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Inditex is a global, Spanish, retailer group who designs, manufactures, sells garments for women, men, children in addition to, its product range include accessories for women and footwear. Zara is the premier brand of the Inditex SA of the six retailers which it owns; They are, Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho.
What makes Inditex so tasty? Well, for a start it seems to show higher profit marjins than comparable retailers, and secondly the trend seemed sustainable. And the secret behind theie profitability is buy low, sell high. Buy on credit, sell on cash.
The clothesÂ label Zara have one of the fastest turn around times and one of the most innovative supply chain management systems in the world. Its not exaclty new technolgoy but they are using existing technology in more innovative and effecitive ways. Their whole system is based on using technolgy to communicate faster and better than anybody else.
Intidex Chief Executive Jose Maria Castellano is saying " This business is all about reducing responce time. In fashion, stock is like food. It goes bad quick."
Zara, which contributes around 80 per cent of group sales and concentrates on three winning formulates which are
Short Lead Time - More fashionable Clothes
Lower Quantities - Scarce Supply
More styles - More choice
While the most retailers try to forecast what and how much its customers may buy in the future, Zara has already moving in steps with its customer. Zara ensure this advantage in the fashion market through a very large design team based in A Coruna in North West Spain. They identifying the prevalent fashion trends and desingning the styles to match the trends. They do this through constant research, by e mails and and phone calls from stores to head offices. The key factor is Zara can react to the report immediately and produce in 2 -4 weeks. This is the secret behind its short supply chain lead times.
To reduce risks, by reducing the quantity manufactured in each style, Zara not only reduces its exposure to any single product , but also creates an artificial scarcity. The added benefit of lower quantities is that if a style doesn't work well, there is not much to be disposed when the season- end sale does happen. The result is that Zara discounts only about 18 per cent of its products, roughly half the level of competitors.
Furthermore, instead of more quantities per style, Zara produces more styles, roughly 12,000 a year. As a result of this, even if a style sells out very quickly, there are new styles already waiting to take up the space. Zara also offers more choices in current fashions rather than its competitors. Stock turnover is really fast but at the same time you get a chance of being a little bit exclusive.
How does Zara achieve to produce small quantities of numerous of styles in short time. Zara's success is as much a result of its history, as its intuitive business strategy.
Ownership and Control of Production
Zara follows a structure that is more closely controlled than most other retailers . While most other retailers completely outsource their production to factories around the world, many of them in low cost Asian countries, it is estimated that 80 per cent of Zara's production is carried out in Europe . In fact almost half of its production is in owned or closely-controlled facilities in the Galicia region of Spain near headquarters which this gives Zara great amount of flexibility and ability to control directly. On the other hand Zara has to contend with higher people costs, averaging 17-20 times the costs in Asia.
Design and product development is a highly people intensive too. Every Month 1,000 new styles is managed by a design and development team of over 200 people . In addition , Zara really good at market searching to make efficient product development. They combine information from visiting discos, university campuses and other venues to observe what young fashion leaders wearing , from the sales report and daily feedback from stores. This gives idea about background of the success factors of Zara. This has meant a significant investment in information technology and communication infrastructure to keep trend information up to date to the people making the product and business decisions. Through super fast garment design and production process , customers more likely to visit its shops regularly to see new goods.
Garment styling for Zara based on the store demand, it starts from the e mail or phone call received from the stores, and Zara's designers and managers sit down and conceptualize what the garment will look like, what fabric it will be made out of, what it will cost and at what price it will sell. Communication and information technology is at the heart of Zara's business. Four critical information provides its speed include:
Close watch on trends
The secret , the information technology they use and the communication between the design team and shop managers. Daily ,designers are in contact with store managers, getting feedback which commodities are most in demand and which are not.
Retail analyst Richard Perks, of Mintel, says what Zara does so successfully is remarkable.
"They've got to get the design. They've got to engineer it for low-cost production. They've got to take the gray fabric and print it. They've go to get it out to their outworkers to be made up and they've got to ship it from Galicia right across Europe. That is an unbelievable achievement." Thursday, July 22, 2004 http://edition.cnn.com/2004/TECH/07/19/spain.zara/index.html
Zara does not afraid of pulling commodities from the shelves if they are not selling. And also only a few items on display even though stores are large. When a customer find a garment which fit to him, if he didn't buy, thought that they would lose their chance. Zara's fast fashion system depends on particularly apply the information exchange in supply chance successfully. From designers to product staff , from store managers to market specialist, from customers to store managers and so on. Mostly companies bog down with bureaucrace, even Zara's offices, organization and performance measures designed to make information flow easy.
IT Infrastructure is the backbone of the Zara's business which provides it to ship the garments quickly from the distribution centers to the stores.
While they do use a number of popular supply chain practices like outsourcing, global procurement, third-party logistics, just-in-time manufacturing, continuous replenishment, they do many things that goes against conventional wisdom.Â However, it has been very successful for them. But one of the biggest problems of any supply chain is minimizing the "bull-whip" effect. Communication and simplicity help reduce the effects of it. Communication is essential in all supply chains
Most companies in the fashion industry use economies-of-scale which favour larger, infrequent orders and shipments.Â The other approach, which Zara uses, is minimizing inventory costs which favour smaller quantities and more frequent shipments.Â http://www.coursework.info/University/Business_and_Administrative_studies/Management_Studies/Zara_case_L863458.html
José María Castellano, CEO of Inditex stated that "the fashion world is in constant flux and is driven not by supply but by customer demand. We need to give consumers what they want, and if I go to South America or Asia to make clothes, I simply can't move fast enough." This highlights the importants of a rapid responce to the market demands to Zara's operation. http://www.123helpme.com/view.asp?id=97642
It has provided significant competitive advantage to Zara especially in the areas of product development, strategic partnerships and cost of production, advertising and marketing, and information technology infrastructure.
