Zappos case part 1&2

GROUP 4: Josep Julià Boquer, Almudena Moreno, Luca Giambiasi, Marta

Cavestany, Patricio Taranenko, María del Mar Ruz.
1. Based on the model to align competitive and operations strategy (see attached
table), what are the critical (priority) decisions that have to be made from different
points of view: a) organizational; b) in terms of hard and soft decisions; and c)
regarding the choice of tools to enable zappos.com?

A) From an organizational point of view, these are the critical decisions that have to be made:

● Look for the best ways to catch customers’ attention and surprise them.
● Create a positive shopping/purchasing experience for customers in order to achieve in the near future
the “word-of-mouth” effect.
● Move from an off-line shopping experience to an on-line one, which could allow customers to access to
physical stores from home through internet.
● Reduce the period of time to serve orders, through a direct and immediate cooperation between the
company and its suppliers and courier services (UPS).
B) In terms of hard and soft decisions, these are the critical ones:

Hardware decisions

● Capacity: Decision to increase the initial warehouse of 265.000 square meters to 830.000 m2. Outlets are
created in order to sell the excess stock.
● Production and logistics center: Highlight the change of the logistic center from San Francisco to
Henderson. The inventories move to Willows and, finally, to Kentucky, place where UPS, which is the
courier service that the company uses to send their products, works.
● Design process: The company works jointly with its suppliers through online systems and the use of call
centers. There is a high degree of customization and flexibility in terms of product offering to customers,
as there is a wide selection of colours, designs and sizes applicable. High level of automatization in
production.
● Vertical integration: “Buy decisions” are key because the company offers products that are produced by
external suppliers.
B) In terms of hard and soft decisions, these are the critical ones:

Software decisions

● Human Resources: The company only hires motivated and passionate (about the company) individuals. They
are asked to do a 4-week training session in which employees have to work (at least) during 2 hours in
customer service support in order to be familiarized with the company.
● Quality: Exceptional customer service. Excellent response time of 20 secs in phone calls. Product return
guarantee of 60 days.
● Planification and control: Software to optimize the company’s needs and reduce its costs. Stock discounts for
off season products or products with excess stock.
● Organization: Employees have total freedom in making and executing their decisions. They can apply the
decisions without the previous check of their boss.
● Monitoring systems: The initial objective for the company was to make customers comfortable with the online
shopping experience in order to get them familiarized with the business.
● New products: New products are offered and shown in advance through the website. The new products
launched in the website are the ones exclusively offered by Zappos’ suppliers. It means that when a brand that
works with Zappos starts to sell new designs, Zappos offers them in their website for online sale.
C) Regarding the choice of tools to enable Zappos.com:

Customer seemed to be changing. Traditionally, customers came to the Zappos.com site and purchased directly.
However, as the economy struggled, Zappos noticed that customers came to the site many times, through multiple
channels, before finally placing orders. They might view the site directly, come through affiliate sites, through
comparison shopping engines, through a Google ad, and then finally buy.

The first thing we would recommend Zappos to do is to use metrics like Google Analytics and A/B tests to analyze
customer behaviour. This data will show if the problem is related to the available stock (sizes, colours…), if it’s price
based, if it’s due to confusion in the website…

The fact that the same inventory can be accessed through many websites might be confusing and this might be the
reason why customers doubt before making the purchasing decision. Zappos should consider selling different kinds of
shoes in their own website than in the “powered by Zappos” ones as to make sure that customers have no other choice
than purchase there.

Increasing flexibility in their structure is also crucial in order to be able to satisfy the changing needs. The previously
mentioned Google Analytics and A/B tests could also help predict what shoes are being sold more and what the latest
trends are as to display those models.
2. What is Zappos’ value proposition? What importance does
Zappos’ culture play in the design of its business model and what
is its impact on decision-making?
Zappos’ value proposition is to deliver an exceptional service during the shopping experience of online buyers by
always beating their expectations.

