ERP Purchase: A Jeff Bezos Type 1 Decision

Amazon recently became one of the fastest companies ever to reach $100 billion in annual sales. We’re going to relate some of the “golden nuggets” from Jeff Bezos, CEO of Amazon, and how they tie back to Enterprise Resource Planning (ERP) and the manufacturing industry.

In a recent letter to shareholders, Bezos shared his “decision” philosophy, and the importance of customer obsession, over competitor obsession.

Type 1 Decisions

Bezos said, Some decisions are consequential and irreversible or nearly irreversible—one-way doors—and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. Bezos defined this as a “Type 1 decision.” Many managers believe that these types of decisions are only made at the highest level of the company.

How wrong could they be?

In manufacturing, hourly employees make decisions on a daily basis, some of which cannot be reversed. What about the unintended decision to set up the machine incorrectly resulting in scrapped parts? That decision could easily result in a lost customer. Why? The customer needed those parts and it can take weeks to get replacement castings. How could a decision like this happen? Because a corrective action report was buried somewhere in a file cabinet that was never found. These decisions adversely affect your customers and your company’s reputation.

Type 2 Decisions

Fortunately, most decisions are not Type 1. There are also what Bezos calls “Type 2 decisions.” According to Bezos, these decisions are changeable, reversible—they’re two-way doors. He continues to say that, Type 2 decisions can and should be made quickly by high judgement individuals or small groups. As organizations get larger, there seems to be a tendency to use the heavyweight Type 1 decision-making process on most decisions.

Unfortunately, businesses can’t wait for supervisory level decisions. When an individual on the shop floor works on parts that are not the most critical, they inadvertently reschedule the entire shop, impacting shipping schedules, downstream operations, and more. Starting production on a particular “job” can be changed (Type 2 decision), but the cost associated with stopping and starting production will erode your profitability. Having up-to-the-minute data can prevent the evolution to a Type 1 decision culture. Knowing precisely when assembly components or raw material arrive or the status of any asset will give your managers confidence that their team will make good Type 2 decisions.

If your company’s emphasis is on the long term, like Amazon, you will likely make decisions differently than most companies. This approach to management and decision-making includes a relentless focus on customer wants, making investment decisions, and maintaining your company culture. Having timely and accurate data can make Type 2 decisions much easier.

High-Velocity Decisions

Startups and startup-minded companies have no problem making high-quality, high-velocity decisions, but established and large organizations struggle to do the same. However, in manufacturing, high-velocity decisions happen on an hourly basis. Shipping, receiving, setup, quality, and productivity are all high-velocity decisions that are made with or without timely information. Bezos said, The senior team at Amazon is determined to keep our decision-making velocity high. Speed matters in business—plus a high-velocity decision-making environment is more fun too.

Bezos also warns that a common pitfall of organizations—one that hurts speed and inventiveness—is “one-size-fits-all” decision-making. The same can be said for selecting and using an ERP system. One size does not fit all. Choosing and using a scalable ERP solution is not a high-velocity or Type 2 decision. This is a Type 1 decision.

Tying Back to Manufacturers

What is the positive impact that technologies are making on small and mid-sized manufacturers today?

One of our clients, a mid-market machine manufacturer, makes products designed unique to the needs of their customers. Each unit consists of hundreds and even thousands of individual parts. The company machines their own parts and assembles each machine in their own facility, which results in a large footprint. There is only so much space for assembly, as machines can take months to complete. In 2015, the company had their best year ever, shipping 57 machines.

The company is highly respected, well managed, and highly automated; yet management was convinced that there was more opportunity. After implementing some key technologies, the company shipped 77 machines in 2016. That was a 35% improvement! So what was the cost to the company? More inventory, more people, more space, more facilities, higher payables, lower cash flow, an acquisition? Actually, none of these. They did it with lower inventories, flat lined their accounts payable, and with fewer people. They even allowed some of their staff to retire, without replacing them.

The reason they made such tremendous improvements was because the new technologies that were implemented helped everyone in the company make better decisions. Better Type 1 and Type 2 high-velocity decisions were made throughout the company. The people on the shop floor made better decisions because they had better information, so every individual contributor always knew what was most important in that moment. You would be amazed at how big an impact thousands of daily decisions, when made better, can have on the results of an organization.

Those results are just waiting. Waiting for the day that the executives come to realize they are attainable. Type 1 decisions can hold your organization back, or take the company, the profitability, and competitive advantage to another level. All you need to do is learn from Jeff Bezos to “disagree and commit” to keep moving your organization forward. Disagree with the status quo and commit to a new and better future.

If you want to learn how to have a better future, contact The Lake Companies. We’ve always focused on the long-term success of our clients. That’s not the first success for our clients, just one of the most recent ones. There are many more and we owe it to a technology foundation and product suite that has helped launch our clients into greater success. It is there for you, just give us a call to find out how.