Read the case If the Shoe Fits (and Even if It Doesnt) Custome.docx

Read the case "If the Shoe Fits (and Even if It Doesn't):
Customer Service at
Zappos" at the end of Chapter 14 (p.22-23).
Book Citation: Abrams, R. (2012). Entrepreneurship A Real-
world Approach. Planning Shop.
Answer the following questions and/or statements in detail:
1. The great customer service at Zappos increases costs -- free
same-day shipping; extensive employee training; and so on. Do
you think the company can reduce costs in other areas of
operations to help offset these costs? If so, how? Use credible
sources and research to support and explain.
2. By off-shoring its customer call center, even if Zappos offers
wages and perks much higher than the going rate, it would stand
to save substantial amounts of money. Do you think Zappos
should consider this? Why or why not? Use credible sources
and research to support and explain.
3. In what other ways do you think Zappos can affordably
enhance its customer service? Use credible sources and
research to support and explain.
Make sure you format your papers in proper APA 6th. Be sure
to properly cite your sources inside your text using APA 6th
citations rules as well as proper APA referencing guidelines in
your “References” (bibliography) section at the end of your
papers.
Your written weekly assignment paper should be at least 1,000
words in length.

Chapter
14
How Will You Run Your Business? 332
Facilities 333
Manufacturing a Product 335
Design your production process 336
Best practices in manufacturing 337
Quality management: ISO 9001 338
Outsourcing and offshoring 339
Producing a Service 340
Research and Development 341
Supply Chain Management 342
Finding suppliers 342
Inventory management 343
Order Fulfillment and Customer Service 347
Insurance 348
Emergency Preparedness and Disaster Recovery 349
“Green” Your Operations 350
Other Operational Issues 351
Real-World Case
If the Shoe Fits (and even if It Doesn’t):
Customer Service at Zappos 352
Critical Thinking Exercise
turn the tables on Costs 354

OPERATIONS
ERA_Ch14.indd 331 6/18/12 9:54 AM
e N t r e p r e N e U r S h I p a r e a L - W O r L D a p p r O
a C h332
How Will You Run Your Business?
Entrepreneurial ventures often are launched and funded based
on a great
idea or a terrific management team, yet they rise and fall—make
profits
or lose money—based on their operations. How will you
actually produce
and deliver your product or service? How will you make sure
you have the
right goods at the right time—and not too many goods, or the
wrong ones?
How will you ship, store, and manage your inventory? If you
run a service
business, how will you make certain that your service providers
are in the
right place at the right time with the right materials to do their
jobs?
The term “operations” covers the entire infrastructure,
equipment, processes,
and procedures that enable you to produce and deliver your
product or
service in a way that lets you run a profitable business.
Operations are
vital because, without them, nothing gets done: You don’t have
an office
or manufacturing plant, much less one with electricity, running

water,
and networking capabilities. You don’t have the machinery to
make your
products, or a warehousing facility to store them, or a trucking
fleet to get
them to market.
Operations may seem dull—after all, how many people are
excited about
lowering the number of steps necessary in a manufacturing
process, or
shaving a day off the time it takes to ship a product? Yet it’s
exactly these
types of issues that often give a company a competitive
advantage or create
continuing profit margins.
Moreover, operations today also includes making sure a
company functions
in ways that protect the environment, lessen waste, and lower
energy
consumption. These decisions can have important consequences
far beyond
the reach of any one company.
In this chapter, you’ll learn how to:
n Determine needs for facilities
n Analyze the options for producing a particular
product or service
n Locate and evaluate suppliers of raw materials,
finished products, and othermaterials necessary to
conduct operations
n Evaluate processes for order fulfillment and

customer service
n Understand insurance needs
n Develop a disaster recovery and business
continuity plan
n Evaluate your company’s carbon footprint and
determine how to reduce it
learning objectives
ERA_Ch14.indd 332 6/18/12 9:54 AM
C h a p t e r 1 4 O p e r at I O N S 333
Contract manufacturing
a type of outsourcing specifically relating to production
of goods. Generally, a company provides the design
specifications for its product to a third party that then
manufactures that product to specifications. Contract
manufacturers typically specialize in manufacturing a
certain kind of good for many different companies that
“make” a product.
FIFO
Short for “first in, first out,” FIFO is a method of valuing
and recording inventory. the oldest unit the company
produced (for a manufacturing company) or received (for
a reseller) is the first one sold, meaning the older inven-
tory goes out the door first.
Inventory
Goods kept by a company to be sold or to be used in the

making of its products. these can be in the form of fin-
ished merchandise available for sale, whether made in-
house or purchased from others; raw materials needed to
produce goods for sale; or other physical goods to support
the company’s production and sale of its goods or services.
Just-in-time inventory
a way of reducing inventory (and the cash that’s tied
up in it) to the absolute minimum by receiving goods
for sale or manufacture as close as possible to the time
they’re needed.
LIFO
Short for “last in, first out,” LIFO is a method of valuing and
recording inventory. the most recent unit the company
produced (for a manufacturing company) or received (for
a reseller) is the first one sold, meaning the newer inven-
tory goes out the door first.
Offshoring
having some of a company’s operations, manufacturing,
or other functions performed in another country, either
by using foreign vendors or by transferring operations to
that country.
Outsourcing
Using an outside company or vendor to perform some
functions of your business, such as manufacturing, It,
human resource management, or public relations.
Raw materials
the unfinished goods or basic physical components,
either natural or man-made, that will go into the making
or manufacturing of finished goods for sale. these goods
could be completely untreated (for example, eggs supplied

to a bakery) or could have been previously manufactured
to a certain level but are not yet finished to the point of
sale (for instance, the manufactured glass supplied to a
smartphone manufacturer).
Supply chain management
the process of planning, implementing, and controlling
the operations of the entire life cycle of a product as effi-
ciently as possible. Supply chain management spans all
movement and storage of raw materials, work-in-process
inventory, and finished goods from point of origin to
point of consumption.
en.tre.pre.neur.ship key terms
Operations encompasses the entire spectrum of management,
planning, and
execution of the making, sourcing, and shipping of a company’s
products or
services, as well as delivery and support to customers.
Facilities
One of the first operational issues you’ll deal with is where you
will work.
You may launch your start-up at your dining room table or in
your parents’
garage, but, with luck and hard work, you’ll soon outgrow that
option. As you
expand, you’ll have to find some place for you and your
employees to work,
produce, and sell your goods or services. Even if the site of
your business
doesn’t seem critical, keep in mind that your choice of facilities
and neighbor-
hood will have an impact on how you and your employees feel
about coming

to work. A pleasant building in a safe neighborhood with nearby
parking
and friendly neighbors can make work more enjoyable. It can
even help you
recruit quality employees.
ERA_Ch14.indd 333 6/18/12 9:54 AM
a C h334
First, though, you must prioritize your needs. How you rank
them depends
on what kind of business you’re in—retail, manufacturing,
service, or another
type of industry—and on your specific business activities. You
also must fig-
ure out approximately how much space you require and what
your budget
can handle. Most of all, your needs will be matched to how
you’ll use the
facilities.
n Office and administrative. Virtually all businesses need at
least some office
space. Many businesses only need office space, in the form of
professional,
sales, or administrative offices. On the other hand, if the main
purpose of
your business is retail or manufacturing, your “office” may
represent only
a small portion of your total site.
n Retail. Location, location, location. One of the most

