Supply Chain Management ZARA

Logistic Strategy in Supply Chain Management A CASE STUDY OF ZARA FASHION BRAND Executive Summary This report studies the logistics strategy in terms of supply chain management of internationally known fashion brand “Zara Fashion”. The study, moreover, investigates the role of suppliers and supply chain drivers in attaining the strategic fit for logistics and supply chain management of the company. Gaps between services and weaknesses in business strategy along with risks and mitigation measures are also discussed in the report. Introduction Zara was established in 1975 and became the flagship brand of Inditex. Inditex stands for Industrial de Diseño Textile SA which produces and sells apparel for children, men and women. In 1985, Inditex was founded as a holding firm, which laid the groundwork for a logistics chain capable of adapting very rapidly to emerging consumer patterns. Ortega also developed a modern design, production and delivery model that will minimise lead times and respond more rapidly to new patterns, which he calls "instant fashion." This was motivated by strong investment in information technologies and the use of groups rather than independent designers for the crucial "design" aspect. Presently, Inditex is the world's biggest apparel company, having more over 174,000 staff running over 7,400 outlets in 202 countries worldwide, including 49 online shops. Inditex's sales amounted to USD 23.4 billion in 2019. The brands involve Zara, Massimo Dutti, Pull and Bear, Stradivarius, Bershka, Zara House and Oysho. In 1963, Zara was introduced by Amancio Ortega Gaona and is located in A Coruna, Spain (Forbes, 2017). Currently, Zara outlets are located on every continent, with around 3,000 shops in 93 different countries (Mo, 2015). Additionally, Zara also retails its product lines in 39online retail sites. the company launched 51 new outlets, including new countries such as New Zealand, Vietnam, Nicaragua, Aruba and Paraguay in 2016 (Lopez and Ying, 2009). Zara’s Business Strategy Zara's primary motive is to drive success by diversifying with hierarchical implementations. It adapts designs, produces, distributes and sells garments within only two weeks of the initial product first showing on catwalks. This compares sharply with the period of six months period it involves to manufacture pieces in the typical fashion industry. The business maintains its production process and distribution framework and competes for its acceleration to the consumer, practically reflected in the concept of quick fashion (Tradegecko, 2018). Four of the largest clothing brands are fast-fashion businesses, which include Topshop, Zara, Uniqlo and H&M. These fast fashion brands possess cheaper labor, inexpensive raw materials and quick production timetables. These considerations make it possible for Zara to embrace a low - price strategy. It has no costly design, marketing and raw material expenses. The existing pricing strategy is appropriate for Zara, taking into account the optimization of training and development expenses. It uses value-based pricing strategies in particular. The approach focuses on the customer's perceived worth rather than on the company's price-setting costs. Its target consumers expect fashion clothing but could not manage the increased price of luxury brands. Zara counts damaged codes and unserviceable items daily. These products are to be sold at a cheap price. Additionally, discounts are often provided at the end of the regular season. Zara’s Logistic Strategy Zara changes its clothing designs every two weeks on average, while competitors change their designs every two or three months. It carries about 11,000 distinct items per year in thousands of stores worldwide compared to competitors that carry 2,000 to 4,000 items per year in their stores. Zara’s highly responsive supply chain is central to its business success. The heart of the company and its supply chain is a huge, highly automated distribution center (DC) called “The Cube”. The Cube is 464,500 square meters (5 million square feet), and highly automated with underground monorail links to 11 Zara-owned clothing factories within a 16 km (10 mile) radius of the Cube. All raw materials pass through the Cube on their way to the clothing factories, and all finished goods also pass through on their way out to the stores. The diagram below illustrates Zara’s supply chain model. Zara’s factories can quickly increase and decrease production rates, so there is less inventory in the supply chain and less need to finance that inventory with working capital. They do only 50 – 60 percent of their manufacturing in advance versus the 80 – 90 percent done by competitors. Zara does not need to place big bets on yearly fashion trends. They can make many smaller bets on short term trends that are easier to call correctly. Figure 1 presents the logistics strategy of Zara Fashion. Zara’s Supply Chain Management The most important thing in Zara’s supply chain is its vertical integration where design, product, distribution and retailing were integrated. The following chat shows its vertically integrated process. I. 200 fashion designers are in charge for the clothing line and among those they select the most cost-effective fabrics for designs. II. Designs will be made into models when sent into factories. The computer then design how to shear fabrics in order waste as little as possible III. Fabrics will be sent to the factories IV. After sewing products will sent back to the factory for button nailing, ironing and inspection V. Underground transmission channels connect all processes VI. Label trademarks for different countries Figure 1 Logistics strategy and supply chain of Zara Fashion Zara suppliers The company purchase the raw material to suppliers from Greece, Spain, Italy and Portugal. Those suppliers have to deliver the goods to “the cube “within 5 days mostly by truck, planes and train. Zara produce 60% of the items, so 40% of the production is being produce by 400 suppliers. The majority are present in Europe, close to 70% and in Asia, 30%. Zara choose to work with European supplier mainly due to a question of quality but also of proximity. Supplier are a very important link of the supply chain, and to have supplier that are far away may cause some issue in term of logistic like I said. When Zara work with Europe suppliers for important raw material as tissue, it works with Chinese supplier’s basics product such as button and zipper. With millions of products sold each years Zara is a huge and stable customer for those suppliers that provide a great amount of command during the years. Working as a pure player in the fashion retail like Zara provide some power among suppliers, like price leverage, frequent quality audit (to avoid issue such as children worker, refugee worker or other ethic issue). Supply chain drivers of Zara Zara concentrates on three winning formulae • Short Lead Time = More fashionable clothes • Lower quantities = Scarce supply • More styles = More choice, and more chances of hitting it Right They have structured their supply chain drivers in order to release more styles in short lead time. Logistical drivers Facilities Zara set up its own factory in La Coruña (a city known for its textile industry) in 1980. 