Amazon Lean Management: The Six Sigma Case Study in 2024

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Amazon, whose signature smile logo we are all familiar with, has begun embracing Six Sigma for its numerous business benefits. Since its founding as an online bookstore, Amazon has expanded its product line, entering the technology market with its Kindle e-reader and tablet offerings. Even more so, they have incorporated innovative methods such as same-day delivery, which is likely to reach new heights of efficiency with drone-based delivery. Their rapidly expanding portfolio of Amazon Originals is comparable to that of online titans such as Netflix. However, have you ever wondered how Amazon became one of the world’s most excellent online retailers? Today we shall discover – Amazon Lean Management: The Six Sigma Case Study in 2023.

“Hi gals!! This is my first Diwali and my mother-in-law has given me a real tough task. In this cyber city where do I search for cow dung cakes for Diwali puja??”

“Just relax!! Apni Dukan hai na.”

You mean Amazon

“Wow!! But I knew they sell only books, electronics, clothing artifacts and other fascinating things.”

According to an analyst, “When you think of wed shopping, you think of Amazon first”

Amazon has made a strong shift in purchasing habit of the world  from ‘think to buy’ to ‘click to buy’.

Amazon – Jeff Bezos’s Brain Child

Jeff Bezos, a computer engineer from Princeton University, quitted his flourishing career of Wall Street as the Senior Vice President of D.E.Shaw &Co. to set up his own e-commerce business. In 1994, Jeff started his business of selling online books from a small garage at Seattle, Washington.

Proving wrong to all the critics in his life, Jeff moved ahead with a big dream of owning the largest share of e-com world. And that’s how he finally landed with the name of the company as AMAZON – on the name on the biggest river in the world.

Ambitious, adventurous and consistency is the secret of success of Jeff as well as Amazon. Amazon, from day one, was a customer-centric company.

Amazon was started as an online book store. In 2000, the logo of the company featured an arrow leading from A to Z, like a smile. Just as the logo suggested the mission and vision was lined accordingly – Customer Delight and humongous expansion of business.

Amazon.com has expanded its business from books to music, toys, movies, electronics, housewares, clothing brands, artifacts, whole foods, artificial intelligence and many more.

They have their own cloud computing service as Amazon Web Service for various data management and storage.

The first e-book platform Kindle was innovation of Amazon.

Although the annual report or any publish material of Amazon dose not feature any implementation of Six Sigma in the organization however, the operational excellence at Amazon has the credit to concepts of Six Sigma and Lean Manufacturing Principle.

What makes it so easy for Amazon to be Competitor’s envy since last 25 years??

Customer Obsession – Leadership Vision

When world’s service industry was struggling for customer satisfaction, this one leader envisioned of mastering customer obsession in a start up of niche industry. The spirit of lean management and customer centric approach was imbibed at Amazon from day one.

Amazon has proven that customer obsession is a holistic approach to become successful in a customer service industry. Compulsive focus on customer is a huge advantage for any company. Focusing on customer, leads to innovation and ensures business growth in right direction by creating great products and services.

No customer will like or pay for waste – this was very clear in Jeffs mind. The information technology unit was used at Amazon to collate customer data, what customer wanted and they downloaded the right information to fulfillment center and customer service center

With the central focus on operational excellence Amazon streamlined its operation by deploying more workforces in fulfillment and customer center department…

Jeff was stubborn on vision and flexible on details.

The Lean Management

Lean is set of tools that assist an organization, specially manufacturing units, to identify and eliminate waste which in turn helps in reducing the cost, improve quality, reduce lead time, increase efficiency and consistency.

The common lean tools used in any organization are 5S, Autonomation, JIT (Just In Time), Kaizen (Continuous Improvement), Poka Yoke (Mistake Proving, Kanban (Pull System), Gemba, Root cause Analysis.

Sounds very technical, but Lean methodology works on simple ideas like –

• Deliver value as per customer’s perspective
• Eliminate waste
• Improve continuously on daily basis

Some of the benefits of Lean Managements are –

• Increased and improved productivity and efficiency of work force
• Optimized utilization of resources.
• A more stable work force and stable production system
• Encourages continues improvement

It appears to be a classic process of – measure, analyze, improve, control. As a part of Lean, to implement strong and continuous improvement in front liner staff they were engaged with gemba workers

Amazon’s system and processes are based on Lean principles to achieve an unparalleled customer experience.

Micro-management using Kaizen

Kaizen is combination of two Japanese symbols for “change” and “good”, most commonly translated as “change for the better”. The process speaks about – take it apart and put it back together in a better way.

Amazon faced one of the major challenge in enforcement of “standard work” while deploying the lean concept as it involved human. A well defined standard process was set for the assigned work and a small kaizen team was appointed to track down all abnormalities and eliminate them. It helped employees achieve regular and incremental improvement.

A single kaizen or change is a simple thing but a reservoir of kaizen makes a remarkable difference. The whole process of continuous improvement is the most important tool of Amazon’s increasing progress and success.

