Amazon.com 2003 Annual Report Download - page 19

We Face Significant Inventory Risk
We are exposed to significant inventory risks as a result of seasonality, new product launches, rapid changes
in product cycles and changes in consumer tastes with respect to our products. In order to be successful, we must
accurately predict these trends and avoid overstocking or under-stocking products. Demand for products,
however, can change significantly between the time inventory is ordered and the date of sale. In addition, when
we begin selling a new product, it is particularly difficult to forecast product demand accurately. A failure to
optimize inventory within our fulfillment network will harm our shipping margins by requiring us to make split
shipments from one or more locations, complimentary upgrades, and additional long-zone shipments necessary
to ensure timely delivery. As a result of our Merchants@ program relationships with Toysrus.com,
Babiesrus.com, Target, and other companies, these parties identify, buy, manage, and bear the financial risk of
inventory obsolescence for their corresponding stores and merchandise. As a result, if any of these parties fail to
forecast product demand or optimize inventory, we would receive reduced service fees under the agreements and
our business and reputation could be harmed.
The acquisition of certain types of inventory, or inventory from certain sources, may require significant
lead-time and prepayment, and such inventory may not be returnable. We carry a broad selection and significant
inventory levels of certain products, such as consumer electronics, and we may be unable to sell products in
sufficient quantities or during the relevant selling seasons.
Any one of the inventory risk factors set forth above may adversely affect our operating results.
If We Do Not Successfully Optimize and Operate Our Fulfillment Centers, Our Business Could Be
Harmed
If we do not successfully operate our fulfillment centers, it could significantly limit our ability to meet
customer demand. Because it is difficult to predict demand, we may not manage our facilities in an optimal way,
which may result in excess or insufficient inventory, and warehousing, fulfillment, and distribution capacity. A
failure to optimize inventory in our fulfillment network will harm our shipping margins by requiring us to make
long-zone shipments or partial shipments from one or more locations. Orders from each of our internationally
focused websites are fulfilled primarily from a single fulfillment center, and we have only a limited ability to
reroute orders to third parties for drop-shipping. We and our co-sourcers may be unable to adequately staff our
fulfillment and customer service centers. Finally, our ability to receive inbound inventory efficiently or ship
completed orders to customers may be negatively affected by a number of factors, including dependence on a
limited number of shipping companies, inclement weather, fire, flood, power loss, earthquakes, labor disputes,
acts of war or terrorism, or acts of God.
Third parties either drop-ship or otherwise fulfill an increasing portion of our customers’ orders, and we are
increasingly reliant on the reliability, quality, and future procurement of their services. Under some of our
commercial agreements, we maintain the inventory of other companies in our fulfillment centers, thereby
increasing the complexity of tracking inventory in and operating our fulfillment centers. Our failure to properly
handle such inventory or the inability or failure of these other companies to accurately forecast product demand
would result in unexpected costs and other harm to our business and reputation.
We May Not Be Able to Adequately Protect Our Intellectual Property Rights or May Be Accused of
Infringing Intellectual Property Rights of Third Parties
We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary
technology, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and
patent law, trade secret protection, and confidentiality and/or license agreements with our employees, customers,
partners, and others to protect our proprietary rights. Effective trademark, service mark, copyright, patent, and
trade secret protection may not be available in every country in which our products and services are made
available online.
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