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well companies are consistently focusing
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their efforts around profitability with
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some Focus being on that of scale how
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big or small do you want your company to
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be in order to reach the level of
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profitability you're looking for that
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question is part of an upcoming Wharton
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Executive Education course with our next
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guest Wharton's Gad Alan who is a
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professor of operations information and
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decisions here at the school Gad great
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to talk to you again hi then great to be
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here thank you and I would imagine that
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the idea of scale and figure out what
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that magic numbers are that's a
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constantly ongoing process for firms
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because the Dynamics change from quarter
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to quarter correct exactly so this is
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when we talk about scale we talk about
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both infrastructure we talk about people
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um I'll just you know I'll talk about
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one example for like a few years
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ago stripe when they saw coid starting
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and and the number of transactions
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increased significantly online hired
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significant number of people and about a
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year ago had to lay off 20% of them and
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Patrick hollison their CEO went on
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online and and wrote a a nice letter
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saying we made a mistake we overe
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extrapolated and didn't realize that
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what we see now is temporary and not
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going to be the the new reality and so
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now we have to lay off but this balance
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is not only when you think about events
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like Co this something you do
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continuously whenever you see an
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economic signal you ask yourself is this
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a new reality good or bad
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and does that mean that we need to now
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hire more people potentially slow down
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hiring or should we maybe even lay off
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people so this questions are is the
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question of scale both people
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infrastructure is an ongoing question
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for almost every firm that I know and
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then when you think about an area like
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retail uh this fourth quarter of the
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year is the time that they really think
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about scale a lot companies like Amazon
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and other retailers because they're
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looking to bring on employees part-time
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for that three-month window so that they
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can you know achieve Max profitability
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on their bottom line heading through the
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end of the year exactly so you know we
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can take Amazon is an example Amazon
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announced about few weeks ago that they
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are planning to hire
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250,000 employees part-time casual
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employees for just the holiday season
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now if you think about Amazon what's the
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main idea here Amazon knows this is
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really the time where people spend many
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of the like product toys for example 99%
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of the toys are sold during that time of
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the year Amazon 6x's overall volume of
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retail during the season during
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specifically the time from Thanksgiving
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to New Year and the question is the
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following right if you hire if you don't
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hire so many employees and demand is
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great you know the economy is great and
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and humming a low
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unemployment if you don't have enough
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people you might lose the opportunity
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they might see that the delivery might
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not be on time they might go and pick it
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up from the local store let's say from
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Walmart at the same time if the economy
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is hitting too much and with the
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inflation people are saying well I might
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buy gifts but maybe cheaper gifts maybe
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fewer gifts now you have significant
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number of people that are really not
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necessary and since you have to make the
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decision before you know exactly how
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many people you need and what's the
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exact status of the economy this a tough
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decision right basically figuring on
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what might happen off of the estimates
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that a lot of economists May throw out
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uh you know uh 6 months before uh that
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we're actually going to get into the
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season exactly exactly now it's it's not
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only about how good the economy is going
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to be but also what type of customer
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you're going to meet and so you can
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think about a situation where if
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customers are more Deal Seeking then
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Amazon knows how to be cheap but then it
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usually does not mean next day delivery
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same day delivery in which case the
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majority of the people will be needed in
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the centralized location in warehouses
