Zara: Proof of The Power of An Efficient Supply Chain

Introduction

The incredible ability of Zara, owned by parent company Inditex, to successfully implement an integrated supply chain whose strategy is to have total control over the whole operation from production to the sale of their items has caused them to not only be the most profitable fashion retail brand across the globe, it has made their owner, Amancio Ortega, the sixth richest man in the world. This method of supply chain in retail is known as “fast fashion” and is supported by how the company is able to vertically integrate completely and ensure flexibility and high efficiency in all areas — from logistics to manufacturing, product design, material procurement as well as being able to distribute and have the correct sourcing strategy to meet the needs of the consumer with incredibly high levels of supply chain responsiveness that has broken through what was once considered the norm . They operate on a lean strategic model, which means being able to adapt and deliver products to stores with latest trends and be able to respond to their customer feedback as quickly as possible and thus not be susceptible to the short life cycle of products in the retail industry and the always changing demand of the consumer, which leads to a much lower levels of losses due to supply chain inefficiencies such as inventory backlog or stock-out.

Traditional Retail Is Dying

Traditional fashion retail brands have usually been directed by a model that is based upon a fixed supply chain that depends upon trade fairs, seasonal clothes, year-long forecasts and other tried and true methods that have ultimately led them to have much longer development cycles as well as the time it takes to plan and design their products. Due to such companies as Zara and the incredible success that they have seen by having smaller collections that are able to meet the needs of the lifestyle of the consumer in a timely manner, most of these traditional companies have been forced to abandon their old ways and adopt this same model of supply chain vertical integration. Several studies, such as the one by McCutcheon, Raturi & Meredith (1994), have shown that if a business is unable to be able to meet the needs of the consumer in a timely and cost effective manner, they will lose their market share to a competitor such as Zara, a company that is able to exactly such that. Zara changed the usual seasonal model of planning and supplying their products from seasonal to as many as twenty periods per year of different designs that are offered (Christopher et. al., 2004).

Rapid Fire Fulfillment

This was made possible by the incredibly efficient supply chain which has come to be known as “Rapid-Fire Fulfillment”, basically meaning that they have the capabilities of being able to have their product design to delivery cycle to a time of only fifteen days (Feredows, Lewis & Machuca, 2004). This unique operating model facilitates the feedback from each individual store towards those who are designing the products and thus the company is better able to adapt and meet the needs of their consumers, which as we know is usually always constantly changing. This incredibly efficient approach to their supply chain has led them to become a hugely competitive player globally and has led them to see incredible profits for the stockholders and the owners of the individual franchises. Zara, with Inditex being the parent behind this incredibly genius model, is at the forefront and is at the top of the game as the leader of fast fashion retailing which has also been described as branded manufacturer in this buyer driven clothing value chain (Gereffi & Frederick, 2010).

A Case Study Being The Best Way To Research

The problem of being able to accurately research such a company as Zara in a real world type manner is answered by the qualitative research methodology (Mintzberg, 1979), more specifically, the qualitative research method of the case study approach which is perfect for such a company where there are no previous examples or theories upon which to base the success of such companies (Eisenhardt, 1989; R.K. Yin, 2009). Being able to study this company in a case study manner allows for a real life method of being able to understand in detail the how and why behind the incredible success of Zara. To be able to case study a company, the company must be one that is able to be studied in comparison to those in the same field and industry as it and that have somewhat similar characteristics, such as retail and a demand driven supply chain (R.K. Yin, 2004).

Zara, Global Presence and Fast Fashion

Zara, the pioneer of this style of retailing, was begun by it’s owner Ignacio Amancio Ortega in Galicia, Spain in the year 1969 (Ferdows, et al., 2004) and is owned by the parent company Inditex (Industria de DisenoTexil, S.A) which is headquartered in Arteixo, Galicia, Spain. Inditex also owns Zara Home, Massimo Dutti, Bershka, Oysho, Pull and Bear, Stradivarius and Uterque and during the first half of the year of 2017, the parent company as a whole had a total of upwards of seven-thousand stores opearint across forty-five different countries and delivers fifty-thousand distinct items to its thousands of brick and mortar stores worldwide. Compare this to their top competitors who are only shipping, at the most, four-thousand items to their stores, and you will get a very good idea of just how efficiently built this supply chain operates and why this company is able to take such a huge margin of the market share for retail, has a stock market capitalization valued at eighty-eight billion dollars and is able to operate in ninety-four different foreign markets with 2,236 physical stores and their global reach towards forty-five different nations through their E-commerce platform (Inditex Annual Report, 2017). Zara has an incredibly efficient strategy of mass targeting a whole industry instead of having to focus on a segment of the market and is able to afford this by providing products that contain the latest trends in fashion manufactured in many different varieties which are produced at a high level of quality at a fast pace and, most importantly, a very consumer-friendly price (Doeringer & Crean, 2006). This is due to the inability to be able to accurately forecast the trends that come with such a highly volatile industry in which demand is always changing according to the changing needs of consumers (Abernathy, Volpe, & Weil, 2007) which in turn results in a very short product life of cycle that consists of, at the most, one month (Doeringer & Crean, 2005).

