Developing Supply Chain to Deliver WOW Essay

Zappos.com is a privately held online retailer with an extensive product category mainly including apparel, footwear, handbags, and watches. Headquartered in Nevada, it primarily operates in the US with about 1,300 employees and revenues mounting to $635M in 2008. Thanks to its strength in offering an outstanding customer shopping experience and strong corporate cultures and values related to customer service, it was the largest online shoe retailer in 2008, with a positive growth outlook. However, in the face of possible economic downturn, its underlying insufficiencies in supply chain management and operations may pose a threat to the company’s long term profitability. Nevertheless, the opportunity of possible international expansion may well be exploited to improve sales and expand the business, but such decision still needs critical evaluation and feasibility assessment in whether Zappos can sustain its focus on outstanding customer service levels in such scenario. The online-retail industry in which Zappos operates is one in which the rivalry among existing competitors is high, as it is competing with both click-n-brick stores like Amazon, as well as traditional retail stores such as Footwear Inc which also have a strong focus on the shoe segment. However, the threat of new entrants is very low as a result of the high initial capitalization required for the start of business. There are a large number of buyers in the market. However, high price sensitivity and low switching cost strengthen the buyer`s position; continuing to attract such customers becomes one of the main challenges for Zappos during a likely scenario of economic downturn. Zappos will need to adopt strategies such as importing directly from foreign suppliers, committing to 5 day delivery through ground shipping as opposed to next-day air shipping, offering its own private label, and expanding its Powered by Zappos initiative. Company Value Chain: Problem Analysis External Analysis Porter’s 5 Forces The following is an evaluation of the external forces acting upon Zappos’ operations and their possible impact in the immediate and future performance of the company: Degree of Rivalry – HIGH: While Zappos is a pioneer player in the online retail segment, in practice it is not only competing with other online retailers, but with brick-and-mortar stores in the traditional retail sector which have substantial experience in the market. Many other players offer similar products to those carried by Zappos’. Bargaining Power of Buyers – MODERATE to HIGH: Given the many alternatives in the market, the switching cost for a customer to other retailers is very low. Consumers are becoming increasingly price-conscious, and with the small potential for differentiation in the non-fashion elite segment, the customer can easily find other similar product options, forcing retailers to offer lower pricing to remain competitive. Threat of New Entrants – MODERATE TO LOW: The barriers to entry in the industry are extremely high, based on the large capital investment required. However the online retail business is still on its growth stages, which may attract new players and investors looking to capture potential markets. Bargaining Power of Suppliers – LOW: Competition for both wholesaler / importer suppliers and direct manufacturers is intense and well established; therefore, the market itself drives the power of the many suppliers down. As discussed, there are many alternatives in the market such that no single supplier is dominant. Threat of Substitutes – LOW: There are no substitute products available for most of the products which Zappos may offer to the public, so such threat is unlikely. SWOT Analysis Strengths – Customer-Oriented Culture and Services – Zappos has strong company culture and values, which have a large influence on all aspects of the business, including the supply chain. Zappos is always looking for new ways to WOW every customer and always treat every employee like family. The employees consider Zappos a fun place to work. In addition, Zappos` commitment to customer service satisfaction is clearly demonstrated by their value propositions and represents their core differentiation strategy. These are free shipping, guaranteed 5 day delivery (WOWing the customer, where 49% of customers will receive their product within 2 days), a 365 day return policy and 24/7 customer service. Unique Products and Innovation – The core products that Zappos offers are designed to be distinctly different from the traditional shoes available in brick-and mortar stores. Zappos provides customizable product models and extensive product information to customers. For example, Zappos` site has a detailed discussion of gait that helps customers to determine which type of shoe is appropriate for them. Weaknesses – Presence Limited to Online Market – Although there are many online shoppers today and the number is still growing, Zappos is unable to reach the majority of retail shoppers by only having the online outlet channel. Relatively Low Profit Margin – The revenue of Zappos in 2008 is $635 million, but the company policy on product returns makes up 35% of gross sales. This is definitely crippling Zappos profits. High Dependency on UPS – Until 2008, Zappos has only one call center in Las Vegas and one distribution center in Shepherdsville, Kentucky. The distribution center is less than 30 minutes from the UPS hub in Louisville. This will make Zappos delivery highly dependent on UPS. Opportunities – Rapid Growth of Online Shopping – Online purchasing has grown consistently year after year; the opportunity lies in capturing new online customers and retaining them. Technology Innovation – In 2008, Zappos added more automation to its warehouse operations by installing a robotic system in which robots picked up shelves that contained the items to be picked, and