Overall, many of the elements of Zara’s supply chain go against conventional wisdom. If a new company were to present a business plan with this type of supply chain that goes against most of the theoretical principles of supply chain management, most experts would probably predict that their company would fail. However, Zara’s supply chain is very strong and gives them a competitive advantage in their industry.
Which elements of Zara’s supply chain would you consider counter-intuitive?
Zara has taken a counter-intuitive approach to many of the elements in their supply chain, particularly in sourcing, design, manufacturing and logistics.
Zara is also vertically integrated in an industry that tends to be the opposites. Most of Zara’s competitors in the fashion sector outsource all of their production. Their competitors hire other companies to make the products that are sold in their stores, becoming more of distributor and vendor for the products rather than a manufacturer. Zara on the other hand produces half of its products in-house, maintaining large production facilities close to its markets.
Their approach to product designs and product lines is also counter-intuitive. Companies usually try to achieve economies of scale to reduce their costs. They carry a small range of product designs and product lines, but produce them in large quantities. By having a narrow range of products, they can be produced using a standard template in the factory, reducing the amount or recalibration and adjustments to the factory machinery, and thus reducing costs. Zara’s practice is exactly opposite of this; they produce a huge range of product designs and product lines in very small quantities. They manufacture and distribute small batches of products rather than using mass production and standardization. All of their goods are customized and targeted at customer demand in their various locations. They do not have economies of scale, which goes against most theories of economics and supply chain management.
Their retail practices are also counter-intuitive and different than most retail practices. They have very strict timetables for placing orders and receiving stock. Most retailers allow their locations more leeway and discretion in placing orders and maintaining their stock levels. Zara allows the managers at the retail locations a little discretion in determining what is carried in their stores, but much of the inventory decisions are made by the “commercials” at La Coruna. They could ship items that the stores did not order and were used to assess demand for those items in various locations.
They put price tags on all the items before they are shipped from the Zara facilities to the distribution centers. Prices are established based on the Spanish market, and then prices for other countries are set at a fixed percentage of this baseline, taking into consideration the distribution costs. This gives the managers at the stores no ability to adjust prices for what they think their market can bear.
The manufacturing facilities are also counter-intuitive, especially for this type of industry. Most companies in the fashion sector are either manufacturers of the clothes, or distributors of the clothes, but rarely both. Zara has invested a large amount of capital into their factories, plants, distribution centers and retail outlets. Most companies try to reduce costs by avoiding capital expenditures when they can, but Zara invested heavily into their capital.
The most counter-intuitive element of their supply chain is the fact that they tolerate and encourage stock-outs. Most companies try to maintain a certain safety stock for their inventories and have automatic reorder points when stock reaches certain levels. Zara encourages stock-outs as a means of inducing and increasing demand. Customers can never be sure if something they see and like will be there the next time they come back, which causes them to make impulse purchases. For most company, stock-outs are strongly avoided if at all possible.
Inventory is loosely tracked and total accuracy is not sought after. As Sanchez said at the beginning of the case, “instead of selling clothes they’ll be counting them all the time, trying to make sure their online inventory figures are 100% accurate. Bad idea.” It is not often where a company decides not to track inventory at a detailed level. Inventory control is usually used to help prevent theft from employees and to ensure that inventory and sales are recorded properly. Instead, Zara uses “theoretical inventory” that assumes that shipments and sales are being recorded properly and that there is no theft taking place. Salgado summed up their inventory control when he said, “Having 100% control is most of the time just too expensive. Being 95% right is pretty good, and often you don’t need more accuracy.”
Another one of their practices that is counter-intuitive is the fact that the factories and distribution centers do not run at full capacity. Factory managers use simple applications to plan production. Managers know the quantities and due dates for all production requests and use the information to load their factories and plan the jobs. However, the factories are highly automated, which minimizes labour costs and minimizes scrap. The machines can cut over 100 layers of fabric at a time, which allows them to decrease the cycle time from when a design is conceived to when it can be produced. They are then able to send the cut fabric to external workshops for sewing. Most companies would keep the factories running at full capacity, and if inventory was not required at their own stores, they would seek external business opportunities to maximize their profit. In other words, instead of letting the factor and distribution centers sit idle, they would contract out to provide services and manufacturing for other companies.
