Why Jeff Bezos Is Obsessed With Waste

jeffbezossmallIn a footnote to Amazon’s (s amzn) 2008 letter to shareholders, Jeff Bezos related this moment of Zen:

At a fulfillment center recently, one of our Kaizen experts asked me, “I’m in favor of a clean fulfillment center, but why are you cleaning? Why don’t you eliminate the source of dirt?” I felt like the Karate Kid.

It may sounds like a koan for the anally retentive, but it says a lot about Amazon’s approach to innovation. While many tech companies are focused on new products, services and business models, Amazon is focused more on new ways of wringing efficiency from its operations. And in a year when consumer and business spending is slowing, focusing on new ways of improving how you do things may yield more returns than coming up with new things to sell.

Of course, Amazon has also moved into the business of producing new gadgets. But the Kindle — be it the supersized version or the original — is not a new idea but the successful execution of an old one.

Bezos also said in that letter to shareholders that everywhere he looks he sees “muda” — the Japanese word for waste — but that he likes that, because it means a chance to increase productivity somewhere, somehow. In a recent conference call with analysts, he explained the idea further.

Every time we go through our planning process we do set top-down targets for variable and fixed productivity and we try to work towards those to make sure that we’re being frugal and efficient, so that we can have a cost structure that supports the customer experience that we want to have, which is have the lowest prices.

A lot of investors would prefer to see the benefits of this work boost earnings rather than lower prices. But the low prices are helping Amazon build market share. Its revenue in the past two quarters has risen 18 percent while overall online sales were flat or down. And Amazon’s obsession with waste removal has provided new sources of revenue — in essence, selling to other companies the efficiency it has built up for its own operations.

In 2007, Amazon opened up its global fulfillment network to other merchants, allowing them to warehouse their inventory alongside Amazon’s own while handling the shipping for them as well. In the last three months of 2008, it shipped 3 million items for other merchants.

Amazon Web Services, meanwhile, offers some of the company’s technology to others. Amazon’s “other revenue” — which includes that of AWS — totaled $550 million in the last 12 months, up 32 percent from a year earlier. Drug companies like Eli Lilly (s lly) are using its Elastic Compute Cloud to analyze clinical trials; other customers include ESPN, Autodesk (s adsk) and several hedge funds. Amazon is reaching out to academics in need of cloud computing as well.

So far, 2009 hasn’t produced a lot of must-have gadgets or startups with a compelling new business idea. It may be that the kind of innovation Amazon is focused on — that of improving how existing business gets done — will have the most significant impact this year.