brought the shelves to the workers. These new robots allow Zappos to ship a pair of shoes in as little as eight minutes. Technology advances will allow Zappos to increase the capacity and efficiency of its distribution centers, without having to build new centers. Build Strategic Alliances with Complementary Retailers – Zappos could build synergies with similar-size online retailers which offer complementary products in an effort to broaden its customer base and target audience. Threats – Economic Downturn – Customers will become more price-conscious in difficult economic times, which will ultimately drive Zappos strategy in order to remain competitive in such scenario. Competitive Rivalry – While Zappos is one of the pioneer players specialized in shoe-retailing, the trend is for established brick-and-mortar companies to start offering their products online, which may generate additional competitive pressures. Possible Security Breach for Online Retailer – Zappos must address possible security breaches to its servers. Problem Statement Based upon the previous analysis, Zappos faces two major problems which may be detrimental to the company’s long-term success. Our aim here is to synthesize them in order to formulate a series of recommendations that the company could implement to solve the mentioned problems. Problem 1: Supply Chain Management The first problem that the company faces within its organization is related to supply chain management. We have identified three different sub-issues within this topic in which Zappos has room for improvement: Imports from wholesalers as an intermediary between Zappos and the manufacturers – Due to the highly uncertain demand in the sector, having a wholesaler between Zappos and the brands that manufactures the product is a strategic problem for the company. When Zappos places an order, it is relying on the inventory that the wholesaler keeps in order to fulfill its need of supply. Furthermore, Zappos may find it difficult to secure its supply as the company grows, having no control over wholesaler import decisions. This is especially critical in a sector with unstable demand faced with global economic uncertainty. Zappos must devise supply chain-related strategies which provide the company with more flexibility in terms of profit margins in order to deal with more price-conscious customers in the future. Delivery to Zappos’ distribution centers from suppliers – The company faces a problem in relation to inefficiency of partially loaded trucks arriving to unload to Zappos’ inventory facilities. As the case highlights, significant numbers of partially loaded trucks (LTL) arrive to unload products generating unnecessary traffic in the distribution center, subsequently slowing down the unloading process. There’s a need for Zappos to address this issue, ultimately affecting its whole operation’s efficiency. Inventory Management – At this point, the company uses manual scanners to register incoming and outgoing stock from its distribution center. This may lead to inventory inaccuracies due to the high probability of human error to occur in the handling of the incoming and outgoing merchandise. It is of the utmost importance for Zappos to have accurate inventory information, not only in terms of its supply chain management, but also in maintaining customer service levels because of the potential of having inaccurate information on the website such that a customer may order a product which is actually out of stock. Problem 2: Growing the business Throughout the case it is been said that the company plans to expand. It is possible to grow the business in a national scale as well as internationally. The following issues need to be addressed by Zappos when evaluating company expansion: determining strategic locations for new facilities to store its inventory and achieve a good balance between supplier lead times and delivery times to the final customer. In addition, the company faces the decision of whether to continue having its distribution centralized in Kentucky. Moreover, Zappos needs to evaluate whether or not it is still feasible to use UPS ground shipping in the long-term. The company would also face a problem not only when trying to maintain its customer service levels and an efficient delivery, but also when trying to get new employees to share its corporate culture. Recommendations: Start Importing Directly from Foreign Manufacturers: Zappos should begin developing direct relationships with foreign manufacturers, especially with Chinese suppliers, starting by importing some products directly, instead of buying from North American wholesalers. This strategy has the following benefits: * Cost savings from purchasing the same products at lower prices, providing the company with more pricing flexibility at dealing with cost-conscious consumers in a difficult economy. * Distribution channel efficiency is increased by eliminating middlemen in the supply chain. In this sense, there is no need for products to be shipped from foreign suppliers to a wholesale distributor and from there to Zappos; Zappos can receive the product directly at their distribution center, reducing freight costs across the value chain as well as lead times. * A closer relationship with manufacturers might enable Zappos to obtain information regarding inventory levels, product availability, and or der status and timing. It is worth noting that even in cases where Zappos is still purchasing from a wholesaler (who in-turn imports from the manufacturer), the wholesaler can request the manufacturer to deliver directly to the Zappos distribution center, earning the lead time and cost benefits. Opt for Ground Shipping as Opposed to Next Day Air Shipping: Given the risk of failing to meet the next day delivery standards because of external factors, Zappos should only guarantee 5-day delivery. In this manner, the company will consistently