important
considerations for a brick-and-mortar retail business is the
choice of
location. Do you want to be in a mall? On a popular pedestrian
street? In a
particular neighborhood? If your business is easily seen by
passers-by (in a
mall or on a well-trafficked street), you can save considerably
on marketing
and advertising costs. These locations typically charge higher
rent, but
paying more to get a more visible and accessible space may be
well worth
it. Customers also have to be able to get to your store easily. If
they have
easy access—by walking, driving, or taking public
transportation—you
already have a competitive advantage over businesses that are
harder to
reach or find.
n Manufacturing. What do you make? Toys? Computer
peripherals? Packaged
organic vegetables? The nature of your product will dictate the
kind of
facilities you require. Your production facilities can also have a
direct impact
on your profitability. Are they set up to save on energy use and
costs? Can
you design efficient production processes? Are you near your
customers
or shipping facilities? How much does it cost to have waste
removed?
Understand all costs and benefits as you choose your space.
Also consider
whether you need your own facilities or whether contract

manufacturing
facilities (such as industrial kitchens) are available. Such
facilities give you
the flexibility to start up without investing large sums of
capital.
n Warehouse and storage. Some facilities are used primarily
for storage. In
these situations, you have many of the same concerns as
manufacturing—
shipping, docks, utilities, safety, access, security, and proximity
to
distributors. Be particularly cautious of environmental and
zoning
considerations that may affect the products or materials you can
store.
Depending on the nature of what you store, consider factors
such as
humidity and temperature.
n Virtual. Perhaps you’re one of the lucky few who can run a
business from
any location because of technology. In that case, your chief
concerns will
revolve around whether the facility in question can support the
technologies
you need. For example, is it already wired for high-speed
Internet access,
and can it handle the bandwidth you need? Likewise, will you
have
Is “hoteling” really
a verb?
The trend in office space arrange-
ment is to provide ever smaller
personal spaces for employees.

Where once a manager might have
enjoyed a private office with a win-
dow, and later a cubicle, these days
office arrangements often have
open-space arrangements with
few, if any, dividers. One trend is
toward “hoteling” in which person-
nel—who often work on the road
or at home—no longer have their
own space at all, but “check in” to
communal spaces when they’re in
the office.
ERA_Ch14.indd 334 6/18/12 9:54 AM
sufficient power and a reliable source of electricity to support a
computer-
intensive operation? If you have special equipment, can the
facilities handle
the energy requirements? Are there security issues you need to
address in
your choice of facilities? In addition, how vulnerable are your
facilities to
emergency situations such as earthquakes, fire, flood, or
hurricanes?
If all these basic requirements have been met, then you have the
luxury to
consider issues related to cost, convenience, and comfort. You
can even locate

outside a metropolitan area, where leases cost much less, or in
places that
wouldn’t be suitable for either retail or manufacturing.
If you’re a retailer or service provider, you’ll be concerned
about the neighbor-
hood or business district you operate in. What other businesses
are nearby?
What kinds of automobile or foot traffic do you need to be
successful? Will
you depend on “drop-ins,” or expect that people will make a
special effort to
come see you? The chart below shows examples of how
business needs relate
to choice of location.
LOcatiOn, LOcatiOn, LOcatiOn
Type OF BuSIneSS BuSIneSS needS BeST LOcaTIOn
Seafood restaurant chain populated areas; vacation crowds
Seaside tourist towns
Women’s clothing manufacturer Facilities with capacity for a
large
number of employees and industrial
equipment; shipping and receiving
areas
Industrial area close to transporta-
tion for easy shipping and receiving
of products and supplies, and a
short commute for employees
B2B IT services Close proximity to a business center Street
visibility not required, but

close proximity to customer sites is
important
Telecommunications company highly skilled workforce
Facilities with the right technology
infrastructure; well-educated, met-
ropolitan population
Green construction for
commercial market
Skilled workforce; close proximity to
business centers
Larger cities and metropolitan areas
Manufacturing a Product
If you plan to produce and sell a product, you have to decide
whether you’ll
build it all yourself or use the services of a contract
manufacturer to build it
to your specifications, assemble it from standard components or
from com-
ponents made to your order, or purchase it outright from another
manufac-
turer. If you choose the latter, you must further decide whether
to “brand it”
with your name and logo before selling it to others. Telephones,
computers,
and many appliances are often marketed in this fashion. You’d
be surprised
to learn how many brand-name goods are actually made by just
one or two
manufacturers.
Facilities needs

How will you use your facilities?
n Office and administrative
n Retail
n Manufacturing
n Warehouse and storage
n Virtual
ERA_Ch14.indd 335 6/18/12 9:54 AM
a C h336
Design your production process
Your production process will vary dramatically, depending on
the nature of
your product. The process of creating hand-made crafts differs
vastly from
that of manufacturing high-tech electronics. Whatever the
product, you
need a “process”—a plan for how you’ll handle your product or
service from
the time an order is placed until it’s delivered to the customer.
Even if you “produce” a service rather than a tangible product,
you’ll benefit
by considering the process by which you prepare and carry out
that service.
Questions regarding the design of your production process
include:
n What raw materials or inventory do you need? How will
you get them?
Where will you store them?

n What are the steps for turning those materials into finished
goods?
n What labor does each step require?
n How will you ensure quality control?
n How will you ship your products or goods? Which
shipping providers will
you use?
n How will you pack your products? What materials will you
need for
packing? Where will you store those materials? Where will you
do the
packing? How will you prevent theft or loss?
n What kind of electricity, gas, water, or other utilities do
you need as part
of your process?
Some of the many things to consider, whether you build,
assemble, or buy a
product, are:
n Materials. What kind of materials do you—or your
supplier—need to
make the product? Will you start with raw goods or existing
components?
For instance, if you’re making mountain bike frames, you’ll
need to
decide whether you’re going to set up a manufacturing facility
to work
with the actual raw metal, or whether you’ll send the design to a
contract

manufacturer and merely assemble the frames yourself. If you
intend to
use existing components, are there standard sizes and
dimensions you
should employ in your design, to keep your costs down? For
example,
manufacturing super-rugged laptops will be infinitely cheaper if
you
conform to the dimensions of existing mobile disk drives,
network cards,
and other components rather than designing your own from
scratch.
n Sources. Who will provide the materials and services you
need? It’s a
good idea to have more than one source, especially for critical
supplies
or services, as it increases the likelihood of cost competition
and makes
you less reliant on one vendor and, thus, more vulnerable if
something
happens to them.
your vendor’s problem is
your problem
Pay attention to how socially
responsible your vendors are. Their
practices reflect on your business,
as well as weigh on your con-
science. Does your supplier conform
to “green” environmental practices
or does it pollute? Of increasing
concern is whether vendors main-
tain ethical and fair labor prac-
tices—especially in developing
countries where labor laws are less

