The Operational Management Challenge at Inditex Group - Case Study Example

? The operational management challenge at Inditex Group BY YOU YOUR SCHOOL INFO HERE HERE The operational management challenge at Inditex Group Introduction The Inditex Group, a multinational organisation, is the parent company of many different subsidiaries including Zara, the fast fashion clothing chain, Massimo Dutti, Pull and Bear, as well as Tempe. Inditex currently operates over 6,000 different stores globally, with the majority of its business and strategic focus encompassing the fashion industry. Inditex is renowned for outperforming competitive forces in many different nations as the business has been quite successful in establishing an unparalleled operations management model that allows the business to gain considerable profitability through its fast fashion business model. This report highlights the operational management challenges at Inditex, as well as successes in providing fast fashion merchandise to many different target markets, to determine how Inditex remains a clothing manufacturing leader among many different competitive entities internationally and within the European environment. Operational objectives and competitive advantages The goal of Inditex is to provide fast fashion merchandise, meaning that there is a rapid turnaround of existing inventory to ensure that the majority of clothing products do not have to be held in inventory, thereby reducing costs in inventory management. Inditex understands that fashion merchandise, especially with the younger markets most attracted to Inditex fashions, maintain a very short life cycle. In Zara, as one example, virtually every piece of merchandise is on display, with Zara holding only a few key pieces of the same piece of fashion products, thereby creating an image of exclusivity for discriminating customers (Ferdows, Lewis and Machuca 2003). Having an understanding of the industry and product lifestyles are absolutely critical as it provides the knowledge necessary to develop worthwhile future operational strategies (Ha-Brookshire and Lee 2010). The majority of Inditex’s fashion stores are still in the growth stage along the industry life cycle, an environment in which the global supply chain for fashion merchandise has increased the total volume of available smaller and larger production entities and where strategic alliances along the supply chain are becoming more well-developed. Therefore, the supply environment in the aforementioned growth stage provides Inditex with unique opportunities to procure raw materials that give Inditex the ability to have a rapid turnaround of fashion merchandise. What is unique about Inditex is that the company is able to move from the design phase to tangible, in-store delivery of finished fashion merchandise much more rapidly than its many other competitors. This is what provides Inditex with the significant competitive advantage. For instance, Zara maintains an in-house staff of approximately 300 designers who consistently upgrade current season fashions and work toward designing the next supply of fast fashion, unique merchandise (Ferdows, et al. 2003). The ability to procure enough raw materials to begin production within a 4-6 week lead time is unparalleled in the industry, supported by Inditex’s ability to produce 50 percent of its total fashion volume within its many self-owned production facilities (Ferdows, et al.). Hence, whilst Inditex is busy designing merchandise along its operational model, in-house production experts and a variety of outsourced garment producers (especially sewing capabilities) are working consistently on producing new and innovative fashions along the short lead time. Other competition in the industry have lead times that can be up to six months, thereby giving Zara considerable competitive advantages over the majority of its fashion competitors. The aforesaid is the operational objective of Zara: to align its operational strategies and production capabilities to meet the strategic objective of exclusive fashion merchandising and production. The organisation, by having significant ownership of its production and sourcing models, achieves substantial cost advantages which can be passed back to customers through competitive pricing models. This is something that is not achievable by competition in this international fashion industry. Further unique to Inditex is that the business is able to procure approximately 40 percent of its raw fabrics utilised for innovative design and clothing distribution by purchasing products from yet another Inditex subsidiary (Ferdows, et al.). Once the company has successfully produced its variety of fast fashion lines, yet another advantage is the ability of Inditex to utilise its five-story distribution hub in Spain to ensure timely and self-managed delivery of completed fashion products to its retail stores. The distribution centre maintains a workforce of nearly 1,200 specialists, thereby further enhancing the ability of the company to meet its fast fashion goals and provide exclusive merchandise that is favoured by discriminating customers in many different target markets. Much of the efficiencies that have been achieved by Inditex are a product of a rigorous and well-developed human resources training model as part of operational strategy, allowing the majority of its inventoried merchandise to be ready for shipment within only eight hours of receipt at the main distribution warehouse. Inditex maintains many different competitive advantages as a result of human capital development, thereby enhancing the ability of the organisation to meet its strategic promises for fast merchandise turnover and product exclusivity. Risk management is yet another capability that outperforms other competitors from an operational perspective. By having a leaner production system and one that decreases quantities produced and received, Inditex is able to control costs and decrease its total inventory risks (Sajwan, Sood, Arora and Ashwani 2010). Other competition in this industry must be considerate along the operational model as it pertains to inventory holding costs, which include lighting, taxation, personnel costs and warehouse space (Heizer and Render 2004). Inditex’s fast fashion subsidiaries again maintain a significant cost advantage in terms of inventory risks that cannot be duplicated by suppliers that have too much reliance on foreign outsourcing. Instead, Inditex maintains a very close proximity to its many suppliers which provides the business with the opportunity to outperform inventory movements within a very short lead time. All operational aspects of Inditex’s many business models provide significant performance improvements and profitability for the organisation. Waste, variability in supply lead times, and even total processing time are reduced by sustaining a business model that can successfully support only a 4-6 week lead time. This is the basis of lean manufacturing (Shah and Ward 2007). Whilst other fashion competitors attempt to duplicate the lean philosophy of production and procurement currently achieved by Inditex, Inditex is able to effectively put theory into practice and outperform all other fashion competitors. Furthermore, Inditex is able to standardise