Zappos Case Study Operations Management

Clarity: Know Where You’re Going

Zappos will take an order as late as midnight and deliver it to the customer’s doorstep before breakfast. It has the world’s largest selection of shoes, and its service includes free returns. If it doesn’t have the shoe you want in stock or in your size, a Zappos call center employee will go to three competitors’ sites to try to help you locate what you want to buy. Seventy-five percent of its business comes from repeat customers, despite the fact that its prices are far from the lowest. (Price is an area where Zappos has made a conscious trade-off in its service model in order to deliver exceptional service.)

It’s not surprising, then, that managers from other companies—including many from service and quality leaders like Southwest and Toyota—make regular pilgrimages to Zappos facilities to learn how the company pulls it off. Everyone wants to know what the heck is going on. A quick look around reveals that part of its success is the company’s IT strategy, including a real-time inventory management system that is 99 percent accurate, compared with accuracy rates as low as 40 percent in other areas of retail. But what gets visitors every time are the clues to Zappos’s true competitive advantage: its culture. And no one inside the company is surprised.

The most visible champion of Zappos’s culture, naturally enough, is president and CEO Tony Hsieh (pronounced “Shay”). Hsieh is crystal clear on the culture he needs to make the company thrive, and he and his team have broken it down into ten core company values:

 1. Deliver wow through service.

 2. Embrace and drive change.

 3. Create fun and a little weirdness.

 4. Be adventurous, creative, and open-minded.

 5. Pursue growth and learning.

 6. Build open and honest relationships with communication.

 7. Build a positive team and family spirit.

 8. Do more with less.

 9. Be passionate and determined.

 10. Be humble.

Hsieh embodies these values. He is passionate, positive, fun, humble. And a little weird. As the fearless leader of a high-profile shoe company, Hsieh unapologetically wore the same pair of shoes every single day for two years. He then replaced them with the exact same pair. Hsieh’s definition of weird, however, is closer to authentic or real. He’s betting that the “real you” will be more valuable to Zappos than the safe, watered-down version that usually shows up in a work environment. So go ahead, be a little weird.

Early in his career, Hsieh had a breakthrough about how much culture mattered to the performance and motivation of employees. He sold a software company he had founded when he realized that even he no longer wanted to come to work, primarily because of the culture. Now Hsieh does many things you’d expect from an enlightened CEO, like taking calls at the call center on holidays to give his employees a break and staying in direct touch with his customers.

But what really sets Hsieh and his team apart is their deep awareness that culture is the company’s most important asset. “Service is a by-product of culture,” says former chief financial officer Alfred Lin, as are things like supplier behavior and employee turnover. In 2005, when the company’s call center moved from the Bay Area to Las Vegas, an astonishing 80 percent of its California employees relocated—for a $13-an-hour job. In 2008, a year in which the average turnover at call centers was 150 percent, turnover at Zappos was 39 percent (including turnover owing to promotions). Managers attribute the loyalty to a culture that cultivates the passion, purpose, and humanity of its employees.

But it’s not just management that gets it. The conviction that culture is key is embraced throughout the ranks at Zappos. It’s so central to the company’s belief system, in fact, that the company publishes the Zappos Culture Book, which is updated regularly and contains hundreds of unscripted comments and essays written by Zappos employees and vendors about the company’s culture, why it matters, and how it affects what they do every day. It was conceived as a training tool for new hires and partners, but consumption of the book has gone way beyond that internal circle. Ringing in at 348 pages in the 2009 edition, it’s a moving and persuasive testament to the power of employee engagement (“happiness” in Zappos-speak), and the role of culture in eliciting it. We recommend buying it and just paging through.

Here’s a taste, from Abbie “Abster” M., an employee who had been working at the company for three-plus years:

The Zappos culture to me is unlike anything I’ve ever experienced before. It’s always fun and weird, we’re all creative and open-minded, passionate and determined, but most of all, we’re humble. I think it’s because most of us have worked in horrible dead-end jobs before and can cherish our Zappos culture for what it is. It’s what makes me want to come to work every day, even my weekends.

 . . . I hear so many horror stories from friends about the places they work and it only makes me feel that much more fortunate to be a part of the Zappos family. I can’t imagine my life without Zappos, and the amazing people that I work with.

The quote that moved us most was from Ryan A.: “At my last job I was afraid to be anything: right, wrong, smarter, dumber . . . At Zappos being yourself is the best thing you can do.” Perhaps the cultural feature we observe most often is unproductive fear, fear of looking bad or doing something wrong. If organizations did nothing else but address that part of their environment, we’re confi dent that the creativity and engagement of their people would have a real chance of being unleashed. Human beings are not at their best in a defensive, self-distracted crouch.