stringent than in developed ones.
ERA_Ch14.indd 336 6/18/12 9:54 AM
n Reliability. A product’s reliability has to do not only with
the quality of
its components, or of the product itself, but also with the
suppliers
of your materials. Will they ship orders to you on time? Will
they carry
enough inventory for you to meet your customer commitments?
Look
into the quality of the customer service your suppliers provide:
Are they
good communicators? Can they respond quickly to changes in
your
requirements? These are the sorts of things that can make or
break a
fledgling business that depends on outside suppliers.
n cost comparisons and evaluations. Naturally, price
considerations come
into play throughout the manufacturing process. Still, you might
not
necessarily want to go with the lowest-cost supplier. The
quality of its
materials might be substandard. Or its reliability (see above)
might be a
worrisome issue. Worse, it might not be financially stable and
could leave

you in the lurch right when you need to deliver to a key
customer. Choosing
the right supplier thus means evaluating candidates across a
broad range
of dimensions, including quality, service, reliability, and
financial stability.
A good way to think about it is that you’re not just looking for
low cost
but good value.
n Equipment needed. Depending on which aspects of
manufacturing,
assembling, or shipping you plan to handle yourself, you’ll need
to consider
what equipment you need to get the product out the door and
into
distributors’ or customers’ hands. These requirements vary
significantly,
depending on the nature of your business. The term “equipment”
could
range from simple computers for your mobile app development
firm, to
woodworking tools for building custom pine furniture you sell
over the
Internet, to commercial-grade kitchen appliances to run your
catering
business, to industrial equipment to manufacture electronic
components.
n contract manufacturing. In many industries, contract
manufacturers
can produce goods to other companies’ precise specifications.
Using the
services of a contract manufacturer means you can usually get
to market
sooner, and at lower cost, because you need not bear significant

upfront
expenses such as building a manufacturing plant and finding
and training
workers. Moreover, you often can tap into the expertise of a
company
that has manufactured similar goods for many years. For
example, with
over 200,000 employees, Flextronics is one of the world’s
leading contract
manufacturers. It manufactures electronics for many well-
known brands,
yet is virtually unknown to consumers. Contract manufacturers
exist in
many industries.
Best practices in manufacturing
Manufacturing techniques have dramatically improved over the
years, the
better to drive waste and inefficiencies—and therefore
excessive costs—out
of the process. Two of the chief advances in this area are “lean
manufactur-
ing” and “just-in-time” inventory management.
Version 1.0
One concept that has taken hold in
the development of certain prod-
ucts is the “Minimal Viable Prod-
uct.” The idea is to quickly get a
product to market, and later make
improvements based on the experi-
ence of actual customers. Google’s
product development mantra, for
instance, is “Experiment, Expe-
dite, Iterate.” In other words, the
company tries a lot of new things,

moves quickly rather than getting
stuck, and refines and improves
along the way.
Clearly you don’t want a minimally
viable product for a medical device
or automobile. But in some catego-
ries, such as online services, mobile
apps, and personal electronics, con-
sumers are willing—even eager—
to pay for version 1.0.
Operations considerations
n Materials
n Sources
n Reliability
n Cost comparisons and
evaluations
n Equipment needed
n Contract manufacturing
ERA_Ch14.indd 337 6/18/12 9:54 AM
a C h338
n Lean manufacturing. This is a management philosophy that
focuses
on eliminating waste to cut costs and, ultimately, deliver more
value to
customers. Lean manufacturing is based largely on concepts

identified
by the automobile manufacturer Toyota. That company outlined
“seven
wastes” that stand in the way of an optimal manufacturing
process:
overproduction, waiting, transporting, inappropriate processing,
excess
inventory, unnecessary motion, and defects.
n Just-in-time manufacturing. This strategy schedules the
production
of goods as close as possible to the time a sale is made—
ideally, after an
order is received. By manufacturing your products “just in
time” so you
can deliver them to customers when needed, you trim expenses
by not
sitting on substantial inventory and thereby reducing the
possibility of
excess inventory. One method to accomplish just-in-time
manufacturing is
building-to-order. Much of the growth of computer-maker Dell
came about
because it was able to assemble computers to order quickly,
thus providing
customers with a custom product while at the same time
reducing the stock
of unsold computers. Be aware that just-in-time manufacturing
requires
close coordination with suppliers, distributors, and customers.
Quality management: ISO 9001
Poor quality can be costly—not only in the form of faulty goods
you have
to discard, but also in the form of lost customers. In an
increasingly global

world, if you want to sell your goods internationally, you’ll
likely want to
follow procedures to get your products or processes certified as
meeting inter-
national quality standards. These measures are set by the
International Orga-
nization for Standardization (ISO) and have been adopted by
more than 90
countries worldwide. To find out more about such procedures,
check the
ISO website at www.iso.org.
Large purchasers may require you to adhere to ISO standards,
especially being
certified as meeting standard ISO 9001 for quality. Such
certifications ensure
that the products they purchase are of good quality,
environmentally sound,
interchangeable, and the like, depending on which certification
they require.
In addition, to be sold in most countries, many products require
ISO certi-
fication. These include, not surprisingly, electronics such as
semiconducting
materials, printed circuits, and boards; aircraft and space
vehicles; and food
and agricultural products. There are many ISO standards,
including those
for office paper, bobbins for yarn and thread, and the size
designation of
clothing. As well, there are environmental standards (ISO
14000) and social
responsibility standards (ISO 26000).
Even if you produce products that may not require ISO
certification, new

customers will certainly feel more at ease working with you if
they know that
you adhere to worldwide standards.
Terms of endearment
When considering suppliers, evalu-
ate what payment terms they’re
willing to offer you. A company that
allows you to pay more slowly—
perhaps over many months instead
of in 30 days—or that extends
credit to you at little or no interest
may be preferable to a company
that simply offers lower prices. So
negotiate on terms as well as price.
ERA_Ch14.indd 338 6/18/12 9:54 AM
Outsourcing and offshoring
Luckily, you don’t have to do everything yourself. One way to
reduce the cost
of producing a product is by outsourcing it—hiring and paying
another
company or vendor to provide a business function or service for
you, or to
manufacture your product or component product.
For example, a company may outsource the manufacturing of its
products to
another company, or may outsource its technical support service

to a sepa-
rate company. Technically, using any independent contractor to
accomplish
a key business function, such as managing your company’s
public relations or
human resource functions, is also considered outsourcing. You
can outsource
to companies in your own country or internationally.
One primary reason for outsourcing is to save money. By hiring
another
business that specializes in a certain aspect of operations—say,
manufacturing,
distribution, or even customer service—you reduce the size of
your permanent
staff and drive your fixed costs down.
Another reason to outsource is focus. By contracting out
noncore functions,
you can concentrate on the aspects about your business that
matter the
most, rather than those that are peripheral. This particularly
benefits newer
companies, in which growth and change happen quickly.
Typically, a company only outsources “noncore competencies,”
that is, the
functions that don’t distinguish it from competitors, while
keeping its key
competitive advantages in-house. For instance, a company may
keep all
the design functions of a new electronic device in-house but
outsource its
manufacturing. After all, you want to maintain control over
those elements of
your business that give you a competitive advantage over time.

