such as product design or manufacturing, to a thirdparty company. The decision to outsource is often made in the interest of lowering cost or
making better use of time and energy costs, redirecting or conserving energy directed at the
competencies of a particular business, or to make more efficient use of land, labor, capital,
(information) technology and resources. Outsourcing became part of the business lexicon
during the 1980s. It is essentially a division of labour. Outsourcing in the information
technology field has two meanings. One is to commission the development of an application
to another organization, usually a company that specializes in the development of this type of
application. The other is to hire the services of another company to manage all or parts of the
services that otherwise would be rendered by an IT unit of the organization. The latter
concept might not include development of new applications.
Drop shipment model
Drop shipping is a supply chain management technique in which the retailer does not keep
goods in stock, but instead transfers customer orders and shipment details to either the
manufacturer or a wholesaler, who then ships the goods directly to the customer. As in all
retail businesses, the retailers make their profit on the difference between the wholesale and
retail price.
In 2001 Amazon decided to outsource its inventory though it knew that it was a huge risk.
When Amazon managed its own inventory it had earned the reputation of providing superior
customer service, which was its biggest strength.
26

Amazon did not stock every offered on its site. It stocked only those items that were popular
and frequently purchased. If a book that is not so popular is ordered Amazon requested that
item from its distributor who then shipped it to the company. In the company, the items the
items were unpacked and then shipped to the respective customers. So basically, Amazon
acted as a trans-shipment centre and ensured that the entire process of shipping from the
distributor to customer was done very efficiently.
The main distributors of Amazon included Ingram Micro and Cell Star handled cell phone
sales while Ingram Micro, a whole sale distributor, handled computers and books. Amazon
had external distributors for most of its products except the bestsellers. Further Amazon
entered into contract with Ingram Micro Inc. for distribution of desktops, laptops and other
computer accessories. Drop shipment model was very successful so Amazon decided to
extend this model to all categories too. The major disadvantage of this model was if the
customers ordered only a single item at a time the drop shipment model was extremely
helpful, but if a single ordered had several items such as a book stocked by Ingram and a
game stocked by Amazon, then the following procedure was adopted: Ingram sent book to
Amazon, Amazon added the game then forwarded the whole box to the customer. Since
almost 35 percent of orders placed at Amazon were of different categories the drop shipment
model was not very effective.
In 2001, Bezos came up with the idea of including the products of competing retailers and
some used items on their website. Amazon earned almost the same profit selling on
commission as it earned on retail. An advantage of this feature was customers could now
verify the prices of Amazons products vis a vis those of other retailers. So the company did
not need to advertise its low price.
By 2003Amazon, s warehouse could handle thrice the volume they used to handle in 1999,
while the cost of operating them decreased from 20 percent of Amazons revenue to less than
10 percent. In 2003 Amazon decided to slash down its shipping charges. Customers who
visited the site were greeted with a pop up window announcing the companys decision to
provide free shipping for those who bought two or more items in any combination from the
sites books, music, or video stores. The company also decided to reduce shipping charges.
Though Amazon spent millions of rupees in marketing in order to get new customers it
managed to leverage the amount spent because of its lower capital costs. Generally physical
bookstores having a wide range of books needed to stock about 160 days worth of inventory.
The distributors and publishers had to be paid 45-90 days after the books were bought from
them, in this way Amazon used to get a months of interest free money.

Conclusion
Amazon has grown admirably from its initial beginnings as a small online bookseller to a
giant superstore company. During this process of rapid growth, it has incurred significant
losses and it becomes more expose to a greater competition and threats. Cutting costs and
27