Hsieh named his book on building Zappos Delivering Happiness, but he and his team didn’t just deliver happiness for its own sake. Like IDEO’s relationship with creativity, Zappos understood that the happiness of its employees, partners, and customers was a deadly serious endeavor, the most reliable route to sustaining excellence in the industry in which Zappos chose to compete. Everyone inside Zappos, from the CEO to the front line, understood the link between its culture of happiness and the company’s daily performance. What’s the cultural analog in your own business? What’s your version of happy?

Reprinted by permission of Harvard Business Review Press. Excerpted from Uncommon Service: Hot to Win by Putting Customers at the core of Your Business. Copyright 2012 Frances Frei and Anne Morris. All right reserved.

One of the most notable case study is from a company called Zappos.com. Founded in 1999, it is an online retailer selling shoes via a drop-shipping business model. In early 2004, they noticed that customer service was the biggest problem. So they had to adapt in order to survive in the bad economy. Of course, they stumbled and fell and learn from mistakes. Nevertheless, they hit a very important milestone of reaching $1 billion in gross sales in 2008.

To determine how they did it, we study many materials as below,

- Stanford Graduate School of Business Case no. GS-65
- Stanford Graduate School of Business Case no. M-333
- Zappos’s CEO on Going to Extremes for Customers on Harvard Business Review

- Delivering Happiness: A Path to Profits, Passion, and Purpose by Tony Hsieh (CEO of Zappos)

These materials are carefully reviewed and presented in the infographic as below,



1. Make service a priority

This may sound a bit typical because every quality system says that the internal customer is also important. However, Zappos brings the service priority to the next level. the below is the exact wording from Zappos's team,

"At Zappos, it all begins with the Golden Rule: Treat others as you’d like to be treated. When vendors fly to visit our offices in Las Vegas, they are greeted at the airport by one of our Zappos shuttles. When they arrive at our offices, their buyer welcomes them as we take their sample bags off their hands so we can deliver them to the meeting room. If it’s their first time visiting our office, we give them a tour. We offer them drinks and snacks, basically anything we can do to make them feel comfortable. This is all far from industry standard, but if we were in their position, I’m sure we wouldn’t mind being treated this way"

It's not about having a nice policy, they actually do it, a service training without training.

2. Find the right people and empower them
They believe that call center is the core competency so they don't outsource this operations. In order to excel in this operations, they try to find the people with positive attitude. The below is the opinion from one of the top executives,

"I attended a conference where someone in the audience asked Starbucks‟ chairman/CEO Howard Schultz why everyone at Starbucks smiled and he said, "We only hire people that smile." We try to do the same thing at Zappos. We only hire happy people and we try to keep them happy. Our philosophy is that you can't have happy customers without having happy employees and you can't have happy employees without having a company where people are inspired by the culture."

3. Measure satisfaction, not productivity
Zappos' don't measure call times, don’t force employees to upsell, and don’t use scripts. And they encourage a long phone conversation with customers if it's useful. If they don't measure call times, how do they handle big amount of calls everyday without letting customers wait too long?

They create the environment that service staffs want to stay. The industry standard of a staff turnover can be as high as 300% but for them it's just mere below 5%. People stays due to many reasons,

- Pay a bit higher than the others

- Promotion happens every 6 months instead of one year or more. So people see how well they are doing.

- Promotion is determined by number of the new skills each staff acquires (company provides training). So staffs are in control of their own career advancement

And when people stay longer, it's like the well-oiled machines without a downtime in contrary to the faster but unreliable machines like those of others.

4. See each contact as business opportunity
Even though people buy products online, they often call service staffs. Then, Zappos analyzes the phone calls extensively to determine customer's changing needs and trends to improve the merchandising.

5. Promise less, delivery more
standard delivery condition is 4-5 days by a ground service. But they some time upgrade the delivery to next day and run the operations on 24/7 basis (when you promise next day delivery, it will be pretty tough to surpass customer's expectation, do you know what I mean!)

6. Partner with 3PL
The reason Zappos can improve the delivery speed is to partner with 3PL. They have a warehouse very close to 3PL's hub. 3PL will automatically upgrade the service from "ground" to "next day delivery" if cargoes volume of next day delivery in particular day is low (in order to drive the economy of scale).

7. Ask vendors for help
Since Zappos treats vendors very nicely, asking for help is not a big deal. Vendors can access the Zappos's inventory level online and may ask buyers to buy more or suggest style changes.

Conclusion
When Zappos says making service a priority, they really mean it. They can achieve the superior result because the whole supply chain is moving into the same direction.


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