37281774-Zara

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Contents

About Zara 3

Zara¶s Vertical Supply Chain 4

The Speeding Bullets in Zara¶s Supply Chain Management 8

Winning Formulae 9

Zara¶s supply chain - advantages and disadvantages 11

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About Zara

Zara was founded by Amancio Ortega Gaona (Ortega), who was born in León, Spain, in 1936.

Ortega worked as an assistant in an apparel shop and in 1963 he set up his own fashion retail

business named Confecciones Goa, in Arteixo-La Coruña, to manufacture housecoats. In 1975,

when a German retailer cancelled a major order, Ortega started selling the clothes from a small

outlet in his factory and called the outlet Zara.Zara went on to become the flagship brand of the

holding company, Industria de Diseño Textil, SA, popularly called Inditex, which was founded

in1979.

Ortega was credited with democratizing fashion in Spain; he was responsible for making

designer clothing accessible to the masses. Between 1976 and 1984, Zara's presence was

extended to major Spanish cities. The first store outside Spain was opened in 1988 in Portugal.

The next international ventures were New York in 1989 and Paris in 1990. By the end of 1990,

Zara had operations in 82 cities across Spain and three cities internationally.

Strategy for keeping ahead

One of the secrets behind Zara's success was its ability to spot emerging trends and react quickly.

Zara had a dedicated design team in Arteixo, A Coruña, in northern Spain. Ideas for new designs

or for modifications to be made in existing designs mainly came from Zara's stores.

Under the Zara model, the retail store is the eyes and ears of the company. Instead of relying

solely on electronically collected data, Zara utilizes word-of-mouth information to understand

more about their customers. Empowered store managers report to headquarters what real

customers are saying. Across all the stores, Zara's sales staff was equipped with wirelesshandsets which provided data to the store manager about the pieces sold. The manager

consolidated the data and sent it to the company headquarters through the Internet. Products that

are not selling well are quickly pulled and hot items quickly replenished. Their quick turn around

on merchandise helps generate cash which eliminates the need for significant debt.

Instead of projecting sales for a certain color, fabric, or style and launching such products, Zara

reacted swiftly to emerging trends in the fashion industry. The company ensured that its stores

were stocked with the products that the customers wanted at that point of time. In contrast, other

retailers took between 8 and 12 months to forecast and arrive at a style and send it for

production. Zara's initial forecast was limited to the kind of fabric and the amount of fabric itwould buy. The fabric thus procured was unprocessed and undyed and Zara colored the product

only before selling it, based on the need and demand by consumers.

Zara has tapped into the power of fashion. Small and frequent shipments keep product

inventories fresh and scarce²compelling customers to frequent the store in search of what¶s new

and to buy now«because it will be gone tomorrow.

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Zara¶s vertical supply chain

Zara, clothing with retail chain throughout the world is probably the world's fastest growing

retailer with almost a thousand stores. Zara has its own unique business model that enabled Zara

to be compete with its competitors, and it's driven by Zara's "fast fashion" with its vertically

integrated supply chain.

Vertically integrated business undertakes a variety of activities from designing, manufacturing,

sourcing, and to distribution to retail stores around the world. A company that operates in a

vertically integrated strategy has total control of various business activities, such as designing,

manufacturing, sourcing, and to distribution to retail stores. This gives the company total

business management.

Vertically integrated supply chain allowed Zara to successfully build up a strong retail chain

combine with the forces of fast fashion. Vertically integrated supply chain enabled company's

domination of a market by controlling all steps in the production process, from the extraction of raw materials through the manufacture and sale of the final product.

By owning an in-house production, Zara enabled itself to be flexible in the multiplicity, quantity,

and frequency of the new styles they produce. In this case, the latest fashion could be delivering

to Zara's customer in short time period. Zara introduce new items every two weeks, which keeps

customers going back to Zara to check out updated stocks. It clearly stated that Zara perform a

successful fast fashion with it unique supply chain which is integrated supply chain.

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Main aspects/points of Zara¶s supply-chain Network that led to higher profitability:

y Limited-supply: In Zara stores, customers can always find new products²but they¶re in

limited supply. A customer thinks, ³This green shirt fits me, and there is one on the rack. If

I don¶t buy it now, I¶ll lose my chance.´

y Outsourcing-Labor : Zara outsourced the labor-intensive operations to a network of localsubcontractors (advantage: the company was able to respond quickly when items sold

better than expected and also cut off production when demand for particular items fell.)

y Organization-Structure: This ³fast-fashion´ system depends on a constant exchange of

information throughout every part of Zara¶s supply-chain²from customers to store-

managers to market-specialists and designers, from designers to production staff, from

buyers to subcontractors. Zara¶s flat organization ensures that important conversations

don¶t fall.

y Regular-creation: Zara¶s designers create approximately 40,000 new-designs annually,

from which 10,000 are selected for production. Some of them resemble the latest couture-

creations. But Zara often beats the high-fashion houses to the market and offers almost the

same-products, at lower-prices.

