Nick Swinmurn was walking around a mall in San Francisco in 1999, looking for a pair of shoes. After an hour going from store to store, he finally went home empty-handed and frustrated.

Eight years and more than a billion dollars in sales later, Swinmurn's on-line retailer Zappos.com (Henderson, Nev., www.zappos.com) boasts the largest selection of shoes anywhere—on-line or off line. And Zappos is not stopping there. The self-proclaimed "service company that just happens to sell shoes" has expanded to bags, apparel, and accessories, and has plans to eventually sell "anything and everything."

Zappos operates on the principle that if you focus on providing a great shopping experience instead of maximizing profits, sales growth will follow. And it's paying off, with the Sequoia Capital-supported company recording $597 million in gross merchandise sales in 2006.

The

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company's "wow" philosophy of service and selection includes 365-day free returns, 24/7 customer service, 110% price protection, and unheard-of free overnight shipping on every order. The Zappos shopping experience also features extensive Web site search options, clear views of every product from every angle, and "live" inventory where nothing is ever out of stock. And they don't skimp on selection either, with more than 1,000 brands and almost three million products available to ship immediately.

Blame it on material handling
"The ‘wow' factor is very important to us and to the success of our business," says Craig Adkins, vice president of fulfillment operations. "We are not competing with other Internet companies; we are competing with the store experience. Offering the best service and selection while getting our goods to the consumer as quickly as possible is the only way to compete in this market."

Getting an order processed, packaged, shipped and onto your doorstep in less than 24 hours is not an easy task. It takes the right people, careful planning, and a fast, optimized order fulfillment system like the one material handling integrator FKI Logistex (St. Louis, www.fkilogistex.com) and London-based design and business consulting firm Arup (www.arup.com) provided for the Zappos facility in Shepherdsville, Kentucky.

In the summer of 2005, exploding sales on Zappos.com were pushing the limits of the company's outdated, largely manual order fulfillment center. Zappos' management knew that it had outgrown simple conveyors and paper pick lists. It leased an 800,000 square-foot building across the street to house a brand-new automated fulfillment system that would serve as the company's primary warehouse and distribution facility.

The proposed facility promised Zappos increased throughput to handle larger shipment volumes and reduced order cycle times to get orders to customers faster than ever before. To get the project off the ground, Zappos' managers formed the Warehouse Automation Team, made up of senior leadership in the company. With only one distribution center and little experience in automation, the team needed someone with a few large-scale material handling projects under his belt to bring a new attitude and perspective to its fulfillment operations team.

Enter Craig Adkins, a technologist whose impressive resume includes 20 years in the military, Total Quality Management (TQM) training at the world-renowned W. Edwards Deming Institute, and process improvement for one of the more successful direct-to-customer on-line retailers in the world.

Adkins says the automated fulfillment center was a paradigm shift for the company. "When I first came to Zappos, the concept of ‘flow' was difficult for people to grasp," he says. "It was still a very manual environment, with workers still picking from paper lists and very little automation."

However, that was all about to change. In a year the new system would be up and running for the 2006-2007 holiday season, shipping twice as many packages as the old building ever had, and achieving the lowest order cycle times in Zappos' history.

Team work
With an empty 800,000-squarefoot building and a blank sheet of paper, Zappos' management turned to the Arup logistics team to create a design concept for the new fulfillment system. Although Adkins was initially skeptical about hiring an engineering consultant, he was pleasantly surprised with the way Arup worked to develop a customized system.

"Our goal was to make the design process interactive to create a concept specific to Zappos' needs," says Charlotte Dangerfield, senior logistics consultant, Arup. "We held workshops and worked closely with the whole team to give it the ability to enhance the service features that it built its business on."

"Direct-to-customer fulfillment takes a very different mindset than retail distribution," says Adkins. "Every single package goes directly to a customer, requiring simultaneous levels of speed and quality control." Also, nothing can be warehoused for long because shoe inventory goes stale quickly, often consisting of seasonal and limited runs, especially for designer brands.

