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What sets Zara apart from the rest of the high street fashion retailers is that it has adopted a vertically-integrated business model covering design, just-in-time production, marketing and sales. Whereas a company such as H&M sources clothes from more than 900 firms, Zara makes more than half of its clothes in-house, at design and manufacturing centre in La Coruna in Spain.
Amancio Ortega thought that customer would regard clothes as perishable commodity no different from yogurt or bread to be consumed rather than stored in closets, and has gone about building a retail business that provides "freshly baked clothes. By Focusing on apparel as product for consumption Zara compete on speed. This business is all about reducing response time. In fashion stock is like food it goes bad quickly. So, Zara concentrates on three winning formulas: Offering fashionable variety with limited supply at affordable price (cost) with a quick response to market. (Devangshu Dutta 2002)
The organization is geared around speed and responsiveness. Using daily sales data from stores, supplied by a surprisingly minimalist IT system, designers can react to what is and isn't selling. Zara can make a new line in three weeks, against an industry average of nine months. This lead-time advantage lets Zara operate with lower inventory levels and permits frequent line changes, giving buyers a sense of exclusivity. Zara store managers place orders twice in a week using a PDA device.
Zara designers are on a constant lookout for new ideas to keep the product line fresh. Breaking fashions can be quickly introduced in the shops, yet the business model helps guard against the risk that a new item may not sell. Zara introduces 11000 new garments in a typical year. Many lines will only be available for a matter of weeks before being replaced.
Supply Chain (SCM) is the process of planning, implementing, and controlling the operations of the supply chain with the purpose to satisfy customer requirements as efficiently as possible. Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption.
Vertically integrated companies are united through a hierarchy with a common owner. Usually each member of the hierarchy produces a different product or (market-specific) service, and the products combine to satisfy a common need. A company domination of a market by controlling all steps in the production process, from the extraction of raw materials through the manufacture and sale of the final product.
Zara operates using a vertical supply chain which is a unique fashion strategy in the fashion industry. Vertically integrated business undertakes a variety of activities from designing, manufacturing, sourcing and distribution to retail stores. A company that operates in a vertical integrated strategy has total control of its business activities. Zara controls most of the steps on the supply chain: It designs, produces, and distributes itself.
The company focused its attention on understanding the fashion items that its customers wanted and then delivering them, rather than on promoting predicted season's trends via fashion shows and similar channels of influence, which the fashion industry traditionally used.
50% of the products Zara sells are manufactured in Spain, 26% in the rest of Europe, and 24% in Asian and African countries and the rest of the world. So while some competitors outsource all production to Asia, Zara makes its most fashionable items half of all its merchandise at a dozen company owned factories in Spain and Portugal, particularly in Galicia and northern Portugal where labor is cheaper than most of Western Europe. Clothes with a longer shelf life, such as basic T-shirts, are outsourced to low-cost suppliers, mainly in Asia and Turkey.
Zara can offer considerably more products than similar companies. It produces 11,000 distinct items annually compared with 2,000 to 4,000 items for its key competitors. The company can design a new product and have finished goods in its stores in three weeks; it can modify existing items in as little as two weeks. Shortening the product life cycle means greater success in meeting consumer preferences. If a design doesn't sell well within a week, it is withdrawn from shops, further orders are canceled and a new design is pursued. No design stays on the shop floor for more than four weeks, which encourages Zara fans to make repeat visits.
The design, Production and distribution process of Zara.
Zara has been able to deliver fashionable and trendy cloth addressing all tastes through a controlled design and integrated process. Zara designs all its products itself. Concurrent method design could be an adjective to the of product design process which involve the whole commercial team , designers, market specialist, procurement team as well as continuous feedback from store managers.
Young Designers (26 average) draw the design sketches then discuss it with market specials and planning & procurement staff. Designs inspiration is copied from different sources (trade fairs, catwalks, magazines) from all around the world, and out of 40,000 designs only 11,000 are approved. This illustrates the flexibility of ideas generation and on the other hand the huge number of designs reflects the ability to meet almost all the fashion requirements by customers of all ages (up to 55).
Zara business is organized around processes not functions, all team are involved in all processes. This method minimizes the time as decision is conducted in one room, and in direct proximity to the information. As a result, Zara reduces the inherent uncertainty associated with new designs in this industry that is characterized by long lead times and very high variability of demand e.g. M&S could need a whole season to get a new item to stock.
