Delivering Happiness

Kentucky
Now that we had some breathing room on the financial side of things, we
had another fire to put out: our warehouse operations. What was supposed
to be a quick one-week trip to Kentucky for Keith had extended through the
entire summer.
Things were not going well with eLogistics, and we weren’t very
optimistic that they would get better anytime soon. Orders weren’t being
shipped accurately, and we still had a lot of inventory that was sitting on the
loading docks not being scanned in and put on the shelves. After an
operations manager at eLogistics told us that the salesperson who had sold

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us on eLogistics had oversold their capabilities, we knew we needed to
figure out something else.
Keith started driving around Kentucky looking for an empty warehouse,
and eventually found one off the side of the highway, about fifteen minutes
away from the Louisville airport. He contacted the landlord and learned that
they would be willing to lease us fifty thousand square feet of space, with
the ability to expand.
Keith and I talked and decided that we needed to take control and run
our own warehouse again. We couldn’t rely on a third party like eLogistics
to take care of our customers, so we signed the lease for the new
warehouse.
With the signing of the new lease, Keith realized that he was going to
have to be in Kentucky for a while, so he flew back to California to pick up
some stuff from home (he hadn’t been home since he first hopped on the
plane a couple of months before) and borrow a printer and fax machine
from our office. Keith also wanted to get his truck out to Kentucky, so I told
him that I would drive it back to Kentucky with him and help set up our
new warehouse.
I had no idea how long I would be in Kentucky, but making sure our
warehouse operations were running smoothly was now the highest priority
for the company. We needed to make sure our new warehouse was designed
properly so that we could get all our inventory checked in within hours
upon arrival and ship out customer orders as quickly and as accurately as
possible.
There was a lot of work waiting for us in Kentucky, so Keith and I
decided to drive from San Francisco to Kentucky as fast as we could. We
took turns driving, stopping only for gas along the way. We settled into a
routine and tried to be as efficient as possible. While one of us was
sleeping, the other would drive until we were out of gas. Then, while filling
the truck up with gas, we would run inside, go to the bathroom, buy some
food and a couple of energy drinks, and switch places. Each driving shift
ended up being about three hours long.
About twenty hours into our trip, both of us were getting pretty tired, but
we didn’t want to stop, so we started experimenting with different energy
drinks, turning on the air-conditioning, and cranking up the music to keep
whoever was driving awake.

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During one of my naps, I woke up to see Keith’s hair and face
completely drenched with water. At first I thought he was sweating
profusely.
“Are you okay?” I asked. “Why are you so wet?”
“Yeah, I’m fine,” Keith replied. “I was splashing some water on my face
to stay awake.”
“It looks like a little bit more than a splash.”
“Oh, yeah, the splashing wasn’t really working so I decided to pour the
entire bottle of water all over my head. I’m pretty awake now.”
If I wasn’t so tired I probably would have laughed out loud, but I went
back to sleep because I knew my driving shift was coming up soon.
A
fter thirty-six hours of nonstop driving, Keith and I finally got to
Kentucky. We slept for twelve hours straight, and when we finally woke up,
both of us felt like we had a really bad hangover from pounding so many
energy drinks. We calculated that we had each downed the equivalent of
eighteen Red Bulls in thirty-six hours. But we were ready to get to work—
we had a new warehouse to start setting up.
We decided to name our new warehouse and the systems we would build
for it WHISKY—WareHouse Inventory System in KentuckY.
We told the people at eLogistics that we had opened up our own
warehouse because we weren’t happy with the service levels we were
getting from them. We told them that they still had a chance to keep our
business, but we were going to have our WHISKY warehouse operations
compete against their operations for shipping and inventory accuracy. Every
week, if WHISKY outperformed eLogistics, then we would take ten
thousand pairs of shoes out of eLogistics and move them over to the
WHISKY warehouse.
The people at eLogistics weren’t very happy about our plan, but it was
hard for them to argue against the logic of it. Every week, WHISKY
outperformed eLogistics. Within a month, we had moved completely out of
the eLogistics warehouse and all of our shipments were coming out of
WHISKY. We were finally in control of our business again. (We would later
learn that we had definitely made the right decision: The entire eLogistics
business eventually shut down.)

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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. Outsourcing
that to a third party and trusting that they would care about our customers as
much as we would was one of our biggest mistakes. If we hadn’t reacted
quickly, it would have eventually destroyed Zappos.
I ended up staying in Kentucky for five months, living out of a small
hotel room. Keith focused on the physical aspects of the warehouse
(shelving, conveyors, electricity, hiring) while I focused on the technical
aspects of it (computer programming, systems, process design). Neither of
us had any background in warehouse operations. We were experimenting
and figuring things out as we went. We quickly outgrew the fifty thousand
square feet we were leasing and worked with the landlord to expand our
space.
As the end of 2002 neared, it was time for me to head back home. Our
new warehouse was up and running smoothly now, and it was time to focus
on other parts of our business back in our San Francisco office. Keith stayed
behind in Kentucky to make sure things continued to run smoothly there.
(He ended up living out of a hotel room in Kentucky for another two years
before moving back to our headquarters.)
Our strategy of combining inventoried product with drop shipped
product continued to drive our sales growth. We ended up doing $32
million in gross merchandise sales in 2002—almost four times what we had
done in 2001.
The growth was exciting, but we also knew we were walking a
tightrope. Our boost in sales had given us some additional runway before
we ran out of cash. We were also able to talk to our vendors and convince
some of them to allow us to take longer to pay them. We would have to
figure out something over the next few months to solve our cash situation,
but we knew we were on the right path.
Internally, we set an audacious long-term goal for Zappos: $1 billion in
gross merchandise sales by 2010. It was a big number, but based on our
growth rate so far, we felt confident that we could get there.
We just needed to make sure we didn’t run out of cash over the next few
months. Everyone could feel it: We were at a turning point for the company.

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Whatever was going to happen over the next year would either make or
break Zappos.