The other side of the coin: Amazon’s future threats

Part 2

By Henry F. Camp and Eli Schragenheim

What future threats does Amazon face?  Don’t believe they are bulletproof because of their current dominant position or an internal culture that embraces Jeff Bezos’ “Day One” philosophy, which demands companies to stay as sharp as they were when they were first founded – vulnerable, before amassing financial or political strength.  While Amazon serves its customers well, it behaves differently with its lower-level employees and even many of its business collaborators are less than satisfied.

As with any company that operates on a massive scale, there is significant pressure on Amazon to control wages.  This is obvious, right?  Their size, in terms of the sheer number of employees, means that paying well would come at a tremendous cost.  After all, the purpose of getting big was to gain operational efficiencies that allow Amazon to both earn high profits and offer low prices.  Given their customer orientation, this combination means Amazon feels it must look out for its customers at the expense of its employees and suppliers.

The Amazon decisive competitive edge relies on efficiencies.  The company’s approach to achieving them is multidimensional.  They work to automate wherever possible, so they require fewer employees and gain speed and accurate delivery.  They push back on their suppliers as well, sharing the cost of providing logistics.  More on this later.

When you employ 1.5 million people, assuming 2,000 hours for each per year, adding one dollar to hourly compensation increases costs by $3 billion per year, a non-trivial consideration.  That may be exactly what they had to do to maintain operations during fiscal 2021, the year of the casual COVID-worker. 

Nevertheless, Amazon’s cash flow increased by $17 billion to $60 billion in fiscal 2021.  To put that number into perspective, it is closing in on Microsoft, $87 billion, and Apple, $120 billion, the two most profitable companies in the world, outside of government owned entities.

Now, having high profits is not intrinsically bad.  Both customers, employees, suppliers and governments alike benefit enormously from Amazon’s success.  Nor do high profits oblige the companies that earn the most to do more than any other company does for their employees.  The question of whether compensation is fair or unfair is in comparison to what other companies pay and for equivalent work in an equivalent context. 

By context, we mean culture, as well as the physical environment and relative safety.  People who work in coal mines may demand higher compensation than those who sit all day in comfortable office chairs.  A wonderful corporate culture or purpose may attract some employees, even if the pay is not up to par, such as missionary work.  Is the workplace tough or even cruel?  Bad cultures typically result in high turnover and quitting-in-place, where workers accept paychecks for doing as little as possible.  Lastly, the degree to which a person’s work relies on their ability to plan out into the future determines what Elliott Jaques called felt-fair pay.  A PhD does not expect to be paid more than their coworkers for flipping burgers at McDonalds.

Back to Amazon in particular, dozens of articles going back for years have decried their treatment of front-line employees, claiming heavy workloads and loss of autonomy, down to timed restroom breaks.  The question is, are these factors a potential risk to Amazon’s future?

Amazon is a system and a very efficient one.  A system that largely took in stride a massive increase in volume as a result of the totally unforeseen COVID pandemic.  They provided the world with goods when we were unable or unwilling to go out shopping in our neighborhood brick-and-mortar stores.

They have dialed in exactly what they expect of employees to gain this efficiency.  The hope is their customers are the beneficiaries.  Meanwhile Amazon’s payrates are not the lowest.  So, where is the risk?

From a TOC point of view, it is a local/global conflict.  The efficiencies Amazon measures their operators against are local, not global.  The reason they want higher efficiencies is to become more effective globally, across their enormous company.  It all seems to be working far better than we might have reasonably predicted.  So, again, what risk?

Systems Theory points us in the direction of an answer.  It informs us that the sum of local optima does not lead to a global optimum.  This conclusion is in sync with the TOC, which implores us to focus on the system’s constraint.  The implication is that non-constraint resources must have some slack in their scheduled workloads.  The many complaints about Amazon as an employer is that they seem to focus on “sweating the assets,” a quote from John Seddon, British consultant to service industries.  By assets he means the employees themselves.

Let’s start from Amazon’s point of view.  They have scale.  This means they can apply division of labor and workloads to an extent seldom seen.  The scale of their operations requires many distribution and sorting centers, which are generally larger than one million square feet.  They have subordinated physical centralization in favor of speed of delivery to their customers.  A high-level manager runs each of these facilities and they are scored on their efficiencies.  Getting more work out of their staff at each facility drives great customer service and validates what a person can produce.  The latter allows Amazon to know when to hire and how many which leads to low excess capacity.  All of these result in the incredibly high profits mentioned earlier.

One of us recently spoke to the manager of one of these distribution centers.  He exposed us to a problem with these measurements.  They are not applied consistently.  Safety and external events blow the circuit breakers on the metrics machine that is Amazon.