A third reason for outsourcing is capability. You can also
outsource functions
that another company might do more proficiently and efficiently
than you can
do. For example, a new company may not be proficient in
human resource
and benefits issues, while there are outsourced providers who
stay up-to-date
on changing labor laws and practices.
Outsourcing may also enable a new company to get to market
faster. A
contract manufacturer likely already has the equipment,
processes, and staff
in place to produce your product. Acquiring all those yourself
would take far
longer, meaning a much longer time before you could begin to
make sales—
and bring in money.
When you offshore functions, you move key business functions
to another
country. Either an outside vendor located in that country
performs your
operations, or you actually set up your company’s operations
there. Offshor-
ing is often done to reduce costs, since labor in many countries
abroad costs
less, though offshoring may also be done to get closer to
suppliers or custom-
ers. Setting up an independent subsidiary of your own company
in another
country to both lower costs and reduce taxes also constitutes
offshoring.

Shipping your product
You’ll also have to consider how
you’ll ship your product to your
customer, whether that customer is
the actual end user or a retailer or
distributor that sells to end users.
Shipping costs include not only the
price of transportation but also
any fees for storing or warehousing
the product between the time it’s
made and when it’s shipped, plus
all handling costs. Some products
also have to be put into an inven-
tory system, be insured, or require
special packaging or handling—all
of which can add to shipping costs.
ERA_Ch14.indd 339 6/18/12 9:54 AM
a C h340
Many companies have learned the hard way that offshoring
typically gener-
ates hidden expenses that may reduce anticipated savings. Some
companies
that offshore key services—such as software development—
have found that
they must spend significantly more of their onshore staff time
developing
clear project descriptions and requirements and that projects are
not com-

pleted as quickly.
Many legal and ethical issues arise when a company begins to
offshore
aspects of its operations. For a more in-depth discussion of
these topics, see
Chapter 18.
Producing a Service
If you’re performing a service rather than producing a tangible
product, you
have many similar issues to address as in producing a product,
plus other
unique ones. Clearly, you still must determine your needs for
appropriate
facilities, supplies and materials, equipment, and so forth.
However, some
factors are particularly important in service businesses.
n Labor. In many service businesses, your “product” is
delivered by a human
being. Whether you provide legal services to corporations or
child care for
parents, people are responsible for “producing” what you sell.
Therefore,
labor is an even more important component of service
businesses than of
manufacturing companies. So one of the first things to consider
when planning
a service business is whether you can continually have access to
the number and
quality of people you’ll need to run your business. Is there a
sufficient supply of
trained people in the geographic area you serve? Can you hire
them affordably?
What kind of training will you need to provide? Supervision?

Security? Labor-
intensive businesses always present unique challenges.
n consistent quality. Quality is one of the critical factors
determining whether
people will buy your service—and return for more. Yet in a
service business,
with the likelihood that many different people deliver the
service, one of the
greatest challenges is maintaining consistent quality. To do so,
you’ll need to
develop clear quality standards and guidelines for the delivery
of your service.
Training is a vital component, so you’ll need to regularly and
continually
train your employees. Even if your service business doesn’t
depend entirely
on individuals—perhaps you have an online service, for
example—developing
and maintaining clear quality standards is an essential
component of your
long-term success.
n Materials and equipment. Many service businesses require
substantial
upfront investment. For instance, an airport shuttle service
entails the
purchase or lease of a fleet of vans; a graphic design firm might
need powerful
computers with high-resolution color monitors, special
software, and high-
quality printers and copiers. Other service businesses might
leverage unique
supplies or equipment to produce fine-quality services, such as
a carpet
cleaning service with proprietary cleaning fluids or supplies.

Consider what
Reducing start-up costs
As a start-up venture, every dol-
lar is precious to you. It’s hard
to raise a lot of money for a new
venture—and every dollar you do
raise costs you, in terms of equity
(or ownership) you must give up.
So start-ups in particular want to
hold their expenses down. Choos-
ing to outsource production lowers
the amount of money you need to
raise. Yes, your profit margins may
be slimmer, but outsourcing can be
an excellent start-up strategy until
you’ve built a customer base and
can fund expansion from sales.
ERA_Ch14.indd 340 6/18/12 9:54 AM
equipment and supplies you’ll need for your service business
and whether
you’ll have regular access to these as you grow your company.
n “Production.” Just as when making a product, you must
plan how you
will “produce” and deliver your service. This entails figuring
out the exact
nature of the service, the quality and qualities of the service

you’ll provide,
the method of delivering the service, how you’ll ensure
consistency, and so
on. Thinking of your service as a product helps you plan and
price every
component. For example, if you start a catering company, a lot
more than
merely the cost of food goes into planning. You’ll want to plan
how and
where the food will be prepared, how it will be transported and
kept safe in
transit, where it will be heated or reheated, what containers
you’ll use, how
you’ll acquire and train staff, and on and on. You’d be advised
to develop
standard flow charts that can be filled in for each booking,
outlining every
step and supply item needed.
n Growth. Another consideration with a service business is
whether you’ll
be able to grow the business enough to achieve your long-term
financial
objectives. For example, expanding a service business beyond a
specific
geographic area can be difficult, because you must reach and
serve your
customers in person. Or, your ability to attract and train capable
staff to
follow you to another city may be limited. As you plan your
service company,
consider ways in which you can grow even after you become
successful.
Research and Development
In business as in life, one thing is certain—change. Your target

market is
forever changing: developing new tastes, being swayed to use
the hottest
product. Technology changes, affecting the way you make, sell,
and deliver
your products or services. Prices change, suppliers change, and
competitors
change. A company that stands still will almost certainly fail in
the long
run. You must not only keep on top of new developments that
are going to
affect your business but must continually evaluate how you can
improve your
offerings and your operations. That’s where research and
development—or
R&D—comes in.
Some companies need relatively large R&D components because
they deal
with constantly evolving technology or rapidly changing
consumer pref-
erences. Yet even companies that sell traditional products
(chocolate chip
cookies, say) need to develop new products based on changing
customer
preferences (such as gluten-free cookies), new technology
(perhaps creative
ways to make, package, or deliver cookies), or other
developments.
Your research and development activities may range from
running a complete
department staffed with researchers experimenting with new
products and
new equipment, to merely subscribing to certain publications
and attending

conferences. Regardless of the extent of such activities,
research and develop-
ment must be a priority in any business.
Production considerations
n Labor
n Consistent quality
n Materials and equipment
n “Production”
n Growth
ERA_Ch14.indd 341 6/18/12 9:54 AM
a C h342
Examine the ways you plan to stay aware of developments
likely to change
your company’s products, services, and practices. Make certain
that key
employees are likewise involved in research and development
activities.
Supply Chain Management
Almost every business has goods or materials coming into the
company and
finished products or services going out. The companies you rely
on to pro-
vide you with incoming goods are essential to the continuing
operation of
your business. They constitute your “supply chain,” and how
you manage
that chain is called supply chain management.

