zappos.com: developing a supply chain to deliver wow!
TRANSCRIPT
Zappos.com:Developing a Supply Chain to Deliver Wow!
Stanford - Graduate School of BusinessDavid Hoyt – 02/13/2009
Presented by Melih Torlak
Zappos.com
Founded in 1999 by Nick Swinmurn
Swinmurn meets Tony Hsieh, a young
entrepreneur who invests $500,000 in
the company
Known for its high quality experience: deliver “WOW” to
customers, suppliers and affiliates
3% of U.S. population are Zappos’ customers in 2008
Repeat customers grew from 40% in 2004 to 75% in 2008
Zappos.com
“A service company that sells shoes, handbags,
clothing, eyewear, watches, accessories.”
Tony Hsieh
Zappos.com
Zappos Culture and Values
Strong supply chain management is an important part of
the company’s success
The company culture is an influence on the supply chain
1,500 employees, half in its Nevada headquarters and call
center, and half in its Kentucky fulfillment center
Zappos.com
Website speed
Telephone support: calls
answered within 20 seconds
Free returns within 365 days
Fast, free overnight shipping
Providing extensive online product information
Large pictures of shoes on website so customers know
exactly what they are getting
“Wow Experience”
Staffed 24/7 by 400 people in Las Vegas headquarters, 2008
All new hires spend two weeks in call center
5,000 calls received a day, 5,000 chances to “wow” a customer
Fast, friendly & expert customer service
Call Center (Customer Loyalty)
Free shipping, often arrives next day
Overnight deliveries made by UPS
Work closely with UPS to increase efficiency
Free, Rapid Delivery
Advertising spending...
75% internet
15% print
10% other
New customers acquired heard about Zappos...
44% from Internet
43% from ‘word of mouth’
13% from other
Zappos.com
Zappos.com
Revenue Growth
Vendors
Other products added: clothing, electronics, jewelry, houseware, luggage, sporting goods (hiking, skiing, skateboarding, surfing, off-road bicycling - 2008)
Operational model:
• Delivery system
• Inventory system
• Web system
International expansion
Many Stages of Growth
The drop-ship model
Orders placed on Zappos website
Orders forwarded to vendor
Orders filled by vendors
Evolution of the Operational Model
Major problems with drop-ship model Inventory 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
Bringing 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
• Warehouse was a manual operation
Continued to use the drop-ship approach
Evolution of the Operational Model
Experimenting with 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
Evolution of the Operational Model
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
Supply Chain Management
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
Operating a Supply Web (Powered by Zappos)
Supply Web
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
Scheduling Product Delivery
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
Dealing with Excess Inventory
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
Opportunities for Improvement
Zappos.com
Conclusion
