Amazon.com 2006 Annual Report Download - page 20

fines and other financial penalties, have its licenses revoked or be forced to shut down entirely. In addition, if
Joyo.com were unable to enforce its contractual relationships with respect to management and control of its
business, it might be unable to continue to operate the business. In addition, Joyo.com is subject to many of the
risks described in “Our Business Could Suffer if We are Unsuccessful in Making, Integrating, and Maintaining
Acquisitions and Investments.”
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 or warehousing, fulfillment, and distribution capacity. A
failure to optimize inventory will increase our net shipping cost by requiring long-zone or partial shipments.
Orders from several of our international websites are fulfilled primarily from a single location, 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. As we continue to add fulfillment and warehouse
capability or add new businesses with different fulfillment requirements, our fulfillment network becomes
increasingly complex and operating it becomes more challenging. If the other businesses on whose behalf we
perform inventory fulfillment services deliver product to our fulfillment centers in excess of forecasts, we may be
unable to secure sufficient storage space and may be unable to optimize our fulfillment centers. There can be no
assurance that we will be able to operate our network effectively.
We rely on a limited number of shipping companies to deliver inventory to us and completed orders to our
customers. If we are not able to negotiate acceptable terms with these companies or they experience performance
problems or other difficulties, it could negatively impact our operating results and customer experience. In
addition, our ability to receive inbound inventory efficiently and ship completed orders to customers also may be
negatively affected by inclement weather, fire, flood, power loss, earthquakes, labor disputes, acts of war or
terrorism, acts of God and similar factors.
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, thereby increasing the complexity of
tracking inventory and operating our fulfillment centers. Our failure to properly handle such inventory or the
inability of these other companies to accurately forecast product demand would result in unexpected costs and
other harm to our business and reputation.
The Seasonality of Our Business Places Increased Strain on Our Operations
We expect a disproportionate amount of our net sales to occur during our fourth quarter. If we do not stock
or restock popular products in sufficient amounts such that we fail to meet customer demand, it could
significantly affect our revenue and our future growth. If we overstock products, we may be required to take
significant inventory markdowns or write-offs, which could reduce gross profits. We may experience an increase
in our net shipping cost due to complimentary upgrades, split-shipments, and additional long-zone shipments
necessary to ensure timely delivery for the holiday season. If too many customers access our websites within a
short period of time due to increased holiday demand, we may experience system interruptions that make our
websites unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we
sell and the attractiveness of our products and services. In addition, we may be unable to adequately staff our
fulfillment and customer service centers during these peak periods and delivery and other fulfillment companies
and customer service co-sourcers may be unable to meet the seasonal demand. We also face risks described
elsewhere in this Item 1A relating to fulfillment center optimization and inventory.
We generally have payment terms with our vendors that extend beyond the amount of time necessary to
collect proceeds from our customers. As a result of holiday sales, at December 31 of each year, our cash, cash
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