Zara Supply Chain Case Study Essay Example

products every year and 10,000 products are selected for production Job design: Zara conducts effective training sessions for the sales force and strongly emphasizes on internal promotion.

Store worker's remuneration highly depends on the profits of the store which involves the workers and make sure that they contribute to company’s success. Network design: Zara has a central distribution center in Zaragoza worth 100million Euros. It also has three other small warehouses in Brazil, Argentina and Mexico to cope up with seasons in the southern hemisphere and distance. Inventory management: Zara uses an efficient Inventory management strategy that avoids running out of products for sale. As fashion is an industry where the trends keep on changing, So Zara restricts itself to limited inventory.

Due, to its low inventory policy, all Zara stores will have latest trends but are very limited. Capacity management: Zara unlike the other fashion retailers concentrates on both the next season and also responses to the fluctuations in the current season. Quality management: Zara manages to provide the customers the best quality at low price when compared to its competitors. Zara monitors and enhances quality service to it’s customers. Instead of focusing on product advertisement or marketing Zara focuses much on its product and quality. Lean: Zara has implemented lean techniques and this is the primary reason for their success.

Some of the lean techniques implemented: Customer Focus: Zara’s primary and main goal was to satisfy the customer and making the right product for the customer at the right time. Cycle time reduction: It reduced the cycle time by eliminating the non-value added activities. Employee’s empowerment: As in Zara it

takes orders from its stores 2 times a week. And, this helped the sales managers to interact with the workers every week and get to know which apparels are selling well and which are not. At the time of placing an order the manager will be having knowledge of what items should be ordered.

In this way the Zara is able to customize its offers based on the different markets. Waste reduction: Eliminating the wastes which helped it to sell good quality products to the customers at low price and in a quick time. Continual process refinement: By implementing lean techniques and methodologies it helped Zara to continuously improve the processes in order to reduce the wastes which in turn helped Zara to flourish till the current day.

In Zara, the designing of the products is done in a separate hall where they have designers, market experts and buyers(experienced staff).

Designers design the product and shows their design catalog to the market experts and buyers. Once, the buyers are satisfied with the designs they start the order fulfillment process which includes planning, procurement and production requirements monitor warehouse inventories and allocate production to various factories or third-party suppliers depending on the availability. ERP(Enterprise resource management): It is the backbone of most firm’s logistical information systems. It also maintains a database of current and historical data which also processes transactions of all business functions. It includes:

Order processing Tracking shipment Inventory assignment JIT: It quickly responds to the demands of the target customers by using JIT manufacturing technology in order to meet the fast-changing fashion and trends. JIT is a pull strategy

of production where we make products on the basis MTO(Make to Order) or ATO(Assemble to order). In Zara, they purchase the fabrics un-dyed in order to allow faster response for mid-season color changes. Word of mouth(No advertisement strategy): Zara doesn’t spend on the advertisement or marketing of the products rather it pays it attention to product quality and customer focus. According to its marketing manager, “Our stores and word of mouth will do the advertising for us”.

 Advanced concepts and Future trends of SCM in the Fashion industry: As we all know the fashion industry have short product life cycles i. e. , the trend keeps on changing in order to respond to the rapid market changes the conventional forecast driven supply chain management is not adequate to meet the challenges in the fashion industry. Nature of fashion markets: Short product life cycle: In this industry, the sales of the products depend on the seasons, months and occasions.

Once, the particular season is gone the demand for the product is low in the market. Hence, the product has short life cycle. Volatile: Demand in the fashion industry is not stable or linear. It mostly depends on the films, celebrities, sports etc.., For example, if you take the FIFA world cup at that time the demand will be more for football jersey’s and suppose if there is a cricket world cup then there will be demand for cricket jerseys. Low predictability: Due to its high volatile nature we can’t predict the fashion market. High impulse purchasing: Buying decisions by consumers are made at the point of purchase.

The conventional way to cope up

with the uncertain situation is to improve the forecast. Due to the highly volatile nature of the fashion industry it is very difficult to develop forecast methods in such a way that can predict sales accurately. So, instead of developing forecast methods ways must be found to shorten the lead times. There are 3 critical lead times in fashion industry: Time to Market – Time taken for the product to come in to the market after recognizing the market trend or market opportunity. Time to Serve - Time taken to get the order from the customer and serve it to the customer.

Time to React – Time taken to adjust the output of the business in response to volatile demand. Advanced supply chain: From early 90’s due to the heavy competition in the apparel world, this initiated horizontal alignment with leaner structure to address demand situation, and also the shift has taken place in the marketplace from mass products to customized products. Due to the changes in the global market and the disadvantages of the push and pull strategy forced the retailers to look for a new supply chain strategy. Hence, this resulted for the push pull strategy. Push-Pull strategy:

It is an asynchronous supply chain where the initial stages are operated on push strategy and the later stages on pull strategy. The strategy of the push portion in the push-pull supply chain is on cost whereas the strategy of pull portion is on service levels. Inventory is minimized using push-pull supply chain as it eliminates the safety stock by make to order approach. Push is applied in the areas where long–term forecasts

and have small uncertainty whereas pull is applied in the areas where short term forecasts and have high uncertainty. The higher the uncertainty in customer demand, it is better to manage that part through pull strategy.

