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Zappos: Developing a Supply Chain to Deliver Wow! Stanford Graduate School of Business David Hoyt, 2-13-09

Zappos.com: Developing a Supply Chain to Deliver Wow! Stanford Graduate School of Business David Hoyt, 2-13-09. Presented by: Jon McDonald Business 550 November 23, 2010. World’s Largest Online Shoe Retailer. Founded in 1999 by Nick Swinmurn $1 billion annual gross sales (2008)

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Zappos: Developing a Supply Chain to Deliver Wow! Stanford Graduate School of Business David Hoyt, 2-13-09

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  1. Zappos.com:Developing a Supply Chain to Deliver Wow!Stanford Graduate School of BusinessDavid Hoyt, 2-13-09 Presented by: Jon McDonald Business 550 November 23, 2010

  2. 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

  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 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

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