The fulfillment center was the center of attraction when it came to implementation of kaizen. Jeff Bezos ensured that all senior management staff of customer service department spends at least one day a year in the fulfillment center as a part of their kaizen training. This is to ensure that they become capable of efficiently attend and resolve any problem faced and reported by a front line staff.

If you have Data, you are the king

Six Sigma is a mathematical and statistical calculation of data to find out the defects or the percentage deviation for the standard of error set. In any organization, data should be treated as an asset and not as a department’s property, especially in an era where the world runs on data round the clock.

At Amazon, digging into data ushered new business avenues. In respect to both customer and products.

At a very nascent stage of his business, Jeff had ensured to inculcate a data-driven culture from frontline staff to the managers. From the very beginning, Amazon had hired engineer for the purpose of various kinds of data mining. He believes that data is empowering and helps in decision making. Probably this is the reason for the organization to successfully sustain its larger market share in e-commerce industry since more than 25 years.

It was Bezos’s farsightedness which helped him place data as the center of his corporate culture. He structured the organization in a way that the data was open and available at every level. It empowered the front liners to take a lot of small and daily decision to improve customer satisfaction.

Amazon utilized its data technology system to research consumer behavior which analyze and expand upon offering low price product with great convenience and personalized product recommendation, type of purchase, demand cycle of products on shelf.

They were able to innovate and introduce new products on the basis of customer’s search data.

With data churning it became easy to search for vendors at convenient delivery location at the lowest price with high quality of products. In this digital era, with data in hand, testing and analyzation of information became faster and easier. This promoted frequent learning and improvement to expand profitability.

Weed out the waste – The Andon Cord

A trainer of Six Sigma at Amazon once questioned Jeff Bezos – Why do I sweep?  Why do I not instead eliminate the source of dirt?

In Lean Six Sigma, Andon is considered as the visual management system which enables smooth operation by eliminating all or any bottleneck.

Andon cord is a Japanese word for traditional paper lantern. An Andon system is one of the principle elements of ‘Jidoka’ – ‘empowering the employees’. Andon system –

• Improves transparency at work
• Increases productivity within the given time
• Strengthen flexibility by empowering employee
• Reduce downtime to resolve issue
• Save cost by improving quality.

The Andon cord eliminates tens of thousands of defects per year.

Amazon implemented this concept that if a repetitive error or defect is detected, the customer service agent had the authority to ‘stop the line’ and take off the product from the website until the defect is fixed.

With the implementation of Andon cord, frontline workers felt empowered and motivated to enhance their service standards. The agenda was to eliminate waste or deformities and put back the products on shelf and gain back customer’s trust.

There are different kinds of Andon card – physical or virtual. Amazon used virtual Andon Cord, the Lean concept, where an employees can address to defects immediately and effectively to his supervisor and helps the over all organization to reduce future customer complaints.

Inventory management

Amazon started as a ‘virtual retailer’ with no inventory, no warehouse, and no overhead. Today, Amazon owed it popularity to excellent customer service, which was possible with a great inventory management system.

Initial days of inventory management was hectic with handling all kinds in inventory like

• Raw material
• Work in progress
• Finished goods
• Transit inventory
• Buffer inventory

Organization, being customer centric, started to hording huge inventories anticipating customer’s order, preventing stock-outs, purchase benefits of low cost in bulk, unpredictability of supply and demand. All these management started to take lots of time and money, and various inventory costs.

Another big problem that started to arise was arranging and expanding huge physical space to build up warehouses at different locations to ease out timely and quick delivery of products to customers.

By 1999, Amazon had acquired a significant market share of e-com customers depending mainly upon the IT service, intact warehouses, inventory management and efficient transportation services.

The only concern was warehousing and space. With an Inventory goal of – right product in the right quality at the right place at right time; so their final decision was OUTSOURCE.

In 2001, Amazon adopted the “Drop Shipment Model” basing inventory outsourcing. In this process the orders placed by the buyer are forwarded to retailer, by Amazon, who then dispatches the goods to the buyer. It increased the overall efficiency and streamlined the logistic issues.

This ensured cost of operating warehousing is reduced to around 20 % and the capacity increased 3 times. This was the first time Amazon earned its profit margin.

Now Amazon is tagged as – the Warehousing Giants

Advanced Supply Chain Management Practices

Supply Chain management in a typical manufacturing company encompasses the following processes – manufacturing, warehousing and transportation. In a service industry it is restricted to warehousing and transportation. Amazon has always been researching, innovating and implementing bold supply chain strategies.

In 2004, 10 years after Amazon was founded, its annual revenue was just under $7 billion. According to Statista, by 2018, revenue reached almost $233 billion. In fact, Amazon is the fastest company to reach $100 billion in sales revenue, taking only 20 years.

From its inception, Amazon has been growing approximately 20% per year. It grew by 30% from 2018 to 2019. Currently, it enjoys more than 13% of gross global e-commerce sales.

