Zappos.com:Developing a Supply Chain to Deliver Wow!

Stanford Graduate School of BusinessDavid Hoyt, 2-13-09

Presented by: Jon McDonaldBusiness 550

November 23, 2010

World’s Largest Online Shoe Retailer

• Founded in 1999 by Nick Swinmurn• $1 billion annual gross sales (2008)• 3% of U.S. population are Zappos’ customers• Known for its high quality experience: deliver

“wow” to customers, suppliers, and affiliates• Repeat customers grew from 40% in 2004 to

75% in 2008

Zappos.com

• Strong supply chain management is an important part of the company’s success

• 1,500 employees, half in its Nevada headquarters and call center, and half in its Kentucky fulfillment center

• The company culture is an influence on the supply chain

“Wow Experience”

• Website speed• Telephone support: calls answered within 20

seconds• Free returns within 365 days• Free shipping• Large pictures of shoes on website so

customers know exactly what they are getting

Call Center

• Staffed 24/7 by 400 people in Las Vegas headquarters

• All new hires spend two weeks in call center• 5,000 calls received a day, 5,000 chances to

“wow” a customer

Free, Rapid Delivery

• Free shipping, often arrives next day• Overnight deliveries made by UPS• Work closely with UPS to increase efficiency

Many Stages of Growth

• Vendors• Other products added: clothing, electronics,

jewelry, houseware, luggage, sporting goods• Operational model:– Delivery system– Inventory system– Web system

• International expansion

Evolution of the Operational Model

• The drop-ship model:– Orders placed on Zappos website– Orders forwarded to vendor– Orders filled by vendors

• Major problems with drop-ship model:– Information on website only 95% accurate– Zappos did not know when orders shipped– Zappos did not know of unhappy customers until

it was too late

Evolution of the Operational Model

• Brought inventory in-house:– November 2000 Zappos began to stock inventory– Bought 30,000 sq foot store in Willows, CA– 100 miles north of Sacramento – Not ideal:• No major airport• Shipments made by UPS Ground• Warehouse was a manual operation

– Continued to use the drop-ship approach

Evolution of the Operational Model

• Third-Party fulfillment– Outgrew Willows distribution center– UPS approached Zappos to manage its inventory

and fulfillment– Zappos continued to own the inventory, but it

would be stored at a UPS facility near its hub in Louisville, Kentucky

– Order fulfillment would be handled by a third party

Evolution of the Operational Model

• Advantages of third-party fulfillment:– Two-thirds of customers would receive deliveries

within two days using UPS ground and at a lower cost than shipping from Willows

– More efficient use of automated tools– Zappos would not have to make major capital

investment

Evolution of the Operational Model

• Disadvantages of third-party fulfillment:– Zappos business involved more stock-keeping

units (SKUs) than the system could handle, since each shoe style/size/color combination was a separate SKU

-Zappos had 70,000 to 80,000 SKUs, and within 6 to 8 weeks the company knew they had to develop their own distribution center

Evolution of the Operational Model

• Kentucky Distribution Center– Opened their own distribution center 30 miles

from the UPS hub in Louisville– Developed its own systems and procedures

focused on a highly SKU-intensive business that required almost perfect inventory accuracy

– Random stocking approach

Evolution of the Operational Model

• Initial 265,000 square foot facility filled to capacity in 2006, Zappos opened a new 832,000 square foot facility

• Automated conveyors, carousels• Robotic system installed in 2008, doubled

worker efficiency

Evolution of the Operational Model

• End of drop-shipments– Zappos was still sending orders to its vendors for drop-

shipping until 2003, though 75% of orders were being shipped from the Zappos warehouse

– Customers served by the Zappos warehouse were happier with the experience than those whose orders were drop-shipped

– Zappos stopped using drop-shipments in order to fulfill its customer service mission

– When an item reaches zero inventory in the warehouse it no longer appears on the website

Supply Chain Management

• Buying– Difficulties of excess inventory or loss of potential

sales when items become a huge hit– Merchandising department has 100 employees,

half of whom are buyers and assistant buyers– Buyers are the primary points of contact for

vendors– Extranet allowed vendors to see the same

information as the buyers

Operating a Supply Web

• Technology to design and run a retail website• Call center to deal with customer questions and

problems• Distribution system optimized for delivery to retail

customers• Zappos excelled at all these areas and began to work

with manufacturers to sell directly to customers under a program called: “Powered by Zappos”

• The supply web allowed the same inventory to be accessed through many websites

Scheduling Product Delivery

• Zappos placed orders with 1,400 different brands in 2008

• Suppliers given delivery windows in which product may arrive at distribution center

• Inefficiencies in the warehouse operation, as some days had significant order arrivals, while other days were quiet

Dealing with Excess Inventory

• Not constrained by space needs that brick and mortar stores face

• Some price reductions based on decrease in sales

• Opened several outlet stores to deal with the excess inventory

• Bought the online shoe company 6pm, which Zappos uses to sell some slow moving inventory

Opportunities for Improvement

• Ship shoes directly from China to Zappos distribution center

• Cut down on partial truckloads by introducing own fleet of Zappos trucks

• Expansion outside of North America

Conclusion

• Zappos remains true to its philosophy of customer service

• Zappos has been successful even in tough economic climate

• Zappos was sold to Amazon.com in July 2009 for 850 million dollars

Questions 1) What company bought Zappos in 2009?

A. Wal-MartB. EbayC. Amazon.comD. Buy.com

2) What is not part of Zappos “wow” experience?

E. Website speedF. Telephone customer serviceG. Guaranteed lowest priceH. Free shipping and returns

3) What did Zappos do to deal with excess inventories?

I. Opened several outlet storesJ. Bought 6PM.com to use to sell discounted inventoryK. Used some small price reductionsL. Initiated a relationship with Overstock.com to sell excess inventoryM. All of the above