1. 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,
Presented by:
Jon McDonald
Business 550
November 23, 2010

2. World’s Largest Online Shoe Retailer
Founded in 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

3. 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

4. “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

5. 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

6. Free, Rapid Delivery Free shipping, often arrives next day
Overnight deliveries made by UPS
Work closely with UPS to increase efficiency

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. Questions Wal-Mart Ebay Amazon.com Buy.com
1) What company bought Zappos in 2009?
Wal-Mart
Ebay
Amazon.com
Buy.com
2) What is not part of Zappos “wow” experience?
Website speed
Telephone customer service
Guaranteed lowest price
Free shipping and returns
3) What did Zappos do to deal with excess inventories?
Opened several outlet stores
Bought 6PM.com to use to sell discounted inventory
Used some small price reductions
Initiated a relationship with Overstock.com to sell excess inventory
All of the above