SCM and Logistics - Assignment Example

SCM and Logistics 1. COMPANY PROFILE Companies’ worldwide struggle to maintain a competitive position and business sustainability along with sound financial results as compared to their industry peers. However, with increasing number of new products and dynamic business concepts rising on to the platform every day, it may seem very difficult for the companies to achieve the status. Today, it is not the firms that struggle with each other, but the effective supply chain management that makes the difference. Supply chain and Logistics management have been regarded as one of the main concerns for companies to achieve better performances. The Fashion Industry has been able to make significant alterations within its supply chain systems as a result of the changing characteristics of the fashion market around the world which requires price benefits by the company and fresh products by the clients. Leading Fashion chains like Zara and Gucci have developed successful supply chains and Logistics systems, to meet consumer needs in an effective manner. This paper is an attempt to analyze the Fashion chain – Zara, an undertaking of the Spanish Company - Inditex Group. The paper will analyze the supply chain and Logistics strategies of the Fashion Company which holds a significant place in the European Fashion Market. The company has displayed competitive character and has continued to gain advantage by employing modern systems as compared to its competitors. The company – Zara Fashion Chain was set up in 1975 in Arteixo, a small city in the Northern part of Spain. Zara has strive to become one of the most successful fashion brands in the Fashion industry, and also helped its parent company, Inditex, to grow from the murkiness to the second largest fashion retailer in the world after the Swedish based company H&M. however, the financial  performance of Zara is much ahead of H&M. The Group with its long chain of 3200 stores, holds its strong presence in 66 countries across Europe, America, Middle East, Asia and Africa. Zara also possess seven commercial formats: Skhuaban, Pull and Bear, Massimo Dutti, Bershka, Stradivarius, Oysho and Zara Home. The Inditex Group comprises of more than a hundred companies that are linked with the Textile fashion design and manufacture industry. Out of the total 3200 stores, Zara fashion stores locations figure at 1000 across 55 countries around the world.   Zara Fashion Chain contributes two-thirds of total sales of the Group – Inditex, which was 9,002 million euro, with a net profit of 1,002 million euro in the last financial year. The group has accounted a 25% rise in profit for 2006 on account of the strong growth in its Zara chain. Profit for the year to 31 January 2008 was EUR1.0bn, on sales that rose 22% to EUR8.2 bn. On 31 January 2008 the Group had 60,740 employees. With a turnover of more than $150 million, the success mantra for Zara is to offer the best quality in shortest time span possible and cheapest prices. Zara Fashion caters to both the sexes including infants to 50 year old clients. The company has closely maintained its focus through the years on uninterrupted improvement and innovation supported strongly by customer needs and satisfaction criterion. Zara focuses on providing the market frequently with the latest trends and maintains to change over 70% of the products every month. According to Luis Blanc, an Inditex Designer Director, “Zara recommends its clients to understand that if they like something, they must buy it now, because it will not be in the shops the following week. It is all about creating a climate of scarcity and opportunity”. 2. SUPPLY CHAIN AMD LOGISTIC ANALYSIS Every retail business that includes supply chain systems, add value to their product in some form or other. An effective supply chain management is an act of optimizing all actions throughout the supply chain process for the retail businesses, and an efficient management of the supply chain is the key to obtaining higher competitive retail business advantages. Supply chain management is all about having the right kind of resources at the right time and supply of the products to the right customers at a limited cost. However, to reach at the helm of leadership and success, it is important that the retail set ups like Zara should bring about a radical change in its methodology and should be willing and determined to shift to the new paradigm. Supply Chain Management has become an imperative and indispensable constituent and any retail organization should make the best use of the resources and potential offered by such management system. The benefits that could be achieved with the help of a leveraged supply chain strategy include increased customer satisfaction, lower inventory tasks, less product obsolescence, and reduced workforce or manpower, (Abernathy, Dunlop, Hammond, and Weil, 2001). It is not easy to implement a successful supply chain, but definitely it is worth putting the effort in terms of the results that can result from the activity of implementing bringing together IT management systems and SCM. With regards to the concern of Logistics, it took some time for the management of Zara to accept logistics as a management process. Most of their competitors have already established this sector as one of the foundation stones to deliver diverse services and products while aiming high profit margins and customer satisfaction. Today, logistics management is acclaimed as a combining process that provides information networks and necessary