Zara manufactures 50% of its products. By owning its in-house production Zara is able to be flexible in the amount, frequency, and variety of new styled products. Zara has outsourced less manufacturing than its peers. It has 22 factories and runs many of them often only in one shift leaving extra capacity to respond quickly to seasonality and unforeseen demand. Comparing to peers which rely heavily on overseas suppliers/manufactures which don't provide same flexibility as these suppliers could request orders to be placed few months in advance.
Zara outsource all the labor intensive tasks mainly the sewing, while the cutting is done in-house. This produces of saving labor cost, flexibility of meeting deadlines, keeping the designs/fashions strictly controlled.
3.2 Information Systems:
Information systems in Zara are one of the drivers of the quick response communication strategy in the organization. Zara stores managers carry handheld Casio computers to send online information to headquarters like selling trends, customers comments, or placing orders. Designers send their design suggestions to factory and to distribution department by scanning a design into a computer and electronically transmit to factory computers including computers controlled cutting equipment. Designers input the designs patterns into CAD systems which automatically feed into the cutting machines in the factories ensuring the required quality of outputs and having a minimum fabrics waste. A CAD system is a combination of hardware and software that enables engineers and architects to design everything.
3.3 Inventory Management:
Zara's parent company, Inditex, had the lowest inventory, as a percentage of annual sales, compared with its nearest global competitors, such as Gap, Benetton, and H&M (based on 2000-2001 figures, Kasra Ferdows) Zara avoids building inventories in any part of its supply chain from raw materials to end user. Zara designs around 11,000 new models every year and replenishes ranges within every one of its 650 retail stores twice per week, but in strictly limited quantities of stock. This ensures Zara's brand promise to customers of exclusivity, and also of design freshness. But it also avoids build-up of large quantities of unpopular stock.
3.4 Centralized Logistics and Distribution:
Zara controls and optimizes across different steps of the supply chain, not within them, even though it may increase costs at some steps, Zara sticks to a deep, predictable and fast rhythm, based around order fulfillment to stores. There are two orders per week from each store on specific days and hours, with shipments in La Coruna usually prepared overnight. Trucks leave at specific times (like a bus schedule) and shipments arrive in stores at specific times. Garments (even those shipped by air), are pre-hung, already labeled and priced.
As a result of this clearly defined rhythm, not only every stage of the supply chain from design to procurement, production, distribution, and retail know their activities, but even regular customers know to visit stores more often on shipment days for the fresh designs. This large and high-tech facility also has extra capacity on hand to enable Zara to react to weekly and monthly demand fluctuations. For example, it operates typically 4.5 days per week, around the clock on full capacity, and extra shifts and temporary personnel are added when needed.
Zara can get the product from the sketch to the store in 2 weeks time, where the industry standard is 6 months, the design and production process is very efficient and harmonized due to the use of the different methods that suites their line of business and set new model to look for.
3.5 Low marketing / advertising cost:
Fashion retailers spend on average 3.5% of revenue on advertising their products, while Zara's parent company Inditex spends just 0-0.3%. Zara depends on word of mouth and relies on its stores to project its image. Zara have three coordinators whose main task is to change the layout of the shop every week. An item that you see today at the right side of the shop next week if not sold yet, will be displayed at some other side in some other way.
Evaluation on how Zara was able to maintain exclusivity of its products through efficient supply chain.
In Zara stores, customers can always find new products but are in limited supply. There is a sense of tantalizing exclusivity; since only a few items are on display even though stores are spacious (the average size is around 1,000 square meters). Customer know that if they don't purchase a product at a certain time it will be sold or move out to make room for something new. While running out of bestsellers, it might be seen as a disaster at most retailers, at Zara the practice delivers several benefits. First, limited runs allow the firm to cultivate the exclusivity of its offerings. While a Gap in L.A. carries nearly the same product line as one in Milwaukee, each Zara store is stocked with items tailored to the tastes of its local clientele. A fifth avenue shopper quips At Gap, everything is the same, while a Zara shopper in Madrid says you'll never end up looking like someone else. Second limited runs encourage customers to buy right away and at full price, and getting targeted designs quickly into store shelves is where Zara really excels.
Most of the products in stores didn't exist three weeks earlier, not even as sketches. The firm is able to be so responsive through a competitor-crushing combination of vertical integration and technology-orchestrated coordination of suppliers, just-in-time manufacturing, and finely-tuned logistics. While H&M has 900 suppliers and no factories, nearly 60% of Zara's merchandise is produced in-house, with an eye on leveraging technology in those areas that speed up complex tasks, lower cycle time, and reduce error.
Zara's success was its vertically integrated supply chain where design, production, distribution, and retailing were integrated, quick response system to market and ability to spot trend quickly, IT integration synergy between business and operation strategy, efficient distribution facility, low advertising cost and global reach.