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Virtualizing Fulfillment Operations – Physical Clouds allow Amazon to Scale
Posted by Prof M. Eric Johnson on May 04, 2011 | Comment (9)
Thanks to my friends at the POMS Supply Chain College, I visited Amazon’s Fulfillment Center (Fernley NV) this week. It is an amazing operation shipping 100,000 items on a routine day and over 400,000/day during peak holiday season. While not the most automated facility I have seen, the Fernley Center has embraced a level of lean that would make Toyota proud (maybe even envious after Toyota’s recent problems). Kaizen activities increased productivity by 15% last year and they are on target to hit their goal of 24% this year. Everywhere you look, you see 5S practiced (everything neatly in its place). White boards in team meeting areas show active root cause analysis and 5 Whys are the lingo among line workers. Technology aids ensure complete orders using poka-yokes like automated scales that check the weight of each box and compare them against the known weight of the items in the order. And a sophisticated IT system releases and routes orders to ensure that picking operations are carefully timed to meet the schedule of outgoing trucks and the delivery specification of customers. A level up in the fulfillment process, algorithms running in Settle determine the best fulfillment center to handle any given order based on inventory availability, service requirements, and transportation cost.
I think one of the most interesting elements of Amazon’s fulfillment network is its ability to scale during peak holiday seasons. Besides scaling each of its fulfillment centers through labor and shift adjustments, Amazon also relies on cloud fulfillment capacity in its suppliers. Setting up fulfillment operations at supplier distribution centers allows Amazon to ship directly from those locations during crunch periods. These virtual fulfillment operations are enabled through a set of Amazon fulfillment tools including IT, hardware, and processes that bring fulfillment operations to life for short periods – much like retailers such as Toys "R" Us use pop-up stores in vacant mall store fronts. The concept gives new meaning to cloud services – both virtual and physical.
Source: BusinessWeek. Click for a slideshow of Fernley
9 comments so far
Wish I could have attended the POMS workshop and seen the Amazon facility. Sounds like a fascinating operation. Eric’s observations bring to mind a WSJ article I read a few months back (discussed on Marty Lariviere’s OperationsRoom blog I think) about the low level of automation in Amazon fulfillment centers relative to other retailers. Part of the reason was labor flexibility giving them better surge capacity for the peak seasons. All signs indicate that Amazon have devoted lots of attention to crafting an effective surge-capacity strategy.
Among other things mentioned by Eric, one thing I found interesting is that the packing / labeling line is different between single-item shipments an multi-item shipments. I was also interested in the commitment to lean. For the “sustain” portion of 5S, there are periodic audits in the work areas, and if there are no compliances (e.g., work space messy), the auditor issues a follow-up sheet for correction. As an additional point, like in many DCs, items are placed randomly in the facility, and the system keeps track of the location of an item. You could have 10 units of the same item in 10 different locations in the facility (they might have been shipped by the supplier at 10 different points in time). A picker finds the item he/she wants to pick at the designated location (by the system) 99.5% of the time. The IT infrastructure / automation is very impressive.
I was impressed by the warehouse management team. These folks knew their stuff and were quite progressive. I thought they did a particularly good job fielding questions during the question and answer session. It is clear that their knowledge extends well beyond their particular operations in the Amazon network. Excellent tour!
I too was impressed with the knowledge of the staff that led the tours. I would note that by tying together the pieces of information provided, it looks like this facility receives, verifies, stores, picks, packs, labels, and ships with about 3 minutes of labor per shipment, 70% of which are multiple item shipments. And this is not the state of the art facility!
Many thanks to Gil, Kyle, et al for putting the program together.
Soon we will be able to use Amazon again as affiliate marketers here in Colorado. I was searching for information about this subject when I came across this post. I would think their fulfillment area would have to be top-notch to keep up with all the different products that are sold. Drop shipping is the only way. Their computer power must be tremendous. Nice post.
I agree with Eric that it was a great visit arranged by POMS. During the visit, I found the 2100 bins that were used to collect mixed orders - books combined with DVDs and anything else, interesting. I wonder if this ability to deliver mixed orders all in one package (to save transport costs) is one of the warehouse’s unique capabilities. Managers seemed to prefer use of labor with some tools as against automation to retain flexibility - that too was great to hear.
Great observations by everyone. One other aspect that I found interesting was their facility location criteria. Of course there is the expected tax and availability of an inexpensive labor pool criteria, but they also would send their scouters to the local high school PTA meetings and baseball games. The purpose is to see how much community involvement there is in the area. I expect that we rarely discuss these more qualitative criteria when we teach about facility location decisions.
I have developed a warehouse assessment method based on a single company tour. Might be handy if you undertake a next warehouse company visit, or for students. it can be downloaded at:
www.rsm.nl/mhf,
click on Research, Current research.
In addition I wrote a short teaching case on the Amazon visit. Write me if you are interested!
I’m Constantly amazed by how far Amazon has come over the years. They have really done well for themselves and operations such as these show just that. 100000 - 400000 orders per day is insane. It’s impressive. I’d imagine their level of lean is quite high to keep it all organized and under control, as I’m sure it is quite chaotic in there at times.
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