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Zara is a fashion brand from the house of Inditex SA, of Spain, which is one of the leading fashion retailers of the world. Inditex is a global specialty retailer that designs, manufactures, and sells apparel, footwear, and accessories for women, men and children through its chains around the world. Zara is the largest and most internationalized of the six retailers that Inditex owns: (Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho). By the end of 2001, Zara operated 507 stores around the world, including Spain. Zara started its retail operations for the in 1975, with its first store opened at La Coruna in Galicia, Spain. Presently La Coruna Galicia is the head office of Zara. Over the last five years Zara's sales has increased at a steady rate of 25% and Zara as a brand contributes to about 80% of the company's total profits.
There are questions that put forward the need for this research to be undertaken. Some of these questions would be that when most fashion retailers reported negative annual profits due to the global economic recession in the year 2008, how has Zara been able to continuously increase its profitability? What are the marketing strategies employed by Zara? How scalable is Zara's business transformation model and finally what does Zara follow to maintain its high market share and at the same time compete with other fashion retailers such as H&M and Gap? Hence to achieve this Zara has an effective vertically integrated supply chain which is very closely integrated with the customer. It is from here that the latest trends in fashion are identified and the garments are produced accordingly and delivered to stores within a period of 2 weeks. In this report we also have look on the comparative study of ZARA and Benetton in term of their competitive priorities and corporate strategy to meet customer's need.
1.2 COMPETITIVE PRIORITIES OF ZARA
As Zara is a world successful cloth retailing company has presence in more than 45 countries in the world. The identifiable competitive priorities on which Zara has built up its successful business model are as follows:
(i) Speed of Production - Zara has the ability to transform a fashion concept and place finish products in the stores within a period of 2 weeks successfully. Zara has dedicated teams at stores which allow the retailer to get designer influenced products at a very rapid pace within the stores.
(ii) Variation of Production - Zara's value chain comprises of members who dedicated work closely with customers in spotting new trends of demand in fashion. They have the ability to launch new trends, designs and variation of products in short span of time.
(iii) Cost Leadership - Zara produces fashionable range of products at an affordable pricing. When compared to other competitors in the same strategic group, Zara's products are priced lower than GAP, Benetton and H&M. The most important reasons to achieve consistent cost leadership in the modern market due to they keep a very low level of inventory in stores. Their efficient distribution system allows them to get products in the store just in time. As a result of which Zara has a high annual inventory turnover compare to their competitor in the market.
1.3 MARKETING STRATEGY OF ZARA
Zara is an international brand with the aim offering latest fashion in the medium quality at affordable prices. Zara follow just-in time manufacturing, vertical integration of design, low inventory system in their store. Zara known for it's internally manufactures live collection, which accounts for almost half of Zara production. About 11000 new item are launched every year (Ghemawat and Nueno. 2003). Zara's marketing strategy includes the following;
Expand market internationally - Zara has its presence in more 45 countries including Europe, America, middle east/Africa and Asia. The main reason to expand the market internationally is the limited market growth opportunities of Spain market. Zara get advantage to expand market after get entry in European Union in 1986, after that they open their store in New York (1989), Paris (1990) and Milan (2001) was justified the status reasons (Castellano, 2002; Ortega and Blanco, 2004). These three cites consider as fashion capital in whole over the world.
Target market selection - Zara's target market is very broad because they do not define their target by segmenting different ages and different lifestyles as traditional retailers do. It's mainly target market is a young educated people change their fashion quickly. Hence, fashion has become more globally standardized and Zara uses this to their advantage by offering the latest in apparel.
Location of store - Zara pride itself on its location (mainly on the best high street in the big cities for instance oxford street London). As Zara is famous worldwide they opposed to spend on expensive TV advertisement and newspaper. Zara spent money to provide current and efficient technology in their store to meet with the consumer changing demand in the market. Zara only placed advertisement only to announce their new locations of store and two promotes it's twice a year sales, they only spend .03% of their total revenue.
Branding - Zara's branding has played a vital role to expand internationally. Zara has made itself from a local Spanish brand to a global recognize brand. Zara brand was ranked 73rd in the list of the world's100 top brands 2006 by inter brand. The firm declines to use any kind of identification with its origin (Ghemawat and Nueno, 2003; Monllor, 2001). The company uses the umbrella branding strategy to attract consumer by its unique brand names for instance Zara woman, Zara basic and Zara Trafaluc. Hence Zara marketing strategy is based on the design, quality and price.