The final design the design team agreed on encompasses 416,000 square feet of the building and includes unconnected but overlapping receiving and shipping systems, a dedicated returns system, a static-racking system that stores each SKU in a pickable location, and a built-in photo lab to shoot new products as they are received.

To really "wow" Zappos' customers, it needed to get things moving with a faster material handling system. And as the project was put up for bid with the holiday season fast approaching, the warehouse automation team knew that it was already crunch time.

Reducing cycle time
In February 2006, Arup contracted FKI Logistex to integrate and install the equipment to automate all of the fulfillment system's material handling. FKI Logistex major systems sales manager David Campbell worked with the Zappos team and Dangerfield to specify high-speed FKI Logistex UniSort XV sortation systems, and reconfigure conveyors to increase speed and optimize automation for receiving, presort, putaway, picking, packing and shipping.

Zappos' managers believe that the speed at which a customer receives an on-line purchase plays an important role in whether they will shop on-line again. It made rapid order cycle time the highest priority, requiring Campbell and his team to design the system with the ability to process an order in under an hour.

When Adkins reviewed a standard design for the static-racking conveyor system, he asked a question: "How much time will it take for a package to be conveyed from the furthest point on the conveyor to the packing area?" The answer was around 35 minutes—which was not good enough.

"To keep our promise to our customers, we needed the ability to process an order in one hour or less under duress," says Adkins. "We could not be spending 35 minutes on conveyor travel alone."

Campbell and his team worked with Zappos' managers to design a customized conveyor system that cut travel time by a half hour, down to five minutes. This and other system configurations made by FKI Logistex brought the average fulfillment cycle time down to five hours, with the capability to process an order in under an hour that Adkins requested. "We could not do this without the material handling system provided to us by FKI Logistex," says Adkins.

With the FKI Logistex system, Zappos' managers felt confident to offer free overnight shipping on all orders, with the promise that any order received by 4 p.m. EST and shipped UPS or FedEx to the 48 contiguous United States will be on the customer's doorstep the following day. The new system has also enabled Zappos to create an unpublished internal deadline, ensuring all orders received by 8 p.m. are on the truck for next-day shipping.

Live inventory
Adkins recalls that on a recent night, 70% of all orders received between 11p.m. and midnight made it to customers the next day. The average cycle time was around 2.25 hours. Meeting customer expectations is one thing, but exceeding them is where the "wow" factor really comes into play.

In addition to free overnight shipping, Zappos.com features inventory that is live to the customer, just like in a brick and mortar store. If someone orders the last pair of shoes in a size or color and it is no longer in stock, it is no longer visible to on-line shoppers. And the moment a new product, size, or color is put on the shelf, it instantly pops up on the Web site.

To truly make the inventory "live," the company needed a way to get product photography onto the Web site instantaneously. And not just any product photography. It needed clear views and zooms that would enable on-line patrons to examine products as if they were on a store shelf.

Taking advantage of its wide range of engineering disciplines, Arup designed and built a full-service photo lab in the center of the fulfillment center. FKI Logistex Accuzone conveyor brings the first of every newly received SKU directly to the photo lab, where photographs are taken from a variety of angles and immediately uploaded to Zappos.com. The photo lab includes a studio to shoot live models for certain apparel and accessories.

Following the flow
According to Dick Anderson, project manager, the new order fulfillment system includes almost every product that FKI Logistex manufactures for retail distribution and fulfillment. Working with FKI Logistex meant Zappos had access to a single-source material handling manufacturer and systems integrator, making it easier to customize and optimize its system while keeping to the aggressive project time line.

"I know when someone is trying to up-sell me on technology or equipment that I don't need, and FKI Logistex didn't do that," says Adkins. "They even looked for ways to save us money and make things more efficient."

