Zara Business Model

Zara is one of the Inditex group, which they mainly in the apparel industry. It considers the most successful brand in this group and most of profit margin is coming from Zara stores that are widespread around the world (76countries) and their main products of apparel are for men, women, and kids. As we can see from the article (It for fast fashion) and Zara’s annual report in 2009, the business model of Zara is based on the link between three important processes, Ordering, fulfillment and, design and manufacturing.

To explain more, Zara’s business model can be addressed in the following:

1- Linking customers to manufacturing process through very organized methodology that is depending on involving effective groups in this process such as commercials and store managers. This method allows to Zara to respond very quickly to the demand in the apparel market at the same time they cope with the new fashions and styles. Zara always tries to produce the styles that is still hot and having demand between target customers.

The group is working hard to meet the information demands of customers even with communicating them via social network. These followers in some cases has exceed 2 million people which reflects clearly how is Zara becomes one of the most successful business model in apparel industry around the world. They send their fast-fashion distribution model to users via the internet. That does include the latest collections hitting the stores for every customer segment. Moreover they combined their experience to insure that all collections are satisfying most of their customers.

We can see here the ability in Zara’s business model to be very strong by comparing with other Apparel brands in terms of disruptive innovation. Zara can be the leader in both, designing for different set of consumers and lowering the price at the end of product cycle to allow enough space of new products. Most of Zara’s shoppers know exactly that some of cloths may not be available in next visiting, so they to decide to by it immediately or may lose the design forever!!

This concept of shopping has developed very successfully by Zara’s management in the last ten years. appendix1)

2- Linking the employees to decision making process (Store) by addressing the question, where the customer and fashion meet? Zara’s senior managers wanted to give the employees throughout the company to make their decisions of their stores. The store is where the customer needs to be and “where the group’s business model begins and ends”. The designer group is setting in the process to meet further goals of design and production. They try to be first in preferred locations, and then in unique appearance. Read also about Zara corporate social responsibility issues

The coordination of tailored product very important to them at the same time the excellent customer service. (appendix1. Zara business model)

3- Rapid response to market needs which can clearly be seen as the link between design and production. Zara design and produce the new products in three weeks and their shipment doesn’t take more than three days to the furthest location around the world. They have very organized system which helps them to recognize the needs of market and meet it quickly. They rely on their experiences and the stores managers rather than formal forecasting of the market.

The delegation of authority could be important successful factor can be seen in Zara strategy. The store manager has to decide which garments should be on sale and which is not. Store manager has the authority to predict the store needs of specific garment based on his or her experience in local market. This relationship is very important between store’s personnel and production center. The link with the distribution center is very important to Zara, so they make their own flexible procedure to facilitate this process.

Placing orders and receive them is very modified and controlled by Zara, so all managers have the responsibility of what and when they need the garments. “as a large share of our business, including manufacturing in our own centers and by external suppliers, takes place on a local level, we can provide a rapid response to the market’s demand”( Inditex annual report in 2009).

This flexibility has led Zara to meet all distribution concern from the logistics centers to the stores more successfully.

– The importance of commercial groups which is great Idea with Zara because it saves a lot of money that could go for R&D or advertisement. Those teams have very defined roles in terms of production, designing, purchasing materials, and setting the prices (appendix1. Zara business model). The observation strategy another successful way of Zara concept. A group of managers travels to worldwide to recognize the trend of clothing styles.

Zara has activated continues communication system between all the product managers and even between store-to store managers and distribution centers.

– Promotion and advertising strategy of Zara could be seen as different of others in industry because they placed the advertisement only to promote the twice yearly sales or to tell people about opening any new store. Their vision here can see as in the following:

a. Zara believes that the best advertisement for the store is the best location you could have. Therefore Zara could be seen from most shoppers in malls as the best store in self-advertising location

b. Zara has developed clear vision of the time they place the new garments in stores and the time that they have in sales or promotion during the year. This well defined strategy has helped even the employees to understand how they can deal with customers in every situation of selling process. Therefore, the sales person can tell the customer about any new collection could be in the store at the same time the possibility of having some sold out items which can let the customer feel more comfortable with customer service. Zara has defined time for incoming new models at the same time they have the annual sales on old items. Experienced shoppers have adopted themselves with Zara’s concept, so many of them are recognizing the time for buying from Zara.

c. Zara has stable strategy in changing the layout of stores regularly (every four to five years) at the same time they test the layout in headquarter before even build it.

d. Pricing strategy is defined as also well defined strategy and organized which help the employees to recognize their organization better at the same time this factor have contributed to build customer trustworthy and loyalty.