1.4 A COMPARATIVE STUDY OF ZARA WITH BENETTON
(i) Introduction to Benetton - The Benetton brand was established in the year 1965 by Luciano Benetton as an Italian fashion brand that empathize brightly coloured knitwear's and Benetton is also world recognise brand and its famous by the name of united colour of Benetton. The Benetton group has 150 million garments including clothes and accessories and foot wear and Benetton is known for its sponsorship in the sport industry and its proactive and innovative united color campaign.
(ii) COMPETITIVE PRIORITIES OF BENETTON
Continuous Improvement in the Production Process - Benetton's production system had undergone a major transformation in the year 2005. It evolved from an organization based on divisions such as wool and cotton, to a structure based on service units such as planning and quality control. The new production system is flexible, and it integrates all the stake holders in the value chain. Thus it helps in reducing product delivery time and it also optimizes the quality and service levels.
Business process unit's - They have three business processes units includes Logistics unit, quality checking unit and customer service unit. The customer service unit plays a vital role in analyzing customer demands and level of satisfaction. The quality checking unit keeps a track of the level of confirmation of specification of each design. Tagging and labeling of the units of garments are also taken care by them. The Logistics team is by far the most important team in firm. Hong Kong is now hub for Benetton that has become fully operational along with the European hub and the US hub. Benetton's logistic system has now transformed from a centralized system to being a satellite control system. This facilitates individual hubs to concentrate on their particular regions of distribution and supply the appropriate number of units and the appropriate design at the right time. Since 2005 till date the stores have thus reported low levels of inventory and high stock turnover rate.
Hiring young Employees - Benetton now looks at hiring young individuals who take the challenge of a fast paced environment. In 2005 a new project called the "Wanna Sell?" was introduced as a part of the training and development program. In this project young and enthusiastic individuals were chosen and put into teams to attend sales workshops. During the 2008 economic meltdown Benetton continued to provide their staffs with incentives and thereby encouraging then to work with greater passion.
1.5 MARKETING STRATEGY OF BENETTON
Benetton is global recognize clothing brand and Benetton group enlarged its brand portfolio expanding product offering with Sisley brand a new target to its consumer base. They employed marketing strategy to meet consumer needs are following;
Advertising Campaign - In the marketing strategy of Benetton includes the advertisement campaign to centered social issue and current worldwide issue such as AIDS, peace, and war. For instance in 1993 Benetton was part of clothing redistribution project and assisted by international Red Cross. In 1994 Luciano Benetton appeared nude in AIDS advertisement and the advertisement showing "HIV positive "tattooed on person arm. In 1998 a human right campaign was initiated as result of united nation proposal to launch a world communication exercise.
Image Advertisement - Image advertising has evolved into a form of lifestyle marketing. The fashion industry targets its image-oriented advertising into a brand than can match every type of lifestyle, such as Calvin Klein is hip, Ralph Lauren is rich.
Sport and Event Sponsorship - Benetton brand highly indulge in sponsorship or sport event. They famous in the world of sport from skating, tennis and snowboarding, they also have design sportswear clothing, sport equipment to meet technical demand of various athletes teams. Benetton also sponsors sporting team such as basketball rugby, volleyball, motorcycle and formula one team as well.
2 CRITICAL ANALYSES AND COMPARISON OPERATIONS MANAGEMENT OF ZARA AND BENETTON
Operation management is play a vital role to meet consumer needs, as Zara is clothing retailing company there are appropriates framework, concept and principal includes supply chain design, inventory management and total quality management.
2.1 SUPPLY CHAIN DESIGN VIEW OF ZARA
A supply chain view is a system of organisation, people, technology, activities, information and resources involved in moving a product or service from to customer. According to McMillan and Mullen (Operations Management Volume 2: 2002), "the purpose of supply chain management is to integrate all tasks associated with the bi-directional flow of materials, information and finance into organized, coherent, managed processes in order to provide end-to-end management and control."
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Design - Zara uses concurrent designing process which integrates members from the entire organization structure in creating its designs for fashion. This includes members from the procurement team, designers, market specialists and finally feedbacks obtained from sales executives and store manager. The average age of the designing team is 26 years. These designers spot the latest trends from different sources such as fashion shows, magazines, new release movie and trade fairs. Then they make a sketch of the design and these designs are consulted upon by different members from the procurement and production departments.