They also do not maximize the manufacturing and transportation batches. Instead of waiting until they have a full order for a product, or a full truck or cargo container, they process orders and shipments on a regular schedule. They try to keep delivery cycle times stable, reducing the variability in the supply chain. While reducing variability and complexity in the supply chain is a goal of the supply chain manager, usually another goal is to maximize production and shipping capacity. Zara tends to favour steady delivery cycles and do not delay orders if quantities do not reach a certain level.
IT is completely insourced, and uses relatively simple and somewhat outdated software applications. Typically IT is one of the first functions that is outsourced to 4PLs since it is not a core competency. However, IT spending as a percentage of revenue is around five times smaller than that of other retailers. As well, IT employees account for less than 0.5% of Inditex’s total workforce, whereas many retailers devote as much as 2.5% of their employees to IT. Keeping IT simple and insourced seems to be working for Zara as the supply chain seems to function well, they do not have high turnover in the IT area, and it is relatively inexpensive.
Explain how Zara’s supply chain works to achieve its business objectives. What are its success factors?
Zara’s business model is to link customer demand to manufacturing, and to link manufacturing to distribution. Their supply chain is run almost entirely within the company, with very little outsourcing and use of 3PL and 4PL providers. The business strategy drives the logistics and supply chain. Zara owns everything in the supply chain right from the plants, to the trucks, to the retail stores. The only thing they source is the raw materials needed (fabric), and the only thing they outsource is the sewing of the garments. They are able to use the point of sale terminals (POS) and handheld personal digital assistants (PDAs) to track actual sales data at each of their retail locations. This data is transmitted to the information systems at La Coruna to help them make decisions on what to manufacture. Digital order forms are transmitted to all the stores’ PDAs 24 hours before each order deadline based on sales data and predictions of sales for that location. This links the customer demand to the distribution of goods for each location.
Zara competes through low cost goods and production, and through innovation. They are able to introduce large numbers of new fashion items that are affordable very quickly; these items are also specifically tailored to the trends in the marketplace. Their strengths are that they can quickly determine what the demand for certain styles and demographics are in each of their locations, produce specific product lines tailored to that demand, and deliver it quickly.
Their company, supply chain, and factories are very flexible, being able to respond to the changing tastes of the customers. They can use their network to move a new design from conception through production and into their distribution centers in as little as three weeks. Flexibility, agility and efficiency are all key components in a good supply chain, and Zara has managed to develop a system that excels at these components.
They are able to reduce demand uncertainty by producing small quantities of clothes to test the market. Once a product has been deemed to be viable, Zara can quickly ramp up production of that item and rapidly distribute it to the stores.
Zara uses integrated development teams in their supply chain. They have linked all the key function of the supply chain into their development teams by including product design, production, distribution and marketing. 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. This key mantra of supply chain management and business is achieved by Zara through their supply chain.
Assess strengths of Zara’s supply chain in terms of critical supply chain elements discussed in class such as risk management, cycle time management, demand forecasting, inventory management, customer service, logistics, etc.
Zara’s supply chain is very strong and effective for one that goes against most supply chain theories. However, it still incorporates the critical supply chain elements
Risk management is a big part of Zara’s supply chain and business strategy. Having a large capital investment increases their risk, as does producing and shipping the goods themselves. However, this risk has had huge payoffs for Zara in terms of reducing lead times and increasing their agility and flexibility to react to market demand. They have reduced their risk by producing smaller quantities of styles. They also created artificial scarcity, and in fashion anything that is scarce becomes more desirable and sought after. As well, if a style does sell well and is not popular, there is a lower inventory that has to be sold at a discount or discarded at the end of the season.
The supply chain and distribution system at Zara has not been designed with costs in mind, but rather with developing a system to support fast and frequent changes of products. This includes reducing cycle time wherever possible; that is, they reduce the total time elapsed to complete their business processes. Zara has reduced the cycle time in the three basic flows in supply chain management. The POS terminals and set ordering times have reduced the cycle time in the ordering process. Shipments can be delivered within two days of the orders being placed, so the cycle time and turnaround is extremely quick. The case does not really go into the payment flow, but since the retail stores are part of Zara and Inditex, payment within the company should occur in a short period (mainly electronic accounting entries). These short cycle times are a great strength in the supply chain since the faster the order is placed, the faster the shipment is made, the faster the payment is sent back to the head office, and the faster the customers can buy new goods.