Because most businesses will experience difficulties with their
suppliers at
some point, try not to be dependent on just one; your financial
future will
be too vulnerable if it fails you. Work to develop excellent
relationships with
your suppliers; you’ll want them to feel that you are in a
partnership together
so that they will try to do everything possible to meet your
needs. Be respon-
sive to their needs, as well; work out payment plans and
communication
methods to reduce pressures on them.
Finding suppliers
If you’re new to business, where do you find the supplies you
need to make
your operations run smoothly?
n Word-of-mouth. The best way to find a supplier is the old-
fashioned
way—asking for a recommendation from someone who’s
knowledgeable.
If you don’t know anyone in the same industry, ask others in
related
industries (for instance, ask a printer for the names of graphic
designers,
or vice versa) or those who might have a similar need (such as
for shipping
services or customized signs).
n trade associations. Excellent sources for locating suppliers
are trade
associations. Besides holding annual or regional conventions as
well as
trade shows where suppliers exhibit their products and services,

many
associations publish supplier directories, both in print and
online. (See
Chapter 3, for information on finding and using these sources.)
n Thomasnet. Consult ThomasNet, the ultimate resource for
locating
suppliers and vendors. Its website features a free, searchable
database of
products manufactured in the United States. You’ll find this site
particularly
useful for hard-to-find industrial products. Go to
www.thomasnet.com.
n tradekey B2B directory. Tradekey is one of the world’s
largest online
marketplaces for importers and exporters. It connects worldwide
wholesale
buyers with importers and exporters, distributors, and agents in
more than
220 countries. Go to www.tradekey.com.
n B2B Yellow Pages. You can find suppliers in more than 70
industries that
offer products, services, and information for your business
through the
Select suppliers that
understand your needs
Usually, competitive supply sources
exist, giving you a number of
choices and enabling you to negoti-
ate better prices. Still, don’t make
your decisions based on price alone,
for you may find the price right
but the delivery time and quality

problematic. Select suppliers with
which you can communicate well;
make certain they understand your
specifications and can consistently
meet your standards.
ERA_Ch14.indd 342 6/18/12 9:54 AM
B2B Yellow Pages. A special section on “B2B Shopping” helps
you find
the best products, prices, and shopping comparisons for
business supplies
and more. Go to www.b2byellowpages.com.
n eBay Business and industrial. Most people think of eBay
for consumers,
but the site also has a section for industrial supplies and
products sold in
large lots. Go to http://business.shop.ebay.com.
n Yahoo! B2B Directory. Most online directories maintain
separate
categories for business-related topics. Yahoo, one of the oldest
directories,
has an extensive list. You can find it at http://dir.yahoo.com/.
Click on
“Business & Economy” and then look for “Business to
Business.”
Inventory management

Many businesses overlook the vital contribution that careful
inventory man-
agement makes to a company’s profitability. How much money
you’ve got
tied up in supplies or finished product sitting in your warehouse
makes a
direct impact on your bottom line. Every box of raw material is
not simply
taking up space; it’s money sitting around, losing value.
Of course, if you don’t have sufficient inventory, you
occasionally can’t make
sales. Every business dreads the possibility of receiving
lucrative orders it can’t
fill due to inadequate supplies. And sometimes you don’t only
lose sales; you
lose a customer. This is the risk in maintaining too low an
inventory.
The answer is to develop inventory management systems that
substantially
increase the flow of information from the sales point to the
production and
purchasing teams. Information can reduce the amount of
guesswork that
goes into maintaining inventory. You’ll know how sales are
going, even on a
daily basis.
MEthODS Of inVEntORY ManaGEMEnt
One of the approaches to inventory management is just-in-time
inventory
control. This concept emphasizes keeping inventory stocked
only to the lev-
els needed to produce or sell goods “just in time” for delivery,

usually in
response to orders in-hand. Such a system significantly reduces
the amount
of money you have invested in inventory sitting idle in
warehouses, at your
store, or on factory floors. This may somewhat increase the
costs of such
goods, and it depends highly on adequate communication
systems and good
supplier relationships.
In devising your inventory control and communication
procedures, you’ll
want to devise a management information system (MIS).
Usually such a
system focuses on the computerized maintenance and
communication of
information, such as order and stock levels, reorder dates,
historical tracking
of sales, and so forth. A computer consultant can help you
select and adapt
an MIS for your company.
Where to find suppliers
n Word-of-mouth
n Trade associations
n ThomasNet
(www.thomasnet.com)
n Tradekey B2B directory
(www.tradekey.com)
n B2B Yellow Pages
(www.b2byellowpages.com)
n eBay Business and Industrial

(http://business.shop.ebay.
com)
n Yahoo! B2B Directory (go to
http://dir.yahoo.com/ then
click on “Business & Economy”
and look for “Business to
Business”)
LIFO or FIFO?
You’ll also need to discuss how
you want to value and record your
inventory. Two commonly used
methods are LIFO (last in, first
out) and FIFO (first in, first out).
These are basic methods of valuing
your remaining stock that can have
significant tax implications, so you
should reach this decision in consul-
tation with your accountant.
ERA_Ch14.indd 343 6/18/12 9:54 AM
a C h344
Build-Your-Business Worksheet
Supplier comparison chart
Supplier 1 Supplier 2 Supplier 3

Name of Supplier
Sales Rep and
Contact Info
Range of Services/
Products Offered
Direct Costs
Additional Costs
Payment Terms
Order Turnaround Time
Shipping Costs
Other Maintenance/
Support
Other:
ERA_Ch14.indd 344 6/18/12 9:54 AM
determine your Supply needs
Answer the questions below to help you evaluate your current
supply needs.
Who is responsible for your purchasing decisions?

_____________________________________________________
What are the key goods or materials necessary?
_____________________________________________________
_
What are the average costs of these goods?
_____________________________________________________
_____
list your sources of key goods or materials:
_____________________________________________________
______
list any alternative sources of these supplies:
_____________________________________________________
____
Are any goods available from only one or two suppliers? ¨ Yes
¨ no
if so, how reliable or secure are these suppliers?
_____________________________________________________
_
Can your suppliers provide you with “on demand” or short-
notice goods? ¨ Yes ¨ no
if so, what additional costs will you incur?
_____________________________________________________
_______
Will your suppliers negotiate no- or low-minimum order
contracts? ¨ Yes ¨ no

What kind of credit terms will your suppliers offer?
_____________________________________________________
What are your average credit costs?
_____________________________________________________
__________
Which key factors determined your choice of suppliers?
________________________________________________
other supplier issues:
_____________________________________________________
______________________
ERA_Ch14.indd 345 6/18/12 9:54 AM
a C h346
Inventory control
Complete this worksheet to assess your inventory control
procedures.
Who is responsible for inventory control?
_____________________________________________________
________

