Zara Supply Chain Case Study Answers

It's not unusual to pass a Zara store and do a double-take - didn't you just see that on the catwalk? As a brand, they value their speed and responsiveness to the latest fashion trends. Owned by the distribution group Inditex, we had a look at what makes Zara so fast that the New York Times called it "mind-spinningly supersonic".

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Amancio Ortega founded Zara in 1975 as an attempt to better understand world markets for his fashion merchandise. From that first store in Spain, Zara has since expanded to 1,770 stores in 86 countries around the world. 

In 2012, Inditex, Ortega’s parent company made up of Zara and other retail concepts and suppliers, reported total sales of US$20.7 billion, with Zara representing a powerful 66 percent, or US$13.6 billion, of that total.

What’s the secret to Zara’s competitive advantage? Its supply chain.

Zara produces around 450 million items a year. How can it stay so efficient with the sheer volume that passes through its supply chain? Regular, small batch deliveries happen with clock-work precision twice a week to all of their stores around the world. 

Ensuring all this runs smoothly is what Zara does best - controlling more of its manufacturing and supply chain than most of its competitive counterparts. 

Synergy between business and operations strategy

Zara’s overarching strategy is achieving growth through diversification with vertical integrations. It adapts couture designs, manufactures, distributes, and retails clothes within 2 weeks of the original design first appearing on catwalks.

The company owns its supply chain and competes on its speed to market, literally embodying the idea of “fast fashion”.

Just in time production

The retail giant delivers fashionable and trendy numbers catered for different tastes through a controlled and integrated process – just in time.

Zara keeps a significant amount of its production in-house and makes sure that its own factories reserve 85 percent of their capacity for in-season adjustments. In-house production allows the organization to be flexible in the amount, frequency, and variety of new products to be launched.

The company often relies heavily on sophisticated fabric sourcing, cutting, and sewing facilities nearer to its design headquarters in Spain.

The wages of these European workers are higher than those of their developing-world counterparts, but the turnaround time is miraculous.

Zara also commits six months in advance to only 15 to 25 percent of a season’s line. And it only locks in 50 to 60 percent of its line by the start of the season, meaning that up to 50 percent of its clothes are designed and manufactured smack in the middle of the season.

If a certain style or design becomes the new must-have on the street, Zara gets to work. Designers churn out the new styles and they're fast-tracked to stores while the trend is still going strong. 

Store managers communicate customer feedback on what shoppers like, what they dislike, and what they’re looking for. That data is instantly funneled back to Zara’s designers who begin sketching on the spot.

Zara also has extra capacity on hand to respond to demand as it develops and changes. For example, it operates typically 4.5 days per week around the clock on full capacity, leaving some flexibility for extra shifts and temporary labor to be added when needed.

This then translates to frequent shipments and higher numbers of customer visits to the stores, creating an environment of shortage and opportunity.

This strategy allows Zara to sell more items at full price because of the sense of scarcity and exclusiveness the company exudes. Zara’s total cost is minimized because merchandise that is marked down is reduced dramatically as compared to competitors.

Zara gets 85 percent of the full price on its clothes, while the industry average is 60 to 70 percent. Unsold items account for less than 10 percent of its stock, compared with an industry average of 17 to 20 percent.

“Most companies are riddled with penny-wise, pound-foolish decisions to reduce cost,” noted Kasra Ferdows, a professor at Georgetown University’s McDonough School of Business in this article on Bloomberg. “Zara understands that if they don’t have to discount as much, they can spend money on other things. They can see the benefit of this certainty and rhythm in the supply chain.”

This is also the reason why Zara can afford the extra labor and shipping costs needed to accommodate and satisfy changes in seasonality and customer demand.

Inventory management

You'll be hard pressed to find any excess inventory or deadstock in a Zara warehouse.  Throughout the supply chain, lean is word, all the way from raw materials to the finished garments on the shelves. 

Inventory optimization models are put in place to help the company to determine the quantity that should be delivered to every single one of its retail stores via shipments that go out twice every week. The stock delivered is strictly limited, ensuring that each store only receives just want they need. This goes towards the brand image of being exclusive while avoiding the build up of unpopular stock.

This quick in-season turnaround, from production facilities located close to Zara’s distribution headquarters in Spain, allows Zara to ship more often and in smaller batches. If the design Zara hastily creates in an attempt to chase the latest trend does not in fact sell well, little harm is done.

The batch is small, so there’s not a ton of unsold inventory to get rid of. And because the failed experiment is over in a jiffy, there’s still time to try a different style, and then a different one after that.

Centralized logistics

“The secret to their success has been centralization,” says Felipe Caro, an associate professor at the University of California at Los Angeles’s Anderson School of Management and a business adviser to the company. “They can make decisions in a very coordinated manner.”

Zara sticks to a deep, predictable and fast rhythm, based around order fulfillment to stores.

Each Zara outlet sends in two orders per week on specific days and timing. Trucks leave at specific times and shipments arrive in stores at specific times. Garments are already labeled and priced upon destination.

As a result of this clearly defined rhythm, every staff involved (from design to procurement, production, distribution, and retail) knows the timeline and how their activities pan out with respect to other functions. That certainly also extends to Zara customers, who know when to visit stores for fresh new garments.

