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OM in the News: Amazon and its Prime Now

September 12, 2016
One of many corporate mantras on display for workers at a Seattle Prime Now hub.

One of many corporate mantras on display for workers at a Seattle Prime Now hub.

“Amazon’s growth has been preposterous,” writes Businessweek‘s cover story (Sept.5-11, 2016). In 2010 its annual revenue was $34 billion; last year, $107 billion. In 2010, the company employed 33,700 workers. By this June, it had 268,900. For years, Amazon lost money but poured billions into such initiatives as e-readers, robot-enhanced warehouses, smartphones, tablets, and TV shows. Yet the company just posted its 5th straight quarterly profit. Amazon Web Services, its cloud computing division, alone had 2015 sales of $7.9 billion.

Amazon’s ambitions depend on the continued success of its Prime service. For $99 a year, Amazon Prime customers get 2-day delivery at no extra charge. Those who sign up tend to spend almost 3 times as much as their non-Prime peers. Amazon had 63 million Prime members as of June—19 million more than the year before. Prime members get that fast shipping, which keeps getting faster. In many large cities, subscribers can now get free 2-hour delivery on more than 25,000 items they might otherwise have bought at Walgreens or 7-Eleven. For an additional $7.99, orders arrive within 1 hour.

Providing near-instant gratification on Amazon’s scale isn’t cheap. Last year the company spent $11.5 billion on shipping—nearly twice what it did 2 years ago. Along with leasing jets and buying trailers, Amazon has opened more than 28 sorting centers, 59 delivery stations that feed packages to local couriers, and 65 Prime Now hubs stocked with best-selling items that can be rushed to customers around the world. Amazon has a patent for “anticipatory package shipping” technology: When some Prime subscriber buys more deodorant, Amazon already has the box standing by, ready to label and ship. “It’s just one giant math exercise,” Deutsche Bank wrote, adding that Amazon has “hundreds of Ph.D. mathematicians” who spend their days optimizing logistics.

Classroom discussion questions:

  1. What OM topics are discussed in this article about Amazon?
  2. Why is prime so important to the firm?
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