zappos com

Service Operations Management Case Analysis Report

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Aashish Jethani - 2010004Debashish Bagg - 2010298

Namita Choudhary - 2010127Prabhuvardhan Reddy - 2010159

Sreechand Nambiar -2010230Susnata Chakraborty -2010236

Tanuraj Kulshreshtha -2010240Mudit - 2010123

Zappos.com, a privately-held online retailer of shoes, clothing and other soft line retail categories, learned that Amazon.com, a $19 billion multinational online retailer, was about to acquire it. Zappos started as a humble beginning in 1999, when less than even 1% of shoes were sold online. How did Zappos climbed the success ladder and become a company which Amazon would look to acquire allowing it to be independent subsidiary in Amazon is the case.The case evolves about the 3C’s that Zappos set for itself and that changes the story of Zappos in a span less than a decade.

Service Operations Management Zappos.com, 2009: Clothing, Customer service and company culture

Table of ContentsAbstract............................................................................................................................................1

Introduction of Zappos.com.............................................................................................................2

Post 2000 expansion........................................................................................................................2

The three C of Zappos.....................................................................................................................3

The First C: Company Culture....................................................................................................4

The Second C: Customer Service................................................................................................5

The Third C: Clothing.................................................................................................................6

References........................................................................................................................................6

Figure 1: 3C philosophy of Zappos.................................................................................................4Figure 2: Corporate communications from Zappos.........................................................................5Figure 3: Sales fluctuations over the years......................................................................................5

Table 1: Some milestones of Zappos.com.......................................................................................3Table 2: Core values at Zappos.com................................................................................................4Table 3: Recruitment and initial training cost.................................................................................4

Introduction of Zappos.comInspired by the low service level and variety of a shoe mall at San Francisco, Nick

Swinmurn, a 26-year-old marketing manager for an online car-buying service, started Zapos.com as shoesite.com. Zappos initially secured inventory through independent shoe stores, but by October 1999, the company had begun creating direct relationships with footwear manufacturers. By the end of 2000, Zappos offered more than 100 brands and manufacturers agreed to ship orders directly to Zappos’ customers so the company could avoid carrying inventory.

In 1999, there were more than 1,500 retailing sites on the Internet with footwear offerings, but online shoe sales were just under $48 million—less than one tenth of 1% of the $37 billion U.S. footwear market. By contrast, mail-order catalog sales were 6.4% of U.S. footwear sales. In contrast to this starting point Zappos were able to manage a sales growth to 1187 million dollars by the time of case i.e. 2009.

Post 2000 expansionBy 2000, Zappos was billing itself as the world’s largest shoe store with 150 brands and

400,000 pairs of shoes in stock. Zappos had begun to switch from having manufacturers ship directly to its customers to carrying inventory. This pile up of inventory seems to be an issue, where Inventory as a percentage of total asserts is approx 65% (Ex 2).

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Hsieh and Lin, founders of venture capital funding firm Venture Frogs invested in zappos.com in January 2000. They started up with selling pizza’s and later at the ages of 24 and 25, respectively, founded an advertising network Link Exchange, that they sold to Microsoft for $265 million in November 1998. Hsieh joined Zappos as co-CEO (with Swinmurn) in May 2001, as Zappos was “the most fun and the most promising” of all companies he had encountered as a venture capitalist. By year’s end, Zappos had grown to $8.6 million in gross merchandise sales. In 2002, he announced a financial goal for Zappos: to grow to $1 billion in gross sales by 2010.In 2003, Hsieh became sole CEO and Swinmurn became chairman.

Table 1: Some milestones of Zappos.com

Year Milestones2000

Nick Swinmurn and Tony Hsieh function as co-CEOs of Zappos. Zappos records $1.6 million in gross sales.

2001

Sustained effort produces $8.6 million in gross sales for Zappos.

2002

Zappos leases the Fulfillment Centers in Shepherdsville, Kentucky. The brand elevates gross sales to $32 million.

2003

Gross sales at Zappos rise to $70 million.

2004

Sequoia Capital infuses a significant amount of cash into Zappos. Zappos moves its Headquarters and call-center operations to Henderson, Nevada. Zappos opens its first outlet store in Kentucky. Employee input is solicited for the publication of the first “Culture Book.” Gross sales at Zappos more than double to $184 million.

2005

Sequoia increases its investment in Zappos to a total of $35 million. Alfred Lin, cofounder of Venture Frogs, joins Zappos as CFO. A quit-now bonus of $100 is offered to new hires so that they will consider leaving the

company after training if they think they aren’t a fit with the culture at Zappos. Zappos is named E-tailor of the Year by Footwear News. Gross Zappos sales double again, to $370 million.

2006

Nick Swinmurn leaves Zappos to follow a passion for creating other successful start-up businesses.

Zappos expands and moves into larger Fulfillment Centers in Shepherdsville, Kentucky.

Gross sales at Zappos climb to $597 million.2007

Zappos launches a Canadian site. Ebags.com’s footwear and accessories e-tailor 6pm.com is acquired by Zappos. Zappos expands its product categories to include eyewear, handbags, clothing, watches,

and kids' merchandise. Gross sales at Zappos hit $840 million

2008

Zappos lays off 8 percent of its workforce after investor Sequoia Capital, anticipating a sluggish economy, sends the message to its portfolio companies (including Zappos) that they need to cut expenses as much as possible and get to both profitability and positive cash flow.