Need for supply chain collaboration: Due to its globalized nature, there is pressure on the fashion retailers with regards to cost element. As we know that this industry is extremely volatile, retailers are required to adapt to the market trends. Thus, supply chain collaboration is viewed as a strategy in order to ensure efficiency in the apparel industry. In order to respond quickly to the changes in the market and customer orders supply chain collaboration plays a major role. Thus, there is a need for all the companies in the fashion industry to incorporate supply chain collaboration (Logistics alliance).

There are two master collaborative disciplines to be followed- Collaborative planning forecasting and replenishment (CPFR) - alternative to traditional forecasting Collaborative product commerce (CPC) – It’s a management philosophy that leverages a company’s supply chain to design and produce products. AGILE supply chain In the context of supply chain management, the term agility refers to responsiveness. Due to the short life cycle in the fashion market, the companies have to be responsive in order to gain competency over its competitors.

Lean supply chain in the Fashion industry: In lean supply chain, the focus is on removing unnecessary activities which causes a delay in the free flow of information and goods and services which in turn provides superior value to the end customers and earn profits for all supply chain partners. Lean supply chain management: It uses latest

information technology to effect real time synchronization of product and service transfer, demand priorities, collaborative and logistics delivering capabilities. It has its roots in the core principles of TPS. Create value for the end-user or customer

Identifying wastes and eliminating them Continuous improvement in the process In order to compete in the fashion market the companies have to run a lean supply chain and apply lean manufacturing techniques as needed. It also requires supply chain collaboration from order processing, product design, inventory control, distribution, shipping and life cycle management.

4) Linking theoretical concepts and real life supply chain management: As we have discussed some of the key features of the fashion industry. Now , we are relating those theoretical concepts to real-time supply chain management.

How ZARA implement those features in the real-life logistics operations? Market sensitive: Zara has a team of fashion ‘SCOUTS’ who seek out the new ideas and running trends in the market. As given in the case study, they also use their own salespeople in order to identify or recognize customers' likes and dislikes. Once, a market specialist Isabelle borges at their headquarters sensed that khaki shirt is sold out at their La Coruna store only after the hours they placed them on the shelves and the store manager has told her that she could have sold even more. Then, they have sent 2800 pieces to the selected Zara’s worldwide network stores.

As they use the latest computerized technologies like CAD with the help of which these ideas can be quickly converted into tangible products. Short lead times (critical): Zara’s main objective is to take the shortest

possible time to get the product in to the market. The minimum time taken by Zara to get the product in to the market is 30 days which is far better than its competitors. So, then it helps Zara to make a maximum profit before its competitors get the product in to the market. Zara’s close relationship with the manufacturers, constant research of the market helped them to achieve short lead times.

These short lead times in turn give enough time to Zara to correct problems resulting from forecasting errors. Network based – One of the distinguishing features of Zara is that its flexible wide network. In order to achieve quick response, Zara works closely with its manufacturers. At the time of production, all the cost efficiency operations are done internally with in Zara. While all other operations like sewing etc.. , are given to subcontractors. These subcontractors works exclusively for Inditex. Zara’s designed its network in such a way that they can cope up with any kind of changes in the market.

Zara also has many number of suppliers so that they are not dependent on a single supplier and none of the suppliers account for more than 4% of Zara’s total production. Push pull strategy: As we know that there are high uncertainties in the fashion industry. So, in order to cope up with the current trend in the fashion world Zara went for the push-pull strategy. Postponement is the best example of the pull strategy which is implemented by Zara. For its in house production, it takes 40% of fabric from another inditex subsidiary. Over half of them are un

dyed to allow faster response to mid-season changes.

Zara follows MTO(make to order) it uses the un dyed fabric and based on the order it gets in touch with the Fibracolor , a subcontractor in order to finish the making of the product soon. Hence, In this way Zara reduces the inventory level and eliminate non-value-added activities in the process. Lean supply chain in Zara – According to the CNN reports “while its rivals typically start planning their lines nine months before they hit the shelves, Zara has a reputation for instant reaction to fashion trends and rapid restocking of stores to meet demand on popular items.

It’s also not afraid to cancel items that aren’t selling. Zara can make new line- from the initial concept to when it arrives in the shops- in just 3 weeks. Zara lines rarely stay on the shelves for more than a month, and new stock often sells out in days. ” According to the CEO, Zara achieved all these by using the existing technology to take the control of design, production, inventory, distribution and shipping. Communication about customer demand – Zara takes their orders twice a week. So, the store managers order those products which are highly sold.

So, the product managers will be knowing the customer's demand. Short production runs - “the lot size of one” it takes out much of the risk in the industry, even if the product doesn’t get sold they can just change their production as per the change. Hence, they can prevent financial loss. Collaboration – Design, product, sourcing, retailing all work together by sharing the same space. Time

to market – Zara’s products reach out to customers as early as possible because of it’s agile nature.

