High Cost of Product Production in Amazon

The estimate of the life cycle cost of a developing product provides fundamental information on how profitable the product will be after production. This is discovered in the early stages of the development process. Notably, decision making on matters relating to the product and the company are dependent on the reliability of the process of estimating the cost. This paper will, therefore, touch on issues dealing with the problem of high cost of Information Technology and development of products. In trying to understand the effect of the high cost of production on the marketing and sales of a company’s products, this discourse shall analyze the problem of high production costs in Amazon and propose a solution to the CEO of Amazon for this problem.

High Cost of Product Production in Amazon

Introduction

Product development is a process where the company creates a new product which will either add to a product that is already extant in the market or occupy an independent market niche or when the company modifies or update a product that is already extant. It is prudent to note that the success of a product development will ensure that a business exist in the market for a considerable amount of time. According to George Gruenwald, new products are essentially critical for the viability of a company, in the sense that if a company does not come up with new products then, there is a greater chance that they will die. In that respect, this discourse shall address the problem that is related with the high costs of development of products as well as the high IT costs (Hannigan et al. 2017). It will also seek to provide a high level solution, explain the benefits of solving this problem, provide a business approach and explain the process changes that the business will have to undergo, provide the best business practices that can be used to enhance the solution and lastly provide conclusions and recommendations subject to the problem discussed. Brief Company Background

Amazon.com, Inc. is a company that engages in providing retail shopping services online. The business segments that it operates in include North America, International and Amazon Web Services (AWS). The first segment deals with the retail of consumer products as well as subscription which are conducted through websites which are North American-focused, for example the www.amazon.com and www.amazon.ca. The second segment offers retail of consumer products, similar to the first segment, but this operates from internationally focused websites. The last segment, the AWS, operates in global sale of compute, storage, database as well as AWS service offerings especially for enterprises, government institutions as well as academic institutions. The headquarters of the company are in Seattle, WA and it was funded by Jeffrey Bezos in 1994.

Discussion of Business Problem(s)

The amount spent on research and development by Amazon by the close of 2018, was about 22.6 Billion U. S dollars. It is prudent to note that this was the most amount of money that was spent on research and development by any company in the United States, which was more than the amount that was spent by Alphabet, Samsung and Intel. Notably, spending money on research and development ensures that a company innovates new products and services. With regard to Amazon, research and development allows the company to stay ahead of their competition and work towards remaining viable for the future markets (Pissano & Wheelwright, 2014). It is prudent to note that many companies are investing in the Artificial Intelligence (AI) technology. Amazon is among the companies that have thrown in collective weight into the analysis of the implications of AI and has consequently spent billions of dollars towards the same.

In the digital arena, companies compete on maximizing spending on research and development. It is the perception of such companies, Amazon included that much spending in these field is associated with success of the innovation after the research and the development. The problems arising from these costs include firstly, it forms the bulk of the expenses necessary for viability of the company. Notably, in comparison to the amount that was spent on R&D in 2018, Amazon had an annual revenue of 25.66 billion dollars which could have been more if the money spent on R&D could have been cut. Secondly, a large chunk of the finances set aside for development of products by Amazon, are intended for employee costs and the information technology personnel (Pissano & Wheelwright, 2014). The large number of manpower does not only provide a problem for office space but also increases costs for network installation in cases where Teleworking is involved. It is prudent to note that most of the scientific manpower used by Amazon are immigrants and as such, this has created the necessity of opening offshore centers for purposes of product development or in some cases lobbying for Visa reforms.

The high cost of Information technology is a problem for the company. Amazon relies extensively on the software provided by third-parties. They include the cloud services, security as well as data integrity systems, the development tool and algorithms. It is pertinent to note that this reliance can be likened to the purchase of raw materials for other companies (Pissano & Wheelwright, 2014). The problem arises from the fact that Amazon spends much of the R&D expenses on obtaining these services, consulting as well as modification and integration of costs in for its operation to be continuous. Additionally, Amazon scouts for talent teams and the costs of acquiring these teams also augment the expenses of the company.

High Level Solution

Digital companies like Amazon, consider high Research and development costs as a representation of innovation, which is not always the case. Noting that these costs affect the profitability of the company, there is a need for a long-lasting solution that will address the issue of high costs of research and development as well as the high costs of Information Technology. This solution there is the use of a lean process improvement (Mcintrye, 2009). This is the process of incessantly reviewing the process of development of products and identifying areas within the process map which can be done away with or improved. It maximizes on ongoing feedback process of loop which will improve the operations of the business overtime. Notably, it is a method that is focused on the user and is used to improve or shorten the cycle time by getting rid of waste processes.

Benefits of Solving the Problem

Solving the issue of high product costs has several benefits to the company. Firstly, lowering the costs will provide the company with the flexibility of price control, which may win new businesses for the company or increase the profit margins of the company. A perfect exemplar of a company that lowered its spending on product development and increased their profits is Cisco (Reducing the Deficit: Spending and Revenue Options n.d). This is because when costs development costs were reduced, the focus of the company shifted from exploration to exploitation. While this may not bring new products for Amazon, it can help in making better the products that are already existing in the market.

Secondly, lowering the costs of Information technology will ensure a fast production time. This is because the amount of time that could have been spent on scouting for talent teams as well as ready-made R&D could be used in the development of a product. Given the product development strategy of Amazon, solving these problems can be very easy. This is because they use the “backward” strategy which aims at collecting the preferences of the customers before developing a product (Reducing the Deficit: Spending and Revenue Options n.d). The backward strategy provides them with advantage of knowing a product will fail before spending much money on the development. Therefore, much time will be directed towards developing products instead of sourcing for information technology.