What is the minimum level of inventory necessary to be
maintained at all times? ______________________________
What is the minimum amount of time necessary to get materials
from suppliers? ______________________________
What is the minimum amount of time necessary to produce
goods to order? __________________________________
What is the minimum amount of time necessary to ship goods?
____________________________________________
how is information about sales translated to the production and
purchasing departments? ______________________
What management information systems does your company use?
_________________________________________
What steps do you take to reduce theft of inventory?
____________________________________________________
What other inventory control steps do you take?
_____________________________________________________
__
ERA_Ch14.indd 346 6/18/12 9:54 AM
Order Fulfillment and Customer Service
Remember, your work isn’t finished when you produce a
product or secure
an order from a customer. You still need to make sure your
customer receives

the product ordered, in good condition, and in a timely fashion.
You need to
know that you’ve satisfied your customer.
Surprisingly, many companies pay relatively little attention to
order ful-
fillment and customer service, since they don’t seem pressing
concerns or
sources of increased profit margin. However, order fulfillment
is part of any
current sale, and customer service is part of any future sale.
Customers are constantly demanding better and better service.
They expect
to get what they want, when they want it, and to be treated
graciously and
fairly in the process. Many companies are renowned for their
customer ser-
vice and have built entire marketing strategies around it.
Some companies assume they’re doing just fine by way of
customer service
because they don’t receive many complaints. But you can’t
judge how well
you’re serving your customers merely by the number of
complaints you
receive; the unhappy customer who doesn’t complain is almost
certainly a
lost customer. At least, a customer who complains gives you a
chance to
make the problem right.
So, it’s your job to make certain that customers have little
reason for com-
plaints. Training all employees—from the shipping clerk to the
sales repre-

sentative—in customer service can pay off handsomely for you,
in customer
retention and referrals. Build sufficient flexibility into your
policies so that
you can easily handle unusual or difficult requests. Empower
employees to
make certain decisions on the spot (such as accepting returns)
instead of
requiring each customer request to be approved by a manager.
Make it easy
for your customers to let you know what they want, by
soliciting customer
suggestions and feedback.
Examine your order fulfillment process. Often, orders are not
communicated
clearly or quickly to the processing department, and valuable
time is lost
due to inadequate internal communication. Assess the methods
by which
you prepare goods for shipping and deliver goods to customers.
If you hire
outside companies to ship or deliver your product directly to the
customer,
make certain they can deliver on emergency or rush-time
schedules, or line
up other shippers for such deliveries.
Look at the kinds of services you provide customers after sale.
Good customer
service emphasizes developing an ongoing relationship with
your customers,
so you’ll need return, repair, service, and warranty policies that
reassure cus-
tomers of your continued interest in them—even after you have
their money.

Three key elements to
superb customer service
n Be honest in all your dealings.
Honesty is not only the right
thing, it also directly affects
your ability to make sales, retain
customers, and (ultimately) stay
in business. In an age when any
customer can rate your company
on online user-review sites,
you must treat each and every
customer with care, respect, and
honesty.
n Promise only what you can
deliver. This has a direct impact
on customer satisfaction and
how you’ll be rated. It’s much
better to underpromise and
overdeliver than to oversell and
overhype and then disappoint
your customers.
n Follow through with commit-
ments. If you say you’re going to
do something, do it. Period. If
you promise to be on call to cus-
tomers 24/7 to fix any problems
that arise with your cloud-based
inventory management appli-
cation that they subscribe to,
make sure you do exactly that.

ERA_Ch14.indd 347 6/18/12 9:54 AM
a C h348
Insurance
One of the more frustrating tasks you’ll encounter when running
a business
is purchasing insurance. After all, you can’t “see” what you’re
getting, and
yet you often will be required to have it or will want it to
protect your busi-
ness and your employees. If this is your first business, you’ll be
absolutely
overwhelmed by the various types of insurance you may need,
want, or be
offered.
Insurance is a way to protect the value of property, life, or
one’s person against
loss or harm arising in specified contingencies, such as fire,
accident, death,
disablement, or the like. Figuring out your insurance coverage
will be daunt-
ing—guaranteed! So you’ll need a good insurance agent, or,
better yet, two
or three. Ideally, you’ll find an agent who understands business
insurance for
companies of your size and industry. It’s best if they’re a broker
who can offer
you policies from a number of different companies rather than
just represent-
ing one company’s products.

To find a good insurance agent, ask for referrals from other
business owners
or from service providers. Check with your industry trade
association as well.
Many trade associations offer lower-cost insurance specifically
for the needs of
companies in your industry. But always do your research: Just
because a policy
comes from a trade association doesn’t necessarily mean it’s
best for you.
Consider these three dimensions and types of insurance:
n incentive. Insurance you purchase because your workers
(including you
yourself ) desire it—such as medical, dental, and life insurance.
n Protection. Insurance you purchase to protect your
business from the
unexpected—liability, accident, fire, theft, and business
interruption.
n Legal necessity. Insurance that others—perhaps your
landlord—require
(such as fire or liability) or that’s required by state law (for
example,
workers’ compensation).
Types of insurance
You need insurance. End of story. As tempting as it may be to
go without
it—especially in the early, cash-strapped days of your
entrepreneurial ven-
ture—you must have it. Some types of insurance are required by
law or by a

landlord (typically, they’ll require fire and liability insurance as
a condition
of a lease), or even by a customer (especially large corporate
customers, who
may demand that you have liability and other insurance). Other
types of
insurance (like fire or business continuity insurance) are
optional but vital to
protect your investment, should something go wrong.
n Workers’ compensation insurance. All employers are
required by law to
maintain workers’ compensation insurance. This provides
workers who are
injured on the job with some financial payment and protects the
business
in case of lawsuits due to serious employee accident or death.
Although
Performance bonds
In some cases, a contractor may
be required to post a performance
bond—a type of insurance—that
protects clients against losses in
case the contractor fails to com-
plete a project or performs unsatis-
factorily. This occurs most typically
in property construction, where a
contractor ’s bond will reimburse
the client in case the contractor
goes bankrupt before the project
is completed or the project has
significant flaws.

ERA_Ch14.indd 348 6/18/12 9:54 AM
some states allow companies to be self-insured, these companies
frequently
must prove they have the financial resources to make payments
to workers
and cover themselves in case of an incident.
n Business insurance. Often called “business liability
insurance,” business
insurance provides protection for your routine daily operations.
The exact
type of insurance you’ll need depends on your business type.
There is
insurance to protect against customers who get hurt on your
premises or
any harm done by product defects, as well as insurance to
protect you if a
customer sues because a service is perceived to be of an inferior
quality.
n Malpractice insurance. Typically, professional service
providers (such
as physicians and attorneys) purchase malpractice insurance to
pay for
lawsuits and any financial awards in case a patient or client sues
based on
a belief they were harmed because the provider performed the
job in a
negligent fashion.
n health insurance. Medical, dental, and vision are typically

