Zara’s Supply Chain Management Model

Executive Summary

Zara, a flagship chain store of the Inditex group owned by Spanish business tycoon Amancio Ortega is one of the top names in the mid-priced fashion industry. Zara was established in 1975 in Acoruna, Galicia, Spain and has expanded to 1395 stores all across the globe.

It is said that Zara, unlike any other retail organization in the clothing industry takes just two weeks to design, develop and get a new product into the stores. However, the retail industry has a six-month average to do so. By using its operational strategies in a very successful manner, Zara is able to launch 10,000 new products every year. This report will discuss the operational strategies that Zara uses which works as order winners and order qualifiers. It also discusses the strategies that they use which makes them one of the top names in the fashion industry.

Introduction

Zara uses very innovative strategies for its business. By doing so, Zara is able to avoid outsourcing its manufacturing process to low cost and developing countries like most of the other companies in the industry. Zara does not even spend a lot of money on marketing, hence increases its profit margin. It however does spend on the layout of its stores. Unlike many of its competitors, Zara is a vertically integrated retailer since it controls most of the steps in its supply chain by designing, producing, and distributing itself.

This unique business model has resulted in the emergence of one of the most successful retailers in the fashion industry. Terry Hill in 1993 came up with the terms order qualifiers and order winners, against which it is believed that manufacturing strategy should be determined (Add Reff. Hill, T. (1993), Manufacturing Strategy: Text and Cases, 2nd ed. , Macmillan Press, London. ). Order Winners are characteristics that serve as a competitive advantage for one firm over others.

Order winners enable the customers to choose particular firms’ goods and services over the competitors. Order winners in this case for Zara are High-end fashion at a reasonable price Even though Zara’s products are highly fashionable, they comparatively cost way less compared to other big names in the fashion industry.

Supply Chain Management

As discussed below in the report, due to Zara’s outstanding SCM, it is able to order the latest in fashion every two weeks for a reasonable price. Thus, are able to offer something to their clients that none of their competitors can.

Order qualifiers are the competitive characteristics that a firm must take advantage of in order to be a viable competitor in the market place. To provide order qualifiers, companies need only to be on par with the competitors, however, in order to provide order winners, companies need to be way better than their competition. Having said that, order qualifiers are in no way less important than the order winners, in fact, they both complement each other. In Zara’s case, the order qualifiers are Quality They offer good quality products at a relatively cheaper price compared to the competition.

Outstanding Operational strategies

While Zara may be a very successful high-end retailer, the main facet of Zara that has got academics buzzing is its completely novel approach to its operations and supply chain for a retailer in high-end fashion. Layout The main intention of a layout strategy is to develop an economically viable layout that will be in line with the company’s Competitive requirements (Render & Heizer, 2005). Zara invests a lot in its store layouts to make sure that its store maintains a fresh and trendy look.

They have a testing facility close to their head office in Spain, where they test different types of store layouts on a regular basis. Zara remodels each of its stores every five years in order to keep up with the current trends (Zara’s Business Model, 2010). The entire layout, including the furniture and the window displays, are all designed at the testing facility in order to maintain a standardized image globally. A flying team from the head office usually flies down to a new location to set up the store. Their motto is that they want the store managers to focus more on sales than anything else.

Zara can afford to do this since they do not spend a lot on advertising and marketing campaigns. Forecasting One of Zara’s major competitive advantage over other retailers is its technique of forecasting. Unlike, other retailers, Zara has developed its business model around reacting promptly. Zara focuses heavily on its forecasting effort on the amount and the type of fabric it will purchase. Zara tends to do this since it’s usually cheaper to rectify mistakes on raw fabric as compared to a finished product. It also uses the same fabric to produce something else (Render & Heizer, 2005).