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at the same time if people are going to
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be more in a splurgy mood so to speak
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and and would like to buy things Last
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Mile last minute next day then you need
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significantly more people in the areas
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that are closer to the customer well
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again last mile on demand um these are
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very very different type of hiring
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different locations different cost
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different skill set and and Amazon has
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to think about not only the aggregate
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number but also where do you place them
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isn't this very much a learning process
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as well year after year for a lot of the
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companies especially in retail because
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what a firm may experience let's say
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2019 prepandemic was obviously going to
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be a lot different than what they
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experienced during the pandemic during
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the holiday season in 2020 yes so that's
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a great example I think where again
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Amazon shines over the years Amazon
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already started hiring hundred of
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thousands of people several years ago
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increased that then during Co decreased
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and increased it back again as we went
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out of the pandemic but you can see how
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the firm is becoming better and better
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in doing that but also there is some
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aspects that you actually need to almost
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relearn Amazon initially was very
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centralized it was much easier to train
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these people as you bring them into a
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massive operation as Amazon become more
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and more decentralized I would say you
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can see that actually Amazon increases
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significantly the number of people they
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higher while their sales are not
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increasing at the same rate so Amazon in
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fact realizes that probably there is
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some level of inefficiency and they need
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more people than they imagin but Amazon
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seemingly they are kind of the the
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standout in terms of the digital economy
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in terms of how much they do to bring on
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now obviously as you said before their
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scale is a lot larger than a lot of
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other company scale so they have to kind
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of uh they have to uh to work with that
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yes I but you can see other firms are
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doing the same I mean I think Macy's for
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example announced I think hiring 30,000
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people um I think overall this season is
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the important season for retail and and
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and it's if you miss the
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opportunity because people are
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continuously searching and there are
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certain brands right if you're in Apple
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for example that people may wait until
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the season they they will wait a few
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more weeks if they really couldn't find
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the Apple watch they want or the
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specific iPad if you're selling re just
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pure r if you cannot find on Amazon
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you're going to go to Maus not Maus
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you're going to go to Walmart so these
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firms know that during the holiday
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season there isn't really an opportunity
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to make too many
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mistakes I guess then the next question
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to ask is because we have seen retailers
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spread out that holiday shopping period
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so much is whether or not those
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decisions like Amazon adding 250,000
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employees will come earlier and earlier
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or will some of those decisions end up
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becoming full-time staff because you've
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stretched this season out so much yeah
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so Amazon is being a I think only mildly
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successful with that right we we we have
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Prime day but to a large extent it's in
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my opinion lost its luster I don't know
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really the I haven't seen the last
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numbers but I don't think it's as
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impressive as it was in the past Amazon
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had something in September which was
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their way of of selling dead inventory
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they claim of course it was a consumer
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facing activity but but it was very
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clear that was primarily selling things
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that were just occupying too much space
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in capital in China it is being
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successful Alibaba Alibaba is being
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somewhat successful in doing that I
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don't think in the US I've seen firms
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that really significantly manage to
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alter the economics of the holidays but
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the the number for Amazon this year with
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250,000 that seems like well and above
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what we've seen in the past correct and
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I I think they've been in and around a
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100,000 when they've added people at the
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holidays this is just so far beyond what
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we've what we've seen and expected from
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them yes so so it is and and and
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primarily well Amazon already crossed