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Manufacturing and distribution

Zara is a vertically integrated retailer. Unlike similar apparel retailers, Zara controls most of the

steps on the supply-chain: It designs, produces, and distributes itself.

Zara was a fashion imitator. It focused its attention on understanding the fashion items that its

customers wanted and then delivering them, rather than on promoting predicted season's trends

via fashion shows and similar channels of influence, which the fashion industry traditionally

used.

50% of the products Zara sells are manufactured in Spain, 26% in the rest of Europe, and 24% in

Asian and African countries and the rest of the world. So while some competitors outsource all

production to Asia, Zara makes its most fashionable items -- half of all its merchandise -- at a

dozen company-owned factories in Spain and Portugal, particularly in Galicia and northern

Portugal where labour is somewhat cheaper than in most of Western Europe. Clothes with a

longer shelf life, such as basic T-shirts, are outsourced to low-cost suppliers, mainly in Asia

and Turkey.

Zara can offer considerably more products than similar companies. It produces about 11,000

distinct items annually compared with 2,000 to 4,000 items for its key competitors. The company

can design a new product and have finished goods in its stores in four to five weeks; it can

modify existing items in as little as two weeks. Shortening the product life cycle means greater

success in meeting consumer preferences. If a design doesn't sell well within a week, it is

withdrawn from shops, further orders are canceled and a new design is pursued. No design stays

on the shop floor for more than four weeks, which encourages Zara fans to make repeat visits.

An average high-street store in Spain expects customers to visit three times a year. That goes up

to 17 times for Zara.

Design

The design centre is located in Spain as well and is divided into three segments for Men,

Women and Child wear.

Team consisted of more than 200 designers who can churn out 60 styles each.

The store managers and sales staff updates the head office every day about the moving

stock and provided inputs regarding the new lines, colors, styles and fabrics that

customers are demanding.

The store specialists provided the designers with an outline of the new style, design andfabric as demanded by the store.

The procurement and production managers provided inputs regarding the capacity and

manufacturing costs.

The designers came out with the design specifications and the technical brief. With all the

teams working in tandem, the prototypes were ready within a few hours!!

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The Speeding Bullet in Zara¶s Supply Chain Management.

Controlling notorious trouble spots along the supply chain is key to speed.

Zara has following speeding bullets in its supply chain management.

y Potential bottlenecks can be thwarted because Zara is a vertically integrated structure.

y Dyeing and fit are critical processes within the supply chain. Zara is a large investor in a

dye and finishing plant, allowing them to oversee the dyeing process²a notorious

bottleneck. Although Zara uses sub-contractors for sewing, they do the vast majority of

cutting themselves²a crucial process that determines fit.

y For quick turnaround, 60% of the manufacturing processes are outsourced in countries

close to the Zara headquarters in Spain. Zara maintains a strong relationship with their

contractors and suppliers²viewing them as part of the company.

y To successfully react to consumers demands, design decisions are delayed as long as

possible. Typically, Zara commits to 50%-60% of their production in advance of the

season, whereas other apparel retailers commit to 80%-90%. Zara practices

precommitment, meaning they reserve mill capacities to ensure production facilities are

available when needed.

y Design collections are not developed by small elite groups of designers but by creative

teams. Teams consist of designers, sourcing specialists and product development

personnel. The teams work simultaneously on different products, expanding on styles that

were previously successful. Designers are trained to limit the number of reviews and

changes, speeding up the development process and minimizing the number of samples to

be made.y Traditionally, design and development precedes fabric procurement. Zara has turned this

practice upside down²Zara is fabric driven. Designs are developed with available

fabrics and trims. This eliminates waiting for the long and laborious process of fabric

formation.

y Poor communication is often the culprit of bottlenecks. Zara invested in information

technology (IT) early on. Their in-house IT is simple and effective. Vendors and

suppliers report that people are accessible and answers can be obtained quickly. Internal

communication is maximized by housing on one floor, the designers, pattern makers and

merchandisers, as well as everyone else involved in getting the product completed.

y Zara hires young designers and trains them to make quick decisions. Decision-making is

encouraged and bad decisions are not severely punished. Designers are trained to limit

the number of reviews and changes, speeding up the development process and

minimizing the number of samples made.

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Winning Formulae

Zara concentrates on three winning formulae to bake its fresh fashion.

y Short Lead Time = More fashionable clothes

y Lower quantities = Scarce supply

y More styles = More choice, and more chances of hitting it right.