Demand forecasting is one of the greatest strengths for Zara in the fact that they don’t do it. Zara reacts to customer demand rather trying to forecast for demand. Their supply chain is flexible and agile enough to assess what the customers want and quickly produce goods to match that demand. Since customer demand for styles is always changing in the fashion world, reacting to it is better than trying to forecast for it. Zara mainly uses a pull-based strategy where demand determines replenishments, production and the design of new goods. They do use a push-pull strategy for some of the more basic goods, such as men’s dress shirts. They design/manufacture certain quantities of these goods and push them out to the retailers. Then customer demand will pull inventory through the system to replenish these items when stock starts to run low.
Inventory management is a big strength for Zara. Their strategy of producing lots of styles, yet reducing the complexity of the supply chain is very different than that of their competitors. Zara can introduce over 11,000 new items in a typical year, which would lead one to believe that they would have large amounts of costs associated with inventory and warehousing. However, Zara produces very small quantities of these goods and ships them out to the stores immediately. They also change out around 75% of their stock every 3 to 4 weeks. They chose not to sell clothes over the internet due to the way their DCs are configured; they are unable to pick and pack for individual consumers. However, they are able to use continuous replenishment through the fact that basic products are automatically replenished, and new products are constantly being produced and shipped out to the retailers. Since there is very little inventory in the supply chain, and stock-outs are almost encouraged, there would be very little in the way of safety stocks to buffer variability in demand. Zara has very low inventory costs, which is due to less variability than their competitors due to better information on changes in supply and demand conditions. Carrying low inventories reduces the costs of physical warehouse facilities, costs of management and coordination, frees up capital, and mitigates the risk of product obsolescence, theft and damages.
The bull-whip effect does not cause inventory problems in Zara since the effects of the bull-whip effect are minimized. The POS data is transmitted directly to headquarters and the factories, so there are no members in the supply chain that can exaggerate or inflate the numbers. The bull-whip effect is caused by demand forecast updating, order batching, price fluctuations, and rationing and shortage gaming. The simplicity of the supply chain, POS data, sharing information and centralized demand information help mitigate the bull-whip effect.
Due to the business model of Zara, they should focus on having the perfect order (received on time, complete, damage free, filled and billed accurately. These are the ideal shipments, and Zara would strive to always have the perfect order. If the order is not on time, or is missing products or has damaged products, then the stores will not always be stocked how they should be. However, given that stock-outs are tolerated, it is not as essential that they always have the perfect order. Companies like Gap and H&M would look for more perfect orders than Zara as it will have a bigger impact on their stores than it will on Zara’s. However, companies are always looking for the perfect order, or at least having a very high fill rate.
Customer service is a big part of supply chain management. This is customer service provided to the final customer, as well as to the retail stores. The end customers know that stock changes rapidly at Zara, so they know to come to the stores more often than going to competitors to see the new styles. They also know to buy what they like when they see it rather than waiting since the product might not be there when they come back. Customer service is not a high priority for Zara, and they even take the approach that their clothes are meant to be worn 10 times and then replaced. This is communicated to the customers so there are fewer issues regarding complaints about quality and with customers trying to order in specific items. There are less post-transaction issues with complain handling and returns/reverse logistics (Zara only has around a 1% return rate at its stores). As for customer service to the retail chains, they are a part of Zara so it is internal customer service. These are transactional in nature and have to do with stock-outs, cycle time, convenience, accuracy and information. Being part of Zara, they know that stock-outs are normal, cycle time for the various flows will be short, and the system provides for convenience, accuracy and constant flow of information. However, being that Zara does not place much importance on customer service, it can not really be considered a strength of the supply chain, other than the fact that they do not have to spend much time or resources on this function.
The strength in Zara’s supply chain lies in the management of logistics. When logistics is outsourced to 3PLs, companies risk losing control over the flow of products and materials, risk losing providers due to business failure, and can lead to conflicting objectives within the shipper’s organization. Zara avoids all these problems by keeping the logistics in-house. They still have to worry about inbound logistics of purchasing and obtaining undyed fabric from the external market, and of coordinating shipments from their textile fabrication facilities, but this is minor. With the majority of the logistics being in-house, they do not have to worry about impacting any other supply chains but their own. Their competition would need to be very careful making any changes to their supply chain due to the impacts it would have on their suppliers, sources, 3PLs and 4PLs. The outbound logistics are also kept in-house, so Zara has control over its shipments and DCs. This increases their flexibility in determining how much to ship by truck and by air, as well as the frequency of those shipments. They are not tied into a specific delivery schedule and can adjust the quantity being shipped very quickly to ensure the right products are getting to the places where they are needed the most. The garments flowed through the supply chain quickly, moving from the factories to the DCs to the stories without stopping. This implies that they probably make some use of cross-docking and break-bulking at the DCs to take the shipments from the factories and prepare them for shipment to their various retail stores.