included in
health insurance plans. Although these days fewer companies
pay 100
percent of health insurance for employees, providing such
insurance
benefits helps attract top-notch workers to your organization.
n Business continuance insurance. Business continuance
(sometimes
referred to as “business continuity”) is insurance that covers
any losses
from situations that prevent your business from operating.
These can
include natural disasters like hurricanes, flooding, earthquakes,
and fire.
When shopping around for these various kinds of insurance,
make sure you’re
comfortable with the financial stability and reputation of the
company pro-
viding your coverage. The last thing you want is to pay
expensive premiums
over an extended period, only to have the insurer be unable or
unwilling to
pay up in the event that you suffer a loss.
Emergency Preparedness
and Disaster Recovery
Bad things happen even to good companies. Sooner or later,
your company
will face a significant problem. It could be a natural disaster—
flood, fire,
earthquake—or it could be something more mundane such as a
burglary,
power interruption, slowdown from a supplier, or a product
failure. As you

develop your internal operational procedures, include
contingency planning
to help you anticipate and prepare for the unexpected.
Of prime importance is to make sure you have proper
procedures in place to
protect your workers and yourself. Devise a disaster plan to
ensure the safety
and well-being of employees, and plan a method for you to
communicate
with employees during emergencies. You may want to have
other emergency
preparedness training or fire drills, especially if you work in
any kind of pro-
duction facility or with hazardous materials.
Types of insurance
n Workers’ compensation
insurance
n Business insurance
n Malpractice insurance
n Health insurance
n Business continuance
insurance
ERA_Ch14.indd 349 6/18/12 9:54 AM
a C h350
Next, make sure you develop procedures to safeguard your
records and data

in case of emergency. Without your data, you will have a very
hard time get-
ting your company back up and running, and an even harder
time collect-
ing on insurance or any government assistance. So safeguarding
procedures
should include regular backup and storage of data offsite. An
easy, inexpen-
sive approach is to use an online data backup company, or use
cloud-based
data storage, so that you copy your records daily over the
Internet.
Next, look at those things that are absolutely critical for your
specific busi-
ness, and find ways to make certain they are protected or able to
continue
even after an emergency. Remember, a disaster elsewhere can
be a disaster for
you if your critical vendors become unavailable (say a tornado
wipes out a
factory). Develop a list of suppliers in other parts of the
country, or even the
world, for backup.
Remember to also examine your business insurance. In addition
to insurance
to cover loss of physical equipment, records, and inventory, you
might want
business interruption insurance.
Emergencies also come in the form of personal disasters—
illnesses and acci-
dents—so examine your procedures to pay bills, deposit checks,
and run
payroll if key personnel become unavailable.

“Green” Your Operations
As a new company, you have the opportunity to plan your
operations from
scratch. By making sure your operations are “green”—or
designed to mini-
mize negative effects on the environment—you’ll not only help
the planet,
you’ll also save money in the long run, and often in the short
run, too.
Some choices—like installing solar panels on the roof of your
facilities, or
retrofitting a leased building to make it more energy efficient—
may come
with higher price tags than conventional choices at first, but
these improve-
ments eventually pay for themselves.
The fact is that every company can save money (and help save
the planet)
by taking a few easy steps. Reducing waste of any kind is one
of the most
important. Waste squanders your resources as well as the
earth’s. Think of
any kind of waste as money you’ve spent on something you
didn’t use pro-
ductively. In your production process, look for ways to
eliminate waste of
all kinds—whether raw materials, energy, or equipment. Use
recycled and
reclaimed materials if possible, buy supplies that arrive with
less packaging,
and choose more energy-efficient equipment. If you use water
as part of your
manufacturing process, find ways to use less, or recycle it to

water your land-
scaping. All these steps are smart, money-saving measures, and
they reduce
your environmental impact.
Your green efforts don’t have to end when the production
process does. Do you
use the most efficient methods to ship? Can you cut down on
your product’s
Shred it!
To help combat the serious crime
of identity theft, the Disposal
Rule, which is part of the Fair and
Accurate Credit Transactions Act
(FACTA), requires anyone with
access to consumer information
used for a business purpose to
properly dispose of such informa-
tion by taking reasonable measures
to protect against unauthorized
access or use of that information.
It applies to a broad range of com-
panies and individuals, such as con-
sumer reporting agencies, lenders,
insurers, employers, landlords, any
governmental agency, mortgage
broker, car dealers, attorneys, pri-
vate investigators, debt collectors,
and the like.
To abide by the Disposal Rule, be
sure to shred any documents that
contain personal information, such
as names and addresses, Social
Security numbers, credit card infor-

mation, credit scores, medical data,
and so forth. For more information
about the Disposal Rule, visit the
Federal Trade Commission’s website
at www.FTC.gov.
ERA_Ch14.indd 350 6/18/12 9:54 AM
packaging? Can you reduce the weight of your product or
shipping materials? If
so, you’ll save money on shipping and use less energy.
For some facilities—especially manufacturing plants, but even
stores and
warehouses—energy consumption is a large expense. If you fall
into this
category, consider hiring a third-party energy auditor to both
analyze your
consumption and help you increase your use of renewable
energy sources.
Perhaps you’re air conditioning a large room that you use
infrequently, or
generating a lot of heat during your production process. Putting
heating and
cooling on timers, controlling when machinery and equipment
comes on
and off in your manufacturing plant, and capturing waste heat,
for example,
combined with the use of renewable energy sources, can
increase your energy

efficiency and improve your bottom line.
If you have an office, one of the easiest things to do is turn off
all electronic
devices and utilities overnight and on weekends. Your printers,
monitors,
and copiers are all on “standby” mode, meaning they still
consume a bit
of energy. Also, look for ecofriendly supplies and raw
materials. Encourage
employees to use less paper and recycle what they do use. Get a
water filter
for your office’s kitchen faucet rather than buying plastic water
bottles. When
you need office furniture, don’t buy new; instead, find one of
the many com-
panies out there that offer refurbished furniture, and help keep
desks, chairs,
and cubicles out of landfills—and more money in your bank
account. These
are just a few of the countless options you can implement in
your office to
reduce your carbon footprint while improving your cash flow.
Encourage employees to walk, bike, or take public
transportation to work
if possible. Promote—or enable—carpooling or vanpooling. The
social net-
working company Facebook originally gave employees an extra
$600 a month
if they lived within one mile of work and walked or biked. If
yours is the type
of business that lends itself well to telecommuting, allow your
employees to
work from home a few days each week. One of the biggest
sources of energy

consumption is that consumed in getting employees to work.
By making a substantial commitment to ecofriendly operations,
you can
stand out from your competitors while carving a niche in the
market. Some
limo and taxi services only use hybrids, for example. That gives
those com-
panies a clear distinction from the dozens of regular limo and
taxi services.
Many customers make choices based on a preference for
environmentally
sensitive products or services, and this can give you a
competitive advantage.
Other Operational Issues
A variety of other operational concerns will face your company,
depending on
the size and nature of your business. Some of these topics might
include pro-
tecting the safety of your workers (see Chapter 13), exporting
goods (see Chap-
ter 18), or dealing with governmental regulations. Other
resources for some of
these topics are also listed in Chapter 20.
Go green; save green
Just some of the ways you can “go
green” and save money are:
n Choose renewable energy
if possible
n Eliminate waste of any kind
n Use recycled and reclaimed
materials

n Buy supplies with less
packaging
n Choose energy-efficient
equipment
n If you use water in your manu-
facturing process, find ways to
use less
n Ship efficiently; try to reduce
the weight of your packaging
n Arrange for an energy audit
n Turn your equipment com-
pletely off at night
n Purchase ecofriendly supplies
and raw materials
n Buy refurbished furniture
n Encourage employees to car-
pool, walk, or bike to work;
permit them to telecommute
n Install a water filter in the
company kitchen
ERA_Ch14.indd 351 6/18/12 9:54 AM
a C h352

