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The operations function is the part of an organisation that produces and distributes products and services. It has become the focal point of various theories and debates due to the complexities introduced into the ever changing modern business environment which has evolved rapidly over the years.
With organisations producing a variety of products sometimes to different markets and industries and with the shift in operations from a labour intensive to a machine intensive environment, processes and the resources required to manage them have become quite intricate. It is therefore pertinent to continuously evaluate how well they are working and any changes necessary to ensure that the ultimate output results in profitability for the organisation.
This report examines the difference between the processes in a manufacturing and a service environment and the ability of two firms, Tate & Lyle and Zara to gain a competitive advantage by developing the right strategies and implementing appropriate processes in their various industries.
Part B covers an analysis of various management theories and how they are applied in the clothing company Zara which is arguably one of the most prosperous apparel retail chains in the world presently with an excellent and effective operations system that does not necessarily conform to the generally accepted theories propagated by management experts yet still seems to produce an overall successful result.
Part C evaluates Zara's operational mix and its impact on competitive advantage, innovation and sustainability.
Part A: A Comparative Analysis of the Companies' Transformation Processes
2.1 Description of Companies
2.1.1 Tate & Lyle
Tate & Lyle is a manufacturing company which provides ingredients and solutions to the food, beverage and other industries. Tate & Lyle was founded in the UK in 1921 and currently operates more than 30 production facilities round the world.
The company's primary focus is transforming raw materials into speciality food ingredients, bulk ingredients and sugars. Tate & Lyle recently developed an innovative fibre called PROMITORâ„¢, a soluble corn fibre in a liquid and dry form which it has used to produce a new high fibre juice and a chocolate cookie. (This report will focus on the speciality food and ingredients processes).
Tate & Lyle provides for four different markets, food and beverage, industrial, animal feed and pharmaceutical and personal care. Their customer base includes many of the world's major food, beverage and industrial companies and their main competitors are Archer Daniels Midland Company (ADM), Corn Products International and Cargill.
Zara is a retail chain of high fashion boutique clothing stores which originated from Spain and now has more than 400 retail stores in 25 countries primarily in Europe but is also currently expanding to Canada. Zara is part of the Inditex group which also owns other businesses within the clothing industry. Some of the Zara stores are operated as joint ventures and franchises.
Zara focuses on offering the latest style in a high quality product at a good price and its main competitors are Hennes & Mauritz (H&M) and Gap. Zara's target market is men and women from teens to adults and the products offered are broadly and deeply assorted.
Operations/ Transformation Processes for Tate & Lyle and Zara
2.2.1 Competitive Priorities
The two major types of processes are service and manufacturing. The key differences between the two processes lie in the nature of their output and the degree of customer contact. Manufacturing processes convert materials into physical goods called products while services basically have an intangible output, the quality of which is difficult to measure.
Tate & Lyle
Both companies are similar as they compete on flexibility, variety, constant quality, development speed and innovation. However unlike Tate & Lyle, Zara does not focus on top quality whilst for Tate & Lyle low cost is not achievable because of the high research and development costs expended to develop new products or enhance existing ones.
Zara maintains a low cost by avoiding outsourcing (where possible) and producing all its merchandise in its state of the art factory in Spain. Consequently Zara is able to design, produce and deliver its products to the stores in less than two weeks in contrast to competitors such as GAP and H&M which require between five weeks and five months lead time to fill orders from its retail operations. In addition, owning its in-house production gives Zara the flexibility of variety, quantity and frequency of the new styles they produce.
Tate & Lyle is focusing on innovation through the production of its recently launched corn fibre products, (see Appendix 1 (a) for details of this process) as well as top quality, variety of products and flexibility as competitive priorities.
Zara's rapid growth is attributed to several factors in addition to the low cost it achieves such as development speed, variety and flexibility (see Appendix 1 (b) for details of the process).
2.2.2 Corporate Strategy through Product Leadership
Zara seeks to gain a competitive advantage through a range of corporate strategies. Product leadership is achieved by the avoidance of outsourcing which means that almost half of production is executed in-house. Manufacture of the fabrics, dyeing and cutting are all executed in-house or by the group's owned companies, giving Zara the opportunity to control the quality of the output and produce a variety of new designs quicker than any of its competitors.
