Crocs and Zappos Supply Chain Management
Zappos’ first core competency is its supply chain management. There were companies that had mastered the art of supply chain management but they most served retailers and often shipped large batches. Zappos has designed a supply chain which has mastered the art of serving individual customers efficiently. The company has built a proprietary software system called ‘powered by Zappos’ which is so reliable that it is also used by other major internet retailers like Overstock.com. Every Zappos employee is required to work in the company’s warehouse to understand its supply chain system. Zappos supply chain system is also quite flexible as it involves both human labor as well as robots. This core competency is sustainable because Zappos already has build solid relations with many major shoe brands as well as other internet retailers. In addition, it has taken years for Zappos to make its supply chain as efficient as it is thus, Zappos already has a considerable lead over any potential competitor.
Zappos second core competency is its reputation. Zappos has become synonymous with unrivaled customer service and thus, has already captured the customer loyalty of major portion of internet shoe shoppers. This is why Zappos is able to charge premium prices despite the fact that internet allows quick comparison shopping. The fact that customers are still willing to pay premium prices for shoes at Zappos.com speaks of the value they put on Zappos customer service. Thus, service has become Zappos differentiating strategy. This core competency is sustainable in the short term but in the long term different things can happen. A rival may appear who discovers a better mix of price and value than Zappos or customers become more price sensitive. In addition, rising shipping costs force Zappos to choose slightly cheaper shipping options which also hurts its reputation over time. Because technological industry and the future business environment is always unpredictable, reputation can suffer in the long term.
Next day air shipment is important to the customer experience because this enables customer to feel some of the instant gratification that comes from retail purchase. This is why Zappos’ customer is willing to pay premium prices because they value fast shipping. It’s worth the cost because Zappos has continued to post ever increasing profits despite the fact that shipping and returns account for approximately 17 percent of the company’s gross sales. Fast shipping is an important aspect of Zappos’ reputation and allows it to retain its customer base. I will not change the shipping policy despite the cost-conscious environment in late 2008 because reducing costs in the short term is not worth hurting the reputation that the company has built over the years.
But I will go for a long term solution to rising shipping costs which will be identifying the regions in the U.S. that are the biggest contributors to Zappos’ total sales. Then I will build warehouses in strategically indentified places so that even ground shipping will enable Zappos to ship shoes to most of its customers in one day. The overall goal will be to achieve 100% rate of shipping shoes to customers in one day through ground shipping. Such a capital investment may be costly in the short term but eventually Zappos will recover the investment through increasing sales.
I will expand the business by adding more products. Zappos core strength is its customer service of which delivery speed is an important aspect. As CEO Tony Hsieh points out, Zappos is a service company that happens to sell shoes (Nanton). The products sold by Zappos are not different from the competitors and they are not even unique to Zappos. Even though Zappos is able to offer styles in more colors and hold larger inventory than most competitors, the products it sells can be found from other sources as well and in many cases, at cheaper prices. Thus, I will focus on service aspect which is what differentiates Zappos from its competitors. Adding other products will require little effort since Zappos already has an efficient supply chain system and large warehouse network which can also be further expanded.
The company will become more profitable through economies of scale. As Zappos business will grow, it will be able to build more warehouses at places selected in such a manner that they make it possible for most customers to receive their shipments in a single day, even with ground shipping. In addition, shipping companies such as UPS will also provide additional value added services to Zappos to keep the company as a customer because of the business volume involved that will only further expand. Zappos will be in a position to make shipping companies compete with each other for its business such as UPS and FedEx, thus, economies of scale will provide ample opportunities to bring service costs down without sacrificing the quality of service.
The environment of a more cost-conscious consumer may force Zappos to bring down the prices of its products. In such an environment, Zappos can take steps to change policies such as discounting products’ prices after 30 days instead of the usual 60 days if the product doesn’t sell as expected. This may also help the company improve its inventory turnover rate from the already impressive turnover levels. This will keep customers interested because there will be ample discounted products while Zappos can continue to charge premium prices on popular products.
Amazon will allow Zappos to continue to operate its existing business model but over time the two companies will learn from each other’s supply chain system and incorporate each other’s strengths. It is possible that Amazon and Zappos eventually settle on single supply chain system because at least Zappos supply chain system has proven its effectiveness at managing the operations of multiple websites including those of competitors such as Overstock.com. The two companies will have even more bargaining power due to the combined strength of their sales so they will further improve their customer service and possibly lower shipping costs for plans such as Amazon Prime (Amazon). Overstock.com also offers annual shipping plan called Club O Rewards (Overstock) which is not only much cheaper than Amazon’s but also offers 5% cashback on each purchase, thus, Amazon has ample room to lower the price of Amazon Prime.