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Zara mainly targets on young and urban female customers and acceptable prices are offered. Page 58, Logistics and Supply Chain Management. There are always new products in Zara stores. Even though usually Zara stores are spacious but the stock is displayed in limited quantity. This kind of strategy gives customers a sense of originality and exclusivity. Most of the stores display clothes only when they have a full set of major sizes so customers would not be upset to find that the needed size is not available. As shoppers enter the stores, reaction between Zara and customers starts with creating a sense of "buy now since you won't see it next time" (page 13, "Zara: Fast Fashion") though the rapid turnover environment. Customer relationship is then strengthened by, instead of offering VIP services and discounts, Zara shows a sense of scarcity by displaying unfilled shelves, limited offer notes on certain items and deliberate undersupply impression to encourage customers to secure their purchases, hence reinforcement of existing relationship.
Such a retail concept depends on the regular creation and rapid replenishment of small batches of new goods. Zara's designers create approximately 40,000 new designs annually, from which 10,000 are selected for production. Some of the goods are high fashion looks-alike, but much cheaper and lower quality and that in many cases allow Zara to beat high fashion designers.
Their networked business designs enable the frequent digital communication from stores to designers, and centralised distribution allow the within-15-day deliveries to ensure the satisfaction of consumers, comparing with the average length of 9 months for the competitors.
In the first half of the 1990s, the supply chain consisted of problems of inconsistence, imbalances and market saturation for three of the store chains of Zara, plus the inefficiently launch of fashion position had created difficulties in joining the U.S. garments market. It has suffered from a significant financial loss in 2001 and a dramatic decrement in the share price. In May of the following year, the chairman, who failed to reposition to a more fashionable assortment due to a major fashion missing, had withdrawn from his long-term CEO position. (page 4,"Zara: Fast Fashion")
The supply chain was restructured in 1990s by lowering the levels of inventories and reducing the suppliers ( page 3,"Zara: Fast Fashion"), 50% of the production was then shifted back to the domestic manufacturing facilities to compress cycle times, seasonal collections was cut down in order to allow reorders of merchandise that was selling well in a season's 3rd month.
Market-driven supply chain (linking customer value to supply chain strategy) was then applied instead of the traditional supply chains which only designed to optimise the internal operations. The company uses "value net" business design to support the networked operation in order to allow connect customers with the company and its key suppliers ( page 11-13,"Collaborative Customer Relationship Management: Taking CRM to the next level"). The "value net" includes: Digital customer input provided by Zara stores; Zara designers sketch the require styles; Textiles are sourced globally; Hi-tech cutting plant and local workshops sewing/assembly; Single distribution system.
Based on the "value net", customer value management is a key issue to obtain a regular group of buyers. Opportunities from current and potential customers can be created by understanding the customers' hobbies, purchase frequency, behaviors and needs. Further actions hence can be taken including contacts of multi-channel customers and campaigns promotional targeting, offers designed to attract and serve different customers according on their potential and existing values. The current shoppers are frequent and loyal customers who visit 17 times on average to a Zara store per year (Page 58," Logistics and Supply Chain Management"). Their interest is retained by regularly updating and varying of stocks on shelves.
Zara does not lead the garment designed operation, but a high sensitive and flexible fashion trend follower. Zara has design staffs that glen fashion inspiration by interaction with potential customers from competitors' stores, clubs, fashion shows, university campuses and any other events or venues related to the lifestyles of the target customers.
(Page 58, "Logistics and Supply Chain Management")
Zara's single, centralised design and production center is attached to Inditex (Zara's parent company). Inditex Chief Executive Jose Maria Castellano says, "This business is all about reducing response time. In fashion, tock is like food, it goes bad quick." (Page 1, "Retail @ the speed of fashion") To maintain a healthy reaction with customers, keeping up with fashion become one of the main strategies.
