Zara Vertical integrated Supply Chain Essay

To analyze ZARA supply chain, it is interesting to look closely at the product design, inventory management, evaluation of suppliers and vendors, logistics management, material management, time scheduling, information systems which are the main contributors in allowing Zara to offer cutting edge fashion at affordable prices. It is also interesting to consider other key performance indicators of Zara comparing to other peers in the retail market. 3.1- Design and Production

ZARA has been able to deliver fashionable and trendy cloth addressing all tastes through a controlled design and integrated process.

ZARA designs all its products itself. Concurrent method design could be an adjective to the of product design process which involve the whole commercial team, designers, market specialist, procurement team as well as continuous feedback from store managers. Zara international employs a stable of more than 200 designers to help it keep up with the latest fashion. Most designers are young (26 average), they draw the design sketches then discuss it with market specials and planning & procurement staff.

Designs inspiration is copied from different sources (trade fairs, catwalks, magazines) from all around the world. It is worth to mention that out of 40,000 designs only 10,000 are approved. This illustrates the flexibility of ideas generation and on the other hand the huge number of designs reflects the ability to meet almost all the fashion requirements by customers of all ages (up to 55). Parent company Inditex Group shortens the time from order to arrival by a complex system of just-in-time production and inventory reporting that keeps Zara ahead. Zara distribution centers can have items in European stores within 24 hours of receiving an order and in America and Asian in under 48 hours.

ZARA business is organized around processes not functions, to close the information loop. All team is involved in all processes. This method minimizes the time as decision is conducted in one room, and in direct proximity to the information. As a result, Zara reduces the inherent uncertainty associated with new designs in this industry that is characterized by long lead times and very high variability of demand e.g M&S could need a whole season to get a new item to stock.

3.2- Procurement

ZARA manufactures 60% of its products. By owning its in-house production ZARA is able to be flexible in the amount, frequency, and variety of new styled products. ZARA has outsourced less manufacturing than its peers. It has 22 factories and runs many of them often only in one shift leaving extra capacity to respond quickly to seasonality and unforeseen demand. Comparing to peers which rely heavily on overseas suppliers/manufactures which don’t provide same flexibility as these suppliers could request orders to be placed few months in advance.

Zara is outsourcing all the labour intensive tasks mainly the sewing, while the cutting is done in-house. This produces of saving labour cost, flexibility of meeting deadlines, keeping the designs/fashions strictly controlled.

3.3- Information Systems

-Zara store managers track sales data with handheld computers, reordering hot items in less than an hour. This lets Zara know what’s hot and what’s not. When a look doesn’t pan out, designers quickly put together new products. According to Dilip Patel, U.K. commercial director for Inditex, new arrivals are rushed to store sales floors still on the black plastic hangers used in shipping. Shoppers who are aware recognize these designs as the newest of the new, soon after, any items left over are rotated to Zara’s standard wood hanger. – Designers send their design suggestions to factory and to distribution department by scanning a design into a computer and electronically transmit to factory computers including computers controlled cutting equipment. – Designers input the designs patterns into CAD systems which automatically feed into the cutting machines in the factories ensuring the required quality of outputs and having a minimum fabrics waste.

3.4- Inventory Management

Zara’s parent company, Inditex, had the lowest inventory, as a percentage of annual sales, compared with its nearest global competitors, such as Gap, Benetton, and H&M (based on 2000-2001 figures, Kasra Ferdows) ZARA avoids building inventories in any part of its supply chain from raw materials to end user.

Notably, Zara designs around 10,000 new models every year(H&M the Swedish competitor designs only 2,000-4,000) and replenishes ranges within every one of its 650 retail stores twice per week, but in strictly limited quantities of stock. This ensures Zara’s brand promise to customers of exclusivity, and also of design freshness. But it also avoids build-up of large quantities of unpopular stock.

3.5- Centralized Logistics and Distribution

Zara controls and optimizes across different steps of the supply chain, not within them, even though it may increase costs at some steps, “Zara sticks to a deep, predictable and fast rhythm, based around order fulfillment to stores.” says Professor Ferdows.

There are two orders per week from each store on specific days and hours, with shipments in La Coruna usually prepared overnight. Trucks leave at specific times (like a bus schedule) and shipments arrive in stores at specific times. Garments (even those shipped by air), are pre-hung, already labeled and priced. ´We receive shipments on Tuesday and Saturday, which means that we have different items in the store at least twice a week. While each shipment replenishes items that sell well, each also includes new items. That’s why our customers come in often,µ the Toronto store manager said. ´We might get ten of one item and five of another. ‘We are constantly testing.’

The density of Zara’s store locations in Europe helps achieve logistics efficiencies. They can fill trucks for frequent shipment in markets close to production and ship larger quantities by air to more distant stores. Zara keeps transportation costs low on the supply side, since most of the production takes place in Spain. This contrasts radically to most large fashion manufacturers, which rely on low cost manufacturing in Asia and South America, but then pay higher inventory costs and move goods to market more slowly. The air express strategy also allows Zara to maintain a multinational market presence with only one distribution center. They trade higher transportation costs for lower warehousing and inventory costs. Add to this the idea that fast transportation supports the product-innovation strategy that is the heart of Zara’s marketing, and the importance of logistics in Zara’s marketing strategies clear.

