What makes artificial intelligence (AI) technology so promising is its potential use in essentially every human interaction. Whether that's accounting, energy usage, or supply chain logistics, AI can instantly analyze a situation and help its users make the best decision.
Amazon (AMZN 3.43%) has long used this technology to help its supply chain, which has helped it rise to e-commerce dominance. Read on to find out how Amazon uses this technology and offers it to other clients, too.
Predictive modeling ensures Amazon anticipates demand
AI requires a vast amount of information to function correctly. By feeding it just a few data points, it may make incorrect decisions because it doesn't have the experience to deal with a new situation. When an AI model is fed the multitude of data generated by a store the size of Amazon, it becomes easier to trust the suggestions the AI model makes.
This segment of AI, known as machine learning, allows the computer to learn new information and change its model without being programmed by a human. Having this aspect is vital, as a human cannot process all of the information that millions of Amazon transactions generate.
For example, Amazon can utilize information like time of year, location, and last year's demand to suggest lawn care supplies during the spring, while also ensuring its warehouses are stocked with those products before the rush hits. This is known as supply chain optimization, and it cuts down on expensive transportation costs.
Product delivery
When delivering products, Amazon also utilizes AI to ensure each product is delivered as efficiently as possible. The most challenging part of getting a package from point A to B is last-mile delivery, when the product finally arrives on the customer's porch. This step accounts for about 50% of the delivery costs, so getting it right is critical.
Image source: Getty Images.
In the old days, delivery drivers may have been given a list of addresses for drop-offs and could choose an inefficient route. Now, Amazon Web Services (AWS) has solutions to ensure the best possible route is taken. This model continually learns as delivery drivers follow their routes and can reoptimize in the middle of a route using real-time data.
While this may seem like a proprietary solution to Amazon's package delivery service, it's not. The same technology could also help a service industry (like an HVAC company or a laundry service) optimize which locations it services to ensure maximum efficiency.
Helping grocers ensure freshness
AWS can also be utilized by companies trying to cut down on waste from expired products like fruit and vegetables. In the grocery industry, McKinsey & Company estimates that 2% to 3% of a grocer's revenue is lost in expired product, which hurts margins in a field that has notoriously thin margins.
Image source: Getty Images.
Amazon also has skin in the game for this product, as it owns Whole Foods Market.
Amazon's stock depletion solution utilizes factors like promotions and local events, and determines whether to mark down prices or relocate products to other facilities. It also might consider running a promotion to get rid of a shipment before it goes bad, as some revenue is better than a complete loss.
While these are just some examples of how Amazon utilizes AI to modernize its supply chain and become more efficient, there are countless others. Furthermore, Amazon isn't hoarding this technology; it's available to its clients (and even competitors in some cases).
This is what makes Amazon a strong buy in today's market.
Its dual-sided AI approach through AWS products and utilizing its own solutions for its commerce gives Amazon a lot of room for efficiency gains. As Amazon improves its profitability and free cash flow metrics, the stock will start looking more attractive to investors. With these two figures steadily rising, it won't be long before they return to levels previously seen.
AMZN Net Income (TTM) data by YCharts
With the stock trading at an attractive two times sales, it's fairly priced and has strong upside thanks to its AI technologies and implementation.
Amazon has paved the way in this field, and any company not on board with an AI solution is not worth investing in. Competitors will have distinct operating advantages if they deploy even some of these solutions.
