The Everything Store: Jeff Bezos and the Age of Amazon (24 page)

Bezos and other startup founders were reacting to lessons from previous technology giants. Microsoft took a top-down management approach with layers of middle managers, a system that ended up slowing decisions and stifling innovation. Looking at the muffled and unhappy hierarchy of the software giant across Lake Washington, Amazon executives saw a neon sign warning them exactly what to avoid.

The drive to cut costs also forced Bezos to eliminate any emerging layers of middle management from his company. After the stock market crash in 2000, Amazon went through two rounds of layoffs. But Bezos didn’t want to stop recruiting altogether; he just wanted to be more efficient. So he framed the kind of employees he wanted in simple terms. All new hires had to directly improve the outcome of the company. He wanted doers—engineers, developers, perhaps merchandise buyers, but not managers. “We didn’t want to be a monolithic army of program managers, à la Microsoft. We wanted independent teams to be entrepreneurial,” says Neil Roseman. Or, as Roseman also put it: “Autonomous working units are good. Things to manage working units are bad.”

But as was often the case, no one could anticipate just how far Bezos would venture into these organizational theories in his quest to distill them down to their core ideas. In early 2002, as part of a new personal ritual, he took time after the holidays to think and read. (In this respect, Microsoft’s Bill Gates, who also took such annual think weeks, served as a positive example.) Returning to the company after a few weeks, Bezos presented his next big idea to the S Team in the basement of his Medina, Washington, home.

The entire company, he said, would restructure itself around what he called “two-pizza teams.” Employees would be organized into autonomous groups of fewer than ten people—small enough that, when working late, the team members could be fed with two pizza pies. These teams would be independently set loose on Amazon’s biggest problems. They would likely compete with one another for resources and sometimes duplicate their efforts, replicating the Darwinian realities of surviving in nature. Freed from the constraints of intracompany communication, Bezos hoped, these loosely coupled teams could move faster and get features to customers quicker.

There were some head-scratching aspects to Bezos’s two-pizza-team concept. Each group was required to propose its own “fitness function”—a linear equation that it could use to measure its own impact without ambiguity. For example, a two-pizza team in charge of sending advertising e-mails to customers might choose for its fitness function the rate at which these messages were opened multiplied by the average order size those e-mails generated. A group writing software code for the fulfillment centers might home in on decreasing the cost of shipping each type of product and reducing the time that elapsed between a customer’s making a purchase and the item leaving the FC in a truck. Bezos wanted to personally approve each equation and track the results over time. It would be his way of guiding a team’s evolution.

Bezos was applying a kind of chaos theory to management, acknowledging the complexity of his organization by breaking it down to its most basic parts in the hopes that surprising results might emerge. That, at least, was the high-minded goal; the end result was somewhat disappointing. The two-pizza-team concept took root first in engineering, where it was backed by Rick Dalzell, and over the course of several years, it was somewhat inconsistently applied through the rest of the company. There was just no reason to organize some departments, such as legal and finance, in this way.

The idea of fitness functions in particular appeared to clash with some fundamental aspects of human nature—it’s uncomfortable to
have to set the framework for your own evaluation when you might be judged harshly by the end result. Asking groups to define their own fitness functions was a little like asking a condemned man to decide how he’d like to be executed. Teams ended up spending too much time worrying over their formulas and making them ever more complex and abstract. “Being a two-pizza team was not exactly liberating,” says Kim Rachmeler. “It was actually kind of a pain in the ass. It did not help you get your job done and consequently the vast majority of engineers and teams flipped the bit on it.”

A year into Jeff Wilke’s tenure at Amazon, he called a former teacher of his, Stephen Graves, a professor of management science at MIT, and asked for help. Amazon operated an e-commerce distribution network of unrivaled scale but the company was still struggling to run it efficiently. Its seven fulfillment centers around the world were expensive, their output inconsistent. Bezos wanted the Amazon website to be able to tell customers precisely when their packages would be delivered. For example, a college student ordering a crucial book for a final exam should know that the book would be delivered the following Monday. But the fulfillment centers were not yet reliable enough to make that kind of specific prediction.