infrastructure essential for the development and functioning of global supply chains. The company has already taken various initiatives such as real time information sharing and distribution, supply chain engineering, efficient consumer response systems and the lean models. The main aim of the company management is to search for new levels of supply chain efficiency and integration. The company’s management has recognized that the future to competitive edge is to define internal improvements and plan far outside the frontiers of the normally envisioned enterprises. In today’s global and volatile market and with ever increasing competitors for Zara, the consumer demands are rising by the minute. It is now acknowledged as a strategic necessity, to forge partnerships beyond geographical and industry-vertical boundaries. Collaborative planning systems are providing the capabilities for accelerating the co-management of planning processes and efficient sharing of information. Logistics collaboration and sharing of infrastructure needs to become a reality for the company in order gain an edge over other market players, (Lambert and Stock 2002, p. 342). Usually, there are five parts to a supply chain in a fashion industry, states more analytically that there are about five parts in the clothing – processing of raw materials into fibres, weaving of fibres into threads, assembling the finished good, transportation to sale centres, and retail sale. With the increasing stiff competition, it is vital to gain higher advantage from superior supply chains in order to gain market share.  2.1 Description of Zara Supply Chain and Logistics Zara employees a team of designers who are responsible for spotting the current trends in the fashion industry as per consumer demands. Also, the store managers offer valuable consumer feedback to the design team. This information communication on design, outlook and consumer demand is done with the help of wireless information systems. This feedback and spotting of current trends helps the design managers to develop products for Zara. The next step is the development of a detailed cost analysis and assessment of the production capability by the Procurement and production planning departments regarding the new product to be launched in the market.  The development of the product prototype occurs fast with the cooperation of designers, and the production planners who work closely and deliver the results within few hours.  The sampling process is carried out with the help of CAD which makes the process fast.  After the decisions on the issue of design, fabrics, production costs are completed, Zara initiates it’s in- house production in low volumes with short life cycles for each product. Fabric is cut through automated manufacturing systems and then these cut pieces are sent to the sewing workshops in Galicia and Portugal. The process of design and cutting of fabric is completed within 10 days. Next, with the help of special algorithm based systems, pre-determined conditions and demands, the management decides to go ahead with the production of some products while retaining some of them back. As an average, only 40% are turned onto styled products for customers. The articles are then returned to the manufacturing centres where quality control, ironing, tagging and wrapping occur. They are then transported to the automated distribution centre, Arteixo, which is divided into two main levels. On the first level the “folded” products are packed into boxes based on each specific destination. On the second level the garments are sorted according to the style and they are placed on hangers. All the products are pre-labelled and the lots marked according to each specific destination. In that case the products are ready for store display. The distribution centre is utilized as a Crisis docking facility without any storage. In case, of Zara, the delivery schedules and accuracy have already arrived at an high of 98.99%.  Since Zara is a vertical supply chain company, which means that it encompasses in itself all the processes from design to final distribution to the outlets, it has been able to reduce its cycle time by producing in smaller batches and applying just in time manufacturing concept. As per the average time taken up by leading fashion companies, the design takes up to six months and manufacturing completes in 3 months, however, Zara completes the whole process within 5 weeks only. This cycle time reduction has enabled Zara to continuously manufacture even within the season and place the majority of its production closer to the season. Modern IT techniques and technology has greatly assisted in maintaining an efficient supply chain and production facility. There are a number of activities that have been shortlisted by the company’s management which were enhanced with the help of a better supply chain management system, (Abernathy, Dunlop, Hammond, and Weil, 2001). They are:          Assembly sub-assembly of products, Package and product labeling of goods, Management of inventory Processing and planning orders Track and trace products Subsequently, by the application of better management capabilities, Zara fashion has achieved the following: Greater operational flexibility Ability to expand geographically Focus on core competencies Ease of achieving economies of scale. Use of IT technologies like logistics electronic data interchange, Logistics Management Information Systems, RIFD, the Direct Store Delivery have definitely proved to be turning factor for Zara Fashion, (Christopher, 2005). These techniques are basically examples of a sophisticated knowledge management system that supports the supply chain business models in a highly competitive manner. The company has invested a substantial amount of money on an electronic warehouse that will drive the product information automatically without any man handling of information at any point in the supply chain, (Abernathy, Dunlop, Hammond, and Weil, 2001). 