Zara Case – College Essay Example

more of the products that are selling and cut back on slow movers, ultimately leaving very few unsold slow moving products at the end of the year. Zara’s competitors, however, have to plan their production months in advance making it near impossible to determine what products will actually sell and which ones won’t. This ultimately makes it difficult to maximize sales and will result in a large quantity of unsold goods on hand at the end of the season. Inventory Management

Given this unique sourcing model Zara maintains extremely low inventory of finished products to create a consumer perception of having to purchase now, to avoid missing out later. This customer environment is evidenced in the fact that customers come to Zara stores 17 times a year as compared 3 to 4 times for its competitors. With this sourcing strategy and customer culture, Zara has several specific challenges with its inventory management strategy. One challenge directly related to Zara’s rapid inventory turnover is the need to have fast moving communication up the supply chain. If Zara’s retailer stores are unable to give the manufacturer the information they need, then the entire sourcing strategy will fall apart. Zara meets this challenge by having direct communication between retail stores and store specials that can give direct feed back to the designers.

Despite apparent success at moving information up the supply chain, Zara still is presented with an ongoing set of difficulties. Another challenge is the necessity to have a quick moving and reactive supply chain. Although some components must be established months in advance, the logistics and production ability to react and move once the information is known can

be stressful. It is necessary to have plans in place and implement them as soon as feasible. Zara has to send several deliveries in a week to update its styles in stores. Zara has to produce different styles of current fashion trend; this helps Zara to become fashion forward merchandise.

The biggest contributors to Zara’s success in regards to their replenishment strategy are the in-house manufacturer and the owned retail stores. This allows for the vertical integration of their supply chain, improving communication and reducing a potential bull-whip effect. Two shipments are made every week, by trucks for Europe and by air transport for stores outside Europe.

Future Strategy

The current in-house sourcing strategy being supplemented by outsourced manufacturing can help Zara in reducing production costs. A closer look at the financial metrics of Inditex provides some insight into the impact of the strategies of Zara to date. Figure 2 shows four profitability metrics for Inditex from 1996 to 2000. The return on equity has held consistently above 20% from 1997 onward. There is also a general upward trend across the other 3 metrics highlighting the continued growth relative to the success of cost cutting measures.

Profitability Measures

Another area of finical metrics to consider is the review of the degree of leverage Inditex has. Two key indicators are the continued movement to decrees the long term debt ratio and the total debt ratio remaining less than 50%. Figure Leverage Measures

Viewing the progressing of Zara from year to year provides insight into how well these financial metrics are managed.

A clear trend to decrease the leverage metrics is seen except in 1999 where there was a marked increase from 1998. For

profitability, there has been mostly positive increase from year to year but these are relatively small compared to the change from 1996 to 1997. This year marks the largest single year gain for all the profitability metrics. The relatively small changes in profitability metrics would indicate that Inditex may have reached a plateau in its current operating configuration. This plateau effect may necessitate the need to look at other strategies. Zara’s current strategy can continue to be as useful as the company expands, however it will become increasingly more difficult. With the growth of the company, the in-house manufacturing facilities will at some point meet their peak production level, resulting in the inability to meet their retailer demands.

The current outsourcing strategy will need some modification as Zara grows its international market; with growth in market, its other objective is to decrease production costs. With current infrastructure, in order to accommodate this change, Zara should also focus on opening up a new manufacturing facility which can help service a defined subset of its retailers. With the current strategy Zara is able to fulfill demand for all items efficiently but as its market grows there will be more variability in demand; lead times will also increase as pressure increases on outsourced suppliers. Zara can shift manufacturing to low cost production countries such as India and China where hourly wage rates are quiet less as compared to Spain and Portugal. Zara should own some factories in these countries and follow the same strategy it followed in Spain. This strategy can be run on trial basis and if it helps in increasing Zara’s profit margin and at the same

time it fulfills customers’ demand then Zara should start in-season production in these countries. An initial risk to this strategy is the low level of production that will likely be seen. If Zara increases its capacity by 100%, that would suggest that its overall production per plant will average 50% use. This can present a higher level of overhead per unit as economies of scale will not be as useful. This expanded outsourcing initiative may also be met with additional risks in the availability of raw materials and their quality. As the new lower cost labor forces are brought on board their productivity must be evaluated to determine if there is cost savings with lower wages and possible lower productivity.

Furthermore inherent with any increase in distribution of manufacturing is the addition of lead-time throughout the supply chain. Zara must also address the social responsibility issues with outsourcing; within the fashion industry these issues may carry more weight than traditional manufacturing. Zara will also have to consider the risks of international trade law, import export quotes and other uncertainties when dealing with other nations and their local companies as part of its supply chain.

Conclusion

Zara has established itself as an industry leader through its unique approach to using vertical integration. Closer analysis shows that this strategy may not be able to expand as international production and distribution increases. To continue to grow and reduce costs Zara must carefully review its proposed outsourcing strategy and ensure that risks are identified and mitigated appropriately to ensure continued company success.