When SKUs are received, a high-speed FKI Logistex UniSort XV sliding-shoe sortation system with Accuglide powered roller conveyor routes a wide range of small cartons, shoe boxes, purses, and other items to shrink-wrapping lanes. Packages are then redirected to another high-speed sorter for put-away in the racking system.

When a customer places an order on-line, an employee picks it from the static racking. A conveyor routes it to another UniSort XV, which distributes the SKUs to a single or multi-pack area. To create a quieter and safer working environment for its employees, managers chose to use FKI Logistex Accuzone 24-volt powered roller conveyor, which operates at less than 72 dBA.

Completed packages are routed to three FKI Logistex Print-and-Apply Modules for automatic labeling. Ready-to-ship packages are sorted by a third UniSort XV at more than 100 cartons per minute to the appropriate shipping lane and conveyed directly onto the truck.

FKI Logistex Warehouse Optimizer software serves as the host and graphic user interface driving the system. It was integrated with Zappos' existing homegrown warehouse management system (WMS). FKI Logistex Answer System monitoring software alerts employees of any alarms or jams, as well as provides productivity information on the system.

For low-speed sortation, a series of telescoping boom unloaders and accumulating loaders, as well as five FKI Logistex UniSort IV belt-powered pop up wheel sortation systems, are included. Because the building was under lease and everything had to be floor-supported, Anderson and his team also installed eight mezzanines throughout the facility.

Putting it to test
In November 2006, as holiday shoppers crowded Zappos.com's bandwidth, the first orders were shipped from the new fulfillment center. Daily shipments hit record levels, peaking at 42,000 units, almost doubling the 23,000 units shipped at the old facility.

According to Anderson, getting to this point took a lot of hard work. "We were working on a very aggressive schedule to get the system up and running for the holiday season," he says. "That means everything was doubletime, many tasks needed to be done in parallel, and there was no room for error.

"The FKI Logistex equipment sailed through the confidence in the October trials," says Adkins. "We're running our system 24 hours a day, and we didn't even come close to the downtime that we allowed for."

Dangerfield also spent long hours on-site, living in Kentucky for the summer to oversee the installation of the engineering packages. "FKI Logistex really stepped up to the plate during the installation phase," she says. "They even worked after their contract was expired to make sure commissioning went well." According to Adkins, the tight project schedule was nothing unusual. "The reality is that every major project that I've been involved with over the last 10 years is always a crunch, always a push and always last-minute," he says. "Having vendors that can react to that is really important. These did a great job."

Increasing Efficiency
"When we moved into the new facility the light went on for many people who never worked in a high-volume environment," says Adkins. "Everyone, managers, supervisors and other employees could finally see the concept of flow and how important it is."

He says constraints mean lost opportunities that you'll never get back. "Now they get it."

Adkins says the new system is intuitive and easy to train on, and therefore easy to drive efficiencies. Zappos reduced distribution and labor costs, achieved record-low order cycle times, and more than doubled shipping volumes to stay one step ahead of the company's astronomical growth.

Working within the Zappos "wow"power paradigm, Adkins strives to continually improve its fulfillment process. He measures standard deviation on everything and calculates probability and variability factors, a practice that he instilled in the rest of his team.

"I don't ever let anyone tell me just the average," says Adkins. "They have to tell me the average and the standard deviation. As we do that, we can continue to drive out the variation and get as close to the mean as possible."

Although built to handle Zappos' projected 2007 capacity, FKI Logistex designed the material handling system to be easily scalable to 2009 throughput levels. The receiving platform is two-thirds built, the singles pack area is half-built, and there are plenty of pre-built divert points on the UniSort XV sorters to tie in more lanes

Direct-to-consumer fulfillment takes a different mindset than retail distribution as evidenced by enhanced graphics on cartons.

Three print-an-apply label modules provide automation to the labeling process.

"To keep our promise to customers, we needed the ability to process an order in less than an hour." Craig Adkins