achieving profitability remain Amazons greatest challenges. However, there are key factors
such as a strong brand, providing customers with outstanding value and a superior shopping
experience, massive sales volume and realizing economies of scale which contribute a lot to
the success of this company. These factors and the people around the company help
Amazon.com to face the threats pose by other online bookstores. Essentially, the company
should aim to maintain its gross margins in its existing business and in future product lines
such as music CDs and videos. In order to do this, Amazon.com should develop strategic
partnerships with all of its main suppliers
Although online shopping has become popular over the years, Amazon had to struggle to
make profits. One of the reasons was variable costs incurred by multiple delivery attempts
and reverse logistics- the return of products by the customers. Despite all difficulties Amazon
maintained its large inventory in a very efficient way. In the late 90s, 12% of the inventory at
Amazon was stored at wrong places leading to delayed orders and lost time; by 2002 this was
reduced to 4 percent because of better software and storage facilities.
Despite all measures that Amazon took to manage its inventory more efficiently, logistics
experts still opinioned that Amazons warehouses were working less than 40 percent capacity.
According to experts Amazon should either reduce the number of warehouses or increase
their sales. With so much of competition and problems one thing is for sure that Amazon is
truly an example of how to manage inventories effectively.

Issues

Question 1
Amazon planned to do things differently for the 2000 holiday season. What were the reasons
that led to the revamping of inventory management methods? How was inventory made more
effective at Amazon?
Answer
In the holiday season of 1999, Amazon was determined not to disappoint any customer who
visited its site for holiday shopping. So, Bezos decided to stock the stores with every possible
item that customers were likely to buy. Right from the latest novel to the chartbuster movie of
the season, he wanted everything to be stored to ensure that none of the customers logged out
of the site, disappointed. In 1999, Amazon added six warehouses. On the whole Amazon had
ten warehouses. Although the strategy adopted by him was appreciated Bezos had to face a
lot of problems too while trying to manage his large inventory.
Building warehouses and operating them was a very tough decision for Bezos. Each
warehouse cost him around $50 million. Amazons warehouses were a quarter-mile long and
28

200 yards wide stored millions of books. Bezos realized the importance of managing
inventory in his company. He knew that a large number of piled up goods represented
unutilized cash which could be used elsewhere in his business. However if fewer goods were
stocked, it meant that some of the customers were bound to be disappointed. In order to
overcome this tedious task of inventory management, the company decided to do things
differently in the holiday season of 2000.
Amazon managed to reduce the size of inventories even as the company offered more
products on its site. This was made possible by managing the warehouse efficiently. Amazon
made careful decisions about which the products to buy and where to buy them from. The
company then had to decide which of the distribution centre it would send its products to and
then know how to receive and track the product once it was in the warehouse. Amazon also
decided to by its books, CDs , videos etc directly from the publishers instead of buying them
from distributors. Amazon also maintained a good relationship with its vendors so that it
could extract best deal from them.
In order to the inventory, Amazon refined its software. The new software helped the company
accommodate inventory as per the demand in different regions.
Amazon also tried to cut down its expenses. It decided to outsource some of its routine
activities so that it could concentrate better on its core activities. It partnered with other
companies for shipping the inventory. So while the partners shipped the items, Amazon
leveraged on its e-commerce expertise. It revamped the layout of its warehouses making it
easier for the company to locate and sort customer orders. By doing this, it managed to save
all expenses related to filling and shipping orders.
Improved inventory management helped Amazon record its first ever profits in the fourth
quarter of 2001. After accumulating a deficit of $5 millions in the fourth quarter of 2001.
This profit was mainly attributed to its ability to reduce costs in stocking and shipping
goods. Amazon had sales record 0f $1.1 billion in the fourth quarter of 2001 which was a
15% increases over the sales recorded during the same period the previous year. In 2002
Amazon recorded sales of $3.93 billion which was 26% higher than the sales of 2001($
3.12billion).

Question 2
Why was Amazon apprehensive about outsourcing inventory management? Do you think it
was a wise on its part to go ahead with its decision to outsource inventory management? Also
comment on the companys idea of selling other retailers products on Amazon.com.
Answer
Amazon was apprehensive about outsourcing inventory management because maintaining
large inventories for satisfying all customers was a costly affair; moreover a huge amount of
capital was locked in the form of inventory which can be used for other purpose such as
29