It has a culture of passion towards service and collaboration to create an exceptional working environment
that would also “WOW” employees. This culture of passion has shaped the evolution of its business model; they have
always chosen to grow more slowly or implement cost-cutting operations improvements in a sustainable way so
that both the empowering working environment and the exceptional customer service are preserved. The idea
behind this is that even though this is a more costly way of operating, it will finally result in word-of-mouth
marketing (both from employees and customers) which is the most effective channel for marketing and therefore
yielding very low marketing expenses at the end of the year.
Explain how the company supports its strategy in terms of its
short, mid and long-term needs?
Some examples of how the company supports its strategy in different time-span needs:

● Short term.
○ From the point of view of the customer: They carefully choose to communicate their offerings so that the
customers always feel exceeded in their expectations and perceive a premium service. They
under-promise and over-perform. Also, when dealing with excess stock they choose to do it through a
vertical web page so that zappos.com premium image is not damaged.
○ From the point of view of the employee: They recruit new employees from year to year carefully looking
at their fit with the company culture. Then, they make each one of them, regardless of the job post
they apply for, to go through an intensive training at the call-center to interact with customers and learn
about being passionate towards service. They even offer an economic incentive midway through this
training for uncommitted recruits to leave the company. On the other hand, passionate employees who
stay are empowered to manage client relationships by themselves and solve emerging issues without
having to resort to their supervisors; they are also measured on “how much WOW they have generated
to customers” rather than how efficient they are of how many deals they close.
● Mid term:
○ Customer: New product offerings are determined by customers. Thanks to their intimate relationship
with the employees of the call center they are able to expand their product lines to offer exactly what the
customer demands and continue offering them an exceptional service.
○ Employee: Likewise, employees play an important role product line extensions; they are empowered to
decide which products related to a specific shoe style they’re passionate about should be available to
customers. Apart from that, employees are empowered to build upon the company culture and
headquarters layout by making them periodically participate in discussions and comments.
● Long term:
○ Customer: They have rejected international expansion since this would involve replicating the
labor-intensive structure in the other country they would want to expand to. This would be the only way of
keeping the a consistently exceptional service abroad too. Also, understanding the culture is a key aspect
of exceptional service so they have chosen to reject markets with high culture fragmentation like Europe.
They chose to stay in the US where there is a consistency among clients’ cultures and still opportunities to
grow.
○ Employee: Some of the company culture’s values are being humble and the faith of building something
great in the long run by doing the right thing. Therefore, they prefer to train employees to take
higher-level positions than to bring in experienced outsiders.
3. What new needs and opportunities do online businesses
generate from the supply chain point of view?
NEEDS

● Investment in new technologies in order to adapt to the evolving market and to be able to compete
● Increasing flexibility in their structure and production in order to be able to satisfy the changing needs
● Improving the geographic allocation in order to be able to be more agile when supplying and be able to reduce
costs
● Reduce costs in order to be able to maintain their competitive advantage in terms of price offered
● Having low stock and big variety

OPPORTUNITIES

● Gain market share:

○ By being able to reach to more consumers
○ By being able to enter into new markets
● Increase the amount of products offered in order to satisfy more needs and be able to reach to more
consumers
● Decrease costs due to the reduction of costs of physical assets (such as shops) and the reduction of the
warehouse space needed. Costs may also reduce due to decrease in the need of labour.
4. From a demand management point of view, analyze the following
questions:
A) How does zappos manage demand: Planning or demand management?

Through experience Zappos has acquired knowledge regarding the consumer’s behaviour of its customers. As a
consequence of this, Zappos manages its demand through planning management but the fact that this market is
sometimes very uncertain, forces the company to manage the demand through demand management. (But mostly
through planning management)

B) How does Zappos define and design its service policy?

Zappos’ culture has been to always offer an excellent customer service. As Hiesh described in 2008, they want to
“Wow” their customers and they want to look for new ways to “Wow” the customers. As a consequence of Zappos’
culture, their service policy has to be aligned with it. One of its crucial aspects is the return policy that Zappos offered
to its clients. They provide free returns (first within the first 60 days and later 365 days).
Zappos website loaded faster than any other retail website and telephone support is also necessary to satisfy
customers expectations (24/7). In the webpage, Zappos offered better information. They show better pictures from
their products and more images than their competitors. and they offer the possibility to give feedback to Zappos
from the customers.

The last point is the rapidly and free delivery that Zappos offered. They achieve a next-day delivery in 2006 and 2007
for all orders.
C) How does Zappos define and design its cost policy?
C) How does Zappos define and design its cost policy?