The process of obtaining market information and relaying it to design and production teams expedites product development by shortening the throughput time of a product to 3-4 weeks from design to distribution.
0.3% of Zara's total revenues has been spending on advertising and marketing. This feature considerably less than their competitors who averagely spend 3-4% of their total revenues on similar expenditures.
Zara's secret, according to CEO Jose Castellano is its reliance on communication, and the way it uses existing technology to take control of almost every aspect of design, production and distribution. "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, and so on."
Zara's business development
Zara's approach to product development is relaying on market research and store trends back to their headquarters in La Coruña. At headquarters there are teams who who consider to plan, design and produce effectively all Zara's product. Design team which consist of 200 people, all produce approximately 14,000 new styles per year. All this process from design to distribution takes 3-4 weeks
Strategic Partnerships and Cost of Production
Zara design and cuts its fabrics in-house and obtains fabrics in four colours to keep cost of low. While its competitors is lack of flexibility in changing orders, Zara by produce only four colours as well as postpone dyeing and printing designs until close up the fabricate.
Advertising and Marketing
Zara uses location, store layout, and product life cycles to act as their marketing tool to consumers. Brand recognition is essential element of Zara's competitive advantage in the market.
Information and Communication Technologies
Zara's information and communication technologies process are considerably different from its competitors. Whilst Zara's IT and IT employees expenditure are less than 0.5 % of total revenue, its competitors who spend approximately 2% of total revenue on IT department. Zara's hybrid model which is the method of using human intelligence and IT applications provide information flow from stores to headquarters. For instance, managers use handheld devices to send information such as customer feedbacks and new demands. This method helps in well managed inventories in addition to respond changes in consumer demand
Key Decision Makers
Store managers and the commercials at the Headquarters are the decision makers in the ordering process. The store manager's manually check the quantities of garments twice a week. After that this information send to the Headquarters.
In addition to store managers have autonomy for ordering the garments. However there are several factors which plays a role on store mangers decisions such as regional sales patterns, garment availability and forecasts. Thus flow of information should be effective between Headquarters and distribution centers. In each store managers should separate the offers into segments and give this authority to different employees to use handheld devices. The store managers has full control over the orders although initial decision lays in the hand of the Headquarters.
Zara's production network based on vertically integrated manufacturing operations. Production originate at around La Coruña followed by small workshops in Galicia and northern Portugal. After going through the last progress at the Zara facilities, completed garments are shipped to the Distribution Centers. Therefore this network liable carrying out the request of the Headquarters.
Since the entire supply chain relies on the subjective orders that are placed by the store managers, the accuracy of this information is elemental to Zara's operations. This so-called 'theoretical inventory' is required in order to keep the supply chain robust without leading to excess supply. In the current system, store managers' order information is taken to be sacred, and these figures are subsequently used for shipment and production.
Store managers has to assess inventory manually. This is substantially slow method. Instead of wasting time to roam the shop twice a week, store managers would focus on customers demand and employees. Another point is, store managers are not clear how much inventory is at the distribution centers. It may cause trouble due to lack of information from the distribution centers. For instance, if store managers assure for a particular sold out garment to a customer which will arrive in two days, could damage to Zara's brand name.
Time to Change to a new Operating System?
Zara had been using DOS operating system which is considered to be out of date . Even though there are still a few companies using it. changing an OS in 531 shops would not be without risks either. From a strategic perspective, although Zara's advantage over its competitors is not so mush a result of its IT leverage, the sustainability of its competitive edge might be at risk due to a lack in IT investment. This is the foremost problem with its current IT situation. Other competitors could in due time develop automated solutions in their operations to such an extent that Zara's original speed to market might be outdone. Coming back to a more resource-based view, a new OS would enable the installation of modern software applications which could allow Zara to develop its capabilities.
Zara using POS terminals based on an highly developed operating system would open doors for more sophisticated software needs and opportunities. This makes zara to reconsider keeping an in-house software development department
There are a large amount of reasons why Zara can consider outsourcing software development, First of all, outsourcing IT could provide cost reduction. On the other hand that if Zara could find an external vendor that reduces ist production and transaction cost, it would be the most favorable option. Therefore Zara would not have to worry about the in house staff with specific experience and skills for certain software pieces. Thus, it would cost less coordinating costs and would not have to use monitor activities in house.
It is best for Zara to maintain software development in-house to play a role in value chain. In IT depertmant of Zara consist of highly motivated workers which allows job satisfaction and productivity.
Software developers are involved in a creative process as opposed to the IT staff needed to only monitor outsourced activities. The benefits from outsourcing may not be sufficient to cover the costs that would be incurred as a result of the complexity of the product and asset specificity, despite the coordination costs that are involved in internalizing IT suppliers. Zara's core competence is at stake, and it is believed that by retaining a internal designer would be the best way to preserve it, provided the supplier can meet Zara's global needs. Similarly for its POS terminals, although Zara has slipped into to a hold up position it could prevent this in future by maintaining a more stringent company IT program. Although the chance of a hold up exists, the downside to having multiple suppliers could potentially threaten its speed. Having a single supplier for the POS terminals will lead to an accumulated knowledge in customization of equipment and services, and result in closer match to Zara's preferences. Zara needs to ensure a continuous link between overall corporate strategy and the IT strategy. For that reason it is deemed important that Zara retain bilateral agreements with its POS suppliers.