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200,000 before once but but it's not not
00:08:11
to that level that we've seen before to
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to 250 but also one is to say Amazon
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also grew quite a bit over the last few
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years I think one one number to think
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about Amazon started coid with around
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750,000 employees they finished coid I
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me at least the period that we call the
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main pandemic with a million and a half
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people so Amazon also doubled over the
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last few years this is part of a
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transition where I mentioned that a few
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seconds ago where Amazon moved from
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being extremely centralized where many
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of these efficiencies are actually built
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to being extremely decentralized there
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are now 90 metropolitans in the US where
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when you place an order within 11
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minutes it's ready to be
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shipped some of that is automation to a
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large extent this is very human labor
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driven and and so Amazon the reason
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Amazon is going so much abroad is that
00:09:04
is that their demand increased their
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scale increased but also their
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inefficiencies increased which if you
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look at Amazon for example shipping
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costs as percentage of revenues or
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fulfillment cost percent of revenues
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which are both indicators of
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efficiencies since 2010 all the way to
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now we're talking about the 13ear
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stretch every year Amazon is becoming
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less and less efficient so the fact that
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they go and needs so many employees is
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driven to some extent also by the fact
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that it's just not as efficient as it
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was initially and of course they're a
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company that has so many more uh kind of
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sectors under the larger umbrella than
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other companies uh as well do so they're
00:09:45
they're almost a little bit of a unicorn
00:09:46
in this in this entire
00:09:48
process very very much so I mean I think
00:09:51
their their ability to really delve into
00:09:53
and I'm talking about just if we talk
00:09:54
about retail Amazon has this fulfilled
00:09:57
by Amazon and this notion of Supply
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Chain by Amazon where Amazon actually by
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now uses the infrastructure was built
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initially just to support inventory of
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of Amazon's inventory and support
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fulfillment to by now support everything
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from fish magnets to a school supplies
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to almost everything you can imagine how
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much do companies then have to focus on
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not only that window using the retail
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example during the holidays of bringing
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those employees on but those
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inefficiencies that you talked about and
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and kind of making that adjustment for
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the next year yeah so you it's
00:10:33
interesting you say that because if you
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look at what Andy jasse the the new CEO
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not new by now from
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2021 talking about is that part of the
00:10:42
legacy of what he got was the The Firm
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was growing very very fast continuously
00:10:47
being built on growth but now his job is
00:10:50
to realize many of these in many of
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these inefficiencies and to try to
00:10:53
convert them so a big part of what he
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did over the last year at least is try
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to build inefficiencies build
00:11:00
efficiencies into that so for example
00:11:03
Amazon as it doubled its number of
00:11:05
employees also doubled its warehouse
00:11:07
space you see them actually calibrating
00:11:09
that recalibrating that to address the
00:11:12
fact that if you continue and acquire
00:11:14
more of these you're just never going to
00:11:16
be profitable at the level of
00:11:17
profitability needed to sustain their
00:11:19
stock prices and I guess is it safe to
00:11:22
say that as we continue to move forward
00:11:24
into the future and Technology plays an
00:11:26
even bigger role and AI comes uh forward
00:11:29
even more so that a lot of these
00:11:31
Dynamics have the chance to be impacted
00:11:33
moving forward as well yes and and and
00:11:36
here there's actually an interesting
00:11:37
video that released a few days ago by
00:11:39
Nvidia one of the key challenges for
00:11:41
Amazon is that their picking and packing
00:11:44
process is extremely inefficient done by
00:11:47
people but even worse if it's done by
00:11:49
robots even the most successful robot
00:11:52
that Amazon has the sparrow can only
00:11:54
address 65% of Amazon skills Nvidia
00:11:57
released actually a video on Friday
00:11:59
where there is a robot of course AED by
00:12:01
AI that has a very nice dexterity
00:12:04
dexterity is really what robots were
00:12:06
missing to try to do the type of jobs
00:12:08
that Amazon needs because we need
00:12:09
something that can pick up an an an
00:12:11
iPhone a pen a water bottle without
00:12:14
breaking any of them and at this point
00:12:16
we just don't have such a robot but I
00:12:17
think we are finally on Pace to have one
00:12:21
maybe in a few years what do you think
00:12:23
then is kind of the future for these
00:12:25
thought processes around scaling where
00:12:28
where are we headed with all of this
00:12:29
right now so here comes the the question
00:12:32
right I mean I think like if these
00:12:33
robots are going to remain expensive as
00:12:35
they are now then for a firm like Amazon
00:12:37
you ask yourself do I want to have a a
00:12:39
robot that is only 15% utilized
00:12:42
throughout the year only in the holiday
00:12:43
season right it's easier to hire people
00:12:46
if robots are becoming cheaper and
00:12:48
cheaper and people are becoming more and
00:12:50
more expensive we're going to get to the
00:12:51
point where there is a switch over in
00:12:54
particular if robots can continue to
00:12:56
learn at this point when you get a robot
00:12:57
you get a technology that said if robots
00:12:59
can continue to learn and address this
00:13:01
significant increase in Variety in speed
00:13:03
needed we will see a significant change
00:13:06
we will see people moving off these
00:13:08
massive warehouses which will over time
00:13:10
I think will be beneficial for everybody
00:13:12
but at least in the short term I don't
00:13:13
see it as a as a viable solution Gad
00:13:16
great to talk to you again thanks very
00:13:17
much for your time today it's great to
00:13:19
be here thank you Gad Alon who is
00:13:22
Professor of operations information and
00:13:24
decisions here at the Wharton School and
00:13:26
as we mentioned this is going to be the
00:13:28
discussion in an upcoming Wharton
00:13:30
Executive Education course on scaling
00:13:32
business to profitable for profitable
00:13:35
growth that'll be occurring in mid
00:13:43
November