Zappos Insights is launched to help leaders, managers, and employees from other businesses benchmark Zappos.

Gross sales at Zappos hit $1 billion.

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The three C of ZapposZappos service and other strategies is routed out of the three C architecture that the

company has developed internally. Figure 1: 3C philosophy of Zappos

The First C: Company Culture Inspired by the value that Starbucks evolved, Zappos routed its company culture in

happiness. According to the company officials Zappos concentrated in selecting and recruiting people who are happy. They also took measures of making their people happy. The company was based out of 10 core values as follows.

Table 2: Core values at Zappos.com

Core values1 Deliver WOW through service2 Embrace and drive changes3 Create fun and a little weirdness4 Be adventurous, creative and open-minded5 Peruse growth and learning6 Build open and honest relationship with communication7 Build a positive team and family spirit8 Do more with less9 Be passionate and determined10 Be humble

The recruitment process is strict and has two sets of it one based on job skills and the second out of potential to mix in Zappos culture. It is said that hardly one of a hundred applications are allowed to come on board.

Table 3: Recruitment and initial training cost

Recruitment and traininglet the cost of initial process per person x cost of recruitment (at Zappos) 100xsuccess rate of initial training yCompensation for those who return (pg 6) 2000 (1 -y)Cost of recruitment (at Zappos) after 4 weeks

100x / y

if 'n' employees are neededTotal cost n(100x / y + 2000 (1 -y))Retention percentage (given for call center) 20% (if generalized)Total cost .8n(100x / y + 2000 (1 -y))

The above table shows that when other companies were able to recruit at ‘$ 1.5 x’ (attrition rate of 150%) per employee Zappos was recruiting them at a cost as high as .8*(100x / y + 2000 (1 -y)) (here 0<y<1). Following figure is a display of one of the corporate communications of Zappos for recruitment.

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Company Culture

Customer service

Clothing


Figure 2: Corporate communications from Zappos

A similar analysis can be made on the cost of training at Zappos. Table 4 summarized total training hours at Zappos.

Table 4: Training at Zappos

Training course Training hoursCore level training 255Leadership training 39Also grooming with other employees 10% - 20%

Such high level being the training to deliver services at Zappos, it expected the culture to be differentiating factor at Zappos.

The Second C: Customer ServiceHsieh and Lin believed that a significant part of the company’s rapid growth was due to

its customers’ loyalty (75% of Zappos orders were from repeat customers), which they attributed to their obsessive focus on delivering superior customer service. Net sales after shipment cost are $ 48 per $100 of sales (pg 7).

Figure 3: Sales fluctuations over the years

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

Gross Sales Old sales New sales

Year

Gro

ss s

ales

($ m

illi

ons)

Zappos allowed call all on an average more than 180 minutes. There were approximately 5100 calls in 24 hrs. The amount of staff needed for handling such call is 638. Average pay per CLT is $14 to $15 an hour. Hence the operating cost of call center is 638*24*$14.5 = $221,850. If the high side of the clock is taken i.e. 5hrs and 20min it would result to an huge operational cost.

This increase in customer WOW effect was supposed to be fetching in more customers, both old and new. Looking at the data in Ex 6 the story seems to be different.

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Above figure shows that the story is other way round, i.e. if Zappos would not have made this move in 2005 it would have been a dying concern due to reduction or stabilization of revenues from new customer. Zappos started maintaining inventory and hence a fully automated warehouse system that reduces the shipping time to the customer. The workers at warehouse were paid $8.25 an hour that is $140.25 per worker (8.25* (11+6)). This amounts to an approximate of $ 84, 150 per day approx of $ 20 to $ 30 million of employee payment with 240 days or 360 days of working.

Training of these employees was specific with a blend of general training also being present. In contrast to other company paying for the employee’s performance at even this level Zappos paid for being flexible.

The Third C: ClothingIn 2006, Zappos began to pursue several additional lines of business, including

purchasing a discount footwear site, running e-commerce sites for other companies, offering private label products, and providing online business advice. As Zappos was not much into making premium as selling it service this C was contributing to the missing volume that Zappos needed to make its model work. They started with brands where we already had a relationship this helped to bring in customer to a well known brand and thus giving them the required exposure.

Hsieh and Lin wanted Zappos customers to associate the Zappos name with service, not with shoes—or even clothing. “We are a service company that happens to sell shoes, and clothing, and handbags and accessories, and eventually anything and everything,” was a popular Zappos saying.

Why acquisition may help?Because of the above expansion plan Zappos has become more prone to attacks of the

external economy and it hit in 2008. Zappos was in a very bad situation and badly needed financial head to come out of the debt it has got into (Ex 2). The business and service model being an extraordinary one Amazon agreed for it to continue to be working as an independent entity in Amazon. It does maintain the same corporate culture till day.

References1. “Zappos? What is Zappos?” the Zappos experience, Joshep Michelli.2. Frances X . F rei, Robin J. Ely, Laura Winig, “Zappos.com 2009: Clothing, Customer

Service and Company Culture”, Harvard Business school, Case No: 9-610-015.3. Dick Richards, “At Zappos, Culture plays”, strategy + business magazine, Booz &

Company Inc., Issue 60, Autumn 2010.

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