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 labour is somewhat cheaper than in most of Western Europe. Zara is the flagship chain store of Inditex Group and they have 4.607 stores in 74 countries. There are over 2000 their own stores located across 88 countries. Zara tends to use franchisee and joint ventures in countries that were small, risky, or subject to significant cultural differences or administrative barriers that encouraged this mode of market participation. Examples included Andorra, Iceland, and Poland in Europe and the Middle Eastern countries that the chain has entered (where restrictions on foreign ownership ruled out direct entry). Inventory 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. Zara seems fully aware of the adage: “inventory = death.” The firm therefore avoids building inventories in any part of its supply chain from raw materials to end user. Inventory optimization models are in place to help the firm determine how many of which items in which sizes should be delivered to stores during the twice a week shipment ensuring sores stock just what they want. Zara designs around 10,000 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. Transportation The transportation system is based on software designed by the company’s own teams. The time between receiving an order at the distribution centre to the delivery of the goods in the store is on average 24 hours for European stores and a maximum of 48 hours for American or Asian stores. With this system its possible ship 45.000 folded garments per hour. The facilities move about 2.5 million items a week. Trucks serve destinations that can be reached overnight, to be more precise in Europe, while chartered cargo flights serve farther destinations. The firm recently tweaked its shipping models through Air France-KLM Cargo and Emirates Air, so flights can coordinate outbound shipment of all Inditex brands with return legs loaded with raw materials and halffinished clothes items from locations outside of Spain. Zara is also a pioneer in going green. Cross functional drivers Information Information is the key drier which coordinates all other drivers. Zara have come out of box and practising more advance and reliable information sources. Zara is in tune with its customers. Trend information is entered into database in regular basis and designers check the database to identify the latest fashions among the customers. Shop managers use PDAs to check on the latest clothes designs and place their orders in accordance with the demand they observe in their stores. Constantly updated information reduces the damage done by bullwhip effect. Sourcing Zara sources fabric, other inputs, and finished products from external suppliers with the help of purchasing offices in Barcelona and Hong Kong, as well as the sourcing personnel at headquarters. Combitel, a 100%-owned subsidiary of Inditex, that dealt with more 200 external suppliers of fabric and other raw materials. Combitel manages (45%) the dyeing, patterning and finishing of undyed fabric for all of Inditex’s chains. Fabric is cut and dyed by robots in 23 highly automated factories, outside the distribution centre in La Coruña.50% of the items that Zara sells are manufactured in Spain, 28% in the rest of Europe, and 24% in Asia and the rest of the world. Zara experience flexibility and more control by giving priority to in-house production. Pricing Zara offers unique, high quality, latest fashionable clothing to its customers at affordable price. Zara’s pricing method can be identified as, = + Most of the Zara’s production is carried out inside of Spain where average labour cost is higher than Asian countries. Therefore, Zara has to charge premium price comparing with other competitor who outsourced all of their production to Asian countries. Zara’s change prices of the same product according to the region. As example, a coat in Spain could be priced at 90 Euros, and the same coat in France could be priced at 118 Euros. Therefore, they use a demand-oriented method for setting prices based on region, taking advantage of what customers are willing to pay. Gap between services Overwhelming success of the company is also accompanied by some gaps between the services but there are no significant signs of difference between customer’s perception and satisfaction. Some of the gaps and weakness in Zara’s strategy are: 1. Over depends on European market – there market is heavily dependent on Spain. 2. Only have one manufacturing and distribution centre 3. Vertical integration – this leads to inability to acquire economies of sale 4. Lack of marketing communication – they do not spend much money on marketing and advertising. They use only simple marketing strategies such as weekly change the shop layout. But it not contributed to attract new customers. It only increases the buying of existing customers. Risks and Security Concerns Local and global competitors – competitors are reducing their lead time. e.g.: H&M has increased the frequency of ne items in stores. 2. Rising labour cost – as they highly depend on European labour market the price of labour become increasing. 3. Currency value in Euro hurts global competitiveness. 4. There is a large amount of consumer switching taking place. Risk Management Suppliers selection Zara select is suppliers with a tree dimensional evaluation to decrease the risk (3T): Time, Trust, transparency; But also, with those characteristics: • • • • • • Level of rapidity Expertise in the sector. Execution Flexibility Quality of supply Capacity to coordinate information’s Minimal worker wage Zara is highly selective on its suppliers mainly due a constant pressure of the market to have fresh new items frequently at a low price, with a decent quality. Conclusion Zara is a specialist in "fast fashion" chain supply, which is essentially recognized as a rapid reaction to customer demands and a quick response to changes in supply. So, to sum up the case of Zara, when the product satisfies the current desires of the market, the consumer buys the product, and that is how Zara retains existing consumers and receives new ones. By taking advantage of big information gathered on current demand and determining the interests of specific consumers, the company potentially prevents future risks due to unsold goods, the acquisition payback period is faster and this is a highly beneficial addition to Zara's cash flow statement. Using actual demand and existing customers’ needs, the opportunity to satisfy individual customer needs occurs and increases customer loyalty. Recommendations • • • Advertising and marketing Mass Media Advertising Tradeshows and Events