increasing distribution channel. Outsourcing inventory was a risky affair as when Amazon
managed its own inventory; it had earned the reputation of providing superior customer
service, which was its biggest strength.
According to our point of view it was a right decision to outsource inventory as maintaining a
huge inventory was harming Amazon. Maintaining inventory at the cost of profit cutting was
not a good decision. As we can see in the case Amazon did not fully outsourced the
inventories it keeps things which were popular. It was a very good way to cut down its
expenses and concentrate on core activities. For outsourcing it used drop- shipping model,
though it faced a lot of problems like reverse logistics and multiple delivery then also it was
profitable.
The idea of selling other retailers products on Amazon.com was very profitable according to
case. When in early 2001, Bezos came up with the idea of including the products of
competing retailers and some used items on their websites. Amazon earned almost the same
profit selling on commission as it earned selling on retail. An advantage of these features was
that the customer could now verify the prices of Amazons products vis--vis those of the
other retailers. So the company did not need to advertise its low prices. Said Bezos, giving
people the choice to buy new and used side by side is the good for the customers. Give them
the choice. They are not going to hurt themselves with that choice. The data we have tell us
that customers who buy used books from us go on to buy more new books than they have
ever bought before. They may not want to plunk down $25 for a brand new author theyve
never tried. This lets them experiments. By 2003, Amazon only handled the net orders, the
companies handled the inventory. This service proved to be immensely profitable for
Amazon.

Bibliography
Websites
1. www.wikepedia.com

2. www.wilsonweb.com

3. www.expressindia.com

4. www.siliconindia.com

5. www.amazon.com
30

Books Referred
1. Principles of Marketing, Philip Kotler
2. Supply chain management and e- commerce, Charles c. Poirier & Michael J. Bauer

Case Study 4:
Quality Control and Quality Assurance at Construction Site

INTRODUCTION
Construction Management:

Construction Management refers to the study and practice of the managerial and
technological aspects of the construction industry.

Construction manager has to do project planning, cost management, safety

management, quality management etc.

Quality management is very essential

Under this heading quality control and quality assurance is practiced.

Definition

Quality control (QC): Is the on-going, comprehensive, independent checking and

verification of those activities, which lead to a final product that meets or exceeds the
Departments requirements.
31

Quality Assurance (QA): Is all those actions necessary to provide confidence that the
Departments Quality Control process has occurred.

Need For Quality Control and Assurance in Construction:

Concern for project managers

Even minor defects in constructed facilities can cause heavy loss

Quality control during construction consists largely of insuring conformance to this

original design and planning decisions.

ORGANIZING FOR QUALITY CONTROL AND ASSURANCE

A variety of different organizations are possible for quality control during

construction

Most common practice is to have two groups: For quality control and For Quality
assurance.

In large organization separate departments are formed.

Specific Individuals are assigned with these functions on small projects.

In both the cases project manager is concerned for the work.

Work and Material Specifications

Specifications of work quality are an important feature of facility designs.

General specifications of work quality are available in numerous fields and are issued
in publications of organizations such as the American Society for Testing and
Materials (ASTM), the American National Standards Institute (ANSI) and Indian
standard codes for different work quality.

Sometimes these specifications have to be changed depending upon the field

conditions.

Approach to Quality Control by Statistical Methods:

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An ideal quality control program might test all materials and work on a particular
facility.

For example, non-destructive techniques such as x-ray inspection of welds can be

used throughout a facility.

Exhaustive or 100%percnt; testing of all materials and work by inspectors can be

exceedingly expensive.

As a result, small samples are used to establish the basis of accepting or rejecting a
particular work item.

Statistical methods are used to interpret the results of test on a small sample to reach a
conclusion.

Quality Control and Assurance Plan

An inventory agency responsible for coordinating QA/QC activities;

A QA/QC plan;

General QC procedures;

Source category-specific QC procedures;

QA review procedures;

Reporting, documentation, and archiving procedures.

Objectives of QA Plan

Describe the quality program and organization to be implemented so that the project
is constructed in accordance with the contract requirements and industry standards;

Describe guidelines for inspection and documentation of construction activities;

Provide reasonable assurance that the completed work will meet or exceed the
requirements of the construction drawings and specifications.