“As a result of this clearly defined rhythm, not only every stage of the supply chain – from design to procurement, production, distribution, and retail – know their activities, but even the regular customers know to visit stores more often on shipment days for the fresh designs. This large and high-tech facility also has extra capacity on hand to enable Zara to react to weekly and monthly demand fluctuations. For example, it operates typically 4.5 days per week, around the clock on full capacity, and extra shifts and temporary personnel are added when needed. It is interesting to know that ZARA can get the product from the sketch to the store in 2 weeks time, where the industry standard is 6 months, the design and production process is very efficient and harmonized due to the use of the different methods that suites their line of business and set new model to look for. During a Madonna concert tour in Spain, Zara’s quick turnaround let young fans at the last show wear Madonna’s outfit from the first show.

3.6- People at ZARA

People at ZARA are one of the components behind the unique efficient and quick response system. People are highly motivated which reflects ZARA HR policy. The Store managers are young people who provide training and fair incentive schemes which result in high and effective communication. The employees are very polite and friendly dressed very elegant. People at ZARA also sell and market the name and represent the fashion. The store manager always dresses in a fashionable way. “We sell fashion”, they say. A lot of consumers see the managers and want to adapt their style. This is a way of in store advertise. Zara relies heavily on store employees for market information.

If a customer looks at a sweater and comments, ´That would look really nice with a cowl collar, an employee can relay that information to Spain where managers decide whether or not to produce the suggested item. If they decide to make it, they can put it on the shelf in Toronto in two weeks or less, partly because they ship by air. Ocean shipping would add at least ten more days to the time it takes to get the product in front of the customer, undermining the speed-to-market and product variety strategy. People plays a vital role in Zara business model whether designers, buyers, logistics and sales staff. For example the store manager is a key player of the decision to make a specific model.

3.7- Low marketing / advertising cost

Fashion retailers spend on average 3.5% of revenue on advertising their products, while Zara’s parent company Inditex spends just 0-0.3% of sales on advertise. Zara depends on word of mouth.

ZARA relies on its stores to project its image. “We have three coordinators whose main task is to change the layout of the shop every week. An item that you see it today at the right side of the shop next week (if not sold yet) will be displayed at some other side in some other way”, Says Adel Hassan (Store Manager- ZARA, Burjuman).

4- Integration between Business strategy and operations

Zara strategy is growth through diversification with both horizontal and vertical integration. Zara copies fashion by adapting couture designs. It manufactures, distributes, and retails clothes within 2 weeks of the original design appearing on catwalks. It owns the entire value added chain and competes on the basis of speed to market, having invented the concept “fast fashion”. Finally it is important to highlight the smooth integration between Zara business strategy and it is operation strategy.

– Zara operations are in line with the strategy. – Zara manufacturing and distributions systems enable delivery from concept to store within 14 days. – Ownership and control of manufacturing facilities in Spain allows for quick response. – Ownership of high tech distribution systems allow for very fast delivery from factory to stores all over Europe. – Zara’s use of sales staff for market research purposes allows quick response to customer preferences and local differences.

5- Financial performance Indicators

It is very important to highlight the result of the efficient operation strategy has resulted in an excellent financial status. Inditex, ZARA parents’ company has outperformed most of its peers; this edge on financial performance has given ZARA prospects for future sustainable growth. Turnover Growth: Average 25% for the last five years.

Operating Profit: Average 15% – higher then H&M, Benetton,

Working Capital: Is one of the lowest (20 m Euro compared to H&M 1035 m Euro – the net operating revenue are comparable) since Inditex is capable of turning capital quicker and have higher assets.

Cost: Inditex cost is low. Operating cost, cost of goods, inventory, marketing cost, employee/ store are examples of an effective and controlled cost management.

6. Key Success Factors behind Zara

6.1- Fashion and Variety

ZARA main competency is selling Fashion and Trendy cloth with high range of variety. Zara designers are on a constant lookout for new ideas to keep the product line fresh. Zara introduces 11000 new garments in a typical year. Many lines will only be available for a matter of weeks before being replaced. As per Adel Hassan (Store Manager at Zara- UAE, Burjuman center), “We do sell fashion. We ask our customers what they want, and then we give it to them.”

6.2- Affordability

“I can get a fashionable outfit at ZARA at a price which is half the price of a similar design and fabrics at any branded shop in Dubai”, Daad Jumblat says. ZARA prices are affordable for people of different income class. Some fashion analysts are referring to this as the democratization of fashion: bringing higher fashion to lower income shoppers. 6.3 – Speed and responsiveness to Market

ZARA is geared around speed and responsiveness providing fresh baked products. Store managers communicate customer feedback on what shoppers like, what they don’t like and what they’re looking for. That data is instantly funneled back to ZARA’s designers who begin sketching on the spot. The responsiveness effects the customer behavior as it plays role in pushing the customer to buy quickly and have higher visits frequency as new models arrive very frequent. (The Secret to Zara’s success, Store Magazine, Fall/Winter 2004)

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