Supply Chain Management and Fashion Industry: The Case of Zara - Research Paper Example

 Supply Chain Management and Fashion Industry: The Case of Zara Abstract The fashion industry, including retailers such as Gap and Zara, faces a myriad of challenges as far as supply chain management is concerned. The added complexity due to seasonal nature of sales, volatility in customer demand and changing fads along with the need to customize products to appeal to the target audience results in the bullwhip effect. This paper examines the causes of bullwhip effect with particular emphasis on ZARA and how the company has become a role model for countering the same. Nevertheless, the tradeoffs of doing so are recognized by highlighting the negative effects of the measures taken to counter the bullwhip. The insights offered by this research paper could provide a strong basis for future research of the complexities of supply chain management with respect to the fashion industry. Further investigation could be carried out to critically analyze what companies such as ZARA forgo in countering supply chain issues such as the bullwhip. Keywords: ZARA, fashion, bullwhip, supply chain, demand The fashion industry has been fraught with challenges pertaining to supply chain management and countering the bullwhip effect particularly due to seasonal sales, outsourcing of manufacturing as well as cutthroat competition amongst fashion retailers. It is not surprising, therefore, that the success of fashion retailers depends of the agility of their supply chains specially due to changing fads and short product lifecycles of fashion apparel. This paper begins with an explanation of the bull whip effect and demonstrates how fashion retailers such as ZARA have been successfully able to mitigate it. With respect to Fisher’s functional and innovative products, it can safely be claimed that fashion retailers such as ZARA fall in the latter category as unpredictable demand, large product variety, high profit margins, greater chances of stock outs and end-of-season sales as well as higher errors in forecasting constitute the supply chains of such companies. Companies such as ZARA also face what is known as the bullwhip effect. The bullwhip effect was termed by Forrester who attempted to describe the supply chain in terms of the cohesion and integration between organizations’ production and operations schedules and its marketing channels. As per this view organisations were seen as being comprised of coordination between resources, finances, materials as well as information (Panda & Mohanty, 2011). Sometimes, however, lack of coordination and inventory practices lead to stockpiling towards the upper end of the supply chain leading to a situation of excess supply. It is important to understand the potential causes of bullwhip effect before analyzing the way ZARA deals with it. One of the major causes of bullwhip effect (which is highly relevant to fashion retailers) is the attempt to offload stock by offering seasonal discounts which results in a situation of variability in product demand. This is because low prices during seasonal sales encourage consumers to buy more than their anticipated demand (Panda & Mohanty, 2011). Therefore, when prices return to their normal levels later, customers purchase less than their usual levels to reduce their inventory (Panda & Mohanty, 2011). This causes more inventories to be stockpiled in the upstream supply chain than otherwise. Furthermore, forecasting demand on the basis of orders received from links in the supply chain leads to inventory stockpiling. For instance, if there is an increase in demand from the end customer, it translates to forecasts of greater inventory towards the end of the supply chain which results in even greater inventory being forecasted by the link above that (Panda & Mohanty, 2011). This process is reversed when the demand from end customer decreases. This often occurs due to lack of a single source for inventory forecasting often attributed to the absence of IT. ZARA’s exemplary supply chain management system, however, has given it an edge over other fashion retailers in the global sphere particularly when it comes to countering the bullwhip effect. The company has been able to introduce highly fashionable apparel in large variety to the market in a relatively short time. This is because customers’ preferences (hence, demand) are continuously tracked by its in-house designers who have close coordination with both internal and external suppliers (Ghemawat & Nueno, 2006). The company uses batch production system with products being manufactured in small quantities and replenished rapidly. Research shows that companies whose suppliers receive POS data and then use it to make shipments has the effect of countering the backlog of inventory upstream (Lee, Padmanabhan, & Whang, 1997). Hence, continuous replenishment is an effective mitigation strategy which is effectively practiced by ZARA. The reason why continuous replenishment is possible in ZARA is because of its business model. The company’s business model is based on offering exclusive products and inculcating the “now or never” mentality amongst customers who fear that the ‘1 piece’ available might go out of stock. This further helps keeps inventories low because it