Operations Management Activities of Zara - Case Study Example

ANALYSIS OF THE OPERATIONS MANAGEMENT ACTIVITIES OF ZARA. A COMPANY BEATING THE TREND The current problems of the main 'standard bearer' retail clothing chains are well known and equally well reported. Shoppers, worried about credit card bills and other uncertainties are staying away, and from London to Frankfurt and Milan to Berlin, the big name retailers are suffering the same lack of shoppers. There are several fashion retailers who are overcoming their problems but one of these in particular is bucking the trend and has been doing so for many years by using intuitive and flexible business techniques and a smooth and efficient organisation management system that has enabled it to consistently outpace its competitors. The organisation that has managed to pull this off is Zara, the Spanish fashion retail chain. Not only has Zara continued to record rising profits in a stagnant market, but is increasing the pace of store openings to almost one per day in the current year. Currently there are 758 Zara stores throughout the world in 58 countries, but by 2009, there are planned to be 4000. (Kane 2005). The company is not just a European phenomenon, but a global force and in many ways could be considered a leader in the retailing revolution that is sweeping the fashion world. Zara is a company within the Inditex holding group also founded by the creator of Zara. Before looking in depth at the successful business model that Zara operates and how it was developed it is worth looking at the overall fashion scene in order to gauge the field and to further show how different Zara is and how it became and remains so successful. The fashion industry overview Without doubt, there is a fashion revolution underway in the High Street. This revolution underscores a fashion retailing war that can only be described as cut throat and it reflects a huge change in the underlying cause of fashion expectations amongst the shoppers - the huge reduction in cost of high fashion items which has been pioneered by such fashion retailers as H&M of Sweden, Top Shop of the UK and especially Zara of pain. The war has had many casualties which have been mortally wounded amongst them C&A and M&S which catered for the wrong people at the wrong time and ended up with millions in unwanted unsaleable stock. Other companies struggled through the bad patches and are fighting back to remain in the high street realising belatedly that shoppers all over Europe and indeed the rest of the world want to dress like the rich and wealthy and the stars of stage and screen. Fashion retailers are rushing to satisfy this demand and shops like Top Shop, gap, Zara and others are battling it out to get ahead and stay on top in this cutthroat and swiftly changing business. The market in Britain alone is worth 27 billion pounds and decisions made by company and group managements right down to store managers together with their chosen business models make the companies sink or swim. A BBC report on the subject (BBC News 2003), noted that shoppers had become obsessed with the way that celebrities dressed because those clothes have become so much more accessible in both price and availability. Stores are becoming that much better at including items that celebrities wear and reproducing them very quickly. The same report quotes Top shop director Jane Shepherdson as saying that customers want to be able to buy into the trends that they've seen from the catwalk as soon as possible. Top shop wasn't always able to accommodate this because of its inflexible business plan that operated separate summer and winter collections which often had lead times built into the system of up to 18 months. By observing another rival on the high street scene, Gap, it can be seen that by relying on previous problems were due to a mistaken strategy of targeting the teenage market with its Old Navy stores. The Swedish firm H&M was one of the leaders in changing that by appointing young designers to make high fashion as swiftly and as cheaply as possible, but initially the quality of those goods was suspect and customers began to realise that although the product was fashionable, after two uses it was unusable. It doesn't take much for the name to suffer in any retailing business and as a result, the company became burdened with high inventories when it misinterpreted the trend. Top Shop fought back and also started to produce clothes much more quickly, abandoning long lead times and appointing new, young and trendy designers for the store. There was another threat rapidly looming up however for these fashion retailers and that was the emergence of Amancio Ortega and his creation, the fashion retailer Zara in the holding group Inditex. H&M has remained essentially a local European group whereas Zara has gone global. This essay will analyse the business model and operations management of the organisation and identify any important factors that contribute to the success of the company and its holding group Inditex. All aspects of the business operations will be looked at including corporate and social responsibility as these are considered vital and inseparable parts of the Inditex business model. During the essay, examples of other business models belonging to other fashion retailers will be compared and the important aspects of the Zara model will be looked at. The Company. Zara/Inditex. Zara was founded by an unlikely entrepreneur in an unlikely location. Amancio Ortega, a drop out with no business education set up a textiles manufacturing factory in La Coruna in the province of Galicia in North West Spain, its advantage as a location being that it was in one of the lowest cost areas of Europe. Some years later, a surplus of stock led to the establishment of the company's first retail outlet and the subsequent establishment of more stores throughout the country. By 1986, under his Inditex holding company, Ortega was able to devote the entire production of textiles to his Zara chain and he developed a logistics model which enabled him to get his merchandise swiftly and efficiently to each of his outlets throughout the country. He made a virtue of high, rapid turnover and the ability to react to restock his store with just the required amount of merchandise to avoid overstocking and all its potential for problems and waste. By fine tuning production to meet demand, and by anticipating demand for both product and numbers of product, he created a model for his later and current expansion plans and for the success of the group which in effect pioneered the innovative "fast fashion" business model vertically integrating manufacture, design and distribution in a single company and enabling stores to react to customer demand in days and weeks rather than in months and seasons. This business model which is analysed in more detail below has been the central plank upon which the success of the company has been and continues to be based. THE BUSINESS MODEL Organisation The Inditex/Zara business model is especially noted for its high degree of vertical integration compared to other models developed by its international competitors. It covers all phases of the fashion process: design, manufacture, logistics and distribution to its own stores. It has a flexible structure and a strong customer focus in all its business areas. (Ryan 2001). Like many of its competitors, the key element in the organisation is the store, designed carefully to make customers