When looking at logistics, we need to look at price, products, promotion and place. Zara is not as concerned with the price aspect of the transportation and inventory costs. They have set modes of transportation (by truck and by air), and adjust shipment quantities based on demand. There are very little inventory costs since they do not need to warehouse the products. For the product, this is the packaging of the product which would impact the storage, handling and transportation of the products. The products are put on hangers and boxed at the DCs for easy transport to the stores. Since the products already have price tags and hangers, it is relatively quick and easy to display the products when they arrive at the stores. Marketing and logistics normally need to be synchronized in order to determine the impact marketing plans and promotions will have on inventory and production. Zara only spends 0.3% of revenue on marketing activities versus the typical 3%-4% spent by competitors. Very little marketing is done due to their business strategy, so marketing has little impact on logistics. Place refers to the distribution system and strategy and as to how to configure the system. Zara located their main DCs close to their factories, and planned their system to react to smaller but many orders.
Zara also uses more of a make-to-order strategy rather than a make-to-stock system. Most of their production is determined by the orders and customer demand, rather than producing large quantities to maintain stock levels. The exception to this is for their basic items, which are basically made to stock. Due to these factors, there is not must use for postponement. The factories only produce what is ordered, inventories are almost nonexistent and there are not many intermediaries between the plants and the stores. Therefore, postponement is not really viable for Zara.
The business aims of supply chain management are to reduce inventory and production costs, have a responsive and efficient supply chain, provide better customer service, and earn higher rates of return. Zara is able to accomplish all of these goals, which indicates that they have a strong supply chain and are able to manage the critical supply chain elements efficiently and effectively. They were able to optimize the strategic, tactical and operations functions of the supply chain to work with their business strategy.
Is the Zara strategy applicable to most of the retail and fashion sector? Why or why not?
The Zara strategy would not applicable to most of the retail and fashion sector. Most retailers spend a large amount of capital on inventory management and forecasting. Retailers and the fashion sector tend to have very long lead times and forecast demand well in advance of the upcoming season. They tend to use a push strategy, choosing their products for the upcoming season, producing large quantities of them, and pushing them out to the stores. Traditional retailers will change their stock by around 20 percent once the season has started, and use replenishment to keep the stores stocked. The result is higher inventory and warehousing costs, but customers can expect that the inventories will not change much of the season. They are almost guaranteed that if they like a certain style that it will either be in stock or be restocked in the near future.
The just-in-time strategy and high number of products does not work well in many retail or fashion sectors. These sectors rely on economies of scale, standardized products, and predictable shipments to reduce costs. There is generally a large amount of outsourcing, both in logistics and production/manufacturing. Most established companies would not be able to change their processes or supply chain to this type of system. Retailers and the fashion sector tend to have lots of partners, whereas Zara manages most of the supply chain internally. The logistics of most company’s supply chains would not work using Zara’s strategy. There are usually longer lead times and schedules of shipments that are used in these sectors. Many 3PLs and 4PLs would not be able to handle the variability that Zara’s strategy requires.
Most companies can no longer be vertically integrated in today’s competitive market. Globalization has led to companies sourcing from various locations across the globe, as well as using 3PLs and 4PLs to manage functions that are not core competencies. Usually when companies start competing at the global level, they divest themselves of anything that is outside their competencies. They also try to minimize risk by deducing their investments in capital and reducing their risks of taking ownership of too much inventory (through the use of 3PLs). Zara is really a success story in their use of supply chain management since how they manage their company is counter-intuitive to conventional wisdom and to the theories of supply chain management.
Zara’s strategy would work for industries where the product life cycle is very short. However, the fashion industry is generally focused on longer life cycles where products are designed well in advance and are marketed for an entire season. Zara reacts to the current market trends and uses a quick response system to produce new styles within three weeks.
Most retailers and fashion companies buy on the basis of brand and use economies of scale. They may source from as many as 900 or 1000 different companies to stock their stores. This is not conducive to having a reactionary supply chain; these companies need to forecast demand and plan to bring in their inventories due to the longer lead times required when dealing with this number of companies. 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.