Tate & Lyle on the other hand appears to be losing its position as a world leader in recent times. This is due to a number of strategic and operational challenges the company faces including operating in a number of different markets with different characteristics. The sugar production is not as profitable as it once was as a result of a decline in sugar prices and Tate & Lyle are re-strategising to shift their focus to the speciality products which are currently generating huge profits. Huge expenditure on research and marketing to develop new products or enhance existing ones make it difficult to maintain their position as cost leaders, but it is hoped that the launch of their new products developed from PROMITOR will give them a competitive advantage through product leadership and restore lost glories formerly achieved by another previously successful product, SPLENDA.
Part B: Further Analysis of Zara through various management theories.
3.1 Capacity Planning & the Theory of Constraints
It is crucial that the management of any organisation ensures that the capacity of production can meet and exceed the demand for the goods produced. Where a capacity deficiency is established, prompt decisions are required to ensure that capacity is increased and opportunities for growth and higher profits are not missed.
According to Eli Goldratt, a renowned business systems analyst, one of the most important impediments to the successful management of capacity, is the bottleneck. He developed the theory of constraints which is defined by Lee Krajewski (2009, p.284), as "a systematic management approach that focuses on actively managing those constraints that impede a firm's progress toward its goal of maximizing profits and effectively using its resources".
The operational system of the clothing company Zara, demonstrates how the removal of bottlenecks from the system can improve the work flow and increase the firm's ability to respond rapidly to the customer's needs thereby giving the firm a competitive advantage.
Zara operates in an industry where a fast response to the customer's needs is key and therefore controlling notorious bottlenecks along the supply chain is crucial. Zara can produce designs within two weeks from its appearance on the runway while competitors will take 2 - 6 months to achieve the same objective. Zara commits to only 50/60% of its production in advance of the season while most firms in the industry will commit as much of 80/90% (Andrew Pearson n.d). This gives Zara more flexibility in changing or introducing new unplanned lines. Zara is therefore in control of its capacity management and deliberately leaves extra capacity for flexibility and sudden requirements.
Zara has managed to achieve these feats by removing most of the bottlenecks from the system as well as planning long-term for extra capacity. Zara is a large investor in a dye and finishing plant which is a well known bottleneck in the industry. This enables Zara to oversee and control the dyeing process. Another trouble spot is sewing and even though Zara subcontracts part of this process, the bulk of the cutting (a crucial process that determines the fit) is executed in-house, again to ensure control and eliminate the bottleneck. The manufacturing processes which are outsourced are mostly in countries close to Spain to ensure a quick turnaround and a strong relationship is maintained with contractors and suppliers.
Most importantly however, Zara has an excellent communication system through early investment in information technology. Poor communication is often the culprit of bottlenecks and Zara removed this bottleneck ensuring that retail managers are in touch with designers who are also communicating with market specialists.
3.2 Inventory Management & the JIT System
Inventory management is the planning and controlling of inventories in order to meet the competitive priorities of the organization. It is essential for realizing the full potential of any supply chain. The aim is to have the right amount for the business to run effectively without wastage and without stock outs.
In determining a suitable inventory control system, the nature of the demands imposed on the inventory items is crucial. In the retail industry which Zara operates in, demand is determined by market conditions i.e. external factors also known as independent demand items.
One of the most popular systems in the modern business environment currently is the JIT system which is designed to eliminate waste by cutting unnecessary capacity and removing any non-value added activities in operations. The ultimate aim is to produce quality goods through continuous improvement to the operations and avoid stock outs through strong and close relationships with suppliers.
Zara has an inventory management system quite similar to a JIT process, producing small determined quantities which may or may not satisfy customer demand. It even appears that Zara deliberately produces insufficient quantities so as to create an aura of exclusivity around their designs.
Zara's main focus is to respond rapidly to customer's needs rather than to satisfy all customers. Thus Zara's system, unlike other retailers and contradictory to general inventory management theories, is not designed to avoid stock outs but to actively encourage it.
However this scarcity system appears to work for Zara because customers on average visit the store 17 times a year compared to other similar stores which are visited 3 times a year. Furthermore Zara has a new product failure rate of just 1% in comparison to the industry average of 10% (Pearson, n.d.). Customers visit the stores repeatedly to avoid missing out on new fashions which they feel will not be available for an extended period and they tend to purchase immediately on most visits.