Creates value for the end customer – Zara tries to deliver the right product to the customer at the right time. It creates a value product for the customer by eliminating the non-value added activities.  Zara gaining a competitive advantage using supply chain management: Supply chain management is a system of peoples, activities, organizations, services, resources, information and activities that are involved in moving a product from supplier to consumer. In order to offer products at affordable prices Zara implemented a strong supply chain mechanism.

And, this helped Zara to gain competitive advantage over its competitors. Design and order administration: Zara designs all its products on its own. It has a commercial team (market specialists, buyers, designers) of 300 in which they all are working together as a unit. Product which is designed by the designers will be examined by the market specialists and decide whether this can be sold at profit or not. It follows a sample methodology where it creates a sample of the design manually with the help of set of skilled workers.

But, the decision is not dependent alone on the market specialists. De-centralized decision approach – In Zara, market specialists deals with the specific stores and they constantly get in touch with the store managers in order to examine the sales, orders etc.. , Final decisions on what products to make are mainly rely on these discussions. Hence, Zara involves all its employees in decision making. Procurement: Procurement term refers to either buying or leasing something (raw materials, components,

sub assemblies, spares, equipments, services).

In fashion industry procurement plays a major role in supplier selection and product decision making. In the given case study, Zara’s make or buy decisions clearly based upon the procurement and production planning. Procurement decisions are mainly based on supplier’s level of speed and expertise, cost effectiveness and capacity. Procurement strategy affects the final product, if the company buys raw materials from the suppliers at low cost and good quality then it can sell at low price to the customers.

As Procurement is a value-adding process, it is important that manufacturing materials should be delivered on time with correct quality and at right total cost. It is all about selecting efficient suppliers and making the right product for the customers. Hence, Zara gained a competitive advantage in the market by providing low-cost products when compared to its competitors. Supplier relationship: In the fashion industry in order to cope up with the high uncertainties and fast lead times the organizations must work closely with their business partners to design, produce, distribute, selling and service their products.

In Zara’s supply chain it bought all its designers, buyers, experts at one place and the production close to them in order to reduce the lead time and also to increase the flexibility. As it is the fast fashion industry, there will be a lot of pressure on the suppliers from the companies due to the change in the market trend. It is very important for organizations to work closely with its suppliers. Zara’s supplier relationship plays a major role in order to gain a competitive advantage by bringing the right product

in to the market at the right time.

Zara works closely with its suppliers though it manufacturers 50% of its products in its own network and the rest of it is procured from 400 outside suppliers. According to the agile supply chain, it is better to have a wide range of suppliers in order to meet the customer demand in the fashion industry and also it eliminates the dependency on the single supplier. Fabric’s for Zara comes from 260 other suppliers as given in the case study and none of them account for more than 4% of its total production so that it can minimize the dependency.

Distribution and Retailing: As we know Zara takes order from its stores twice in a week. It is very important for it to have wide range of efficient network in order to place the product in the desired time. Zara announced a 100million logistics center in Zaragoza besides three other small warehouses in Brazil, Mexico and Argentina. By taking the orders regularly from its stores it is minimizing the inventory and overproduction. Sales managers of the particular store places the order depending upon the sales as it is driven by customer focus. In this way Zara reacts for the fast market changes.

Managing global supply chains: Global economies-

Most firms today are impacted by Global economies

•  Global sourcing of materials and products.
•  Global customers are willing to purchase.
•  Increase revenue.
•  Increase in production capacity.
•  Cheap resource and labor Currently, Zara has only limited its production to Europe.

With the changing behaviors’ of the

consumer due to globalization, there is a huge opportunity for Zara to enter into the US markets. It can set up its 2nd distribution center in US in order to deliver fast and also it can be the expansion to one of the warehouses which are located in Argentina, Mexico and Brazil.

By maintaining a distribution center in the US it will allow them to reduce the lead time and also analyze changing market trends in America. Hence, this will save a lot of money for the company and also increase the customer response. Even Zara should enter into the internet retailing business as we know that people in US like to purchase apparel sitting at the home. Even in India, if Zara wants to expand its market it has to invest in marketing and internet retailing. Zara also should change its designs based on geographical location and local trends.

By entering into the internet business it can reach to the customer faster and easier. Because, if compared to its competitors outside Europe all the companies are reaching the customer faster and hence gaining the competitive advantage over Zara. As Zara opened its first store in 1989, but it still got only 8 stores by 2002 which shows that its slow growth in the US market. By operating globally, Zara faces lot of uncertainties due to long distances, long lead times, and lack of market knowledge.

So, Zara has to make use of this opportunity for expansion in the retail industry In conclusion, Zara is the 3rd in the world retailers ranking by implementing the agile supply chain in the fashion industry.

And because of its close relationship with consumers and supplier, it has been able to place the right product to the customer at the right time. Zara’s quick response strategy reduced excess inventory in the production and also forecasted risks. Due to its agile nature, it decreased overall risks, increased market opportunity and reduced total costs.