its production processes, which allows the majority of current and future clothing output to be free of deviations. Inditex sets specific standards for units of quality measurement, product quantity manufactured, and total product value, something necessary to achieve a successful lean production strategy (Kumar and Suresh 2009). However, there is a challenging difficulty in setting production standards: it tends to limit flexibility in the event that production systems and strategy require unexpected shifts to meet with rising or falling demand. The high costs of revamping and restructuring the existing production system can be detrimental to cost controls along the operational model. Though evidence did not suggest that Inditex has maintained historical problems with being forced to alter production methodology, it should be recognised that there is a potential cost issue that could arise in the event that production forecasts require spontaneous adjustment due to externally-driven market factors. However, despite the potential drawback of adjusting standardised production systems, Inditex maintains further competitive advantages by reducing the bargaining power of suppliers; something that many other fashion competitors must contend with. According to Porter (2012), nearly all businesses face the risk of having prices dictated by external suppliers who maintain a critical role in providing important raw materials for production systems. When the switching costs for a supplier are low due to availability of a high volume of potential buyers, it affects pricing along the supply chain which, oftentimes, requires fashion producers to extend higher prices on finished merchandise to many customer segments. Inditex, with such a high level of control and ownership over most of its production facilities, is able to bargain successfully with the small volume of suppliers that provide critical services to meet with the short lead time expected by its consumer markets. Marketing and strategic business theory further states that one of the biggest challenges for businesses is ensuring that their products are not replicated by existing competition. The largest challenge is being able to differentiate products so that consumers continue to perceive the fashion brand as being exclusive and unique (Nandan 2005). Where once differentiation was achievable on pricing and product quality, Inditex and its many subsidiaries are able to differentiate simply on exclusivity which is strongly supported by being able to achieve short lead times and provide limited quantity, exclusive merchandise. Therefore, from a marketing perspective as part of operational strategy, Inditex again achieves substantial competitive advantages whilst other fashion producers are spending considerable capital on the marketing and advertising functions. Inditex is able to keep these administrative and operational costs lower by simply meeting its promises for exclusivity, providing tangible and consistent evidence that the business can continue to satisfy consumers who demand exclusive fashion products. Differentiation occurs without significant cost and emphasis on promotion within the Inditex Group whilst other companies do not experience these same cost advantages. Inditex further achieves considerably more effective performance over competition by adhering to the theoretical principle of establishing cooperative partnerships along the supply chain. According to Ragatz and Handgeld (1997) involving important suppliers early in the product development process allows a firm to take advantage of the knowledge and expertise of critical vendors to improve knowledge management. This is accomplished by Inditex by having its large tea of designers coordinate with suppliers about impending new designs and fabric needs along the operational model, allowing suppliers to be more responsive to sudden changes in product design associated with consumer demand. However, despite the advantages of pooling knowledge by developing strong relationships with important vendors, it does open Inditex to considerable risks. There are no guarantees that suppliers are going to maintain guarded caution about the strategic abilities of Inditex, thus any number of trade secrets or production-related activities could be gleaned by other buyers along the same supply chain that service competitive fashion industries. This could, theoretically, impact the marketing prowess of Inditex and allow competition to respond with similar merchandise styles in an effort to outperform their large Inditex competitor. Conclusion As established by the research, Inditex is superior to nearly all competition in keeping control over costs, satisfying a very demanding and discriminating customer by providing fast and exclusive merchandise selections, and maintaining managerial control over the majority of its production systems and supply streams. Inditex, unlike its many competitors in the international fashion industry, maintains much more competitive advantages as compared to potential disadvantages of its operational model which continues to give the business a positive brand reputation and maintain the ability to keep clothing retail prices low for consumers by streamlining its production philosophy and maintaining a lean manufacturing premise. The dynamic capabilities and competencies of well-trained staff further provides the efficiencies both in cost and in human capital development that allows the business to continue to meet its brand promises. Reducing costs in marketing, procurement, and manufacturing are the most significant advantages of Inditex that continue to keep consumer demand high and guarantee ongoing profitability within a growth industry. Inditex is a benchmark for operational management efficiencies and should be commended for achieving unparalleled competence and cost controls from design all the way through to finished manufacture and retail delivery of fashion products. References Ferdows, K., Lewis, M. and Machuca, J.A.D. (2003). Zara, Supply Chain Forum, 4(2), pp.62-67. Ha-Brookshire, J.E. and Lee, Y. (2010). Korean apparel manufacturing industry: exploration from the industry life cycle perspective, Clothing and Textiles Research Journal, 28(4), pp.279-293. Heizer, J. & Render, B. (2004). Operations Management Flexible Version Package, 7th edn. Prentice-Hall. Kumar, S. and Suresh, N. (2009). Operations management. New Age International Publishers. Nandan, S. (2005). An exploration of the brand identity/brand image linkage: a communications perspective, Brand Management, 12(4), pp.264-277. Porter, M. (2012). Porter’s Five Forces: a model for industry analysis. [online] Available at: http://www.quickmba.com/strategy/porter.shtml (accessed 5 November 2013). Ragatz, G. and Handgeld, R. (1997). Success factors for integrating suppliers into new product development, Journal of Production Innovation Management, 14(1), pp.190-202. Sajwan, A., Sood, A., Arora, R. and Ashwani, V. (2010). Inventory management practices followed by Zara. [online] Available at: http://www.slideshare.net/anusaj/zara-ppt (accessed 5 November 2013). Shah, R. and Ward, P. (2003). Lean manufacturing: context, practice bundles and performance, Journal of Operations Management, 21(2), pp.129-148. Read More