Wilke asked Graves if he might meet with Wilke and his colleagues later that month to take a fresh look at their problems. Bezos and Wilke were asking themselves a fundamental question that seems surprising today: Should Amazon even be in the business of storing and distributing its products? The alternative was to shift to the model used by rivals like Buy.com, which took orders online but had products drop-shipped from manufacturers and distributors like Ingram.

That St. Patrick’s Day, some of Amazon’s biggest brains descended on a drab meeting room at the Fernley, Nevada, fulfillment center. Jeff Bezos and Brewster Kahle, a supercomputer engineer and founder of Alexa Internet, a data-mining company Amazon had acquired, made the two-hour flight from Seattle on Bezos’s newly purchased private plane, a Dassault Falcon 900 EX.
Stephen Graves flew from Massachusetts to Reno and then drove the dreary thirty-four miles through the desert to Fernley. A few other Amazon engineers were there, as was the facility’s senior manager at the time, Bert Wegner. In the morning, the group toured the fulfillment center and listened to a presentation by one of the company’s primary contractors, who listed the benefits of additional equipment and software that he could sell them, reflecting the same traditional thinking about distribution that wasn’t working in the first place. They then dismissed the surprised contractor for the day and spent the afternoon filling up whiteboards and tackling the question of how everything at the FC might be improved. For lunch, they brought in McDonald’s and snacked from the building’s vending machines.

For Wegner, the questions being asked that day carried personal resonance. “We had a key decision to make,” he says. “Was distribution a commodity or was it a core competency? If it’s a commodity, why invest in it? And when we grow, do we continue to do it on our own or do we outsource it?” If Amazon chose to outsource it, Wegner might be out of a job. “I basically saw my own career flash before my eyes,” he says.

Amazon’s problem boiled down to something called, in the esoteric lexicon of manufacturing, batches. The equipment in Amazon’s FCs had originally been acquired by Jimmy Wright, and, like the system in Walmart’s distribution centers, was designed by its manufacturers to operate in waves—moving from minimum capacity to maximum and then back again. At the start of a wave, a group of workers called pickers fanned out across the stacks of products, each in his or her own zone, to retrieve the items ordered by customers. At the time, Amazon used the common pick-to-light system. Various lights on the aisles and on individual shelves guided pickers to the right products, which they would then deposit into their totes—a cart of the picks from that wave. They then delivered their totes to conveyor belts that fed into the giant sorting machines, which rearranged products into customer orders and sent them off on a new set of conveyor belts to be packed and shipped.

The software required pickers to work individually, but, naturally, some took longer than others, which led to problems. For example, if ninety-nine pickers completed their batches within forty-five minutes but the one hundredth picker took an additional half an hour, those ninety-nine pickers had to sit idly and wait. Only when that final tote cleared the chute did the system come fully alive again, with a thunderous roar that rolled through the fulfillment center and indicated that it was again ready to start operating at peak capacity.

Everything in the fulfillment center happened in this episodic manner. For a company trying to maximize its capacity during the big push each holiday season, that was a huge problem. Wilke subscribed to the principles laid out in a seminal book about constraints in manufacturing, Eliyahu M. Goldratt’s
The Goal,
published in 1984. The book, cloaked in the guise of an entertaining novel, instructs manufacturers to focus on maximizing the efficiency of their biggest bottlenecks. For Amazon, that was the Crisplant sorting machines, where the products all ended up, but picking in batches limited how fast the sorters could be fed. As a result, the machines were operating at full capacity only during the brief few minutes at the peak of the batch. Wilke’s group had experimented with trying to run overlapping waves, but that tended to overload the Crisplant sorters and, in the dramatic terminology of the general managers, “blow up the building.” It would take hours to clean up that mess and get everything back on track.

