Armand and Jeff – Both of you made very strong points. The one point that I wanted to address (only because Zappos’s CEO pointed it out specifically in his book) is the comment on how many consumers interact with an employee of Zappos. Tony Hsieh actually said that most customers will talk to a customer service representative at least once in their time of being a Zappos customer. Zappos’s philosophy on this is that this is an opportunity for the customer service representative to build the Zappos brand by providing exceptional customer service. Their philosophy is that if the customer service representative can create a personal emotional connection with the customer, than that person will be a customer for life.
Yeah – I agree with SR. While there clearly are supply chain advantages, cost savings, and sales benefits with this operating model, I think inventory management could be extremely difficult. As someone who used to buy fashion socks where I would have to commit to inventory without sales history, I would love to know how they determine the quantities to produce for each item. I imagine they can get size-selling percentages from past items (even those change between styles though), but it would be very interesting to see how they determine the quantities for each style. As SR stated, if they buy too much inventory because a style does not sell as well as they thought, Zara would probably need to markdown, salvage, or sell the items to a third party at a significant discount. If Zara has new styles coming in and going out every few days, this unsold inventory will have large margin implications. Also, since these items are on the floor for such a short period of time, Zara does not have much of an opportunity to take pricing or promotional action to move through unproductive inventory. On the flip side, if the items sell out right away (as I am sure some do), the opposite problem occurs where Zara now has additional sales left on the table and an empty space to fill on the floor. I wonder if they tend to be more conservative on their buying strategy to avoid markdowns, and they have have contingency inventory in the backroom that they can flex onto the floor to fill in gaps for items that sold unexpectedly well. Obviously, this model is working very well for them as they are able to capture more sales because their products are more on trend, but it would be really interesting to see how Zara buys its inventory.
Kevin – Very interesting write-up. The fact that IKEA can keep 95% of its inventory instock in stores around the world at such a low cost is mind-boggling to me. At Target, our goal is to have roughly 90% of the items in our Home business be instock at any given time, and this is for stores that are just in the US (so a much simpler supply chain). The only time that Target comes close to these instock numbers in Home is when Target is building up safety stock in the weeks before Christmas, but it is also very costly to maintain this inventory level for Target. IKEA’s supply chain, self-service model, and strategy to reduce cost-per-touch truly are innovative, and this is clearly seen in IKEA’s profits and instocks.
Heather – Great post. Costco’s operations are clearly spectacular, and its operating model is very well aligned with its business model. However, in terms of outlook for the company, do you know what Costco is doing to get in front of online retail? It would be interesting to know what Costco is planning to do from an operations standpoint to support the growth of online retail as this would allow Costco to continue to provide the best possible prices, but Costco would be able to do it in a way that is more convenient for its customers. Also, since it would be more convenient, this would potentially result in customers shopping Costco even more frequently than they do now. I mentioned this in a post for Erik’s article as well, but Target and Walmart are currently developing the capability to fulfill online orders from their stores – even with a same day delivery option. Based on Costco’s already superior supply chain, I would have to imagine that Costco is working on something similar at this point as well. With Costco’s 3,700 SKUs (This is SO LOW – Target has 5,000 SKUs in Cosmetics alone), it seems that this would allow them to execute an online fulfillment operation even more efficiently than Walmart or Target, giving them an even larger supply chain advantage over both of them.
Yeah – This really is an interesting time in this industry. On the B2C point, obviously Amazon is the large threat here, but other large retailers could hurt FedEx’s business as well. If you look at Walmart and Target, one of the advantages they have over Amazon is that they have thousands of physical store locations throughout the country. Currently, both of these companies are trying to turn the backrooms in some of these stores into Distribution Centers for their online business so that they can profitably ship products from their stores to the guests’ homes. This online inventory would be shipped on the same trucks to the stores as the inventory that is being placed on the floor, so it would be a very small incremental cost to ship this online inventory to the store. If Target and Walmart can fulfill online orders, even same day orders as they are currently testing this capability, out of a few hundred stores and cut down the transit time to the guests’s homes, that will significantly reduce the cost of shipping online orders for these companies. I used Walmart and Target as examples, but I know many other retailers are trying to develop this capability as well. If these retailers are successful, it will be interesting to see how much business they take away from a company like FedEx and how FedEx would respond.
Etienne – I enjoyed reading your article. I agree with you and Doug that Uber’s operating and business models are very well aligned at this point. However, I do not think that Uber should become complacent at this point. Actually, I believe Uber has an opportunity, as Doug alluded to in his last sentence, to enhance its operating model with the development of driver-less cars to better support its business model. With driver-less cars, Uber would not need to worry about attracting the right drivers, and Uber could actually keep all of the customers’ payments – not just the 20% fee that Uber is collecting now. Also, with this operating model, Uber could offer its customers even lower prices, and Uber potentially could provide even shorter waiting times in the future depending on how many driver-less cars it puts on the road. Obviously, this would require a large investment, but I found it very interesting that Google invested $258 million dollars into Uber in 2013 and more in 2014. It appears that both Uber and Google believe that there potentially is a large market for a driver-less Uber service, and I think Uber should act now to ensure that no competitors steal its business.