Manufacturing - 60% of the products produced by Zara are by their own factories. Zara has about 25 factories across the world and most of the plants run on a single shift basis. Thus Zara has unutilized capacity which they use for quick response to increase in seasonal demand. As a result of this Zara can transform their products quickly to the stores even when the demand is high. Although the design and automated manufacturing is done by Zara in house, most of the labour intensive activities are outsourced to reduce overall cost.
Information Systems - Most of the designs developed are done using CAD. This is a major reason for making the manufacturing process rapid. Apart from this ZARA invests considerably on technology in order to aid in the flow of information. Zara store managers' posses hand held PDA which they use to send information such as sales figures, order placing and customer feedback to the head office in La Coruna. Based on this designing team confirms the design and sends them across to manufacturing units wherein CAD is used to manufacture the products.
Centralized Logistics And Distribution - Zara has a centralized distribution unit that operates from its head office in La Coruna, which observes, analyses, and applies the various research findings of the talent spotting team. Zara uses all modes transportation for shipment namely trucks, trains and even planes in some cases. Trucks are loaded as per the specific order in the evening and they are dispatched at night at a specific time.
2.2 VALUE CHAIN FRAMEWORK OF ZARA
Based on the above research a value chain frame work of Zara is given below:
FIG 1.2 VALUE CHAIN OF ZARA
2.3 INVENTORY MANAGEMENT
Zara replenishes its inventory from one of its 650 stores at least twice a week. However the stock quantities are limited so that they ensure not to carry excess inventory. On record Inditex has the least inventory as a percentage of annual sales as compared to Gap, which is its closest competitor.
2.4 TOTAL QUALITY MANAGEMENT PRACTICE OF ZARA
1975-1995: Since its inception in 1975 till 1995 Zara has followed the method of inspection in order to keep a check on the quality of its products. Zara's designing team has worked closely with customers and have spend their time in spotting the latest trends in demand. An instant sketch of the design has been analyzed and the accordingly produced. The quality control teams at Zara inspected the designs before placing them in stores.
1995 till date: After 1995 Zara has implemented the practice of Total Quality management. In this practice Zara's vertically integrated supply chain tries to achieve Continuous Improvement of their processes. From the aspect of employees, Zara invests a lot in the motivation process of employees. Collectively all these aspects are applied to meet the customer needs.
2.5 COMPARATIVE STUDY OF ZARA WITH BENETTON
Benetton is also clothing retailing company, they offer sportswear and sports equipment etc. They follow appropriates framework, concept and principal includes supply chain design, inventory management and total quality management to meet with the consumer needs.
2.6 SUPPLY CHAIN MANAGEMENT AT BENETTON
Supply chain design is the ultimate core competence of an organization, because it involves very important choice of what capabilities/operations it should develop internal and should allocate to external suppliers, where to locate its operation and how to manage its overall long-term capacity with the network (fine, 2000). The Benetton follow dual supply chain to meet with consumer needs.
FIG 1.3 SEQUENTIAL SUPPLY CHAIN OF BENETTON
FIG 1.4 INTEGRATED PLANNING SYSTEM
Product Design - Benetton launce only two seasonal collections per year (spring-summer and autumn-winter), which is not meet with customer needs by providing fashion the latest fashion trends such close competitor like Zara were already doing. Benetton reduced the number of pieces by 30% in the standard collection and introduced new "flash" collection during the season according to the latest trend in the market and customer preference. Benetton design their clothing for the four groups such as men, women, children and expectant mother.
Research And Development - In order to beat competitor and meet with customer needs, they do lot of research to develop different type of colors and designs as for their product line. The company uses the CAD/CAM system in order to design its fashion and also invests considerably in newer and improved technology that would facilitate the production process to become faster.
Managing Information - The Company uses EDI as a technology for communicating information regarding designs, manufacturing, production and distribution. The EDI interface has been collaborated with CAD/CAM technologies to achieve a precession in the company's supply chain.