Merchandise and the Offer/Order Strategy

The offer and order process for merchandise are prepared in distinct segments and executed in different stages, with a commercial within the design team communication order information to manufacturing plants in what is known as a FPR (First Product Request), which is then sent out to the individual retail stores (Mcafee, Dessain & Sjoman, 2007). Every retail store receives approximately about twenty-five thousand units within a two week period and the responsibility to order new merchandise is placed upon the section managers, who transmit these requests through an internal EDI database that sends information directly to headquarters and thus is able to keep the cycle moving smoothly and at its highest efficiency. This buyer driven and vertically integrated supply chain method, known as “the order” results in a huge loss of lead time between the section manager and headquarters and is done twice a week with very strict restrictions on their deadlines for order placement (Ferdows, Lewis & Machuca, 2003). However, the managers are also able to have the independence of being able to have the say-so of what is needed manually depending on the feedback by their regional market and the knowledge that is provided by such feedback by gathering information at all the different levels involved in such a decision. By analyzing the data of how well their products are selling as well as talking to the employees, they are able to get a better view of the trends with the information that is needed about what the consumers’ needs, which they are able to do since most managers have been promoted internally and have worked at the stores and know the correct questions to ask in order to make the right decisions financially (Sull & Turconi, 2008).

Procurement and Productions Through Ownership & Outsourcing

By having the correct information about what products are needed and in demand, Zara is better able to target how their apparel items are going to be produced in their facilities and the amount of fabric that will be required to purchase (Christopher et al., 2005; Tyler, Heely & Bhamra, 2006), Zara keeps half of its fabrics in an undyed state that are later adapted into different colors that are done in their own manufacturing facilities after the sectional managers have provided the information about what it is the market demands (BusinessWire, 2002) and by enhancing the responsiveness of their reaction to the color changes that may happen mid-season (Ferdows et al, 2004) and reduces the risk of clothes being manufactured from the wrong fabric type (McCarty & Jayarthne, 2007). This is done through offices located in Barcelona and Hong Kong, which are both completely owned by Inditex and maange over 932 different suppliers of fabric and raw materials with locations stretching from Italy, Spain, Germany, Portugal and Greece, which decreases the dependency on single suppliers and encourages responsiveness that moves the supply chain as effectively and efficiently as possible (Ferdows et al., 2003). Not only does Zara was one of the first companies to actually make tremendous investments to have ownership over the production, distribution and retail facilities which boost their ability to handle the cyclical and crazy demands of such an industry. Owning these assets allows for Zara’s overall success as a company that operates with LEAN principles by allowing them to adjust in a flexible manner towards what the consumer and market demands. Zara’s manufacturing plants use the incredibly efficient manufacturing technique, also used by Toyota, known as just-in-time, which allows them to customize production operations and be able to adjust to unforeseen innovations. There are 11 plants that Zara owns and they have them positioned strategically around the globe and they are heavily automated with machines of the highest technological standards. Once the work is done by these machines, such as the cutting of fabric, they are then sent to their outsourced “partners”, which range from about five-hundred different locations who then do the labor intensive assembly and sewing operations, which are ultimately then sent to distribution centers. Zara also outsources the products which fall under the fashion category to geostrategic locations with cheap labor wages as well as outsourcing the less time-sensitive products to sources such as China, Bangladesh, India, Pakistan, Vietnam and Cambodia.

The Logistics and Distribution Behind Zara’s Success

Inditex controls ten centers which are in charge of the logical operations and are located accordingly in order to be able to be close to head offices of each of their eight brands, all located in Spain (Inditex Annual Report, 2017). The distribution center, also known as “The Cube”, is a 5 million square feet and highly automated factory that even has underground monorail links connected to each other eleven factors within a short radius. These tunnels use a high speed monorail that are able to transport these cut fabrics for assembly into clothing items and return them to the distribution center for shipment to the individual retail stores (Butler, 2013). In comparison to this, their competitors produce products from different production points and then are shipped to distribution center and take about two to four weeks to transport their products from one of the distribution centers whereas Zara is able to complete this within a span of eight hours to two days, depending on the location of the store. It is of no surprise that Zara has completely overtaken the market and, just as Walmart did to its competitors, was able to use a highly efficient buyer driven supply chain in order to stay at the top of the market in the industries in which they are in operations in.

Conclusion

This paper was done in hopes of making a comprehensive study of the incredible achievement that Zara was able to accomplish in its supply chain practice in an industry that had never been exposed to such efficiency. Ownership over all levels from the initial “order” all the way to the sale, save for a few outsourced operations, has allowed the company to operate under LEAN principles in a highly efficient manner. Vertical integration through this style of ownership of various stages of the operations ultimately includes the product development, manufacturing, logistics and distribution, sourcing strategically to meet the needs of the consumers, material procurement and manufacturing that ensures low levels of inefficiency as well as a seamlessly integrated infrastructure that are all done in a strategic manner to increase the supply chain efficiency and counter the usual problems that retail stores encounter such as short product life cycles and a high variety of demand for products.

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