Yes, the fulfillment center.  You don’t think the Zappos family hits its Wow! service standard by drop shipping do you?  (Drop shipping is where orders start with the retailer, but then are sent to the shoe company, that then sends the order to the customer.)  Zappos did start out that way, but drop shipping didn’t give them the kind of control they needed to provide their extreme form of customer service.  Though the team didn’t have experience in complex inventory systems, they jumped in, got their hands dirty, and created a organizational (warehouse facilities & team) and technology (inventory management) system that can hit their service goals while still managing costs.  The iterations they’ve gone through show deep systems savvy driven by their focus on delivering a Wow! experience to their customers, as well as great shoes and other products.

© 2010, Inc. or its affiliates

I’ve had the chance to correspond with Keith Glynn about how they came to do things the way they do.  Keith is the guy who (story from Zappos CEO Tony Hsieh’s new book, Delivering Happiness) jumped on a plane to Kentucky, without going home to pack, to help for a couple of weeks with 3rd-party warehouse issues -- and ended up staying for two years.  At the point where Keith and Tony decided they needed to run their own warehouse, Keith went back to San Francisco to pick up his truck. 

He and Tony then drove the truck 36-hours non-stop to Kentucky.  This is serious commitment to warehouse operations! Many thanks to Amelia Smith and the “Ask Anything” team at ZapposInsights for the connection. I asked how Zappos came to run the fulfillment center the way they do.  I’d read that they randomly stocked the shoes as this actually made things easier to find! Keith’s response:*

In a traditional brick and mortar store stocking was done based on Brand, Style, Size and Color.  At Zappos originally there was no intent to stock inventory. As Zappos grew we realized we wanted to own the customer experience, so we started to hold inventory.
We started with a small space in our office. It held a couple thousand pairs of shoes. This consisted of static racking and the shoes were stocked based on what other stores were doing.  Brand, Style Size, Color.  We learned early on that this was a laborious job. You would have to continually shift brands because you did not account for seasonality and future growth.
[In 2000] we moved to a larger warehouse in Willows, CA.... We would receive a shipment, let’s say from Ugg. We would have to unbox the shoes. Lay them out in a large area on the floor based on style, size and color.  Imagine hundreds of shoe-boxes laid out on the floor and the amount of space needed to do this.  And this was only one brand. Once you had them organized you would have to now figure out how to put them on the racks for storage. In order to get everything to fit you most likely had to shift thousands of shoes to get everything in the proper place. There were other brands on each side which had to be moved as well. 
We would review our processes and come up with some small wins as to efficiency but it could cost us in space or other areas.  We thought it would be great to have a system where we did not have to rotate the inventory every day when the shipments came in.  We had the idea but did not have the resources or know how to make it work. *Keith’s quotes are © 2010, Inc. or its affiliates

In 2002, they thought they had a solution when warehouse service provider eLogistics offered to take over the warehouse and fulfillment operations.  eLogistics had a warehouse next to the UPS Worldport hub and this would speed up shipping.

When we moved to the Kentucky eLogistics location they did things quite differently. They had large static racks about 25-30 feet high. This probably worked for most of what they were shipping but there was no way it would work for us. We had large volumes of shoes, thousands of SKUs [stock keeping units - product identifiers].  The need for speed and accuracy was extremely important to us as this was our business’ “customer service.”
We had many conversations with UPS on how to improve what they were doing. We even had them install shorter racks so it wouldn’t take as long to put shoes away or pick for shipping. They only wanted to use this space for the faster moving products and felt the need to grow upward since this space was available to them. Imagine having 30’ ceilings and only 6’ racks. 
I could see their rationale but it would not work for Zappos. Another challenge was that we were paying them for space. Basically this was a cube that varied in size. Let’s say 1’L x 2’W x18”D. They may have had only one or two shoes in the space based on Brand, Style, Size or Color that we had in inventory. This left a lot of empty space that we were paying for since we paid for the entire cube.