Short Lead Times: Keeping Up With Fashion

By focusing on shorter response times, the company ensures that its stores are able to carry

clothes that the consumers want at that time. Zara can move from identifying a trend to having

clothes in its stores within 30 days. That means that Zara can quickly identify and catch a winning

fashion trend, while its competitors are struggling to catch up. Catching fashion while it is hot is a

clear recipe for better margins with more sales happening at full prices and fewer discounts. In

comparison, most retailers of comparable size or even smaller, work on timelines that stretch into

4-12 months. Thus, most retailers try to forecast what and how much its customers might buymany months in the future, while Zara moves in step with its customers.

Unlike other retailers, Zara's machinery can react to the report immediately and produce a

response in terms of a new style or a modification within 2-4 weeks. Many other retailers have

such long supply chain lead times that for them it would seem a lost cause for them to even try

and respond to a sales report.

Reducing Risk

By reducing the quantity manufactured in each style, Zara not only reduces its exposure to any

single product but also creates an artificial scarcity. As with all things fashionable, the less its

availability, the more desirable the object becomes. When Zara opened its first store on London's

Regent Street, shoppers are said to have browsed without shopping, thinking that they would

come back to buy during a sale. Then the store assistants explained that the styles were changed

every week, and the style liked by the customer would very likely not be available later.

Subsequently, Regent Street became one of Zara's most profitable stores and more stores opened

in the UK.

Leadership in Numbers

Thirdly, instead of more quantities per style, Zara produces more styles, roughly 12,000 a year.

Thus, even if a style sells out very quickly, there are new styles already waiting to take up thespace. Zara can offer more choices in more current fashions than many of its competitors. It

delivers merchandise to its stores twice a week, and since re-orders are rare the stores look fresh

every 3-4 days. Fresh produce, moving in step with the fashion trend and updated frequently the

ingredients are just right to create the sweet smell of success.

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Zara achieve its above three key success factors through a structure that is more closely controlled

than most other retailers, and pays further by having the various business elements in close

proximity to each other, around its headquarters in Spain.

Ownership and Control of Production

For one, most other retailers (like the American chain Gap and the Swedish retailer Hennes &

Mauritz) completely outsource their production to factories around the world, many of them in

low cost Asian countries. In contrast, it is estimated that 80 per cent of Zara's production is carried

out in Europe, much of it within a small radius of its headquarters in Spain. In fact, almost half of

its production is in owned or closely-controlled facilities. While this gives Zara a tremendous

amount of flexibility and control, it does have to contend with higher people costs averaging 17-

20 times the costs in Asia.

Counter-intuitively Inditex has also gone the route of owning capital-intensive manufacturing

facilities in Spain. In fact, it is a vertically integrated group, with up-to-date equipment for fabricdyeing and processing, cutting and garment finishing. Greige (undyed fabric) is more of a

commodity and is sourced from Spain, the Far East, India, and Morocco. By retaining control

over the dyeing and processing areas, Inditex has fabric- processing capacity available ³on

demand´ to provide the correct fabrics for new styles. It also does not own the labour-intensive

process of garment stitching, but controls it through a network of subcontracted workshops in

Spain and Portugal.

Supercharged Product Development

Design and product development is a highly people-intensive process, too. The heavy creative

workload of 1,000 new styles every month is managed by a design and development team of over 200 people, all based in Spain, each person in effect producing around 60 styles in a year (or 1-2

styles a week). With new styles being developed and introduced frequently, each style would

provide only around 200,000-300,000 of retail sales, a far lower figure than other retailers or

brands, and certainly not ³cost-efficient´ in terms of design and product development costs. But

obviously, this higher cost of product development is more than adequately compensated by

higher realized margins.

In addition, the entire product development cycle begins from the market research. This combines

information from visiting university campuses, discos and other venues to observe what young

fashion leaders are wearing, from daily feedback from the stores, and from the sales reports. This

has meant a significant investment in information technology and communications infrastructure

to keep streaming up-to-date trend information to the people making the product and business

decisions.

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Zara¶s supply chain - advantages and disadvantages:

Zara is able to react swiftly to the emerging trend in the fashion industry. In contrast,

other retailer took between 8 to 12 months to forecast and arrive at a style and send it for

production.

If the style did not sell as expected, the low production quantity ensured that Zara did not

lose much, as there was not much stock to be discounted. On an average, Zara sold only

18% of the clothes through discount sales twice a year, as against the industry average of

36% and constant markdowns.

Though this supply chain of Zara has higher cost but it allowed Zara the advantage of low

inventory and higher profit margins. Analysts opined that Zara¶s supply chain did not

minimize costs, but worked towards maximizing revenues.

The biggest disadvantage with Zara is that since Zara owned all the channels of supply

chain, it is difficult for Zara to expand to far location as it becomes very costly to

distribute such products.

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37281774-Zara