3.3 Supply Chain Design and Outsourcing
William Stevenson (2008, p) describes the supply chain design as a "sequence that begins with basic suppliers of raw material and extends all the way to the final customer" hence it is key to an operation's delivery performance.
There are two distinct designs used for competitive advantage, efficient and responsive supply chains. The nature of demand for the firm's product or services will determine the supply chain strategy. Efficient supply chains are suitable for environments where demand is predictable and prices are crucial to winning an order. A responsive supply chain on the other hand is designed to react quickly in order to hedge against uncertainties in demand. They work best when firms offer a great variety of services or products and demand predictability is low.
Zara's supply chain design is responsive hence their competitive priorities are development speed, fast delivery times, customization and volume flexibility. In Zara's case however, the response is not to specific customer demands but to the requirements of the market determined either through fashion shows or designs identified by store managers, designers and other market research sources. How effective is their supply chain design though?
Hau L. Lee (2004), in "The Triple A Supply Chain", stated that "the best supply chains are not just fast and cost effective, they are also agile (react speedily to sudden changes in demand and supply), adaptable (over a period of time as market structures and strategies evolve) and they ensure that all their companies' interests stay aligned with the interests of all the firms in the supply network". Lee found in his research, that companies whose supply chains became more efficient and cost effective without the three additional qualities did not gain a sustainable advantage over their rivals. In fact their performance steadily deteriorated and surveys showed that consumer satisfaction with product availability fell sharply during the same period. Lee's argument may justify Zara's successful supply chain design. Zara's supply chain is agile and able to create sketches and order fabrics as soon as designers spot possible trends. This gives them a head start over competitors as fabric suppliers require long lead times.
Lee further suggests that adaptability means that the company does not need to stick to the same supply networks but must have a system that can adapt and adjust to any change in supply networks. This is not applicable to Zara's as their source of competitive advantage has been identified as their ability to control their networks, either through investments or close relationships and they tend to stick to the same suppliers. They have a variety of firms all located in the same place who are responsible for their sewing function and any of these firms could be used for particular jobs. However all those companies are available for their use in the event that their services are required.
Finally Lee states that there must be alignment between the firm and other firms in the supply network and if their interests differ, the firm's actions will not maximise the chain's performance. Zara has achieved alignment with the other companies in its supply chain hence its ability to respond rapidly to market demands.
Zara's supply chain is a combination of vertical integration and outsourcing. Unlike most other apparel retailers, Zara does not however outsource to low cost Asian countries but mostly to neighbouring European countries such as Spain and Portugal which is a more expensive option. The factories utilised, employ teenage girls, mothers and grandmothers seeking extra wages and pay almost half the average wage (Dutta, D. 2002). In this way, Zara has the advantage of producing in a politically stable environment, at the same time as obtaining relatively cheap labour, avoiding the bad publicity that is associated with sweat shops in Asia and benefitting from the state- of- the- art technology based distribution system.
The advantage of cost that is lost through outsourcing in Europe is compensated by the advantage of being able to produce new fashions quickly and at relatively low prices.
3.4 Performance Measures and Balanced Scorecard
One of the objectives of operations and process management is performance improvement. In order to determine whether the performance of an organisation is improving, certain performance measures should be established. Slack et al ( p.419) stated that performance measurement concerns three generic issues i.e. what factors to include as a performance measure, which are the most important performance measures and what detailed measures to use. The main factors of performance measurement that should be included are speed, dependability, flexibility, quality and cost. The most important performance measure to use will depend on the organisation's strategy and the measures to include will be a further breakdown of the five key performance objectives.
It has been established that performance measures should include long term and short term, external and internal, soft and hard measures. The balanced scorecard approach developed by Kaplan and Norton achieves this whilst retaining the traditional financial measures which outline historical events. It also includes operational measures of customer satisfaction, internal processes, innovation and other improvement activities.
Zara uses a balanced scorecard approach to evaluate its performance. Critical performance measures include the precision of store managers to forecast their sales (which is communicated through the ordering process and sales growth) and rate of improvement of daily sales from year to year. Financial measures include return on investment (ROI), return on average equity (ROE) etc. and performance is benchmarked against the main competitor H&M.
3.5 Total Quality Management (TQM) and the Three Principles
Quality refers to the "ability of a product or service to consistently meet or exceed customer expectations". (William J. Stevenson). Total quality management (TQM) is defined as "a management philosophy and strategy designed to involve all members of an organisation in the process and responsibility for producing quality products and services". It was originally based on the ideas of W. Deming et al and was first associated with the Toyota production system. TQM stresses three principles for achieving high levels of process performance and quality. The three principles are related to customer satisfaction, employee involvement and continuous improvement.
