Web Delivery -- in an Hour

IT plays a key role at online convenience store Kozmo.com, where technology and business processes help it accomplish its goal: speedy -- and free -- delivery of snacks, videos and the like.

With legs pumping hard on icy pedals, the spandex-wrapped rider weaves through traffic, cabbies cursing as he passes. He eyes his destination and cuts over, dismounting to lock the bike and head upstairs. When the apartment door opens, an arm reaches out from a bathrobe, takes a sack from the rider and pulls back.

E-mission accomplished.

In the past two-and-a-half years, Kozmo.com Inc. has managed to create a new face for e-commerce. The city might be New York, Boston, San Francisco or Washington. From 10 a.m. to 1 a.m., people can go to www.kozmo.com to order CDs, event tickets, videos to rent or buy, snacks and takeout food. They pay by credit card and request a delivery time. The catch for Kozmo.com is that it offers delivery -- an expensive service -- free of charge, and promises to make most deliveries within an hour after the order is placed. That means the company needs business processes -- and systems -- to make this logistical madness work. Such demands raise information technology from a supporting position to a starring role, where decisions could make or break the company.

Dot Com-plex

Kozmo has all the characteristics of a dot-com operation. Started in 1997, the company launched its New York service in 1998. It's now in five cities and has announced plans to expand to 30 markets by the end of this year. Its growth to date has been funded with $28 million in first-round venture financing. According to knowledgeable sources, the company is expecting to complete a substantial second round of financing. News reports in January claimed that Amazon.com Inc. and Softbank Inc. would invest between $80 million and $100 million, though company representatives say the deal isn't final.

And just last month, Kozmo announced a five-year comarketing agreement with Starbucks Corp. The deal will bring Starbucks $150 million from Kozmo and give Kozmo publicity in Starbucks' coffee shops. In return, Kozmo will sell Starbucks coffee on its site.

Although dot-coms have a reputation for putting stock price before profits, making money is the ultimate goal and proving ground for every business. Kozmo prices goods comparably to what local convenience stores ask, then offers gratis delivery. That combination can seem disastrous to observers.

"Certainly, there will be people who use it. Nobody ever went broke banking on laziness," says Malcolm Maclachlan, an e-commerce analyst at International Data Corp. in Framingham, Mass. "Whether they can make a profit doing this? Gosh, it's not a business I'd want to be in."

Kozmo management -- and investors -- seem confident that the company can drive to profits. Delivery services may be expensive, but the bet is that cost savings from serving an entire city from a few locations can take up the slack. To get to the black, the company's focusing on selling high-margin products and offering an assortment of goods that will increase the average order size.

But even with orders growing at a rate of 20% to 30% per month, Kozmo won't see daylight without efficient processing. First and foremost, that has meant finding solutions to business problems and developing systems to implement those solutions.

"All you have to do is look at the traditional types of problems that a retail business is going to have, that an e-commerce business is going to have," says Skip Trevathan, Kozmo.com's chief operating officer and former managing director of North American logistics at Memphis-based FDX Corp., parent of Federal Express Corp.

The solution: Divide a city into delivery districts, each with a warehouse ranging in size from 2,500 to 10,000 square feet or more. Warehouses typically hold a couple thousand items and are replenished several times a day by local distributors. It makes sense, but it's a logistical nightmare. Customers have to see what products are available at the local warehouse. Orders must travel to the right warehouse, be readied for delivery and end up at the customer's door within an hour.

Smart Division of Labor

Kozmo uses a three-tiered computing infrastructure. Each warehouse has a server and PCs. The server processes business rules, handling such tasks as scheduling deliveries and managing inventory reorders. Employees use the PCs when receiving goods, picking orders and sending deliveries.

The warehouse servers connect though a wide-area network to redundant Sun Microsystems Inc. Enterprise 4500 machines, which act as servers for an Oracle Corp. database. The Sun 4500s are maintained and run by Exodus Communications Inc. at its New York facilities. Customer orders go to Web servers at the same site.