overdeliver, with 99% of customers receiving their orders within 4 days. This strategy not only makes sense from a cost perspective, but it also goes hand-in-hand with Zappos’ culture of outstanding customer service. However, the option of next day air delivery should be made available to the customer for a premium rate. Sign a Contract with a Selected Trucking Company Specialized in Consolidation: In order to minimize LTL shipments to its distribution centers and mitigate the economic inefficiencies that LTL implies, Zappos should sign a contract with a major transportation and logistics company specialized in consolidation in order to handle Zappos order pick-ups from some of its remaining local suppliers, optimizing cargo capacity and delivering such products to the distribution center. This contract strategy would only be possible to implement in areas with high supplier concentration such as Southern California and Ontario. It is granted that such a strategy would require a long and difficult negotiation process between suppliers, the logistics company and Zappos; however, economies of scale benefits could be obtained from the large volumes to be handled and the cost savings distributed across the industry value chain. Search for Additional Partners and Expand â€Å"Powered by Zappos†: Powered by Zappos partners act as distributors of the products carried by Zappos. In this sense, finding new partners will generate additional revenues from both the fees of developing and running distributor websites and operations and from an expanded market base deriving from multiple websites offering Zappos products. Offer its own Zappos Private Label: Zappos could expand the business by offering its own private label; private labels offer the advantage of not purchasing from a third-party wholesaler which in itself is making a profit from the merchandise, allowing for more flexibility in terms of pricing and profit margins. Overall, by commercializing its own brand, Zappos can offer its private label merchandise at lower prices than the industry standards, while maintaining its profit margin. This strategy would be effective at dealing with price elastic customers in uncertain economic times. It must be noted that to achieve this, however, the company would need to develop internal design capabilities and source its private label through selected manufactures which meet their needs. In order to achieve the lowest supplier prices, supplier relationships would need to be developed through established contracts which may include exclusivity agreements. Based on the large volumes that Zappos handles through its established customer base, the strategy could also earn benefits from economies of scale and increased brand awareness. Do not Expand Internationally in the Short-Term: The huge capital investment required and the risk of affecting customer service levels makes international expansion undesirable in the short run. The company’s financial base must be strengthened further before pursuing such expansion, maintaining the focus on customer service that the company has been known for. Customer service is core to company values and culture and therefore cannot be compromised by any strategic decision. International expansion must be accompanied by the same training standards, staffing levels and passion for customer service at company call centers and order delivery must meet Zappos promise. This last factor could pose a special challenge, given that Zappos would be relying on couriers operating in different countries which may introduce a factor of uncertainty beyond Zappos control as to what levels of delivery performance can be met. Invest in an Automatic Scanning System for Inventory Control: In an environment where such accurate inventory information is required, the current manual scanning of goods entering and leaving the distribution center is inadequate. Errors in inventory control will inevitably have a negative effect on customer satisfaction in that the system may allow a customer to purchase a product that is in fact out of stock. A system which automatically scans incoming and exiting products (magnetic doorways or similar) guarantees inventory accuracy and goes hand-in hand with the core values of the company, making it a worthwhile and even necessary investment. Limitations * The capacity of the existing distribution center in Kentucky is unknown; therefore we are assuming that the current infrastructure will be enough to sustain the operations of the company to meet an increasing demand and market share in the short-term. * Suppliers which have their own fleet might be reluctant to agree to let Zappos do order pick-ups and deliver their products; however, our recommendation assumes that the suppliers are flexible in this sense. * A break-up of the company`s operational costs would be required in order to make better-informed strategy recommendations. The performed analysis is based on purely qualitative information. ——————————————– [ 1 ]. MGSC 602 Strategic Management of Operations Coursepack, Zappos.com: Developing a supply chain to deliver WOW, Stanford Graduate School of Business, Case GS-65, 02/13/09, page 276 [ 2 ]. MGSC 602 Strategic Management of Operations Coursepack, Zappos.com: Developing a supply chain to deliver WOW, Stanford Graduate School of Business, Case GS-65, 02/13/09, page 296 [ 3 ]. MGSC 602 Strategic Management of Operations Coursepack, Zappos.com: Developing a supply chain to deliver WOW, Stanford Graduate School of Business, Case GS-65, 02/13/09, page 273 [ 4 ]. MGSC 602 Strategic Management of Operations Coursepack, Zappos.com: Developing a supply chain to deliver WOW, Stanford Graduate School of Business, Case GS-65, 02/13/09, page 280 [ 5 ]. MGSC 602 Strategic Management of Operations Coursepack, Zappos.com: Developing a supply chain to deliver WOW, Stanford Graduate School of Business, Case GS-65, 02/13/09, page 276