Case Study – Operations

Zappos (www.zappos.com) is a Las Vegas-based online
retailer that has been cited’in Fortune’s list of the Best
Companies to Work For and Fast Company’s list of the
world’s most innovative companies. In fact, its remarkable
success resulted in Zappos being bought by Amazon for
$850 million in 2009. Zappos was founded in San Francisco
in 1999 and moved to Las Vegas for the cheap real estate
and abundant call center workers. The company sells a large
variety of shoes from nearly every major manufacturer and
has expanded its offerings to handbags, apparel, sunglasses,
watches, and electronics. Despite the crippling economic
downturn, sales jumped almost 20 percent in 2008, passing
the $1 billion mark two years ahead of schedule.
The company’s first core value is “Deliver WOW
through service,” which is obvious if you’ve ever ordered
from Zappos. It provides free shipping in both directions
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Zappos provides free shipping in both directions on all
purchases.
30 PART ONE: Basic Concepts of OM and Value Chains
on all purchases. It often gives customers surprise upgrades
for faster shipping. And it has a 365-day return policy. In
2003, Zappos made a decision about customer service: It
views any expense that enhances the customer experience
as a marketing cost because it generates more repeat customers through word of mouth. CEO Tony Hsieh never
outsourced his call center because he considers the function too important to be sent to overseas. Job one for these
frontliners is to delight callers. Unlike most inbound telemarketers, they don’t work from a script. They’re trained
to encourage callers to order more than one size or color,
because shipping is free in both directions, and to refer
shoppers to competitors when a product is out of stock.
Most important, though, they’re implored to use their
imaginations. This means that a customer having a tough
day might find flowers on his or her doorstep the next
morning. One Minnesota customer complained that her
boots had begun leaking after almost a year of use. Not
only did the Zappos customer service representative send
out a new pair-in spite of a policy that only unworn shoes
are returnable-but she also told the customer to keep
the old ones, and mailed a hand-written thank-you. 14 Over
95 percent of Zappo’s transactions take place on the Web,
so each actual customer phone call is a special opportunity.
“They may only call once in their life, but that is our chance
to wow them,” Hsieh says.
Zappos uses a sophisticated computer system known as
Genghis to manage its operations. This includes an order
entry, purchasing, warehouse management, inventory, shipping, and e-commerce system. Genghis tracks inventory so
closely that customers can check online how many pairs of
size 12 Clarks Desert boots are available in the color sand.
For employees, it automatically sends daily e-mail reminders to call a customer back, coordinates the warehouse robot
system, and produces reports that can specifically assess the
impact on margins of putting a particular item on sale.
Free shipping has become a customer expectation.
Research has found that online customers abandon their virtual shopping carts up to 75 percent of the time at the end of
their order entry process when they can’t get free shipping.
Other online retailers have copied the free-shipping policies of Zappos. L.L. Bean, for example, now provides free
shipping and free returns with no minimum order amount.
Case Questions for Discussion:
1. Draw and describe the customer bene:8.t package
that Zappos provides. Goods? Services? Digital
content? Who manufacturers the physical goods?
Who is responsible for the quality and delivery of
the physical goods?
2. Identify and describe the primary, support, and
general management processes needed to execute a
customer order at Zappos.
3. Describe how any three of the OM activities in the
box “What Do Operations Managers Do?” impact
the management of both the goods that Zappos sells
and the services that it provides.
4. Explain how this case illustrates each of the seven
major differences between goods-producing and
service-providing businesses.