Lastly, building on the first benefit of lowering costs subject to exploitation of already existing research, will provide the company with better development of products as well as improved products. This is because the exploitation will mean that the product shall be developed with the interest of the customers in mind. When a product is introduced in the market, there are several people who do not find the product conducive for their use (Reducing the Deficit: Spending and Revenue Options n.d). Exploiting these products by using the backwards strategy to identify the problem with the product will ensure that the product that will be released will be conducive for use by everyone. This will not only ensure that there is an improved product in the market, but also ensure that there will be increased sales.

Business/Technical Approach

The lean improvement will be able to achieve two critical things which are imperative for cutting down the costs of production as well as the costs of Information technology. Firstly, through sieving the process of production, the company will be able to cut down on the cycle time. It is pertinent to note that the development of products in Amazon takes the backward strategy, as it has already been stated. Identifying waste areas in this process will ensure that the company cuts down on the amount of time used during the customer experience surveys and as such, the cycle time required to develop the products for Amazon shall be reduced greatly (Cohen, 2009). Cutting down on the cycle time will increase the sales of products and subsequently increase the profit margins.

The amount of manpower required for the development of these products is great and these manpower gobbles up a huge chunk of the research and development costs. In that respect, there is a possibility of the company retaining a large headcount given that they do not want to lay off the scientific manpower and employ them again once the need to develop products arises given that there is a great demand for scientific manpower. Using the lean process improvement will ensure that the company retains only the manpower whose work cannot be done by other people, this will reduce the headcount and consequently reduce the R&D costs (Jameson, 2014). The choice to lay off certain manpower as well as revise the process of development was inspired by the fact that much money could be saved by ensuring there is a small effective manpower and similarly a short effective cycle time.

Business Process Changes

Several process changes shall be implemented with the implementation of these solution. Firstly, there will be the redesigning of the product development process. This will seek to question all the assumptions that were guiding the development process earlier in a bid to understand their purpose in their process. Secondly, there will be the simplification of the product development process. This will aim to not only make the process simpler but also seek to eliminate instances of redundancy within the process (Smith et al. 2012). This process change will ensure that the cycle time of product development is reduced greatly and consequently all the benefits of a reduced production cycle time shall follow.

Technology or Business Practices used to Augment the Solution

Several business practices could be used to augment this solution. They include setting of goals, result monitoring and implementation of corrective actions. Setting of goals will include goals such as deadlines for the cycle time of product development and should be done in reference to minimizing costs of product development. Result monitoring will seek to achieve the best end results by monitoring the daily turn-ins of the personnel tasked with the development of products. Lastly, implementation of corrective action will identify areas that need improvement at the early stages and implement them, for example, if the company was spending much on the outsourcing of talent teams and the lean improvement process identifies it as a waste area, correction of this process should be implemented (Womack et al. 2013).

Conclusions and Overall Recommendations

The perception as held by many of the digital companies with regard to the costs of research and development are not entirely true. This is because, a number of companies have reported higher profits but with low research and development costs. Amazon Company should, therefore, identify within its budgetary expenditures under the research and development costs on the spending which can be improved or done away with without affecting negatively the production cycle time or otherwise impeding the success of the products with regard to sales and marketing.

High-level Implementation Plan

The plan for implementation shall include the human resource managers, the engineers, the consumer protection team of the company as well as strategy advisors. A meeting should be conducted to broach the solution to the team and also address question that they may have with regard to the solution. The solution will be rolled out in phases, with phase one seeking to address the process of product development and phase two seeking to address the employee issue. The phases shall be conducted within specific time as will be dictated by an agreement of the key stakeholders and the results of the phases shall consequently be evaluated.

Summary of Project

This project intended to identify a problem at a company of my choice and propose a solution for the problem. In that respect, the company under study was Amazon and the problem identified was the high costs of Information Technology as well as the high costs of product development in terms of research development costs. The projects sought to propose a solution for the company with regard to this problem and ensure that the solution achieves results intended to make the company resolve the problem. By providing business process changes, technical approach and a high-level implementation plan, the project manages to explain the benefits of the solution to the company.

References

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Cohen, S. (2009). Amazon Income: How Anyone of Any Age, Location, And/Or Background Can Build a Highly Profitable Online Business with Amazon. United States: Atlantic Publishing Group.

Pissano, G. P., & Wheelwright, S. C. (2014, August 1). The New Logic of High-Tech R&D. Retrieved February 5, 2020, from https://hbr.org/1995/09/the-new-logic-of-high-tech-rd

Hannigan, T. J., Mudambi, R., & Swift, T. (2017, December 6). Sometimes Cutting R&D Spending Can Yield More Innovation. Retrieved February 5, 2020, from https://hbr.org/2015/01/sometimes-cutting-rd-spending-can-yield-more-innovation

Economic Models of Technological Change: Theory and Application. (n.d.). (n.p.): Quorum Books.

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Mcintyre, W. W. (2009). Lean and Mean Process Improvement. (n.p.): Createspace Independent Pub.

Womack, J. P., Jones, D. T. (2013). Lean Thinking: Banish Waste And Create Wealth In Your Corporation. United Kingdom: Simon & Schuster UK.

Smith, D. B., Walz, J. W., Land, S. K. (2012). Practical Support for Lean Six Sigma Software Process Definition: Using IEEE Software Engineering Standards. Germany: Wiley.