Zappos supply chain management and customer service strategy

Zappos Case Study

This case study analysis is based on the 2009 case study from Stanford Graduate School of Business titled Zappos.com: Developing a supply chain to deliver WOW! It begins with the general overview of the background, philosophies and current problems faced by Zappos. This is followed by a hierarchal ranking of the four major presenting problems for the company, which are: maintaining the "wow" image without overspending, inventory management/distribution problems, transportation efficiency problems and customer behavior problems.

Each of these problems is addressed in more detail in the discussion section and the recommendations section at the end of the analysis. Prior to the conclusion and recommendations section, a list of possible strategic alternatives is provided with a brief explanation, and potential scenarios that might affect the firm are presented and assigned a level of likelihood. A list of references is provided in APA style at the end of the paper.

Overview

When Zappos first launched in 1999, there was a great deal of reluctance about the notion of selling shoes online. Shoes are a product in which fit is essential, and most entrepreneurs and investors feared that people would never buy shoes that they could not try on first. Zappos founder Nick Swinmurn was able to convince investors Tony Hsieh and Alfred Lin that because 5% of shoe buyers purchase from catalogs, the Internet represented a huge opportunity to capture a virtually untapped market.

The unique selling propositions of Zappos included 1) the ability to buy from a much larger selection of styles, sizes and colors than in brick and mortar stores; 2) the ability to receive free overnight shipping; 3) the provision of detailed information and visual access to the shoes; and 4) the "WOW" experience of a customer service call center whose passionate employees were trained to go above and beyond.

The company went through many growing pains between 1999 and 2008, most of which had to do with supply chain management. Zappos' distribution evolved from a drop-ship model, to a partnership with UPS, to complete management of its own inventory in less than 10 years. It also went through massive changes in its product offerings, expanding from an online shoe store, to a seller of everything from handbags to clothing to electronics to camping equipment. It also diversified itself by acquiring a discount shoe retailer known as 6pm, allowing it to move slow-selling items quickly without tarnishing the store's higher end image. Some problems began to occur however due to the failing economy. The company had decided on several occasions that international expansion was not a viable option, but they needed to something to avoid declining sales.

Problem Statement

1. Zappos has created a philosophy and image based on "wowing" the customer, even when it is cost prohibitive. If they want to raise profit margins, they may need to alter some of their practices. However, if they do this, they will lose a major part of what makes Zappos unique and special to customers.

2. Zappos owners want to have complete control over their inventory for quality assurance purposes. However this is proving to be less and less cost-efficient as customer sales are declining and inventory systems remain the same.

3. Trucks are often not running at full capacity, causing traffic jam problems and poor cost-efficiency.

4. Customers are changing the way they shop online since the economy slowed down. They are not as quick to buy, often accessing the site through other sites and returning several times before making a purchase.

Strategic Alternatives

Strategic alternatives include speed and shortening product life cycles; strategic information flows; customer partnerships and relationships; cross-functionality; flow-through distribution and a focus on business processes rather than functions.

The role of the operations strategy and operations management in e-business is to execute or implement the general business strategy and effectively use the tools and information flows (Bessant & Lamming, 1999). The challenge for an operations strategy is that it has to translate and implement these business models. This involves a continual and, in some cases, ever-shortening business cycle. In addition, the organization must seek to understand how to take advantage of new operational it capabilities to better operate within these parameters (Irani, Love & Li, 2000).

An e-operations strategy is concerned with both the internal and external decisions necessary to translate the business vision. According to Williamson, Harrison & Jordan (2004) the e-business strategy should therefore be a fluid collection of business activities in which each node or business activity focuses on a limited number of competencies to create value. It is also important to keep in mind however that new product and service flexibility can also be reduced if a firm may has heavily invested in certain activities, processes and technologies, as part of an integration move, and finds it hard, both economically and emotionally, to justify a switch in direction (Lee, 2000).

Scenarios

1. Economic collapse/major recession -- moderately unlikely (due to the economy beginning to heal)

2. Major competitor outdoes Zappos on customer service and variety -- unlikely (based on it being difficult to top them without losing money)

3. Zappos gets involved in an ethics scandal that ruins its reputation - highly unlikely (based on what is known about the owners and the operations)

4. Online shopping continues to evolve into unforeseeable possibilities (likely, due to the fact that several decades ago, no one could have predicted the magnitude of the internet).

Porter's Five Forces

1. Threat of New Entrants

As the industry's potential grows, joint efforts among manufacturers, equipment suppliers, and materials manufacturers will be needed to enable the transition to high-volume production of the largest, most advanced products. This is currently Zappos biggest threat in terms of new entrants, since start-up companies with the available capital to compete are unlikely at the present time.

2. Threat of Substitutes

Obviously, a substitute product, service or distribution system that increases profitability would be a great competitive advantage - if it is developed by Zappos. However if it is a competitor that develops a better substitute, Zappos could be in serious trouble. This is why their research and marketing teams must be exceptionally proactive in their endeavors.

3. Bargaining Power of Suppliers

The suppliers currently rely on Zappos as much as Zappos relies on them, giving them equal bargaining power. However, this could change in light of variations the market, the economy and the changing preferences of customers.

4. Bargaining Power of Customers

While it is important for Zappos to exceed customer expectations and outdo its competition, it is important to ensure that the company does not over-extend itself. Right now, the customer is "king" and has the edge in terms of bargaining power, which is the way Zappos wants it. However, the company needs to be cautious of putting too much power in the customers' hands.

5. Competitive Rivalry between Existing Players

Direct competitors are currently not able to match Zappos capabilities, especially in terms of customer service. But this does not mean they should be dismissed as viable competitors. In fact all direct competitors should be watched very closely.

SWOT Analysis

Strengths

Outstanding customer service

Free overnight shipping

Wide variety of products

Happy, dedicated employees

Weaknesses

Cannot afford deep discounts

Transportation problems with half-full trucks

Opportunities

Expansion into other markets

Developing niche customer bases

Eventually going overseas

Threats

Changing customer behaviors on the internet

Possibility of new entrants

Over-diversification of product offerings

Recommendations/Conclusions

My recommendation for problem 1 is to exert somewhat more control over what the customer service representatives are permitted and encouraged to do. This does not mean that they have to suddenly start reading scripts or giving rehearsed responses to their customers. The randomness of the operation is one of its greatest appeals. But at the same time, executives need to keep in mind that randomness and uncertainty can also be ticking time bombs in the business world. Therefore, training employees how to react to certain situations without actually stripping them of their creative freedom would be the ideal scenario.

My recommendation for problem 2 is ship products manufactured overseas directly to Zappos Kentucky distribution center to eliminate the proverbial "middle man." My recommendation for problem 3 is to do a cost-benefit analysis regarding purchasing and managing its own trucks, and act according to the results of that analysis. Finally, my recommendation for problem 4 is to add content to the site such as SEO-rich articles (search engine optimization) that will draw customer directly there.