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

Zappos.com:
Developing a Supply Chain to Deliver Wow!
Stanford - Graduate School of Business
David 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

“A service company that
sells shoes, handbags,
clothing, eyewear,
watches, accessories.”
Tony Hsieh
Zappos.com

 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

 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

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

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

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

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

 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

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

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)

 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: Developing a Supply Chain to Deliver WOW!

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

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