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well companies are consistently focusing their efforts around profitability with
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some Focus being on that of scale how big or small do you want your company to be in order to reach the level of
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profitability you're looking for that question is part of an upcoming Wharton
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Executive Education course with our next guest Wharton's Gad Alan who is a professor of operations information and
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decisions here at the school Gad great to talk to you again hi then great to be here thank you and I would imagine that
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the idea of scale and figure out what that magic numbers are that's a constantly ongoing process for firms
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because the Dynamics change from quarter to quarter correct exactly so this is when we talk about scale we talk about
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both infrastructure we talk about people um I'll just you know I'll talk about
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one example for like a few years ago stripe when they saw coid starting and and the number of transactions
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increased significantly online hired significant number of people and about a year ago had to lay off 20% of them and
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Patrick hollison their CEO went on online and and wrote a a nice letter saying we made a mistake we overe
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extrapolated and didn't realize that what we see now is temporary and not going to be the the new reality and so
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now we have to lay off but this balance is not only when you think about events like Co this something you do
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continuously whenever you see an economic signal you ask yourself is this a new reality good or bad
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and does that mean that we need to now hire more people potentially slow down hiring or should we maybe even lay off
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people so this questions are is the question of scale both people infrastructure is an ongoing question
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for almost every firm that I know and then when you think about an area like retail uh this fourth quarter of the
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year is the time that they really think about scale a lot companies like Amazon and other retailers because they're
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looking to bring on employees part-time for that three-month window so that they
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can you know achieve Max profitability on their bottom line heading through the end of the year exactly so you know we
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can take Amazon is an example Amazon announced about few weeks ago that they are planning to hire
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250,000 employees part-time casual employees for just the holiday season now if you think about Amazon what's the
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main idea here Amazon knows this is really the time where people spend many of the like product toys for example 99%
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of the toys are sold during that time of the year Amazon 6x's overall volume of
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retail during the season during specifically the time from Thanksgiving to New Year and the question is the
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following right if you hire if you don't hire so many employees and demand is
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great you know the economy is great and and humming a low unemployment if you don't have enough
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people you might lose the opportunity they might see that the delivery might not be on time they might go and pick it
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up from the local store let's say from Walmart at the same time if the economy
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is hitting too much and with the inflation people are saying well I might buy gifts but maybe cheaper gifts maybe
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fewer gifts now you have significant number of people that are really not necessary and since you have to make the
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decision before you know exactly how many people you need and what's the exact status of the economy this a tough
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decision right basically figuring on what might happen off of the estimates that a lot of economists May throw out
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uh you know uh 6 months before uh that we're actually going to get into the season exactly exactly now it's it's not
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only about how good the economy is going to be but also what type of customer you're going to meet and so you can
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think about a situation where if customers are more Deal Seeking then Amazon knows how to be cheap but then it
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usually does not mean next day delivery same day delivery in which case the majority of the people will be needed in
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the centralized location in warehouses at the same time if people are going to be more in a splurgy mood so to speak
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and and would like to buy things Last Mile last minute next day then you need significantly more people in the areas
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that are closer to the customer well again last mile on demand um these are very very different type of hiring
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different locations different cost different skill set and and Amazon has to think about not only the aggregate
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number but also where do you place them isn't this very much a learning process
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as well year after year for a lot of the companies especially in retail because what a firm may experience let's say
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2019 prepandemic was obviously going to be a lot different than what they experienced during the pandemic during
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the holiday season in 2020 yes so that's a great example I think where again
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Amazon shines over the years Amazon already started hiring hundred of thousands of people several years ago
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increased that then during Co decreased and increased it back again as we went out of the pandemic but you can see how
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the firm is becoming better and better in doing that but also there is some aspects that you actually need to almost
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relearn Amazon initially was very centralized it was much easier to train these people as you bring them into a
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massive operation as Amazon become more and more decentralized I would say you can see that actually Amazon increases
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significantly the number of people they higher while their sales are not increasing at the same rate so Amazon in
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fact realizes that probably there is some level of inefficiency and they need more people than they imagin but Amazon
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seemingly they are kind of the the standout in terms of the digital economy in terms of how much they do to bring on
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now obviously as you said before their scale is a lot larger than a lot of other company scale so they have to kind
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of uh they have to uh to work with that yes I but you can see other firms are doing the same I mean I think Macy's for
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example announced I think hiring 30,000 people um I think overall this season is
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the important season for retail and and and it's if you miss the opportunity because people are
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continuously searching and there are certain brands right if you're in Apple
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for example that people may wait until the season they they will wait a few more weeks if they really couldn't find
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the Apple watch they want or the specific iPad if you're selling re just pure r if you cannot find on Amazon
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you're going to go to Maus not Maus you're going to go to Walmart so these
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firms know that during the holiday season there isn't really an opportunity to make too many
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mistakes I guess then the next question to ask is because we have seen retailers
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spread out that holiday shopping period so much is whether or not those decisions like Amazon adding 250,000
