I have found that you will get little puckers around an appliqué if the Zig Zag stitching is dense. You can do a few things to help....put a stabilizer under the background fabric to sew through to prevent tunneling, open up the Zig Zag a little so it's less dense or switch to the buttonhole edge finish instead.
Another method of doing appliqué is to stitch about 1/8 in from the appliqué edge and let the fabric edges fray. This method is called raw edge appliqué and I find it works best with batiks that fray less. Unless that is the look you are going for like in the French Rose bed runner?