6- Inventory strategy successful in the industry has been clearly evidence of Zara’s ability in producing what they need for short time period which is considered very competence factor in the industry as we will see later in this journal.

All of these factors and tips have built Zara business model which is considered as a different business model of the industry as we will see in the next answers of questions. The ability of Zara to make short life products with the ability and managing the inventory has contributed in decreasing the cost of goods sold (COGS) as we can be seen clearly in their financial statement in the last two decades. How business model of the industry could be different of Zara business model?

Basically the current business form in apparel industry is depending on three main elements: 1) Creating an accurate and clear plan for the demand and supply chain. The purpose of this well defined plan is to generate the forecast in advance for each season accurately. Inventory is considered the crucial factor in this element because it can increase or decrease the COGS and other relevant cost. 2) Maximize the sales through all seasons which are considered a real challenge in the industry because it is required very coordinated and flexible chain between all the segments of any firm in the industry.

This factor could be the hardest one and it reveals the real competencies of the firms in industry. 3) Develop a strong reliable and continues foundation for the main critical factors in demand and supply chain performance. And as we can see here this element is considered as extension for the first two elements. Therefore, the company cannot compete and survive among other firms in industry without any consideration to the performance of this development.

As we can see above that industry business model is not similar to the one that Zara use it, so what does make Zara more successful in the last years in apparel industry? Simply because Zara has been very successful in doing integration between all the elements above which was very difficult to other firms to cope with that especially in introducing new garments in close periods with a perfect inventory and distribution management. Zara has integrated the manufacturing system with the customer needs through its flexible distribution centers channels and supplies.

Zara can design, manufacture and distribute the garments from three to four weeks maximum. They don’t manufacture a lot of pieces because they won’t keep the same model for long time. By this way, Zara do not have to build big inventory as the other firms in the industry do. In addition to that, Zara has speed up the business industry model by introducing its products in more than four seasons and take the competitive advantages from the others. In fact, we can say that Zara combines all the three elements in more successful way than others in the industry.

To explain more these facts, let’s compare Gap business model with Zara in apparel industry. Gap Vs Zara (advertising, outsourcing, supply chains, production, and inventory) Although Gap has reduced its expenditure on advertising lately from 4%to 2% of gross sales, Zara still have the lowest cost of advertising by 0. 03% of its gross margin. Although Gap has the advantage of reducing the labour cost by outsourcing, Zara did not take this step which has coasted them 15% spending more than Gap or other outsourced apparel firms in the industry.

Zara strategy is to keep the manufacturing system close to headquarter (Spain) and the main inspection centers (Spain and Portugal). However, this strategy has helped them to manage the inventory more effectively than Gap at the same time they keep the highest quality. Moreover Zara has more successful turn over inventory than others even though they are producing more than others. For example Gap introduces their new garments twice per year while Zara introduces more than four times per year.

Therefore we can clearly why Gap has to keep more inventory than Zara and why Zara can sell most of its garments in the full price with fewer inventories. We can conclude the main difference between Zara and Gap of this point in this next quotation of recent case study about Zara and apparel industry in 2008: “Behind the unusually quick rate of delivery was Zara’s centralized distribution center, where products were inspected and immediately shipped in accordance with time zones using a logistics system whose software was designed by the company’s own teams.

The time between receiving an order at the distribution center and the delivery of the goods to the store was, on average, 24 hours for European shops and a maximum of 48 hours for American and Asian stores” Why Zara’s business model could be disruptive to the apparel industry? After we have defined Zara business model and how is it different of industry business model. We have also compared Zara with gap in few lines to recognize how they think differently in industry.

However, not just Gap in apparel industry could be the only disruptive from Zara Business model. Zara business model has been disruptive for others because of the following reasons:

1- Responding to the new changes in industry quickly could be the first major concept that makes Zara take the competitive advantage and develops the competency factors more effectively in the industry.

2- Moreover Zara has very effective supply chain management in connecting with all distribution centers which give the responding to changes in industry more accurately.

3- Testing design and quality centers of Zara was very organized and it has contributed in reducing the errors and lowering the cost.

4- Involving store managers, commercial groups and employees in decision making process (decentralization) is another successful factor that Zara has implemented better than others in the industry. – Zara’s growth in industry more faster than others because they don’t have to spend a lot of money on advertisement at the same time they have been very well known brand around the world with more differentiated garments in different times of the year. Zara captures the concept of innovation to meet all tastes of apparel industry that the market could not expect by designing different sets in different times to its customers.

Bibliography

http://www.tjb.ca/Newspaper/powerofadvertising.pdf

http://www.inthesetimes.com/article/823/the_gap_minds_itself/

http://www.marketwatch.com/story/inventory-control-helps-lead-to-gaps-51-profit-increase