Amazon's halo slips with embarrassing management fail at Whole Foods

Based on its stock price and the competition among cities to subsidize its planned new “second headquarters,” a lot of people seem to think that Amazon does everything right. But based on this report by Hayley Peterson in Business Insider, the halo is slipping from its perch atop Jeff Bezos’s head.

Whole Foods is facing a crush of food shortages in stores that's leading to empty shelves, furious customers, and frustrated employees.

Many customers are blaming Amazon, which bought Whole Foods in August for $13.7 billion. Analysts have speculated that the shortages could be due to a spike in shopper traffic in the wake of the acquisition.

But Whole Foods employees say the problems began before the acquisition. They blame the shortages on a buying system called order-to-shelf that Whole Foods implemented across its stores early last year.

Business Insider spoke with seven Whole Foods employees, from cashiers to department managers, who asked to remain anonymous for fear of retribution.

Order-to-shelf, or OTS, is a tightly controlled system designed to streamline and track product purchases, displays, storage, and sales. Under OTS, employees largely bypass stock rooms and carry products directly from delivery trucks to store shelves. It is meant to help Whole Foods cut costs, better manage inventory, reduce waste, and clear out storage.

Pictures accompanying the article remind one of Venezuela:

Boston (photo via Business Insider)

Hartford (photo via Business Insider)

Actually, the OTS system – introduced just before the acquisition of Whole Foods by Amazon – is a variant of the “Just-in-time” (JIT) inventory management system pioneered by Toyota and now widely used in manufacturing in Japan and elsewhere.  Because I spent a couple of decades consulting in the auto industry and had sequential multi-year engagements with two of the world’s biggest companies in the industry, I am rather familiar with this system, how it works, and especially with the management disciplines necessary to make it work well.

The basic strategy is to avoid build-up of inventory at the factory (or supermarket) level by making a tightly-linked system where new parts supply(or food) is delivered as it is used (or sold). First and foremost, it requires suppliers to build the capacity to make frequent deliveries, and to be immediately responsive as the factory-floor (or supermarket shelf) inventory drops to a level requiring re-stocking.  It also requires the factory-floor (or supermarket) personnel to be knowledgeable and alert -- and in essence be responsible for inventory. They become critical elements of the management system, replacing back-office personnel who normally would have cut the orders to suppliers.

In the auto industry, this often results in parts suppliers building their own factories very close to the final assembly plants. This is one big reason why Alabama is celebrating the news of a massive $1.6 billion Toyota-Mazda auto assembly plant in Huntsville. Parts suppliers will attracted to the area to be able to supply parts on a JIT basis – sometimes even making hourly deliveries -- multiplying the number of jobs there beyond the 4,000 workers expected to work directly for the plant. In Japan, employees of suppliers sometimes work inside the final assembly plant. The level of trust required is enormous. This means that the relationships tend to be very stable over time, and often include some level of shared ownership (called keiretsu in Japan) linking the suppliers to their customer.

The situation of a supermarket chain is very, very different from auto manufacturing, making it much harder to apply such a system. Fresh produce varies with the weather, so its supply cannot be reliably planned to be as responsive as spark plugs or bumpers. It is also not of uniform quality, requiring judgment calls to be made on which products to buy and display and which to pass up, or discount.

Wages for floor staff in supermarkets generally do not approach the levels of the auto manufacturing industry, with the consequence that there is a lot more staff turnover. The most essential ingredient in making a JIT (or OTS) system work is staff training and buy-in to the responsibilities. The floor-level workers have to be smart, reliable, and very well-trained. The vendors, too, have to be absolutely on the ball, ready to do handstands or whatever else required to make sure that their customer gets the supplies when they need them, not the day after.

The threat of an automobile assembly line shutting down because a part has stocked out is so visible, so financially consequential, and so embarrassing that incredible effort will be expended to make sure it doesn’t happen. Running out of Romaine lettuce at a Whole Foods is also embarrassing, but the entire store does not shut down.

There actually are good reasons for Whole Foods to want to have an OTS system. Fresh food rots when it languishes in a store room, unlike spark plugs or bumpers. But rushing into a system without adequate preparation inside and outside the company (getting vendors to change their ways) is a recipe for disaster. It requires consistent and energetic support from the top. The fact that this program was being implemented at the same time Amazon took over Whole Foods was a danger sign.

Given the fact that Amazon manages many huge distribution facilities all over the country, no doubt Amazon has great inventory management skills of its own. But applying them to a system where the supply is by nature erratic, owing to weather and other factors, was risky. I can’t say that it is an impossible task, but maybe the difficulties were greatly underestimated.

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