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Why Amazon may be sweating when you click 'buy'

With its reliance on Chinese factories, Amazon shows what happens when a giant retailer faces disruptions from an outbreak

Amazon is likely to feel potential shortages of goods earlier than its American peers because it usually keeps fewer items on hand than the others... But that approach, called “lean inventory”, exposes Amazon more to shocks.


WHAT if the Everything Store couldn't sell everything because of disruptions from the coronavirus?

That's the situation that Amazon - which typically stocks more than 100 million items, from toilet paper to yoga pants - is working to avoid as the deadly outbreak continues to shut down and slow factories in China that produce the world's goods.

Over the past few weeks, Amazon has responded to the crisis by making larger and more frequent orders of Chinese-made products that had already been shipped to the United States, according to company emails and consultants who work with major brands. Some of its suppliers have cut back on advertising and promotions on the site so they don't run out of products too quickly.

Amazon also sent an urgent e-mail to brands on Wednesday about Prime Day, its midsummer mega sale, indicating that it has begun worrying about inventory for the event. And the company has contacted some of its third-party merchants, whose dog leashes, crayons and other products account for about 60 per cent of its sales, to figure out how their flow of goods might be impeded.

"Hello!" read one recent e-mail from Amazon to a seller, which The New York Times reviewed. "We have identified that part of your supply chain process might be China dependent and in light of the coronavirus outbreak effecting manufacturing and logistics in China, we are reaching out to you to understand its impact on your business operations."

With its reliance on Chinese manufacturing, Amazon is turning into a case study of how a giant retailer grapples with the fallout from the coronavirus and what may lie ahead for other stores. Already, dozens of companies have indicated that the virus will take a toll on them, with Apple cutting its sales expectations this week and airlines cancelling flights to China.

Retailers have said less about how the coronavirus will affect them. On Tuesday, Walmart said sales at its 430 stores in China had not faltered and added that the impact on its supply chain was unclear but might be more muted than at other companies.

Last year's trade war with China may inadvertently be helping some big retailers now. At the time, companies imported more goods than usual from China to get ahead of expected tariffs. Some moved manufacturing to Vietnam and other Asian countries. When the new tariffs never took effect, retailers were left with more supply and more sourcing from other countries already in place.

Still, if China Inc continues to be fitful beyond the next few weeks, major stores could run out of everyday products like sponges, print cartridges and construction paper by mid-April, according to a report from Wells Fargo last week. China is the largest source of imported consumer goods.

"We believe the time to start worrying about the supply chain risk" of the virus "is here," the report said.

Amazon is likely to feel potential shortages of goods earlier than its American peers because it usually keeps fewer items on hand than the others. In good times, that lets the Internet company run more efficiently because it does not tie up money to buy and store products that are waiting to be sold.

But that approach, called "lean inventory", exposes Amazon more to shocks.

"This is a cost to pay for the efficiency that a just-in-time supply chain gets you," said Guru Hariharan, a former Amazon employee and founder of CommerceIQ, a startup whose automation tools are used by major brands including Kimberly-Clark and Logitech.

Some supply problems may be hidden. Even products made in America can rely on Chinese suppliers, which may cause problems down the line. Ketchup made in a plant in Sacramento, California, for example, may depend on tomato paste or bottles and caps from China.

Amazon faces an additional wrinkle in keeping its virtual shelves stocked: while traditional retailers generally control their inventory directly, most of the products on Amazon are bought and sold by third-party merchants. Amazon simply facilitates those sales, giving it less visibility into supply.

Amazon's algorithms have now asked for six to eight weeks of supply on products made in China instead of just two or three weeks, said Mr Hariharan, who discussed the changes with large brands that supply the retailer.

Amazon has also made larger and more frequent buys, deviating from its regular cadence of automated purchases, according to company e-mails and consultants.

"Amazon issued off-cycle orders to you last night in order to prepare for possible supply chain disruptions due to recent global events originating in China," one recent email to a vendor read. Similar emails were earlier reported by Business Insider.

Fahim Naim, who managed inventory at Amazon and now advises brands selling there, said it had placed extra orders from his clients who have more than US$10 million in annual sales on the site and had marked "China" as the source of their products. Amazon's e-mails to his clients show that it is giving brands extra time to get their products to its warehouses without a penalty.

On Feb 7, the main Amazon website that sellers use to run their business posted a message that included tips for making sure Amazon's algorithms didn't ding their accounts if they couldn't fulfill orders.

Jerry Kavesh, who offers Western wear like US$85 cowboy boots on Amazon, is emblematic of the supply issues that its sellers face.

Mr Kavesh, 57, who is based in a Seattle suburb, said the factory in China that produced his cowboy hats was closed and that he did not know when it would reopen. Even after the factory's workers return, the facility needs wool from its Chinese suppliers to make the hats.

"The key component - they don't know when they are going to get that," he said.

Eddie Levine, who has been selling on Amazon since 2012, shipped more than 130 containers of toys, housewares and other goods from China last year, largely to offer on the site. He has cautioned the brands he works with against raising prices, saying that if a US$20 product suddenly costs US$40, "the last thing you want is a bad review saying it's not worth US$40".

But if the virus disruptions persist into late spring or early summer, "people will have to raise prices without even having the option because there is just no stock," he said. "That's pure supply and demand." NYTIMES