The choice of hardware was economically important. "You can put a lot more power in (the 4500s), and they're space-efficient," says Chris Siragusa, Kozmo's chief technology officer. "It's all about how much you can fit on one rack." According to Siragusa, 50 square feet in a colocation facility costs a few thousand dollars per month, and peak Internet bandwidth of 5M bit/sec. usually costs between $4,000 and $5,000 per month. Yet Siragusa says the expenses are justified. Kozmo can focus on its core strengths of building systems and attracting customers, while the colocation facility manages network traffic and provides additional bandwidth as customer demand increases.

By outsourcing host and network tuning, Siragusa's department is able to concentrate on its core competencies, such as writing software for warehousing and dispatching systems. Kozmo considered using third-party systems but decided that would leave too many unsatisfied requirements.

Flexibility and openness are vital to the company. Not only do customers have to see custom Web pages that show only the products available in their areas, but dispatching systems must also account for the transportation mix in a particular city, based on existing traffic characteristics. For example, New York relies heavily on bicycle messengers, but San Francisco uses motorized delivery -- which comes in handy when delivery people face the city's famously steep hills.

To avoid disappointing customers, Kozmo needs systems that know when meeting a delivery deadline is impossible. "We can create a huge amount of demand," says Trevathan. "We just have to make sure we do not create demand faster than we have the facility to fulfill them." The systems use a scheduling technique to measure product availability and delivery capacity. In unusual conditions, such as a heavy January snowstorm in the Northeast, a Web page might warn customers to expect delays.

Handling Problems

Growth may have been steady, but Kozmo's systems have seen some bumps in the road. There are some browser compatibility problems.

"When I use it from my work computer, I have much better luck," says Kozmo.com customer Denise Cox, who lives in New York. "At home we have (America Online), and AOL doesn't seem to agree with Kozmo's Web site. We can't download the descriptive pages."

There are also some annoying limitations in the user interface. "If you misspell anything (when searching for a movie title), even if you leave a punctuation out, (the page) will say it doesn't exist," adds Cox. "You want them to give you some slack. Let me misspell one letter and still be able to see the movie instead of wracking my brain to see what's wrong."

Potentially disconcerting were the problems some customers had in accessing the site as recently as last fall. The company started with Windows NT servers and an IBM DB2 database. They worked well for smaller amounts of traffic but couldn't scale to meet increased demand. "As we grew, they became less and less useful," says Siragusa. So the company moved to its current server/database configuration to alleviate the ordering bottlenecks.

Kozmo's technical team is also being forced into other sorts of changes. IBM's Net.Commerce, which Kozmo uses to manage the delivery of Web pages to customers, is moving from C++ to Java support. To continue using the product, Kozmo has to train existing staff and hire people with both sets of skills. That eats up time.

"It's not something I'm too happy about," says Siragusa, "but the architecture they're moving to is going to be a better architecture." Every time a vendor issues a product upgrade, the Kozmo staff examines whether the tool is still a fit for the business. More important to Siragusa than the individual tools is how they all work together.

The importance of Kozmo's technical department becomes obvious in the breakdown of the company's staffing. Counting messengers and part-time warehouse staff, Kozmo has more than 2,000 employees. But only 150 people work at its corporate offices, and half them are in the technical department.

To manage all the development work, Siragusa has three major departments: one that focuses on logistics and warehouse issues, another that handles Web development and a third that manages information systems for reports and decision support. Each department has a manager to provide a coherent vision. Everyone else works on ad-hoc teams that are put together to complete specific projects. As people finish their part on one project, they move to another.

What makes the approach really unusual is that the company rarely knows far ahead of time which project will be next on the schedule. Because of the business's rapid growth and volatility, Siragusa has many project plans for future developments but often has to implement them at the drop of a hat. This approach to management requires him to stay flexible and be ready to address the most urgent issues as they occur.

Siragusa says he sees growth as the biggest challenge. "Trying to stay six months ahead of that growth is a challenge," he says. "The other (challenge) is the growth of the department itself -- the number of people we're bringing on and getting them integrated. You want to keep them happy."

Even if things get rocky, though, Kozmo has found a way to keep customers coming back. "They're always so friendly, that's why I like them," says Cox. "Even when you're calling to complain."

Sherman is a freelance writer in Marshfield, Mass. Contact him at esherman@reporters.net .

Copyright © 2000 IDG Communications, Inc.

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