Zara usually buys un-processed fabric and colors it according to the season based on the market’s immediate need. By doing that, and by combining it with a high-speed garment design & production process, it’s able to deliver what the market is actually looking for at that time. Product life cycle In a typical Product Life Cycle Curve of the fashion retail industry, sales decreases as products move across the time’s line. However, Zara’s Product Life Cycle Curve is totally the other way round since it is in the high fashion industry and it offers products that are of the latest trends and designs with a life of a maximum of 5-6 weeks.

Product Design and Supply Chain Management

The entire process of product design is very unique compared to its competitors. Commercial managers and designers at Zara start working on the design of the fabric, the costs, raw material, selling price, etc as soon as they receive the instructions from the Zara stores. Instructions are issued to cut appropriate fabric as soon as approvals are received. All the raw materials are distributed for assembly to a network of small family-owned businesses that are mostly in Glacia and in Northern Portugal.

Unlike its competitors, Zara’s high-tech distribution services system ensures that there is no style lying around at the head office. The finished products are quickly cleared through the distribution centers and are shipped to the stores within 48 hours. Deliveries’ are received twice a week by each store. This entire process of product design and supply chain management gives Zara a huge edge over its competitors. Marketing Zara has a very unique approach to marketing compared to the other big players in the industry.

Unlike its competition, which spends 3-4 % of total revenues on marketing and advertising campaigns, Zara spends 0. 3%. This is a major competitive advantage over its competitors. Zara strategically locates all of its stores in prime retail districts for µvisibility marketing. As mentioned earlier about the product development cycles, customers are rendered immune to visit Zara stores very often since new items are stocked weekly and are often not re-stocked. Zara creates a feeling of scarcity within the customers, and this makes them come back to the store frequently and make purchases.

Just in time, Just-in-time (JIT) is a strategy that is used for inventory management in such a way that it helps a business improve its return on investment by reducing in-process inventory and the associated carrying costs (Shingo, 1989). Zara follows a true JIT inventory system. Its inventory system is influenced by the pull of the customer instead of a push from the designer. This helps Zara to have a competitive advantage over the competition since it has a very low inventory to sales ratio.

Vertical Integration

Zara is a very vertically integrated company by working through the whole value chain and is highly capital intensive. This is a unique model that let the company develop a strong merchandising strategy that led it to create a unique model of fast fashion system (Craig, Jones, & Nieto, 2004). Incorporation of Bershka Most big brands in the world regardless of the industry they are in usually have more than one brand name. In the fashion retail industry, Gap Inc. Owns few big names as Gap itself, Old Navy, Club Monaco, etc. It is a strategy used to penetrate different segments of a market and to increase the market share.

It also tries to give consumers the impression that different brand names have something different about them. Companies also use them is a strategy to create a specific brand for each and every market they try to target. Inditex has also used the strategy of penetrating different segments of the market by creating a different brand name for each segment (Inditex Annual Report, 2008). Inditex owns different brands such as Zara, Massimo Dutti, Pull and Bear, and Bershka which tend to cater to different markets. Merging all of these brands or any two brands into one name would not make a lot of business sense for Bershka.

The brand Bershka was launched by Inditex in the year 1998 with an aim of targeting the young fashion-conscious crowd. Incorporating Bershka into Zara’s operations would not be a very good strategic move for Inditex. Bershka currently owns 638 stores in 41 different countries, hence incorporating that into Zara’s operations would raise a lot of challenges for Inditex. Since Bershka and Zara both have a very different target market, formulating strategies for both of these firms combined will definitely affect the operations of the company as a whole. Both brand names have established different clientele for themselves.

Bershka currently targets the young and fashionable and Zara targets the fashionable crowd as well, however, it has different demographics for it. Combining these two brands into one will result in the loss of loyal customers and might also impact the company negatively. There’s no guarantee that Bershka’s existing clientele will shift to Zara, in fact, they might just end up losing the majority of that segment. Zara’s market share might increase by a very small percentage; however, Bershka might end up losing a major chunk of its current clientele, which in turn will not be good for Inditex as a whole.