Customer satisfaction is normally defined by quality which could mean any number of things to the customer depending on the products in question and the particular expectations the customer has of it. The main tests for quality include, value, fitness for use, support and psychological impressions. Zara does not necessarily produce "high quality" clothing; hence the prices are not "top of the range". However at the same time a customer would not expect to purchase a dress from Zara that would fall apart in a couple of weeks. The high number of store visits for subsequent purchases are evidence that Zara clearly meets the expectations of its customers and hence it achieves customer satisfaction.
Employee involvement is an important element of TQM. It is crucial that the concept of the importance of customers (internal and external) is communicated to all staff. In a TQM environment everyone must be involved in the quality control process and committed to the success of the organisation. Zara's organisational structure is flat and a great deal of emphasis is placed on training the sales force and internal promotion. Store employee remuneration is based on a combination of salary and bonus derived from overall store sales which will further motivate the staff and improves the team spirit. The store managers are also very involved in the decision making process and in addition to being responsible for the profit or loss of their individual stores, are also required to spot current fashion designs and relay that information to head office to consider and incorporate into new designs. The level of involvement and responsibility would give the managers a sense of importance and increase their motivation.
Continuous improvement is based on the Japanese concept, Kaizen and is the philosophy of continuously seeking ways to improve the system. The concept involves the identification of best practice benchmarks and encouraging the employees to take responsibility or ownership of the process of achieving it. The general idea is that any part of the process can be improved and that the people most closely linked with it are in the best position to identify the required changes that should be made and finally that action should be prompt and pre-emptive.
Zara ensures continuous improvement by giving managers and other staff the responsibility of communicating customer preferences and trends seen elsewhere including night clubs, offices, runway shows, schools etc. The new ideas are communicated to the designers through hand held computers and phone calls and the designers meet regularly to process them and translate them into interesting designs.
4. Part C: Evaluation of the Operational Mix
Zara's success and constant growth is testimony to the fact that the mix of the factors above is appropriate and effective. Zara's mix includes product leadership, removal of constraints, the JIT system, the balanced scorecard (ROI and ROA) and an application of the three principles.
4.1 Competitive Advantage
Zara has successfully removed several of the constraints typical in the apparel industry which makes it possible for it to achieve product excellence and keep expenditure low through its JIT system. Furthermore its focus on involving all the employees from managers, designers to market specialists and even its sales staff in the process of continuous improvement and delivery of its variety of designs has given it a competitive advantage over other firms in the industry.
In terms of innovation, Zara does not actually set the trends and has very few original designs. The bulk of their releases are based on styles copied from other designers and from fashion shows with some modifications. However their system of communicating and developing these designs is quite unique and innovative. The managers observe and make notes of styles in universities, discos and other venues which are subsequently communicated to designers who consult with the market specialists and develop designs. The ability to produce and distribute these designs within a period of two weeks to various stores is as a result of their innovative and unique mix.
In current times of rising costs in Europe, Zara's European outsourcing strategy may not be sustainable. Indeed they have focused on European countries like Spain and Portugal which have low cost factories in comparison to other parts of Europe and have so far been able to offset the higher cost of labour with the advantage of quick and frequent releases. However with the current world recession and the fact that fashion is no longer a priority or affordable luxury for most people, the number of sales may drop making it difficult to justify the higher cost of labour.
Most of Zara's operational strategies defy current conventional wisdom about how supply chains should be run. Zara does not push factories to maximise output and in fact intentionally leaves extra capacity. It does not chase economies of scale but produces in small batches. Instead of relying on outside partners, the company manages all design, warehousing, distribution and logistics functions itself and shuns advertising completely. Even the operational procedures differ from the norm as Zara holds retail stores to a rigid timetable for placing orders and receiving stock, puts price tags on all items before they are shipped out rather than at the store and tolerates, even encourages occasional stock outs to induce a climate of scarcity which ensures that most of its goods are sold at full price. Despite all this, Zara is a product leader in the industry and a step ahead of its competitors which prompted Daniel Piette, director of LVMH to describe Zara as "possibly the most innovative and devastating retailers in the world!".