2.2 Competitive Supply Chain Strategies  This section will study the various supply chain approaches d by the company to differentiate their supply chain from other competitors.    2.2.1 Quick response systems (QR) – due to the threat from low cost overseas fashion product suppliers like China, Zara has developed its own “Quick response” systems to gain advantage. QR allows the company to achieve higher flexibility to offer a higher range of products with better quality at the right time with the right price as stated by the real time demands. Zara fashion chain has applied these Supply chain management systems to decrease the inventory levels and forecasting errors, (Johnson and Scholes, 2005). Within a Quick response system, there exists a strong relationship amongst all parts of the supply chain which ultimately reduces process times. The base of the strong relationship is due to the fact that in a QR system, the production is based on real time demands for which effective communication relationship between supplier and buyer is necessary. With this, Zara has been able to develop better buyer and supplier relationships. More over, QR support to extensive use of latest IT technology (CAD/ CAM) has resulted shorter lead and quick replenishment times for the sampling, designing and production teams of Zara Fashion Chains, (Birtwistle, Fiorito, and Moore, 2006).  Another example of QR supply chain approach is the utilization of Electronic Point of Sale information exchange from customers and retailers to the design team to achieve better results.  2.2.2 Fast Fashion Concept – Fast fashion concept has been materialized by leading fashion companies like Zara and H&M to reap more competitive advantages. With the help of this concept the company has been able to significantly reduce its lead times to only 12 days as compared to H&M’s lead times which is 3 weeks. The concept has increased due to the increase in demands and subsequent need for fast response and large product varieties by the companies, (Barrie, 2004). While QR is related to maintaining supply chain production efficiency within the manufacturing plant, Fast fashion concept relates to increasing efficiency within the retail supply and demand chain, (Johnson and Scholes, 2005). However, the main difference between the two concepts is that Fast fashion encourages retailers to motivate their customers to visit their stores more often by offering them best quality at affordable prices. Moreover Fast fashion concept allows for lesser production volumes and no replenishment within the supply chain than the traditional QR concepts.  In the same manner, Zara fashion chain has maintained its focus on effective response management to consumer demand in lower volumes, and no replenishment with the aim of offering new assortments more frequently to its clients. This has helped Zara to achieve smaller lead times within its supply chain. Also, Zara has been the first to lead the trend of managing its supply chains as per season forecast. Seasonal forecast is another strategy first developed by the company to launch new seasonal products in low volumes to attract fast turnaround times for its supply chain, (Barrie, 2004).  Since Zara maintains its own production and retail facilities, there is no involvement of middle men and distributors.  2.2.3 Lean supply chain -- Leanness is defined as the improvement of a supply chain or a value stream to reduce waste production, time, offer fast replenishment rate and improve product delivery schedules. In case of Zara fashion chains it was important to meet the time boundations and product accuracy as per client demands, (Johnson and Scholes, 2005). Use of modern IT techniques like bar coding, EDI, and product marking tools helped Zara to further enhance the logistics operations.   A lean supply chain was developed by Zara, to eliminate all the waste activities, synchronize activities, and perform better communication and downstream flow of both product and information. This helped to increase the end value for the customer and the company/ IT techniques emerged as the most significant element of the lean supply chain for Zara fashion which helped to increase its logistics, delivery and real time information through the supply chain.  Zara improved its capability to predict short term visibility of customer demand within each period with highest possible accuracy by setting up the demand-driven supply chain which looks out for real time client orders. This system helped to transmit the point-of-sale (POS) data from the cash registers at the outlets back to company headquarters many times a day. This information related to the demand by the customer, helped to queue shipments to the various store distribution centers, (Birtwistle, Fiorito, and Moore, 2006).  This way an enhanced inventory positioning helped to lower costs and better forecasting of demands.  