compels customers to visit the store frequently because customers know that the new stock will be gone soon (Waters, 2010). However, the same can generate dissatisfaction amongst customers who do not get the design they desire. This is where ZARA’s competitors such as Gap and Benetton could have an edge. Furthermore, items that are time-sensitive are produced through a vertically integrated manufacturing setup. Under this system almost 40% of the required fabric is produced by ZARA itself with dying occurring in-house as well (Gallaugher, 2008). Furthermore, the production flows into the company’s centralized distribution center from local and foreign suppliers (Ghemawat & Nueno, 2006). The final products are then shipped directly from this center to ZARA’s retail stores approximately twice a week (Waters, 2010). This system of supply chain management has reduced the need for hoarding inventories as well as the need for warehousing. On the other hand, these bi-weekly shipments are likely to prove costly to ZARA as fuel costs soar and logistics become expensive. Nevertheless, the concept of vertical integration has proved to be an effective mitigation strategy for ZARA in countering the bullwhip effect. Vertical integration has also ensured that bottlenecks are reduced. In contrast with competitors such as Gap and H&M which outsources its production and produces nothing itself, ZARA benefits from the fact that almost 60% of its products are produced in-house (Gallaugher, 2008). The system of centralized manufacturing and distribution, however, presents major challenges to the company. ZARA’s centralized system has been criticized in that it is creating diseconomies of scale for the company as it expands. Furthermore, the company’s sole reliance on its manufacturing in Spain is has also been criticized. This is because any disruption-natural or human can essentially bring production to a standstill in which case the company will have no alternative to fall back on (Gallaugher, 2008). Furthermore, centralized production in Spain presents a threat in the midst of weakening of Euro relative to Dollar (Gallaugher, 2008). ZARA’s competitors who mostly have their manufacturing in low-cost, developing countries benefit from the fact that their currencies are fixed against the dollar or have weakened relative to Euro (Gallaugher, 2008). ZARA, however, does not enjoy this benefit due to its Spain-centric production. Profit margins of the company are, therefore, likely to suffer by more than those of its competitors. In-sourcing and vertical integration too can generate several problems for ZARA. Producing majority of products in the home country could mean insensitivity to global fads and fashion trends which could best be incorporated by global production facilities. The ‘one size fits all’ approach could be threatening to the company as it would lose the advantage of manufacturing closer to its global markets. Vertical integration, therefore, may not allow ZARA to expand to geographically dispersed markets. By following ZARA’s model of vertical integration, local retailers can achieve greater success than ZARA in foreign markets. Although the company does not produce designs that are culturally bound, the risk of losing foreign markets to their local retailers is high. The inherent assumption that products will be speedily delivered from factories in U.S or Europe to global markets ‘before’ the fashion changes is also threatening. Also, the resulting inconsistency in prices could result in an inconsistent brand image of the company. Furthermore, the company must realize that different countries may demand a different image and outsourcing production in Asia may not always be a good idea. For instance, American customers had to be reminded that ZARA’s products were “made in Europe” for them to realize their worth (Palladino, 2010). Furthermore, this system has allowed the company to come up with new designs and have finished products delivered to its retail outlets within a short span of five weeks (Ghemawat & Nueno, 2006). This is in stark contrast with its competitors who take up to 6 months for designing products and 3 months for manufacturing them (Ghemawat & Nueno, 2006). The reduced cycle time also helps mitigate the bullwhip effect by ensuring that stock is rolled-out in less time which reduces the need to stock it up. Also considering the high level of demand volatility in the fashion industry (owing to changing trends and fads), the considerably low design time enables more products to be aligned with current fashion trends and be actually bought by customers than would be the case otherwise. Consequently one can safely assume that the need to offload inventory through seasonal discounts is also reduced due to low buffer stock. This further reduces the bullwhip effect. Another strategy used by ZARA to counter the amplification of stock in open-loop systems pertains to its use of empowered management in stores that provides real-time information pertaining to customers to the company’s headquarters using a highly effective IT system in-house. Latest technology such as “customized handheld” devices are used for such communication (Ferdows, Lewis, & Machuca, 2005). Furthermore, regular telephonic conversations between the store managers and market