Project QC/QA Organization

Construction Manager
Construction Contractors
Site Manager
Construction Quality Assurance Officer
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Senior Field Engineer

Field Inspectors

QC Testing:

As required by the contract specifications, the contractor shall establish a test program

To ensure that all required testing is properly identified, planned, documented and
performed under controlled and suitable environmental conditions, including
cleanliness

QA Testing:
The CQAO will be responsible for the QA materials sampling and testing program.QA testing
is provided for the verification of the adequacy and effectiveness of the contractors QC
testing.

Why Quality Assurance Programs fail:

Starting site work without an acceptable, approved Quality Control Plan

Inadequately developed Quality Control contract provisions

Inadequately enforced Quality Control contract provisions

Delay in submitting an acceptable Quality Control Plan

Inadequate qualifications of personnel in the quality control organization

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Untimely or incomplete reports

Failure to take corrective action when deficiencies exist

Late or incomplete reporting of tests and inspections

Lack of interest by contractors management personnel

CASE STUDY

Six/Four Laning of Bharuch-Surat Section Of Nh-8, On Bot Basis (Bot Package-2)

Salient Features of the Project:

Type of project : Infrastructure

Type of contract : Built operate transfer (BOT)

End use of project : Road transportation

Owner/ Authority : National Highway Authority of India (NHAI)

Concessionaire: M/s IDAA infrastructure Ltd.

Contractor : M/s IRB Infrastructures Pvt Ltd

Independent Consultant : M/s STUP consultants Pvt Ltd

PMC : M/s NAC designs Pvt Ltd

Date of signing of concession agreement: 7th July 2006

Date of starting: 7thJanuary 2007

Construction Time frame: 30 months

Intended date of completion: 6th July 2009

Concession period: 15 years

Quality Control and Quality Assurance Management System

FEILD INSPECTION SYSTEM

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A 3 level field quality control system is established at site. For every activity
executed, there are at least 2 agencies inspecting it

The PMC (Project Management Consultancy) appointed by Concessionaire is

responsible for day-to-day inspection of the works being done by the contractor

PMC inspects the work for its accordance with specifications and after finding it
appropriate allows the contractor for further work by accepting the RFI submitted as
Accepted . Without approval of consultant contractor cannot proceed further on that
work

Other than PMC appointed by the concessionaire the client NHAI has appointed an
Independent Consultant (IC) for monitoring of works on its behalf.

Contractor itself has deployed engineers to monitor the work going on project

REQUSITION FOR INSPECTION (RFI)

Most important documentary evidence for a work executed by the contractor is RFI .It
is a detail sheet of all aspects of works executed.

Along with the RFI, documents pertaining to levels, formwork, and inspection
checklists, material test results, Concrete pour card, Stressing and grouting records,
material consumption records, comments of independent and engineering consultant.

MATERIAL TESTING

One of the important aspects of quality management is quality of materials. And for
maintaining a regular check on quality of material a field laboratory housing all the
necessary tools and equipments becomes a must on large scale projects.

Regular testing of all materials is required as the batches of supply keep on changing
and the ultimate quality of the structure is highly dependant on quality and properties
of the used material.

FIELD LABORATORY

For testing properties and quality of materials used and for other quality checks on
concrete and bitumen mix tests a site laboratory is of great importance.

Most important of its benefits is of quick and at will results.

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SPECIFICATIONS

All the Materials shall be tested and incorporated in the works by the contractor after
obtaining the approval of the engineer (PMC Consultants)

The Contractor shall arrange to provide fully furnished and adequately equipped field
laboratory constructed near the site. The field laboratory shall preferably be located
adjacent to the site office of the Engineer.

MATERIALS
Testing procedures for materials are as follows
a).Soil
Tests conducted on Soil are as follows:
1. Grain size distribution
2. Liquid and Plastic limit
3. California bearing test
4. Density test
5. Density of compacted soil Nuclear density test/Sand
replacement
6. Plate load test for compacted soil in approaches
b) Bitumen and Bituminous Mixes
Testing of Bitumen and Bituminous Mixes
1. Penetration Test
2. Ductility Test
3. Softening Point Test
c) Aggregates
Tests Conducted On Road Aggregates
1. Flakiness and elongation index
2. Los Angeles abrasion value
3. Aggregate impact value
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4. Water absorption

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