The costs within a company can be segmented into fixed costs and variable costs. Fixed costs do not change as the
number of units sold changes. Notwithstanding, a variable cost varies, generally linearly, with the number of units
sold. The differences between fixed and variable cost are extremely relevant to creating a profitable business. In this
way, we can make a classification between the different costs that Zappos faces.

Among the variable costs, one of the most relevant ones were shipping costs, both outbound and for return.
Shipping represented a significant amount of the overall costs, adding up to $100 million, which in relative terms
represents the 17% of the company's gross sales in year 2006, which were $597 million. Nonetheless, three
significant events must be considered.

● Firstly, the focus on making the shipping as fast as possible. As Zappos concentrated on maximizing the
velocity of deliveries, the shipping costs as a percentage of net sales reminded constant although the
percentage of returns increased.
● Secondly, by the year 2008 Zappos worked very closely with UPS to improve the efficiency of the processes
within the delivery function and in this way, Zappos was able to drive down shipping costs.
● Finally, if Zappos decided to structure their deliveries of orders dependent on the distance of their customers
from Zappos offices instead of assuring overnight shipping, significant savings could be achieved.
Regarding fixed costs, it is important to highlight the inventory and the fulfilment costs.

● Drop-Ship Model: the original Zappos business model was to provide exceptional product selection by partnering with
shoe companies, which would hold the inventory and fulfil orders. As Zappos outsourced the inventory and fulfilment of
orders to other partner companies, Zappos did not have costs on these matters.
● Inventory in House: the company incurred in an inventory cost by buying a shoe store in Willows to use it as a
warehouse and a distribution centre.
● UPS: As the Willows shop was not ideally located and as Zappos quickly outgrew the Willows distribution centre they
decided to let UPS to manage inventory and fulfilment of orders. The shipment cost was lower by letting UPS manage the
fulfilment of orders than by shipping from Willows which did not have many communication infrastructures. Within 6 to 8
weeks, however, it was clear that this approach would not work. The Zappos business involved more stock-keeping units
(SKUs) than the system could handle, since each shoe style/size/color combination was a separate SKU.
● Own distribution center in Kentucky: Zappos decided to create their own distribution centre in Kentucky in order to
provide exceptional service to its customers. The company found an inexpensive building in Shepherdsville, Kentucky
very close to the UPS hub in Louisville, so they bought it.
● The company developed its own systems and procedures focused on a highly SKU-intensive business that required
virtually perfect inventory accuracy. Consequently, the company created their own software to manage all the
stock-keeping units in the Kentucky warehouse. As hardware equipment, Zappos used inventory shelving and
hand-held bar code scanners, which stored information that was later uploaded to the inventory management servers.
The company’s rapid growth required continual upgrading of both hardware and software which represented two
additional fixed costs.
● Other costs the company had to face, which are not developed in this case but can be inferred from the script, were the
salaries of the 1500 employees and the lease or the payment of the local in which they placed the call centre in
Nevada.
To conclude, all the major costs incurred by Zappos were demand-driven. That is, the different needs and
preferences of the customers guided the investments of Zappos. As mentioned above and according to Hsieh,
“Zappos’s culture was based on always looking for new ways to wow everyone they came in contact with”. That specific part
of Zappos’s culture had a direct impact on the way the company defined and designed their cost policy. In this way,
Zappos wanted customers to say “wow” after every interaction with the company. To accurately depict the priority
placed on serving its customers, Hsieh referred to Zappos as “a service company that sells shoes”. In this way, this
philosophy guided the definition and design of the cost policy followed by Zappos. The costs incurred by Zappos in
2008 amounted to $413 million which represented 65% of the revenues of that specific year ($635 million) as the
Exhibit 5 shows.

We have seen that the business decisions that derived in the generation of costs were based on the conception
Zappos had on the service/cost relationship, which in online commerce is resolved by designing a back end as a
means of stimulating business and securing customer loyalty. If we look at the overall trend of the costs Zappos has
faced, we can observe that in the initial stages of the company life cycle, costs were reduced due to the removal of
intermediaries, however, as the company grew in volume and size, logistics took over in the strategy to optimize
costs.