This is a problem that requires serious systems savvy.  At this point they are trying to work with building space, types of storage racks, costs, alliance partners, customer perception, and human heights (note the comment about shorter racks and stocking). They eventually decide to again have their own warehouse.  According to Delivering Happiness, Keith went shopping for a warehouse and found one only fifteen minutes from Louisville airport. Again, good for shipping, and thus, customer service.  They signed the lease and take the crazy road trip mentioned above in preparation for moving the inventory.

In Delivering Happiness, Tony Hsieh tells the story of how they gave eLogistics a last chance to keep the business.  They designed a competition pitting Zappos’ new warehouse operations against eLogistics’.  For every week that the Zappos system beat eLogistics on shipping and inventory accuracy, 10,000 pairs of shoes would move from the eLogistics warehouse to the new Zappos warehouse.  It took only a month for the Zappos warehouse to win all the inventory into the new Zappos warehouse. “It was a valuable lesson.  We learned that we should never outsource our core competency.  As an e-commerce company, we should have considered warehousing to be our core competency from the beginning” (p. 118-119). Keith continues:

While receiving the inventory, Tony came up with a quick program that would allow us to scan the UPCs [the “universal product code” you see with a barcode on many products] into a location on a shelf. This allowed us to put any shoe anywhere in the racks and we would be able to find it based on the UPC and the rack location.  We realized that this system would give us a higher density of storage and allow us to store items randomly.

Random storage is good for the people in the warehouse.  They can more easily grab the right box when its randomly stored -- think about having to grab the right box if it were stored next to boxes that all were identical except for a color or size designation -- random is good for people as the boxes are more distinguishable. But they needed yet another innovation.  UPCs are not unique to a particular pair of shoes.  That is, the pair of size 7 Chocolate Leather Fitflops that I bought would have the same UPC code as the pair of size 7 Chocolate Leather Fitflops that you bought.  No good for managing inventory or returns.  That and some boxes have multiple UPCs printed on them. The warehouse team wanted a unique identifier for each and every unique box of shoes. Keith:

Tony initially came up with the LPN (license plate number) system.  He then created some initial coding to test the system... [and] went to our development team and asked them to scale the code.

The LPN turns out to be a excellent example of a systems savvy outcome.  It’s a great way for Zappos to track the location of every item accurately in the warehouse and have a higher density of storage -- Technology.  They are able to track specific items through receiving, shipping, and returns (Fun fact: 1 out of every 60 overnight packages shipped by UPS is a Zappos box) and as a result be amazingly responsive to customer service needs (and so be true to the Zappos Family Core Values) -- Technology & Organizational Practice. Random storage takes into account human perception -- People.

It’s the intertwining of these dimensions that makes the LPN so powerful.  All from a number! The warehouse story also shows what happens when a system isn’t built on systems savvy.  Keith and Tony realized that the technology eLogistics used wasn’t a fit with the Zappos products or the Zappos Core Values; the “pay for space” system wasn’t a fit with the Zappos business model; and as an e-commerce company, they couldn’t outsource warehousing.  All the parts have to be aligned if they are to “deliver Wow through customer service” (the first of their Core Values).

Note that they didn’t come to this approach in one giant leap and it didn’t come for free.  From 1999 to 2010, Zappos has had four different warehouse locations and inventory/shipping systems. They continue to grow their warehouse space in Shepherdsville, Kentucky and have added large carousel storage systems that rotate like the racks you’d see at a dry cleaners. Systems savvy is built into the  Zappos Family Core Values, even if it isn’t there by name:

  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

This list of values is a well woven together platform for how to achieve your organizational goals, create one of Fortune’s “100 Best Companies to Work For,” and hit a $1 billion in gross merchandise sales goal -- ahead of schedule (p. 210 of Delivering Happiness).  Zappos' openness to learning, change, and communication means to me that they are constantly considering how things (technology tools, organizational practice, and people) might work together in new and different ways to better deliver Wow! experiences to their customers, employees, vendors, and everyone who interacts with Zappos. More on this soon.  I’m taking the Zappos “Tour Plus” in August.  What questions would you like me to ask? Please add as a comment below.