Inside Amazon.co.uk: More than just a boy wizard

COMMENT Perhaps more than any other online brand, Amazon has become synonymous with the boom in internet retailing, going from strength to strength over the past 10 years.

Its fastest growing market currently is here in the UK, and silicon.com went to visit the company at its Marston Gate distribution centre - a colossal hangar of a warehouse just outside Milton Keynes.

Currently the warehouse is at its lowest stock levels after a hectic few months. The last Harry Potter book is out the door and Amazon.co.uk is yet to start stocking up ahead of Christmas. (See our 'Day in the life of an Amazon.co.uk order' photo story here).

Since last Christmas, however, the company has opened second and third distribution centres, both north of the border on the outskirts of Edinburgh and Glasgow, showing the rate at which the company is growing in terms of orders and inventory. Those two centres will be distributing electrical goods - a growing market for Amazon.co.uk which now offers everything from kettles and blenders to iPods and digital cameras.

At its busiest point, in the run-up to Christmas 2004, the Marston Gate distribution centre shipped more than 400,000 items in one day.

Perhaps even more staggering was the release of the sixth Harry Potter novel in July, which saw more than 200,000 pre-orders of just that one item, shipped for delivery on the first day of release.

Chris Bateman, senior operations manager at Amazon.co.uk, described such challenges as "a huge balancing act". While the size of the distribution centre means the company is able to keep millions of items in stock there are major benefits to be gained from managing the supply chain so it doesn't have huge stockpiles of unsold items or inefficiencies which would drive up prices.

The stock balancing operation around Harry Potter and the Half-Blood Prince worked well enough to ensure the company was only left with around 3,000 copies of the book - plus a vast empty space where the shipped copies were kept (see the pictures here).

The balance Amazon.co.uk must strike is to make sure no order goes unfulfilled but the company doesn't over-estimate the extent of the demand so as to eat further into a bottom line - already eroded by fierce price cutting - with inefficiencies in the supply chain.

"Nobody is going to put up with ordering Harry Potter only to be told it's not going to be with them until two or three days after the release date," Bateman told silicon.com.

"As soon as the customer hits 'enter' all the wheels are turning throughout the supply chain. The system will look at which distribution centre has the item in stock or where the item is and how many we have and how many we are going to need."

"Everything works continuously and dynamically. In order to keep prices down we have to have very robust management of our supply chain and work closely with our vendors so we know where everything is," added Bateman.

But for all the automation and supply chain management there is also some serious leg work which goes into running the Amazon.co.uk operation smoothly.

A large team of 'pickers' walk the floor and compile items for the orders. To assess the workload they are undertaking to ensure any inefficiencies are ironed out quickly these staff are all fitted with pedometers, according to Bateman.

"These guys are walking miles and miles each day," he said.

And anybody who walks to one of the furthest corners of the Amazon distribution centre will find a self contained area which hosts one of the companies most recent new ventures - the DVD rental service launched in December last year. (For pictures, click here and here.)

silicon.com has long suspected that December launch was not intentional, given the busiest time of year is never the best for launching a new business, and Bateman admitted it was actually intended to launch in September 2004.

"You know how it works." he told silicon.com. "September became October, became November, became December."

Amazon has recently slashed the price of its DVD rental service, aware it must play catch-up with rival online services such as Screenselect and a host of similar offerings.

It remains confident that the DVD rental business will be successful but admits establishing it posed new challenges for the company - not least of all the fact a company which prides itself on a low returns rate in its core business had launched a business unit where a 100 per cent return rate is preferable.

The systems in place make sense of a complicated return and despatch relationship. Some titles in stock - generally older and less popular titles - may sit on the shelves for some time between rentals, while popular new releases will rarely make it back onto the shelves, being opened on their return and promptly despatched again.

The supply chain management systems must work out which titles should be sent back to the shelves for restocking and which should be put aside as they are either on order with another customer or likely to be ordered within seconds or minutes of being put back.

The company embraces initiatives such as Six Sigma and strives to remove all inefficiencies within its process management.

It takes a similar approach to staffing levels which rise and fall with the peaks and troughs of its activity. It will soon begin staffing up for Christmas with large numbers of casual staff.

In the reception area there are already small groups of hopefuls filling in application forms.

But not everybody is sticking around for another Amazon Christmas. The woman within the communications department who set up the visit tells me as we leave that she's leaving.

"I've done my two Christmases, I'm out of here," she jokes.