Happy Feet

Shoppers are not a forgiving species. Although this is a fact known intimately well by many retailers, Zappos.com is one of the lucky few that has a stellar reputation for customer satisfaction.

The online retailer, a self-described service company that just happens to sell shoes and accessories, launched in 1999 with a key differentiator from other e-commerce sites: All Zappos orders ship for free. In February, Zappos raised the bar even higher and began providing overnight shipping at no cost.

The objective, according to Craig Adkins, Zappos’ director of fulfillment operations, is to come as close as possible to providing the instant gratification of a bricks-and-mortar shopping experience. Complimentary next-day delivery does not come cheap, but the customer loyalty it engenders outweighs the cost.

“Free overnight shipping does cut into profit margins, but more importantly it takes us to the next level,” he said. “We’re not competing with online retailers necessarily as much as with the instant gratification a shopper has walking out of a store with her new shoes.”

The success of the Las Vegas-based company, which achieved sales of $597 million in 2006 and has projected that 2007 sales will reach $800 million, hinges on the ability of its fulfillment center to meet customer demand.

Early in 2006, Zappos’ management realized that the company’s existing fulfillment center (FC) in Shepherdsville, Ky., was quickly approaching a time when it could not keep up with customer orders.

“We realized the 265,000-sq.-ft. building that we had would not be able to serve the needs of the 2006 holiday season,” stated Adkins. “In July, we were operating at the edge of our ability to ship orders. It was operationally necessary to have a new, automated FC up and running in time to ship holiday orders.”

Thanks to an aggressive time line, a new 832,000-sq.-ft. FC outfitted with a $10.8 million automated material handling system has opened adjacent to the original FC.

Zappos awarded the contract for its material handling system (MHS) in the spring of 2006 to FKI Logistex, St. Louis. Construction on the MHS began in June and the completed system delivered in September.

“From October to November, we put approximately 3 million units into the system, and now the majority four orders are fulfilled through the new building,” said Adkins.

The new MHS has risen to the challenges of Zappos’ explosive growth. In January, the company’s orders were double what they had been in January 2006—and that was before the offer of free overnight shipping went into effect. An automated system was necessary, not only because of the volume of orders but also because of the complexity of fulfilling footwear orders.

“Footwear has enormous variability; each model of shoe can have 15 or 20 SKUs, between all the various length sizes, width sizes, colors and textures. We stock everything we sell, around 600,000 SKUs, in our FC,” explained Adkins.

Ironically, the variability does not complicate the picking process, because Zappos assigns each item an individual SKU number as it enters the FC and intentionally mixes product so like items are not stored together. Orders are picked according to their individual SKU number, not by style or size.

When product arrives at the FC, it is loaded onto a conveyor directly from the truck via extended “truck unloads.”The full cases are conveyed to ergonomically designed receiving tables where FC associates can process the inbound shipments without lifting boxes. The associates scan the case’s UPC and print out barcode labels, with the individualized SKU number on each one, and apply a label to each individual shoebox. The boxes are then put on a take-away conveyor to move into storage.

“Typically we process 400 cartons per hour, per receiver,” said Adkins. “It is a metered flow and each station has a working queue of master cases.”

The biggest challenge is not the volume of shipments but the timing. “Our challenge is dealing with fluctuations in inbound shipments. One day we may receive 50,000 units and the next day 25,000 units—we have to labor plan for that,” noted Adkins.

Associates at the FC work a 10-hour, four-day week, in one of five shifts, and each is trained in a minimum of three processes enabling them to work wherever needed on any given day. Inbound shipments arrive Monday through Friday, and the FC ships seven days a week. Orders are usually filled within four hours.

“At certain times of the day, we allow orders to accumulate to get better economies of scale with efficiency inside the warehouse, but all orders ship same-day,” stated Adkins.

On the inbound side, inventory management is a tightly integrated collaboration between Zappos’ merchandising department and its vendors. Many of the vendors have access to inventory numbers through Zappos’ intranet, and replenishment is sometimes automatically triggered.

Although customer satisfaction is job No. 1 at the Zappos FC, there is another critical element contributing to the company’s success.

“We pride ourselves not only on the customer experience but also on the employee experience.”

To that end, every Zappos employee is provided free health care and the FC environment is enhanced with an assortment of free perks, including catered meals for all employees twice daily and vending areas fully stocked with free snacks, drinks and fruit. Advancement is strongly encouraged, and any employee may participate in the Zappos Academy, an education enrichment program that pays for the employee to attend classes at nearby community colleges on paid company time. Many employees take advantage of the opportunity, and all but two of the FC supervisors began their careers as temporary employees.