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Zara Case Analysis

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Introduction

Zara: IT for Fast Fashion How would Zara's supply chain be considered and rated purely on the basis of theoretical principles? In other words, would it be considered an effective way of managing a supply chain by conventional wisdom? Zara's supply chain would normally not be considered an effective way of managing a supply chain by conventional wisdom. While they do use a number of popular supply chain practices like outsourcing, global procurement, third-party logistics, just-in-time manufacturing, continuous replenishment, they do many things that goes against conventional wisdom. However, it has been very successful for them. They have higher product margins than Gap, H&M and Benetton and have manage to substantially increase their revenues from 2001 to 2002 while the other companies either maintained or decreased their revenues (Exhibit 4). They also have higher market capitalization than both Gap and Benetton, even though those companies have over double the number of stores that Inditex has. Inditex also has a very high return on equity, with an ROE over 20% from 1996 to 2002 (Exhibit 5). If their supply chain was not effective, they would not be as successful as they are. Conventional wisdom is to outsource anything that is not the company's core competency. Zara does very little outsourcing, choosing instead to produce more than half of it's products in-house rather than using individual suppliers. Typically, companies focus on their core competencies and outsource things like manufacturing, transportation and distribution, and financial/human resource/information technology functions to third-party logistics (3PL) and fourth-party logistics (4PL) providers. Zara outsources very little, choosing to keep many of these functions in-house. One of the biggest problems of any supply chain is minimizing the "bull-whip" effect. This is when information about the customer's actual demand is distorted and amplified as we move up through the supply chain. Zara is able to use their point of sale terminals and information to transmit the customer's actual demand right to their manufacturing facilities. ...read more.

Middle

These teams of commercials usually consist of two designers and two product managers, who purchased material, placed production orders with the factories and set prices. Each team is dedicated to a section of the store (men, women and children). A second group of commercials called store product managers sit close by the teams and serve as the link to Zara's stores worldwide. The store product managers collect feedback from the stores and bring it to the design teams. This helps determine what items will be developed and how many to manufacture. This arrangement is shown in Exhibit 3. This setup assists in linking the supply chain to the business objectives of the company. Since the store product managers are in contact with the retail stores almost every day, they are able to determine customer demand in each of their locations and pass this information over to the other commercials. They can then design what will be produced, order any materials required and place an order with the factory. This layout and process contributes to the low lead times and to matching what Zara supplies to customer demand. The supply chain is based around three fundamental ideals. Short lead time leads to more clothes that are in style, rather than having huge inventories of clothes that are outdated. Produce lower quantities to create a scarce supply, thereby driving up demand for those items. And finally, more style equals more choice, increasing the chances of producing a popular product and limiting the risk of producing something unpopular. If Zara produces something that fails, it is statistically a small portion of the overall production and sales that it has a minor impact. For their competitors, having a product fail has major impact since they carry a smaller number of product lines. One of Zara's success factors is that they make sure they have the right product, at the right time, in the right place. ...read more.

Conclusion

Companies are also moving more to the "China price" where they source from wherever is the cheapest. This might be all the way on the other side of the world, increasing the lead time and making it difficult to react quickly. Culture can also pose a barrier to this type of system. It requires rapid turnaround, employees who can follow orders and react quickly to changes in demand and work load, and corporate buy-in from everyone in the company. When you are working with people in other countries, culture, customs and tradition can sometimes stand in the way of a system like this. Inditex operates in 45 countries, second only to Benetton who operates in 120 countries. If Inditex/Zara had to deal with their retailers in all these countries, plus work with their suppliers and distributors in numerous other countries, then the system would become so complex that it would be impossible to operate using this business model. Cultural differences would start popping up and further complicate the system. What sets Zara apart from the rest of its competitors is that it reacts rather than trying to predict customer demand. Their supply chain and rapid production system allow them to use POS information and within a month, have a new product in their stores to satisfy customer demand. They have developed their business around reacting swiftly rather than putting lots of money into forecasting. Typically retailers can take up to a year to move from a concept stage to having the goods produced and delivered to the retail store. This is due to the long lead times required by sourcing from multiple countries and suppliers, and outsourcing the manufacturing and logistics. It would almost be impossible for an existing company to mimic or reproduce Zara's supply chain, thus giving Zara a competitive advantage in the fashion industry. Most retail companies would also face too many problems over inventory management, logistics and marketing to be able to successfully use the Zara strategy. ?? ?? ?? ?? ...read more.

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