In the meeting that day at Fernley, the executives and engineers questioned the prevailing orthodoxies of retail distribution. In the late afternoon, everyone headed back onto the facility floor and watched orders move haltingly through the facility. “I didn’t know Jeff Bezos but I just remember being blown away by the fact that he was there with his sleeves rolled up, climbing around the conveyors with all of us,” says Stephen Graves, the MIT professor. “We were thinking critically and throwing around some crazy ideas of how we can do this better.”

At the end of the day, Bezos, Wilke, and their colleagues reached
a conclusion: the equipment and software from third-party vendors simply wasn’t designed for the task at hand. To escape from batches and move toward a continuous and predictable flow of orders through the facility, Amazon would have to rewrite all the software code. Instead of exiting the business of distribution, they had to reinvest in it.

Over the next few years, “one by one, we unplugged our vendors’ modems and we watched as their jaws hit the floor,” says Wegner. “They couldn’t believe we were engineering our own solutions.” When Amazon later opened small facilities in places like Seattle and Las Vegas to handle easily packable items and larger fulfillment centers in Indianapolis, Phoenix, and elsewhere, it would go even further, dispensing with the pick-to-light systems and big Crisplant sorting machines altogether and instead employing a less automated approach that favored invisible algorithms. Employees would bring their totes from the shelves right to the packing stations, their movements carefully coordinated by software. Slowly, Amazon would vanquish wave-based picking, elicit more productivity from its workers, and improve the accuracy and reliability of its fulfillment centers.

Wilke’s gradual success in making the logistics network more efficient would offer Amazon innumerable advantages in the years ahead. Tightly controlling distribution allowed the company to make specific promises to customers on when they could expect their purchases to arrive. Amazon’s operating all of its own technology, from the supply chain to the website, allowed Russell Allgor and his engineers to create algorithms that modeled countless scenarios for each order so systems could pick the one that would yield the quickest and cheapest delivery. Millions of those decisions could be made every hour, helping Amazon reduce its costs—and thus lower prices and increase volume of sales. The challenge was getting good enough to do this well.

“No matter how hard it is, the consolidation of products within fulfillment centers pays for the inventory and for pieces of the overhead,” says Jeff Wilke, who claims that he never worried that Bezos
would abandon the FC model at the Fernley meeting. “The principles and math were on our side, and I realized early on that this was a company where you can carry the day when you have the principles and math on your side, and you are patient and tenacious.”

Whenever Jeff Bezos roamed a fulfillment center or his own Seattle headquarters, he looked for defects—flaws in the company’s systems or even its corporate culture. On an otherwise regular weekday morning in 2003, for example, Bezos walked into an Amazon conference room and was taken aback. Mounted on the wall, in a corner of the room, was a newly installed television meant for video presentations to employees. A TV in a conference room did not by itself seem controversial, yet Bezos was not pleased.

The installations, which he had not known about or authorized, represented to him both a clumsy attempt at interoffice communication and an extravagant expenditure. “How can anything good be communicated in this way,” he complained.

Bezos had all the new televisions in Amazon’s conference rooms immediately removed. But according to Matt Williams, a longtime Amazon manager, Bezos deliberately kept the metal mounts hanging in the conference rooms for many years, even some that were so low on the wall that employees were likely to stand up and hit them. Like a warlord leaving the decapitated heads of his enemies on stakes outside his village walls, he was using the mounts as a symbol, and as an admonition to employees about how not to behave.

The television episode was the foundation of another official award at Amazon, this one presented to an employee who identified an activity that was bureaucratic and wasteful. The suddenly superfluous televisions were given as the prize. When the supply ran out, that commendation morphed into the Door-Desk award, given to an employee who came up with “a well-built idea that helps us to deliver lower prices to customers”—the prize was a door-desk ornament. Bezos was once again looking for ways to reinforce his values within the company.

Around the same time he was ripping televisions off the walls,
Bezos made two significant changes to the corporate culture. As part of his ongoing quest for a better allocation of his own time, he decreed that he would no longer have one-on-one meetings with his subordinates. These meetings tended to be filled with trivial updates and political distractions, rather than problem solving and brainstorming. Even today, Bezos rarely meets alone with an individual colleague.