Service Operations Management company culture

Zappos.com, 2009: Clothing, Customer service and

Clothing, customer service and company culture

Aashish Jethani - 2010004 Debashish Bagg - 2010298 Namita Choudhary - 2010127 Prabhuvardhan Reddy - 2010159 Sreechand Nambiar -2010230 Susnata Chakraborty -2010236 Tanuraj Kulshreshtha -2010240 Mudit - 2010123

Abstract 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 3Cs that Zappos set for itself and that changes the story of Zappos in a span less than a decade.

Group 8

Page 1

Service Operations Management company culture

Zappos.com, 2009: Clothing, Customer service and

Table of Contents Abstract............................................................................................................................................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 References Figure 1: 3C philosophy of Zappos.................................................................................................4 Figure 2: Corporate communications from Zappos.........................................................................5 Figure 3: Sales fluctuations over the years......................................................................................5 Figure 3: Sales fluctuations over the years Table 1: Some milestones of Zappos.com.......................................................................................3 Table 2: Core values at Zappos.com................................................................................................4 Table 3: Recruitment and initial training cost.................................................................................4 Table 3: Recruitment and initial training cost Introduction of Zappos.com Inspired 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 millionless 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 expansion By 2000, Zappos was billing itself as the worlds 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).

Group 8

Page 2

Service Operations Management company culture

Zappos.com, 2009: Clothing, Customer service and

Hsieh and Lin, founders of venture capital funding firm Venture Frogs invested in zappos.com in January 2000. They started up with selling pizzas 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 years 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

Yea r 200 0 200 1 200 2 200 3 200 4

Milestones Nick Swinmurn and Tony Hsieh function as co-CEOs of Zappos. Zappos records $1.6 million in gross sales. Sustained effort produces $8.6 million in gross sales for Zappos. Zappos leases the Fulfillment Centers in Shepherdsville, Kentucky. The brand elevates gross sales to $32 million. Gross sales at Zappos rise to $70 million. 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. 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 arent 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. 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. Zappos launches a Canadian site. Ebags.coms 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 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.

200 5

200 6

200 7

200 8

Group 8

Page 3

Service Operations Management company culture

Zappos.com, 2009: Clothing, Customer service and

The three C of Zappos Zappos 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

1 2 3 4 5 6

7 8 9 1 0 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

Core values Deliver WOW through service Embrace and drive changes Create fun and a little weirdness Be adventurous, creative and open-minded Peruse growth and learning Build open and honest relationship communication Build a positive team and family spirit Do more with less Be passionate and determined Be humble

with

n(100x / y + 2000 (1 -y)) Retention percentage (given for call 20% (if generalized) center) 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.

Recruitment and training let the cost of initial process per person cost of recruitment (at Zappos) success rate of initial training Compensation for those who return (pg 6) Cost of recruitment (at Zappos) after 4 weeks if 'n' employees are needed Total cost

x 100x y 2000 (1 -y) 100x / y

Group 8

Page 4

Service Operations Management company culture

Zappos.com, 2009: Clothing, Customer service and

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 hours

Core level training 255 Leadership training 39 Also grooming with other 10% - 20% employees 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 Service Hsieh and Lin believed that a significant part of the companys 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

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. 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 employees performance at even this level Zappos paid for being flexible.

Group 8

Page 5

Service Operations Management company culture

Zappos.com, 2009: Clothing, Customer service and

The Third C: Clothing In 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 shoesor 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. References 1. 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.

Group 8

Page 6