Secret principles of Amazon, Flowcasting

The recent acquisition of Whole Foods by Amazon has sent shock waves throughout the grocery industry and, indeed, the retail industry as a whole.  While I’m quite sure retail is not dead, as some proclaim, I’m convinced it is and will undergo massive change in the years ahead.

Early pundits and supply chain professionals were very quick to scoff at Amazon and their business model. The experts predicted that they would never make money selling things over the internet and delivering directly to your home.  And, for a number of years they were right.  However, a combination of scale, volume and innovation has disproven this, as evidenced by the chart below:


Clearly, Amazon is doing well financially and have become a profit machine.  Further evidence of the fruits of their labour can be seen in the following chart, which outlines the change in major retailer’s gross margins over the last few years:


The story of success of Amazon is not really about scale and volume to ensure their supply chain costs are competitive.  Sure, that’s important and something they continue to work on, but the success of Amazon is really built on its culture and three fundamental principles that Jeff Bezos has instilled in the organization.  In his own words, they are:

  1. Put the Customer first
  2. Invent
  3. Be patient

Customer First
Amazon, no one can deny, puts the customer first.  Think of all the innovations they have introduced and almost all of them have been designed to improve the customer experience. Bezos takes the view of the customer seriously, and rumour has it that at executive meetings sits an empty chair.

This chair is reserved for the customer. And, when they are debating ideas and concepts, Mr Bezos will turn to the empty chair and ask, “what does the customer think”?, and a customer focused discussion ensues.

The following number says it all:


That’s the number of patents that Amazon has been awarded.  Yup – one thousand, two hundred, and sixty three and counting.

Amazon is an innovation factory and, given the turbulent times and unprecedented change on the horizon, what better organizational capability to have.

If you’re competing against Amazon (and there’s a decent chance you are or will be), here’s a question: how many patents has your organization been awarded?

Be Patient
Again, you would be hard pressed to argue that Amazon is not patient.  They have also been smart and have had the good fortune of convincing their employees and shareholders to be patient as well.

They take the long view and are not driven by short term goals.  Being patient also ensures that they give the innovation machine time to work.  Change takes time.  And Amazon seems like they’ve got all the time in the world – to patiently make sure the innovation works, or they learn something from it.

These are the three principles that Jeff Bezos has believed in and instilled in the very fabric of the Amazon culture.  This is the secret to their success and is, no doubt, difficult to replicate or change an existing culture to embrace.

Parallels of Flowcasting and Amazon
The evolution of Flowcasting has, in many ways, paralleled the principles of Amazon.

Customer First – Flowcasting, as you know, is based on the tenet of “never forecast what you can calculate”, and the entire retail supply chain is driven by a forecast of consumer demand.  Flowcasting is definitely a Customer First philosophy.

Invent – Flowcasting is an innovation on how the retail supply chain works.  A single forecast of consumer demand, by item/store/selling-location can be translated into all product, financial, capacity and resource flows throughout the entire supply chain.  This is not how retailers and their trading partners have worked (or still do for virtually all of them) and is an invention in supply chain planning.

Patience – Flowcasting is only now starting to gain traction, with our client, Princess Auto, being the first retailer to implement the process properly and completely. Did you know that the idea of Flowcasting was conceived about 35 years ago, and improved upon by a small group of folks about 20 years ago?  Andre Martin and core members of the Canadian Tire team (including yours truly) have had the patience to see Flowcasting work as intended.

Ralph Waldo Emerson summed it up nicely when describing the importance of principles:

As to methods there may be a million and then some, but principles are few”.

Spot on Ralph.  Spot on.

Facts and Principles

The truth is more important than the facts. – Frank Lloyd Wright (1869-1959)


‘Our decision making needs to be fact based!’

Not many people would argue with that statement. But I will.

While I wouldn’t recommend making decisions devoid of all fact, we need to be careful not to assume that facts, figures and analysis are the only requirements to make good decisions. More importantly, we must never use facts as a cop-out to allow ourselves to make decisions that we know are bad. As obvious as this sounds, doing the wrong thing for the sake of political expediency and ‘keeping the peace’ happens all too frequently in business today.

As a case in point, many economic studies have used facts and figures to argue that a major catalyst to economic growth in the United States in the 1800s was the widespread use of slave labour in agriculture. Some have even gone so far to suggest that America would not be the economic superpower it is today without the slave trade.

In a presidential election year, there is much hand wringing about the state of the U.S. economy and there has never been an election in which this hasn’t been a key voting issue. So here’s my question: If ‘the facts’ show that slave labour was historically a key contributor to economic growth, why isn’t anyone suggesting a return to slavery as part of their platform?

The first problem is that facts are rarely, if ever, complete. The second problem is that humans have a tendency to dismiss facts that don’t support their preconceptions.

The fact is (no pun intended) that the really big and important decisions can often be made on principle (as in the slavery example) without having to bother doing a full blown cost benefit analysis to tell you the answer.

Data analysis is great, but it must be used to support and measure decisions made on principle, not to make the decisions themselves. As an example, we are often lambasted for our long standing criticism of pre-distributed cross dock as a retail distribution channel. After all, it reduces picking volume and frees up pick slots in the DC, decreases ‘touches’ in the supply chain and takes advantage of the existing outbound network to get product to the stores. What could be wrong with that?

While those are certainly facts about cross-dock, so are these:

  • It shifts the burden of picking store orders from a facility that was designed for that purpose (the retail DC) to a facility that was not (the supplier’s DC), lessening efficiency and increasing cost.
  • It requires stores to lock in orders further in advance, resulting in decreased agility when demand changes and higher inventories in the stores.
  • It reduces transport cube utilization, as pallets must be built with only the handful of products that are shipped by the supplier, not the thousands of products that are shipped by the retail DC.

So how do we use these conflicting facts (along with dozens of others that I didn’t mention) to determine whether or not cross-docking is a wise distribution strategy?

You don’t.

Retail is about customer service. Customers can walk into any store at any time to get any product. Their expectation is that the product they want will be there on the shelf when they show up to get it.

Postponement (i.e. committing to decisions at the last possible moment) is a timeless supply chain principle that maximizes service while minimizing costs.

By its nature, the cross-dock channel increases commit times at the point where the customer is demanding the product without notice and builds inventory at the point in the supply chain where it is fully costed and can’t easily be redirected.

That’s not to say that there is never a scenario whereby cross-docking doesn’t make sense, but violation of a core supply chain principle should at least give you pause before pursuing it in a big way.

No facts required.