specialists take place through these PDAs (Ferdows, Lewis, & Machuca, 2005). Data exchanged includes sales trends, orders as well as customers’ reactions to new products and the “buzz” generated by ZARA’s new styles (Ferdows, Lewis, & Machuca, 2005). Although the same can hold true for any organization in the fashion industry, what makes it efficient is the company’s flat organization structure which makes sure that the conversation and communication is not hampered by bureaucratic barriers. The use of technology also extends to production where “inventory optimization models” help the corporation determine which sizes and designs ought to be shipped (Gallaugher, 2008). Therefore, outlets end up being stocked only with the stock that is demanded by customers. This reduces the need to get rid of unsold stock through seasonal sales, thereby mitigating the bullwhip effect. As noted earlier, the bullwhip effect emerges from small alterations in retail orders which results in greater fluctuations upstream. In order to counter this, the company allows its retailers greater adjustment to ensure that the company has enough flexibility to accommodate greater levels of changes in customer demand. Although its competitors allow a mere 20% of adjustments to retailers, ZARA allows them to adjust by 40%-50% (Ferdows, Lewis, & Machuca, Rapid-Fire Fulfillment, 2004). Furthermore, the strategy of delayed differentiation can also reduce bullwhip as, under this strategy, products are differentiated late and are kept in standardized form until then (Stevenson, 2009). ZARA follows this strategy as almost half of the fabric is left un-dyed which allows the company to respond to any changes in fashion that occur in the middle of the season (Ghemawat & Nueno, 2006). Additionally, reducing uncertainty and variability in customer demand can also counter the stockpiling of inventory upstream. Apart from the use of real-time customer data and integrated information systems, ZARA effectively produces its riskiest products (which are subject to last minute changes in fashion) in small batches in-house or uses contractors who located close to the company’s stores (Ghemawat & Nueno, 2006). Research also suggests that partnering strategically with the parties in the supply chain can help mitigate bullwhip effect. ZARA’s commitment to strategic partnering, however, is not limited to continuous replenishment used to maintain the required inventory in stores. The company uses a handful of 20 suppliers that are responsible for 70% of the external purchases for the company (Ghemawat & Nueno, 2006). The company has developed long term relationships with most of its suppliers along with unwritten and informal commitments. However, this may not always reap benefits as global suppliers and subcontractors can present problems when company’s code of conduct is not followed. ZARA faced a similar scenario whereby one of its subcontracted vendors was discovered using illegal immigrants in Brazil (Leach, 2011). Violating labor laws in some countries may not be a problem which can cause global suppliers to evade corporate laws. Therefore, even though ZARA produces most of its products in-house, it is faced with risks as far as its use of global subcontractors is concerned. To conclude, the case of ZARA effectively demonstrates how fashion retailers that suffer from seasonality, unpredictability in demand and the consequent high forecasting error can use information technology, third party logistics an integrated supply chains to reduce the bullwhip effect. At the same time, however, several trade-offs are involved. The centralized system for instance can prove to be a highly risky strategy for the company. Similarly making subcontractors abide by corporate code of conduct in far flung areas can be an issue. Insensitivity to local market trends as well as products losing the charm as they arrive from centralized location can be an issue. References Ferdows, K., Lewis, M. A., & Machuca, J. A. (2004). Rapid-Fire Fulfillment. Harvard Business Review, 1-7. Ferdows, K., Lewis, M. A., & Machuca, J. A. (2005, February 21). Zara's Secret for Fast Fashion. Retrieved from Harvard Business School: Working Knowledge Archive: http://hbswk.hbs.edu/archive/4652.html Gallaugher, J. M. (2008, September 13). Zara Case: Fast Fashion from Savvy Systems. Retrieved from Galluagher: www.gallaugher.com/Zara%20Case.pdf Ghemawat, P., & Nueno, J. L. (2006). ZARA: Fast Fashion. Harvard Business Review, 1-35. Leach, A. (2011, September 17). Zara tightens oversight of Brazilian supply chain . Retrieved from Supply Management: http://www.supplymanagement.com/news/2011/zara-tightens-oversight-of-brazilian-supply-chain/ Lee, H. L., Padmanabhan, V., & Whang, S. (1997). The Bullwhip Effect in Supply Chains. Sloan Management Review, 93-102. Palladino, A. P. (2010). Zara and Benetton: Comparison of two business models. Organización de Empresas. Panda, T. K., & Mohanty, P. K. (2011). Supply Chain Management and Bull Whip Effect: A Conceptual Framework for Efficiency Improvement in Supply Chain. IUP Journal of Supply Chain Management, 16-29. Stevenson, W. J. (2009). Operations Management. New Delhi: Dorling Kindersley . Waters, D. (2010). Global Logistics: New Directions in Supply Chain Management. London: Kogan Page Limited. Read More