DC Upgrade Makes It Possible for Zappos to Offer Free Overnight Shipping

Today online retailer Zappos.com can provide next-day delivery to all customers without an up-charge for premium transportation. Its old fulfillment system had too much variability in cycle time to achieve that level of service, but when growth drove a need to expand its Shepherdsville, Ky., operation, one of the benefits was improved flow and consistency that allowed the company to shift from free ground transportation (with an up-charge for overnight delivery) to 100% free overnight delivery.
Zappos, which specializes in shoes but also offers luggage, clothing and related accessories, is really competing with the instant gratification of the store experience, says Craig Adkins, director of operations. He joined Zappos as its distribution evolution was just getting underway. Bringing experience in six other greenfield developments, he describes the original 265,000 sq.-ft. distribution center operation as "immature." It had been growing "biologically" and couldn't keep up with demands. The new 832,000 sq.-ft. facility took a fresh approach. "We were able to step back and design with flow in mind," says Adkins.
Zappos started in San Francisco and initially did fulfillment out of the West through a third-party logistics operation. But as the company grew, it decided to take over its own fulfillment operation.
Since Zappos' business is direct-to-customer fulfillment, it didn't need a national network of distribution centers. Most goods come in by direct import or from suppliers' distribution centers. The distribution center processes customer orders and ships them via UPS and FedEx. The Shepherdsville location is about 20 minutes south of the UPS Louisville Worldport and it can also be served easily by FedEx. Locating the new facility near the original site offers some economies of scale, Adkins adds. The two facilities employ about 500 people.
On the outbound side of the operation, UPS drops trailers for Zappos to load. Though he can't offer an exact number, Adkins notes that there are many UPS drop-and-hook trailers at the site being loaded with thousands of orders every day. So, with the infrastructure for fulfillment and the economies of scale working for Zappos, Adkins doesn't feel constrained by the center's location.
With its new building, Zappos added foreign trade zone (FTZ) status, so it can receive import goods into the warehouse and hold them duty free until they are shipped to customers. The FTZ status is still new, so Adkins wasn't able to detail the benefits, but he said that aggregating transactions with U.S. Customs and Border Protection is clearly on that list.
Many of the workers in the expanded distribution center had no prior experience in a material flow environment (neither in manufacturing nor in a large-scale distribution or fulfillment center). Adkins says he walked in the door talking flow, but until the new facility was completed and operating, many of the workers weren't sure what he meant. When they could see it in action, they got it. The new operation moved Zappos from high cycle time variability to processing most customer orders within an hour of receipt.
"We truly have a building where the process flows," says Adkins. "Everything is pretty intuitively obvious about what's supposed to happen, when it's supposed to happen, and how things are moved throughout the building."
Once the shell of the new facility was completed, Zappos managers were able to focus on the handling systems and flow of goods. Working with an engineering consultant, Zappos developed a concept and selected suppliers. Then Zappos worked with automated material handling equipment supplier FKI Logistex.
FKI worked very collaboratively with Zappos, says Adkins. In the initial concept design, from the farthest pick point to the packing area, goods could spend half an hour on the conveyor, says Adkins. While that is pretty typical in facilities of this size, it wasn't want he wanted, so Zappos invested a little money and FKI went over the design, added some merges, changed the direction of some of the material flows and came up with a maximum conveyor travel time of just five minutes.
Adkins says automation can be useful, but it can also paint you in a corner, he cautions. The Zappos facility uses box sorters and conveyor sorters from FKI to do stage sorting throughout the building. Each item has a unique bar code identifier, so the inline scanners direct the items throughout the building. As it stands, the combination of systems will allow some scalability and growth before Zappos will have to consider further automation or expansion.
One of the more unusual approaches the design took was that all goods are stocked directly to pick locations, there is no bulk storage. This eliminates rehandling for replenishment. Storage is 100% random down to the "each," says Adkins, but he won't elaborate beyond that.
"We're not using tilt-tray sortation," he continues. Sortation and order consolidation is fairly manual, but they are getting boxes in a very automated fashion. Right now it is the right thing to do, says Adkins, though he doesn't rule out a more automated sortation system in the future.
Adkins says he expects the company will outgrow this facility in about two years, but in the interim, Adkins and Zappos aren't likely to evolve another "Rube Goldberg" facility while accommodating that growth.-Perry A. Trunick.