The major contributor for the quick and efficient supply chain management is the advanced utilization of information technology, extensive network of warehouses, multitier inventory management and excellent transportation management and facilities.

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1. Outsourcing Inventory Management

Amazon has a huge network of warehousing and fulfillment center all across the world. However, their supply chain is largely dependent on outsourcing of inventory. Also almost 82 % of Amazon’s sales are supplied by third- party sellers.

Outsourcing of ordered inventory at different locations from different sellers eased out amazon from the necessary warehousing establishment, which was not possible at all locations.

2. Delivery Options for Customer

Amazon offers to its users a wide range of delivery options. One hour delivery, Prime delivery, one-day delivery, first class delivery and free super delivery. Amazon’s one hour delivery or same day delivery is successful because of its in-house logistics usage. Amazon relies more on the own transportation arrangements rather than being dependent on any third party logistics to deliver their orders on time.

3. Push  – Pull Strategy for Supply Chain Success

Amazon being a global brand receives orders from every corner of the world. Location, size and number of warehouses became important sustenance strategy. With increasingly fast delivery promise, company had to position its ware houses as closest possible to the supply area as well local urban market.

They use the ‘push strategy’ to stock in the warehouses with products forecasting demand in the nearby location. They use the ‘pull strategy’ by selling the product directly from third-party sellers.

4. Automation

In 2012, Amazon acquired “Kiva System”. It facilitates automated and robotic warehouse solutions. This got re-branded as Amazon Robotics in 2015. This robot has replaced manual intervention for pick and pack of products reducing the time spends in arranging the warehouse. Till 2017, Amazon had acquired 45,000 robots. They help bring products to staffs for picking up orders.

Futuristic dream is to bring in the next generation robot which will pick orders as well.

5. Supply Chain Cost

Supply chain is the tools of manufacturing industry. Due to economies of scale, Amazon has used this tool and reduced it’s per unit supply cost to minimum range.

Hire best and Develop best

The leadership believes to work in the future, and they do not believe in leaning away from the future so hire the best of work force that are quick, innovative and high speed and has a progressive approach.

Amazon acknowledges the transformation happening in the industry and therefore they focus on hiring efforts and take the responsibility to up skill and train employee with living skills needed to move up the ladder.

They groom employees with living skills to stay on toes with changing environment and prospect for a long term career.

As a part of on the job training, leaders at Amazon keep raising the performance bar to bring out exceptional talents and more leaders to invent mechanism for development.

Deliver Results

With designers, developers, vendors, packaging, shipping, re-ordering legal and finance, new innovation and many more challenges keep cropping up as daily routine.

All the leadership positions are trained to proceed with perseverance, keep striving, take responsibility, recover fast, focus right, drive solution because only thing that matter @ Amazon is – “RESULTS”

Not  just the attitude of the employee alone contribute to a greater company, the outcome at Amazon is also credited upon six sigma parameters of great inventory management, increased efficiency, streamline control and a strong value and culture.

Despite all setbacks, leaders here aspire to deliver results with right quality and ‘On Time Delivery’

Game-Changing Delivery Strategy

“Amazon Prime “was a game changing business strategy for customer acquisition by Amazon.

“Amazon Prime Day” sounded better than a ‘Black Friday’. Amazon started selling yearly membership under the tag Amazon Prime which will guarantee – “two-day shipping/delivery” for more than thousands of products with no shipping charge.

The two-day shipping strategy encouraged customers to change their purchasing behavior. The other service offered to customer in the Amazon Prime scheme was subscription to music, movies and books. The economies of scale helped expand the customer and lowered overall shipment costs.

Their business strategy team not only outshined the brand image and also made competitor’s life difficult by this innovative strategy.

Drones: The Supply Chain of the Future

Once again in 2013, Amazon’s CEO Jeff Bezos proved that he is too stubborn to conquer the world.The Giant Online Retailer announced that the company is developing a drone-based delivery system which would be named as ‘Amazon Prime Air’.

These drones will deliver products weighing less than 5 pounds in locations within 10 miles of any Amazon fulfillment center in just 30 minutes or less.

The idea and the thought process of developing a drone delivery system indicate that Amazon is not going to leave its 25 years old place as market leaders in e-commerce business.

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FAQs

Q1.Dose Amazon use Lean Six Sigma?

Ans. There is no specific mentioning of Six Sigma implementation in the annual report of the company. However, various principles and methodology of Six Sigma and Lean is being implemented in the process of the organization.

Q2. How dose Amazon uses Six Sigma?

Ans. Amazon is giant data-driven organization. They use the standard deviation and error management practices of Six Sigma to all sphere of their work.

Q3. What are the five principles of Lean?

Ans. The five Lean manufacturing principles are – value, value streams, flow, pull and perfection. Lean practitioner strives for nothing but perfection.

Q4. How does Amazon manage quality?

Ans. They check for quality of product, packing, and presentation at each any every stage from indent to storage to packing to supply. If products are supplied from third party, a pre-shipment inspection for total quality management checking is called for so that the product can be thoroughly checked before dispatch.

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