2.2.4 De-coupling point approach – This supply chain strategy has been prominently used by Zara to maintain its inventory in unfinished or generic form and to make the final product only when the accurate demand information and volume is known. This method offers great flexibility to design changes, production volumes and increasing customer’s interest by timely incorporating feed backs into the products, (Birtwistle, Siddiqui, and Fiorito, 2003). Moreover, De-coupling also offers the advantage of smaller batching to the supply chain of Zara Fashion. Small order batching process is followed, which reduces order costs, and offers more transportation economics, and increasing sales benefits, (Porter, 2004). Zara has adopted a strategy to take frequent orders frequently in smaller batches which have lead to smaller variance within its supply chain systems.  2.3 Modern Logistics Recommendations Zara, in order to gain higher competitive advantage, can utilize some modern IT logistics trends being used in the industry. This integration of logistics with modern technique will help the managers to take a complete 360 – degrees view at the entire business activity, other than just looking at the end results. 2.3.1 E-Logistics The Internet has created new means to reach the market. It has compressed time and moved the emphasis from supply-based to demand-based. The focus is converging on the customer. Many experts have coined the term e-logistics with home delivery (the ‘last mile’) but it is, in fact, an issue for the B2B market just as much as it is for the B2C market. The term e-logistics came about with the dotcom start-ups and was marked by the rush of the retailers to establish their position in new market, (Lambert and Stock 2002, p. 342). It is essentially about electronically managing the order-to-cash process. The basic e-logistics model remains customer-focused, giving the purchaser (whether business or individual) the ability to: • electronically place and pay for orders; • track orders from source to delivery; • select appropriate delivery time. This model combines bricks and clicks in the fulfillment process. It will include picking, packing, order confirmation and dispatch, customer help lines and returns process. In addition, demand driven secondary production activities, such as final assembly and servicing, are likely to increase with Business to Business and Business to Consumer Web-based transactions. 2.3.2 Home Stretch Online consumption by the buyers in UK has been predicted to rise ten times in next four years. Though, this accounts for a minor percentage of total retail sales, it is still having an inconsistent impact on supply-delivery operations. The e-fulfillment logistics model for the last mile will transform a number of times before the favored solution for supply and return is agreed. Establishing partnerships with existing distribution channels can be a good option for Zara. Recognizing the value of existing mature supply chain infrastructures, the company is planning a network based on established parcel delivery companies, the doorstep provider, eight-till-late local pick-up points and courier services, (Simchi-Levi et al 1997, pp. 105). 2.3.4 IT and Logistics Use of IT technologies like logistics electronic data interchange (EDI), Logistics Management Information Systems (MIS), RIFD, the Direct Store Delivery (DSD) and the geographic information system (GIS) can definitely prove to be turning factor for Zara. These techniques are basically examples of a sophisticated knowledge management system that supports the logistics business model in a highly competitive manner. The company can invest a substantial amount of money on an electronic warehouse that will drive the product information automatically without any man handling of information at any point in the logistics chain, (Lambert and Stock 2002, p. 342). 2.3.5 RFID application - One of the most common IT applications within a logistics supply chain is that of bar codes which makes data collection accurate and fast. Most of the enterprises apply the bar code shipping labels or RFID application on their finished goods that are about to leave the company premises. But with changing trends, mangers have learned that if the use of bar codes is pushed back into the production system, then it provides tremendous labor and material savings, (Hyde 1992, pp 25). These new Information trends if applied by Zara in the company’s Logistics chain can definitely lead to less time delays and this times saved can easily be converted into financial benefits and increased productivity. 2.3.6 Direct Store Delivery (DSD) - Similarly, the use of Direct Store Delivery (DSD) and other route accounting operations when combined with mobile printing applications saves a lot of time and reduces the cost by a remarkable amount and in turn increases the return on Investment. 2.3.7 OLAP Cubes - A Goods supply data cube helps the company to identify the main products that can be sold easily over phone by analyzing the past trends of the tele-callers and the sales graph. The sales data can be recorded and converted in the form of an OLAP cube and then changed into textual form which can used for decision making by the management upon which products to re-in force in the market by studying their popularity chart, (Kok and Graves 2002, pp. 45). This data in the form of cube provides detailed information for resolving problems within the logistics distribution network of the business. Similarly, a problem with the Distribution network has been cited at many instances, causing difficulties with suppliers, production facilities, and distribution outlets. At the same time, the inefficient data distribution has been identified as a cause that leads to loss of integration of various processes and causes the inability to predict demands, forecasts, inventory and transportations needs. The use of data in the form of OLAP cubes can help to sort out the errors and analyze the losses and its causes in an effective manner. 