October 7, 2011 / 4:36 PM / 6 years ago

Customer-service leader Zappos trips up

* Switch to new warehouse system creates order backlog

* Changes give Zappos access to Amazon warehouses

* Project WMS like open heart surgery on moving train-CEO

By Alistair Barr

Oct. 7 (Reuters) - Zappos, a unit of Amazon.com Inc that’s known for top customer service, tripped up in recent weeks because of problems with a major upgrade to its order and shipping system.

Zappos switched to a new system over a weekend in September, meaning orders placed on two days before that weekend weren’t processed until Sunday night, Chief Financial Officer Chris Nielsen told employees in an email that was posted on the company’s blog on Sept. 27.

Once the new system kicked in, shipping started more slowly than expected because Zappos “ran into some unanticipated mechanical, systems, process and training issues,” Nielsen said.

Zappos has been “churning” through the order backlog and Nielsen said in the email that the backlog would be down to a “manageable” level by the weekend of Oct. 1 and cleared within “days” after that.

The hiccup could damage Zappos’s reputation for fast shipping and first-rate customer service. The company’s success in these areas led Amazon.com to acquire it for almost $900 million in 2009.

“It shows that, as good as they are, they’re still not perfect,” said Jordy Leiser, chief executive of customer service rating agency StellaService. “People expect the best from Zappos when it comes to service. I have a feeling the Zappos team will learn from this seemingly one-off event.”

‘OPEN HEART SURGERY’

The systems upgrade, known as Project WMS for Warehouse Management System, gives Zappos access to Amazon’s many warehouses, increasing the number of products it can potentially sell, Zappos Chief Executive Tony Hsieh said. Zappos has two warehouses, while Amazon is building more than 10 this year alone.

When Hsieh and Amazon Chief Executive Jeff Bezos first started talking about the acquisition of Zappos by Amazon, the WMS project -- the integration of the two companies’ fulfillment systems -- was something they both agreed to do, Hsieh said.

“We just performed the equivalent of open heart surgery on a moving train,” Hsieh told Reuters.

“While there were some unanticipated complications during the cutover, to follow the analogy, the patient is currently in stable condition but we are continuing to monitor her closely (she is not allowed to go home yet),” he added.

Fulfillment of orders is now back within a “normal range,” Hsieh said, although some kinks remain.

‘BLACK EYE’

“We know that some customers have been inconvenienced as part of this transition,” Zappos’s Nielsen said in his blog entry. “Frankly, nothing disappoints us more than this.”

One Zappos customer said in a post under Nielsen’s blog that they placed an order on Sept. 25 and hadn’t received the products or gotten an update on the order as of the morning of Oct. 3.

“It’s a ‘black eye’ for Zappos,” the customer wrote.

Another customer said it looked like orders were still delayed in a post on the Zappos blog on the afternoon of Oct. 3.

Zappos should have warned customers that orders might be delayed ahead of the system upgrade, another customer wrote in an Oct. 4 post.

“There’s always the possibility of disruption and confusion when a company changes systems,” StellaService’s Leiser said. “It’s prudent of all companies -- no matter the industry or category -- to warn their customers when a major business function is about to undergo a change.”

Zappos decided not to warn customers ahead of time based on information it had at the time, Hsieh said, adding that such decisions are always a “tough call.”

”Less than one-third of 1 percent of our entire customer base was impacted by the WMS switch-over,“ he said.”

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