R e a L - W O R L d c a S e
challenge
Grow an online retail business
with very high shipping costs,
yet remain profitable
solution
Create extreme customer loyalty
and streamline operations
to achieve efficiencies
If the Shoe Fits (and even if It doesn’t):
customer Service at Zappos
One day in 1999, at the height of the dot-com boom, Nick
Swinmurn
went shopping for shoes in San Francisco. Despite spending
hours
going from store to store, he couldn’t find the shoes he wanted.
after returning home empty-handed, Swinmurn tried shopping
online but found himself defeated there as well. Online stores of
every type were springing up, but none was devoted to a huge
selection of shoes. Swinmurn saw a market opportunity from his
personal need and knew that the investment environment at that
time made substantial growth possible.
although potential investors were initially skeptical that anyone
would buy online something as individual and difficult-to-fit as
a
pair of shoes, Swinmurn had research showing that 5 percent of
shoes were already being sold through mail-order catalogs, and
that
shoes were a huge market. he received a $500,000 investment,

and
he and his investors—one of whom, tony hsieh, would later
become
co-CeO—changed the name of the company from shoesite.com
to
Zappos—reminiscent of the Spanish word for shoes, “zapatos.”
Swinmurn’s original idea was to offer the absolute best
selection
in shoes. Selection would be the company’s competitive advan-
tage. But when Zappos couldn’t get a number of shoe brands to
participate, the company realized it had to differentiate, based
on
customer service. From the beginning Zappos offered free
shipping.
When someone ordered ground shipping, Zappos sent it
overnight
instead, amazing the recipient. the company also offered free
return
shipping—and accepted returns up to a year after purchase. the
goal was to surprise and wow customers…and to get them
talking
about Zappos.
Yet all this was costly. Shipping is extremely expensive, and
two-
way shipping significantly reduces profit margins. Zappos
believed
in delivering purchases quickly, which is also expensive. One
way
Zappos reduced its cost was to use “drop-shipping.” In other
words,
the manufacturers (or their distributors) sent orders directly to
the
customers from their own warehouses rather than from Zappos’.
the advantage, of course, was that Zappos could maintain far

lower
inventory levels—thereby reducing costs. But it also had far
less con-
trol over the customers’ experience. Shipments would come
from
different sources; they could be slow, lost, or just plain wrong.
ERA_Ch14.indd 352 6/18/12 9:54 AM
questions
1. the great customer service at
Zappos increases costs—free,
same-day shipping; extensive
employee training; and so on.
Do you think the company can
reduce costs in other areas of
operations to help offset these
costs? If so, how?
2. By offshoring its customer call
center, even if Zappos offers
wages and perks much higher
than the going rate, it would
stand to save substantial
amounts of money. Do you think
Zappos should consider this?
Why or why not?
3. In what other ways do you think
Zappos can affordably enhance
its customer service?

So in 2002, Zappos built its own centralized distribution
warehouse next to a UpS facility in Kentucky. that meant that
orders could often be shipped out the same day they were
received. and the next year, the company discontinued the
practice altogether of drop-shipping from other companies.
Zappos also realized it needed to make sure its customer
service representatives were well trained, highly customer
motivated, and passionate about the company. the com-
pany instituted above-industry salaries, extensive training,
and lots of extra perks for employees. New Zappos hires
are put through a five-week training course (extraordinarily
long
by industry standards) to ensure that they are fully immersed in
corporate culture, customer service, and distribution skills.
then,
at the end of their training, they’re offered $2,000 to leave.
anyone
not completely enamored of the company is encouraged to take
the money and go. Few do. (In 2011 Forbes ranked Zappos 15th
on
its list of the 100 best companies to work for.)
another way that Zappos differed from the industry was in how
it treated call center workers. Unlike in other call centers, calls
to
Zappos are not timed, nor do the call center workers have to
meet
minimum sales goals. In the end, all of this paid off. With lower
turnover—the company’s call center turnover is under 7
percent,
compared to 150 percent industrywide—Zappos saves
considerable
dollars in recruiting, hiring, and training costs.

another way Zappos keeps costs down is by eliminating errors.
employees are rewarded when spotting potential mistakes in
ship-
ping or warehousing. Without the need to correct costly
mistakes
after the fact, operational expenses are also kept in line.
Zappos considers customer service an investment, not a cost
cen-
ter. although returns amount to approximately 35 percent of
overall
revenues, 75 percent of orders come from repeat customers, who
typically buy, on average, 2½ times within a year, spending
more
each time.
By depending on happy customers to spread news of the com-
pany through word-of-mouth marketing, Zappos also keeps its
advertising budget low. a full 43 percent of new customers
come
from word of mouth.
Zappos was first profitable in 2006, and since then has had an
unbroken record of profitability. It was acquired by amazon in
2009
(a short 10 years after its founding) for about $1.2 billion, and
is
operated as a wholly owned subsidiary. n
ERA_Ch14.indd 353 6/18/12 9:54 AM
a C h354

TuRn The TaBLeS On cOSTS
Goal:
Calculate ways to improve operational efficiencies
without sacrificing quality.
What to do:
Imagine that you’re a U.S. maker of oak tables and
chairs. Your company has been in business for more
than 100 years, and is one of the few American table
and chair manufacturers left in business—most other
furniture manufacturing has gone overseas. You only
produce a limited line of designs and have small-run
rates to ensure the high quality for which your com-
pany has been known since its inception. True, you
charge a premium price for your high-quality goods,
but now your costs are rising to the point where you
have to make operational changes to save money if
you’re to stay in business. You want to do this with-
out compromising on quality.
1. Either working alone or with others, examine
all aspects of operations to determine where you
might be able to reduce costs.
2. Without knowing all the specifics of this com-
pany, consider where there might be inefficien-
cies or where you might be able to implement
cost-saving measures in each of these areas:
a. Use of technology for customer data manage-
ment and order taking
b. Shipping
c. Inventory management

d. Customer service
e. Production and manufacturing
f. Supply chain management
g. Personnel management
h. Billing and collections
3. Come up with other strategies for streamlin-
ing operations, if you can think of any, that will
enable you to continue offering high-quality,
American-made furniture at a reasonable price
point.
ExERciSE: c r i t i c a l t h i n k i n g
ERA_Ch14.indd 354 6/18/12 9:54 AM

Read the case If the Shoe Fits (and Even if It Doesnt) Custome.docx

More Related Content

Similar to Read the case If the Shoe Fits (and Even if It Doesnt) Custome.docx (20)

More from makdul (20)

Recently uploaded (20)

Read the case If the Shoe Fits (and Even if It Doesnt) Custome.docx