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The following report was prepared by Lina Gasiuniene and Yu. The report analyses Zara's which is big Spanish retailer, supply chain strategy, how it works, what are main advantages and disadvantages of discussed supply chain.
In this report we aim to understand the supply chain practices followed by the fast fashion company Zara. The report takes into consideration the profile of the company and the characteristics of fashion industry, the time cycle of the products of Zara, what it offers to its customers and also the customerÂ segmentation has been considered.
COMPANY OPERATIONS AND PROFILE
Zara is a Spanish fashion clothing manufacturer and retailer, formed in the 1970's It is known that only two weeks are required for Zara to complete the development and shipment of a new product to its stores, which outweighs the average of fashion industry of six months, thanks to the collaborative relationship with customers and suppliers.
Zara mainly targets on young and urban female customers and acceptable prices are offered (Christopher p58) 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 out that the needed size is not available. Ghemawat and Nueno in their study (p13 2006) noticed that 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" because of the rapid turnover environment. Customer relationship between Zara and shoppers is then strengthened by, instead of offering VIP services and discounts, showing a sense of scarcity by displaying unfilled shelves, limited offer notes on certain items and deliberate undersupply impression to encourage customers to run to the counter
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 (Ferdows Michael Machuca 2005) 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 in sales and profit amounts.
Zara is not a world leader in cloth designs, but it is a high sensitive and flexible fashion trend follower. Christopher M. states that 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. Zara's 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.
ORIGIN OF ZARA'S SUPPLY CHAIN
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." (Dutta 2006) To maintain a healthy reaction with customers, keeping up with fashion has become one of the main strategies of Zara.
In the first half of the 1990s, Zara's supply chain consisted of problems of inconsistence, imbalances and market saturation for three of the store chains of Zara, plus the inefficient 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. The supply chain was restructured in 1990s by lowering the levels of inventories and reducing the number of suppliers.50% of the production was then shifted back to the domestic manufacturing facilities to compress cycle times, seasonal collections were cut down in order to allow reorders of well selling productsl in a season's 3rd month (Ghemawat Nueno 2006).
Market-driven supply chain (linking customer value to supply chain strategy) was then applied instead of the traditional supply chain 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. Kracklauer, Mills, Seifert (2003) suggest that Zara's the "value net" includes: digital customer input provided by Zara stores, Zara designers' sketch pads of the required styles, globally sourced textiles , 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(Christopher). Their interest is retained by regularly updating and varying of stocks on shelves.
The design and production 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 (Ferdows Michael Machuca 2005) Though it is more expensive to operate three different and separate channels, the information flow for each channel is fast, direct, and not disturbed by problems in other channels which makes 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. According to Kracklauer, Mills, Seifert (2003) Zara's drafting machines can produce a corresponding style or modification to specific requests within 2 to 4 weeks after a requirement is placed and samples would 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.
Efficient communication between the company and suppliers is essential in order to reduce production cost and quality maintenance. Comparing with Zara's competitor Benetton which uses Asian resources, about 40% of Zara's merchandise are internally manufactured, 66% of raw materials are imported from Europe and north Africa, and only a small amount of basic items (items with the broadest and least transient appeal) are outsourced from Asia (Ghemawat Nueno 2006)). The global sourced strategy provides a large range of possible selection of fashion fabrics and reduces the dependence on any particular suppliers. More than half of the material is purchased in gray color and is dyed in one of Inditex's facilities. Only one week is required for this process to complete which shows the benefit of proximity and domestic control(Christopher).
Domestic production incures extra cost of aproximatelly 20% comparing if the garments were producedin Asia, yet Zara does not really 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 (Dutta 2006). 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 and Zara is able to react and respond quickly to changes of customer demands which alsoreduces the risk when final demand gets amplified as they are fulfilled quickly by transferring new designs to the supply line.
Two big questions come to our minds when researching Zara's supply chain: Could other companies apply the same supply chain model and 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 Economist 2012) But the difference between Inditex and its rivals should shrink. 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 (The Economist 2012).
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 positive effects 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. 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 (Ghemawat Nueno 2006).
The biggest disadvantage with Zara's supply chain 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.