Starbucks’ AI Coffee Makers: A Productivity Case Study

Starbucks’ implementation of artificial intelligence coffee makers¹ offers a simple and ideal case study that can illustrate the synergy between efficiency, wages, profits, and inflation. Even if we don’t know the actual cost figures, we can use some hypothetical numbers to demonstrate how higher efficiency enables higher wages, higher profits, and lower prices.

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Incidentally, I don’t know Starbucks’ markup, or the portion of the item price that must cover ingredients, equipment, utilities, and the cost of owning or renting the store. The takeaway is the principle rather than the exact numbers.

Harrington Emerson³ pointed this out more than 100 years ago: “Fewer men should work less hard, receive higher wages, and deliver a cheaper product.” This single sentence is also a major selling point for the quality and manufacturing professions. Waste in industry is equally unhealthy for the economy. Waste is something for which we must pay, which puts money into circulation, but for which we receive no value. Waste is the root of all evils related to a nation’s economy—and it’s the job of quality and manufacturing professionals to eradicate this waste from supply chains.

If the company handled it properly, Starbucks could sell more per hour at a lower price while keeping baristas employed—at a higher wage—and still net higher profits.

Automation at Starbucks

Regarding Starbuck’s Siren automated system, the original reference says, “Starbucks claims that baristas using the machine will be able to (make drinks in) less time and fewer steps, making a grande mocha Frappucinno in 36 seconds rather than 87 seconds.”

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Also assume there’s a setup time of 13 seconds between orders, i.e., the barista needs this much time to receive and understand the customer’s order. In the absence of automation, it takes 100 seconds to fill the order, so the barista can fill 36 per hour. The labor cost is therefore 45 cents per drink.

Both examples illustrate Emerson’s simple statement, “Fewer men should work less hard, receive higher wages, and deliver a cheaper product.”

A square deal for all

Although pressure to increase wages is generally linked to inflation,² this paradigm assumes the higher wages aren’t driven by higher productivity. When workers become more productive, their product or service becomes cheaper rather than more expensive, and this is deflationary.

Consumers have direct control over other forms of waste, such as premium prices for fancy brand names, celebrity endorsements, junk fees, and extended warranties. With regard to capital equipment, although the same principle applies to any asset, Henry Ford wrote, “They are worth only what we can do with them.”⁴

This seems to leave room for a price reduction of only 15 cents per drink. But also suppose Starbucks accepts a lower profit margin, let’s say 33 percent less, which it can do because it’s now selling more than twice as many per hour. The lower price means more can be sold, which keeps the baristas employed—at a higher wage—while the company earns higher profits as well.

This model’s success requires a square deal for all stakeholders or relevant interested parties. Starbucks can’t, for example, continue to pay the baristas only $15 an hour (again, this is the number assumed in the example, the actual figure varies) and expect them to buy into automation. Frederick Winslow Taylor told us this more than 100 years ago: “After a workman has had the price per piece of the work he is doing lowered two or three times as a result of his having worked harder and increased his output, he is likely entirely to lose sight of his employer’s side of the case and become imbued with a grim determination to have no more cuts if soldiering (i.e., marking time, deliberately limiting productivity) will prevent it.”⁷

Labor shortage-driven wage increases are indeed inflationary because the velocity of money increases without a commensurate increase in the quantity of goods and services. Efficiency-driven wage increases, in conjunction with price reductions, counteract inflation by making goods and services less expensive. The manufacturing and quality professions are ideally situated to help make this happen.

Thanks,
Quality Digest