Solid distribution network

Zara’s strong distribution network enables the company to deliver goods to its European stores within 24 hours, and to its American and Asian outlets in less than 40 hours.

According to Nelson Fraiman, a Columbia Business School professor who wrote a 2010 case study about Zara, the retail giant can get a product out from concept to store in just 15 days, while the industry standard is 6 months.

Fast fashion success

This brand’s success story shows the strength of its operations. Its cross-functional operations strategy, coupled with its vertically integrated supply chain, enables mass production under push control, leading to well-managed inventories, lower markdowns, higher profitability, and value creation for shareholders in the short and long term.

Zara is all about staying on top of the hottest trends, and exuding an exclusive feel, but its supply chain is the real star of the show. These rockstar-level logistics take it from being just another fashion retailer to an industry example of fast fashion done right. 

References: 1 | 2 | 3 | 4

Images: 1 | 2 | 3 | 4

See also:

3 lessons startups can learn from Alibaba

Tesla created a custom-built supply chain that competes with the best, and so can you

Out of stock problems? Walmart, Nike and Best Buy had them too, but here's how you can do better

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Zara

cash into the company. Zara

s growth is based on abusiness model that allows it to operate with essentially

negative working capital

in other words, it collectscash faster than it pays it out! As an illustration of thesuccess of the model, Inditex sales grew from

367million in 1991 to

3.25 billion and net profit from

31million in 1991 to

345 million in 2001. In 2001 alone,while many companies in the industry were facingdownturns, Inditex sales grew by 27% over 2000 andprofit increased by 32%. In 2001, Inditex

s EBITDA andEBIT as percentage of revenues were the highest amongits peers.

ZARA

Zara is the largest Inditex division - accounting for morethan 75% of total Inditex sales. By April 2003, Zara had565 stores in 33 countries

albeit with the largestconcentration still in Spain (followed by France,Portugal, Mexico, and Greece). While further flungmarkets such as Japan hold long term and potentiallysubstantial growth prospects, Zara remains extremelycautious in the development of these markets. In theU.S. for instance, even though Zara opened its first storein 1989, by 2002 it still had only 8 stores. Zara owns andoperates almost its entire store network. In 2001 forinstance, only 12 stores were operated as joint ventures(in Japan, Mexico and Germany) and only 31 werefranchises (all outside Spain).Specific retail locations are only ever selected afterextensive market research to ensure that Zara

s targetmarket segments is of sufficient size in that locality torender the store financially viable. Moreover, Zaraalways tries to locate its stores in the most up-market,high traffic, and prestigious locations. Even though suchprime retail locations are often very expensive, most of the selling space in a typical Zara store is left empty inorder to create a pleasant, spacious and unclutteredshopping environment that invites customers to walk around and browse (see Figure 1). The layout of thestores, the furniture, and even the window displays areall designed at La Coru

ñ

a to give the same imageworldwide and a

flying team

from headquarters isusually dispatched to a new site to set up the store:

wewant our store managers to focus on sales andcustomers

not on things like air-conditioning,

explained Mr. Borja de la Cierva, Zara

s Chief FinancialOfficer. Location, traffic and layout are particularlyimportant for Zara because it spends relatively little onadvertising (In 2001, 0.3% of sales turnover comparedwith 3.5% by its peers). According to marketingexecutive Miguel Diaz,

Our stores and word-of-mouth,do the advertising for us.

Further emphasizing theimportance of the stores, Mr. Diaz argued that theInternet would not have a radical impact on their retailoperations.

[Customer

s] have to try the dress to seehow they look in it. In fact, that is why we don

tanticipate a lot of sales through our web page.

A typical Zara store has women

s, men

s and children

ssections, with a manager in charge of each. Women

swear accounted for almost 60% of sales, with the restequally divided between men

s wear and children

swear. The store manager is usually also the head of thewomen

s section.Zara places a great deal of emphasis on training its salesforce and strongly emphasize internal promotion. Storeemployee remuneration is based on a combination of salary and bonus derived from overall store sales.Although store managers are responsible for the

profitand loss

of their respective stores, La Coru

ñ

a controlprices, transfer costs, and even a certain amount of merchandizing and product ordering. In practice, thecritical performance measures for the store managersrelate to the precision of their sales forecasts(communicated through the ordering process) and salesgrowth. A simple yet key measure followed by seniormanagers is the rate of improvement of daily sales fromyear-to-year

for example, sales on the thirdWednesday of June 2003 compared to the thirdWednesday of June 2002.Zara

s strategy requires the generation of a great deal of product variety throughout the year.

We are in thefashion business

not clothing. Our customers buy ourproducts because they like it

not because it is Zara,

explained Mr. Diaz. To its customers, Zara stores areplaces where you can find something new and, crucially,of limited supply. As part of this fashionably exclusive(yet low cost) image, stores hold very low levels of inventory

typically only a few pieces of each model

and this often means that a store

s entire stock is ondisplay. As a result of the low inventory policy it is notunusual to find empty racks by the end of a day

s tradingand therefore stores are completely reliant on regularand rapid replenishment of newly designed products.

63

Supply Chain Forum

An International JournalVol.4 - N

°

2 - 2003

www.supplychain-forum.com

Figure 1

Typical Layout of a Zara store (Women’s section featured)

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