Logistics And Distribution - Logistic and distribution is part of Benetton's operation. Benetton is in the apparel industry speed and dependability is major issue, they aimed direct control of logistics and distribution. It has highly invested in automated logistic to handle 10,000,000 item per month. In 2004 was opened the new Hong Kong hub serving in China, Japan and other countries in Asia. An analysis showed Benetton that economies of scale were possible in the freight-forwarding function. In a joint venture it established WIDE (Worldwide Integrated Distribution Enterprise) to manage the international forwarding and customs clearance functions. WIDE was first established to manage the North American product movements. This organization deals directly with air carriers--eliminating a level of freight-forwarded intervention.(Peter, 2002)
Distribution - The Company follows the hub and spoke model for handling distributions. In its major regions, close to its manufacturing units the company has central distribution centers. The central distribution centers are in collaboration with other regional distribution centers that supply directly to retail outlets.
Retail And Sales - Benetton pioneered in the fashion retail supply management developed 6500 franchised store whole over the world, but with the difference from the competitor of not owning the franchisees store garment. The retail and sales supply management reduces business risk, and also developed a licensor-licensee relationship with worldwide network of agent and recruitment and managing all retailer' transaction.
2.7 INVENTORY MANAGEMENT AT BENETTON
Unlike Zara Benetton is not a vertically integrated company. However the company has a strategic framework through which it can effectively manage its supply chain network, maintain low inventory levels at the stores and finally achieve a high stock turnover ratio.
In order to achieve this Benetton has adapted to the "knit now- dye later" strategy. This postponement strategy allows the company to keep low levels of in-store inventory and achieve high stock turnover ratio. The company designs its garments according to the conceptualized CAD/CAM technologies and then bulk manufactures a white version of these designs. These stocks are stored in the warehouses. On analyzing the popular colour trend and making a suitable sale forecast the company dyes an appropriate quantity of garments and ships it to stores.
2.8 QUALITY CONTROL MEASURES AT BENETTON
Since its inception, until 2004 Benetton had a centralized production and distribution system. It also did inspection of its products and rapid quality checks from 1980 to the mid 2004. However in 2005 the control has become decentralized and Benetton now follows the Total Quality Management practices in its entire value chain.
CONTINUOUS IMPROVEMENT IN THE PRODUCTION PROCESS - Benetton's production system had undergone a major transformation in the year 2005. It evolved from an organization based on divisions such as wool and cotton, to a structure based on service units such as planning and quality control.
The new production system is flexible, and it integrates all the stake holders in the value chain. Thus it helps in reducing product delivery time and it also optimizes the quality and service levels.
In this process there are three teams that work in tandem to deliver greater value to customers. These are the Logistics unit, the quality checking unit and the customer service unit.
The customer service unit plays a major role in analyzing customer demands and level of satisfaction. This team has departments which keep a close track on the sales staffs and the store managers, whose inputs are taken into consideration during the production process.
The quality checking unit keeps a track of the level of confirmation of specification of each design. Tagging and labeling of the units of garments are also taken care by them.
The Logistics team is by far the most important team in the organization. There is now a new Hong Kong hub that has become fully operational along with the European hub and the U.S hub. Benetton's logistic system has now transformed from a centralized system to being a satellite control system. This facilitates the individual hubs to concentrate on their particular regions of distribution and supply the appropriate number of units and the appropriate design at the right time. Since 2005 till date the stores have thus reported low levels of inventory and high stock turnover rate.
On critically analyzing the above concepts we find that the two companies in discussion are profitable in the same industry, however they serve to different sets of customer needs. Over the years Benetton is expanding much faster when compared to Zara. The Benetton business model looks to be sustainable and strategies are aligned to give the company a sustainable competitive advantage. On the other hand it is recommended that Zara should make changes in their operational measures in order to achieve a sustained profitability in the future. Therefore it is recommended that Zara should go for decentralization as a means of controlling its operations.
Looking at the fact that Zara faces certain challenges logistically in markets such as United States and certain parts of Asia, Zara should now go for a decentralized structure in their distribution channel. As we have seen in the case of Benetton, due to the decentralized structure Benetton can efficiently manage their operation on such a large scale. For a company like Zara which is looking to penetrate the emerging markets, it should bring about a decentralized structure in the following ways:
Zara should build controlling units of Distribution and Production in every geographic region where it has its operations. In this way it would help Zara to concentrate on each and every region rather than controlling the entire business from their headquarters in La Coruna.
Zara should not bring about any change in the overall Supply Chain View which it now follows.