2.3.8 GIS - A Geographic Information system or a GIS is a tool to capture, store and managing data which are spatially related to Earth. In close terms, the system is related to managing, integrating, storing and analyzing geographically referenced information. From the perspective of the business provider like Zara Fashion, utilization of GIS to the value chain administration, human resources, technology development, procurement, sales and marketing, services and operations are adding value to the inbound and outbound logistic services. Better management of distribution resources, higher level decision making, and easier routing, scheduling, tracking is made possible with the use of GIS in Logistics, (Sustar. & Sustar. 2005). Likewise, there are a number of IT applications that can benefit the organization to develop its information system so as to meet the customer requirements. Business information, production reports, warehousing data, inventory problems can be supported with the help of better managed Information and Business Intelligence solutions coupled with some of these IT solutions, (Hyde 1992, pp 25). 3.0 KEY CHALLENGES FOR ZARA FASHION CHAIN  The strategy adopted by Zara also possesses some weakness. The vertical integration of the entire supply chain at Zara has some drawbacks which should be carefully considered by the company management. Vertical integration often hinders large scale production capabilities for the supply chain at discounted prices. Therefore, if in case, Zara needs to produce large scale volumes, then the cost of the same would be very high. In view of the high investments of the Group – Inditex, it may not be able to support the high financial needs of Zara for a very long time. The fast and constant changing of products incurs high costs along with lots of money being spent on research, employee training and IT integrated manufacturing techniques. Moreover, with the centralized business in Europe only, Zara also faces challenges from other fashion companies who have invested heavily into the US market (unlike Zara) which holds more than 30% of the fashion industry consumption. 4.0 RECOMMENDATIONS TO IMPROVE MARKET POSITION Zara Fashion Chain needs some changes in view of the changing industry environment and competition trends. The opportunity to enhance the profits of the business chain, it is required to control to the business more at international levels than at local and country levels. This will help the company to become more competitive.  New joint venture projects, internal management transfers and new holdings are some of the reforms that can bring out new opportunities for Zara Fashion, (Porter, 2004). Business diversification and expansion in view of new market opportunities, creation of a large centralized management group, can be a successful plan, particularly for the US where the potential is still untapped. It is important to marshal the resources behind the drive for good strategy execution and operating excellence within the existing supply chain at Zara.This requires that the budget should be safely linked to the company strategy and should at all times be able to support the policies that are meant to be initiated by the support systems. International budgeting plans should be implemented in order to capture the global market effectively.  Apart from budget issues, shifting of resources and localizing of leadership in particular areas is also very important to consistently hold the market attention for Zara fashion chain. Zara can further introduce some local teams that perform as specialists on local patrons and vendors for Zara’s company units in the new markets. The aim of these localized company units will be to shape up the advertising approach, strengthen the links with the local retailers and market promoters, and at the same time unlock new streams for product distribution for Zara Fashion Chain, (Porter, 2004). In conclusion, the company possesses the capability to attain sustainable growth rate and face challenges from the new trends and expansion ventures while paying close attention to the market and company’s strategic needs. 5.0 REFERENCES Porter, M. Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, New York, NY, 1985 Abernathy, F. H., Dunlop, J. T., Hammond, J. H. and Weil, D. (2000/1), "Retailing and supply chains in the information age", Technology in Society, vol. 22, no. 1, pp. 5-31. Johnson, G. and Scholes, K. (2005). Exploring corporate strategy: text and cases 7th ed. Harlow: Financial Times Prentice Hall. Porter, M. E. 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Graves (Editors): Supply Chain Management: Design, Coordination and Operation, Cambridge University Press, Cambridge, England, 2002, pp. 45-78. D.M. Lambert and J.R. Stock: Strategic Logistics Management J.J Coyle, E.J. Bardi and C.J. Langley: The Management of Business Logistics. Indiana University Press, 2002, p. 342 Hyde, A. (1992). The Proverbs of Total Quality Management: Recharting the Path to Quality Improvement in the Public Sector. Public Productivity and Management Review, 16(1), 25-37. Sustar, B. & Sustar. R. (2005). Managing marketing standardization in a global context. Journal of American Academy of Business: Cambridge, 7(1), 302. Retrieved October 10, 2005, from ProQuest database. Read More