The center consists of three halls - men's, women's, children's. Unlike most of the companies, especially after Global Finance Crisis has started, which try to reduce labor costs, Zara makes a point of running three parallel, but operationally distinct, product families. Separate sales, production planning, design staffs are responsible for each clothing (men, women, children) line. Any Zara store may receive three different calls from centralised headquarter in one week from a market specialist in each channel, a factory making shirts may deal simultaneously with two Zara managers, one for men's shirts and another for children's shirts. Though it is more expensive to operate three different and separate channels, the information flow for each channel is fast, direct, and unencumbered by problems in other channels - making the overall supply chain more responsive. This sort of physical and organisational proximity of all three channels allows to increase productivity, the speed of new customer desired designs and the whole design process and the quality of that process. Zara's drafting machines can produce a corresponding style or modification to specific requests within 2 to 4 weeks after a requirement is placed ( page 11,"Collaborative Customer Relationship Management: Taking CRM to the next level"). Samples will be released shortly throughout varies of medias and further manufacturing may be proceeded upon to the market reactions.
This "fast fashion" system depends on a constant exchange of information throughout every part of Zara's supply chain - from customers to store managers, from store managers to market specialists and designers, from designers to production staff, from buyers to subcontractors, from warehouse managers to distributors. We can see that Zara's organisation, performance measures, operational procedures are designed to make information transfer easy.
Corporation with suppliers efficiently is essential for reduction of production cost and maintenance of quality. Comparing with Zara's competitors Benetton who uses Asian resources, about 40% of Zara's merchandise were internally manufactured, 66% of raw materials were imported from Europe and north Africa, only a small amount of basic items (items with the broadest and least transient appeal) were outsourced to Asia (page 11,"Zara: Fast Fashion"). The global sourced strategy provides a large range of possible selection of fashion fabrics and reduces the dependence on any particular suppliers. More than 50% of the material is purchased in gray color and to be dyed in one of Inditex's facilities. (Page 59, "Logistics and Supply Chain Management") Only one week is required for this process to complete which shows the benefit of proximity and control domestically.
Domestically production cost incurs an extra of about 20% of extra cost than Asia, yet Zara does not suffer from it due to the efficient operation with the Europe manufacturer. The suppliers provide Zara flexibility to postpone the printing and dyeing procedures to adapt product lines according to updated market fashion trend. ( "Zara's Business Model, Information and Communication Technologies, and Competitive Analysis") Holding inventories costs are reduced as well because orders do not have to be placed for a season in advance and kept in the storerooms before the periodic shipment arrives as what the peers do, Zara is able to react and respond quickly to changes of customers demand (page 9,"Zara: Fast Fashion"), also reduces the risk in which when final demand gets amplified as they were transferred to the supply line, the "bullwhip effect".
The positive affects associated with the vertically integrated, shortened supply chain are obvious: Zara's advertising fee is only 0.3% of its revenue whereas the peer retailers normally spend 3% for advertisements and marketing purposes. (Paragraph 8, "Zara's Business Model, Information and Communication Technologies, and Competitive Analysis") The short cycle time requires less working intensive of new merchandise and allows Zara committing to the bulk of production line for a season later than the peers. The high frequent of shifts of displayed merchandise (about three quarters of them are changed every 3 weeks) allows regular customer-visit rates to be maintained (page 9,"Zara: Fast Fashion").
Why has no one copied Inditex's business model? One executive at Gap is said to have answered: "I would love to organise our business like Inditex, but I would have to knock the company down and rebuild it from scratch." The gulf between Inditex and its rivals is bound to shrink, however. Isabel Cavill of Planet Retail, a consultancy, notes that retailers such as Gap and George, a brand owned by Britain's Asda, are seeking to move production away from Asia and closer to home.
As Benetton addresses its problems, it will adopt elements of Inditex's model, such as the way it frequently updates its collections, says an executive close to the company. Plenty of competitors are poaching the Spanish firm's people to learn its secrets. "My main task at C&A is to replicate Inditex's obsessive focus on its products and its shops," says Mr Pavia, who has hired people from Inditex to help him. Nothing lasts forever in the world of fashion. Fortunes, like hemlines, can go down as well as up.
Zara's supply chain - advantages and disadvantages:
One of the biggest advantage of Zara is being able to react quickly to all fashion trends and supply customers latest fashion outfits as soon as in few weeks time.
Secondly, Zara never makes its production in big quantities, so if the style does not sell as good as expected, Zara does not lose much as there is not much stock to be discounted.
Thirdly, though Zara's supply chain has higher cost but it allows 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 was difficult for Zara to expand to far location as it becomes very costly to distribute such products.