For example, during thunderstorms outside a DC (and if the buildings get any bigger, there may soon be weather inside) drivers are prohibited, for their own safety, from leaving their trucks to dash into the building.  This prevents their trucks from being unloaded.  So, if a storm persists, as they often do in the Southern United States, the DC can become both starved of inputs and constipated for lack of outputs. 

The newest and most efficient DCs employ a direct flow model where receipts that are immediately required flow directly to shipping without having to first be put away (buffered) and then picked to be shipped.  Efficient – skipping steps – resulting in faster shipments out to customers, particularly of those items that have been on backorder.  However, during a long-lasting thunderstorm, if drivers can’t deliver their loads, the DC grinds to a stop after just a few hours.  (Interestingly, the older less efficient designs that are put away first and then pick are more resilient for a much longer time when such external events occur.)  When a stoppage occurs, the efficiency metrics are ignored, as it is not the fault of the staff of the distribution center; the stoppage being caused by an external event and a built-in desire for people’s safety.

What is really interesting is that behaviors change as soon as an external event is declared.  The sub-system resets.  Training that was needed but not prescribed takes place.  Equipment that needed fixing are repaired.  Preventative maintenance is accomplished.  It seems that efficiency measurements prohibit management from doing what they instinctively understand must be done to be effective.  Without an external event to turn off the efficiency spotlight, Amazon’s top managers’ efforts to improve future productivity (training, coaching, maintenance, repairs, etc.) make the manager look bad in the short term.  We imagine this creates a pressure-cooker workplace – damned if I do, damned if I don’t.

Furthermore, there is no metric that scores how quickly the facility recovers from the externally triggered reset.  As such, what often happens is the managers of the sub-systems prolong an interrupted condition specifically to be able to afford to work on what they perceive as necessary, over and above that which is proscribed by upper management.  In other words, managers must cheat to do the right things.  Eli Goldratt described this as his fifth Engine of Disharmony: gaps between responsibility and authority. You are responsible to accomplish something both in the short-term and over the long-term but you are not given the authority to undertake the actions that are necessary to meet your responsibilities.

Let’s investigate what this revelation means to employees.  Many psychological studies, popularized by Dan Pink, suggest that there are three main drivers of motivation: autonomy, mastery and purpose.  The last two are certainly achievable at Amazon, as it is today.  Our question is about the opportunity for autonomy, other than when there is an external interruption of Amazon’s proscribed processes.

The conflict is between allowing people to realize their very human need for autonomy versus expecting them to be part of a well-oiled machine.  At this point, allow us to broaden our discussion beyond employees to include suppliers, service providers and other stakeholders.

Earlier, we promised to return to the sellers of goods through Amazon.  The desire to provide top value to customers does not extend to suppliers.  Amazon provides these owners of the products sold on its site a world class operating system but they also charge high fees.  Why?  These fees offset Amazon’s expenses.  Many Amazon partners claim that the giant dictates to their ‘partners’ and forces them to largely finance their efficiency machine.

Let us briefly explain the diagram.  For Amazon to succeed, it must be both effective at doing what the market expects and do so efficiently enough to earn a vast profit.  To gain that efficiency, they must proscribe precisely what they understand needs to be done and hold others, employees and providers, accountable for delivering.  On the other hand, in order to keep their enormous system functioning now as well as in the future, they rely on the continuing support of their stakeholders.  To maintain that support, they must honor the needs of those stakeholders to express themselves, especially when they identify and desire to implement good ideas that improve Amazon’s effectiveness.  But, how can they give stakeholders autonomy, while ensuring the flow of work for as little money as possible?

We know from Eli Goldratt’s pillars of TOC that every conflict can be eliminated.  Our intuition suggests that the D action creates a legitimate risk to the C need.  However, is there an inherent jeopardy to efficiency if they seek collaboration and allow autonomy?  With an injection of seeking advice from staff, suppliers, providers and acting on it in meaningful ways, the cloud falls apart.  The D’ action is sufficient to both be globally effective (C) and locally efficient (B).

Current relationships with its work force and suppliers cannot be fully described as win-lose (there are other places selling your wares) but it would be correct to claim that they are BIG-WIN–small-win, with Amazon always getting the bigger win.  The more their internal and external constituents accumulate objections and the longer they remain unresolved, the greater the resultant animosity.  The threatening situation is that complaints of unethical behavior are spreading through the media and might erode their customers’ trust, which seems to us is Amazon’s biggest strategic asset.  Should public opinion swing against them, the government may be forced to intervene.  Afterall, politicians love to pander to their constituents.  Many other giants have fallen.  We little folk love to tell the stories.  Antitrust is a real risk to a company of Amazon’s scale.  That should be warning enough.