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employees will come earlier and earlier or will some of those decisions end up becoming full-time staff because you've
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stretched this season out so much yeah so Amazon is being a I think only mildly successful with that right we we we have
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Prime day but to a large extent it's in my opinion lost its luster I don't know
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really the I haven't seen the last numbers but I don't think it's as
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impressive as it was in the past Amazon had something in September which was their way of of selling dead inventory
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they claim of course it was a consumer facing activity but but it was very clear that was primarily selling things
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that were just occupying too much space in capital in China it is being successful Alibaba Alibaba is being
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somewhat successful in doing that I don't think in the US I've seen firms
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that really significantly manage to alter the economics of the holidays but the the number for Amazon this year with
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250,000 that seems like well and above what we've seen in the past correct and
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I I think they've been in and around a 100,000 when they've added people at the
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holidays this is just so far beyond what we've what we've seen and expected from
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them yes so so it is and and and primarily well Amazon already crossed 200,000 before once but but it's not not
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to that level that we've seen before to to 250 but also one is to say Amazon
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also grew quite a bit over the last few years I think one one number to think about Amazon started coid with around
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750,000 employees they finished coid I me at least the period that we call the main pandemic with a million and a half
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people so Amazon also doubled over the last few years this is part of a transition where I mentioned that a few
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seconds ago where Amazon moved from being extremely centralized where many of these efficiencies are actually built
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to being extremely decentralized there are now 90 metropolitans in the US where when you place an order within 11
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minutes it's ready to be shipped some of that is automation to a large extent this is very human labor
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driven and and so Amazon the reason Amazon is going so much abroad is that is that their demand increased their
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scale increased but also their inefficiencies increased which if you look at Amazon for example shipping
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costs as percentage of revenues or fulfillment cost percent of revenues which are both indicators of
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efficiencies since 2010 all the way to now we're talking about the 13ear stretch every year Amazon is becoming
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less and less efficient so the fact that they go and needs so many employees is driven to some extent also by the fact
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that it's just not as efficient as it was initially and of course they're a
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company that has so many more uh kind of sectors under the larger umbrella than other companies uh as well do so they're
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they're almost a little bit of a unicorn in this in this entire process very very much so I mean I think
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their their ability to really delve into and I'm talking about just if we talk
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about retail Amazon has this fulfilled by Amazon and this notion of Supply Chain by Amazon where Amazon actually by
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now uses the infrastructure was built initially just to support inventory of of Amazon's inventory and support
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fulfillment to by now support everything from fish magnets to a school supplies to almost everything you can imagine how
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much do companies then have to focus on not only that window using the retail example during the holidays of bringing
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those employees on but those inefficiencies that you talked about and and kind of making that adjustment for
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the next year yeah so you it's interesting you say that because if you look at what Andy jasse the the new CEO
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not new by now from 2021 talking about is that part of the legacy of what he got was the The Firm
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was growing very very fast continuously being built on growth but now his job is
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to realize many of these in many of these inefficiencies and to try to convert them so a big part of what he
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did over the last year at least is try to build inefficiencies build efficiencies into that so for example
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Amazon as it doubled its number of employees also doubled its warehouse space you see them actually calibrating
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that recalibrating that to address the fact that if you continue and acquire more of these you're just never going to
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be profitable at the level of profitability needed to sustain their stock prices and I guess is it safe to
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say that as we continue to move forward into the future and Technology plays an even bigger role and AI comes uh forward
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even more so that a lot of these Dynamics have the chance to be impacted moving forward as well yes and and and
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here there's actually an interesting video that released a few days ago by Nvidia one of the key challenges for
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Amazon is that their picking and packing process is extremely inefficient done by
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people but even worse if it's done by robots even the most successful robot that Amazon has the sparrow can only
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address 65% of Amazon skills Nvidia released actually a video on Friday where there is a robot of course AED by
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AI that has a very nice dexterity dexterity is really what robots were missing to try to do the type of jobs
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that Amazon needs because we need something that can pick up an an an iPhone a pen a water bottle without
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breaking any of them and at this point we just don't have such a robot but I
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think we are finally on Pace to have one maybe in a few years what do you think then is kind of the future for these
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thought processes around scaling where where are we headed with all of this right now so here comes the the question
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right I mean I think like if these robots are going to remain expensive as they are now then for a firm like Amazon
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you ask yourself do I want to have a a robot that is only 15% utilized throughout the year only in the holiday
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season right it's easier to hire people if robots are becoming cheaper and cheaper and people are becoming more and
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more expensive we're going to get to the point where there is a switch over in
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particular if robots can continue to learn at this point when you get a robot you get a technology that said if robots
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can continue to learn and address this significant increase in Variety in speed needed we will see a significant change
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we will see people moving off these massive warehouses which will over time I think will be beneficial for everybody
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but at least in the short term I don't see it as a as a viable solution Gad great to talk to you again thanks very
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much for your time today it's great to be here thank you Gad Alon who is Professor of operations information and
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decisions here at the Wharton School and as we mentioned this is going to be the
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discussion in an upcoming Wharton Executive Education course on scaling business to profitable for profitable
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growth that'll be occurring in mid November