comfortable as they discover new fashion concepts. It is also the looking glass of the company, where the manager and staff obtain the information required to rapidly adapt their holdings to meet customer demand. The key to this model being the ability to adapt the offer to meet customer requirements in the shortest time possible. From the earliest days of the company, as for Inditex now, time is the main factor to be considered, above and beyond production costs. Vertical integration enables the company to shorten turnaround times and achieve greater flexibility, reducing stock to a minimum and diminishing fashion risk to the greatest possible extent. This factor is of extreme importance to the success of the company over its competitors and contrasts with other well known fashion retailers, one of which ended up with recently had to write off nearly two billion euros worth of old stock when one of its stores found itself sitting on thousands of unsaleable dinner suits. This vertical integration therefore brings many benefits to Zara in this all important area of stocking and supply and a situation such as the one described above with the excess of unsold stock would not happen in the company. Clothes are delivered to the stores ready priced and on racks so that they can be put on show in the store immediately. Time isn't wasted ironing or pricing the items; the display is colour coordinated in a similar fashion to Benetton and if any line sells out it can be replaced easily and quickly. Selling out of an item is in fact regarded as good rather than bad as it tends to increase the exclusiveness of that item, but in any case, the system allows for rapid replacement within 48 hours for American stores and usually within 24 hours for European stores. In this way, overstocking does not become an issue. This contrasts with many other high street fashion retailers who tend to plan and unveil their ranges months in advance using manufacturers often thousands of miles away, and if they get it wrong, there is no going back. The strength of this vertical integration as a business model can be seen therefore to be the key to the success of Zara and as if to prove the system, a recent problem with supply of some knitted garments caused concern amongst business watchers, but it transpired that the problem was caused by garments not manufactured by Zara's own factories, but were among the small proportion of goods outsourced to the far east. This 'problem' tended to confirm the robustness of the original business model. Other strategies related to and integrally a part of the business model outlined above contribute vitally to the success of the company and it is useful to look at these in more detail. Each strategy sets Zara apart from its rivals and competitors in many ways and first among them is the policy of manufacturing as much as possible in house. Ryan 2001). Manufacturing policy Unusual amongst most fashion retailers, a significant proportion of production (60%) (Kane 2005) takes place in the Group's own factories, which mainly manufacture the most fashionable garments. The Group takes direct control of fabric supply, marking and cutting and the final finishing of garments, while subcontracting the garment-making stage to specialist firms located predominantly in the north-west of the Iberian peninsula. In other words to nearby, local manufacturers in Spain. There are fewer in nearby countries and very few other outsourcings. This means that a fashion item can move from notepad sketch to being on the shelf of a store in the USA in just three weeks. The group can therefore maintain a tight control on manufacture in line with its vertically integrated business model. The Group's external suppliers, a high percentage of which are European, generally receive the fabric and other elements necessary for making the clothing from Inditex. Although percentages vary from season to season, in 2004, 70% of production was carried out in Europe and neighbouring countries. A further 27% of total production took place in Asia. (Press brief 2005). The success of Zara's fashion collections lies in the ability to recognise and assimilate the continual changes in fashion and to this end the company seems to be able to unashamedly copy the designs of other fashion houses and the so called 'high' fashion houses, should these be selling well. The importance of the store manager and staff in this respect that has been mentioned above cannot be overestimated in this respect. They are the 'eyes' of the company and are well able to micro manage the situation. The information flow of 'intelligence' is used well and Zara can imitate design, add flair to it if required and get it on to the shelves in the minimum time. In this way, Zara moves with society, implementing the ideas, trends and tastes that society itself creates. This is another key to its success among a variety of cultures and generations. Zara maintains a creative team of more than 200 professionals and using the information flow well, Zara's design process is closely linked to the public. With information travelling continuously from the stores to the design teams, and transmitting the demands and concerns of the customers, a high degree of customer satisfaction and customer loyalty is maintained. The vertical integration of activities (design, production, logistics, and sales in the company's own stores) means Zara is flexible and fast in adapting to the market and the designers can change tack rapidly if a new style is seen to sell better. Its model is characterised by continuous product renovation: new articles reach the stores twice a week. Store design and location is an integral part of the company profile. Shop windows and interior dcor are important and new stores are opened in the best places such as London's West End or the Grands Boulevards of Paris. (Kane 2005) Inditex uses this flexible business model to adapt to changes occurring during a season, reacting to them by bringing new products to the stores in the shortest possible time. The models for each season (over 20,000 last year) are developed in their entirety by the creative teams of the different chains of stores in the group. Over 300 designers (200 for Zara alone) take their main inspiration from both the prevailing trends in the fashion market and the customers themselves, through the information received from the stores. Because rival retailers use a horizontal business model whereby outsourcing and distribution times mean fixed stock levels for the season, most are prepared to sell their merchandise off at up to a third off the label price just to shift stock and make room for new stock for the next season. Zara averages 85% of the label price, again showing that its business model is giving it a distinct advantage in the market place. The founder has told journalists that his secret was to have "five fingers touching the factory and five touching the customer". (Kane 2005). This stance is unusual at a time when suppliers are usually kept at arms length and when customers are taken for granted - the latter, an accusation levelled at Marks & Spencer over the last few years. The Logistics organisation All production, even that originating from out sources, is taken to a logistical centre specialising in Zara products. From here, the products are distributed simultaneously to all stores all over the world. This distribution is carried out on a regular, frequent and constant basis. Zara store distribution takes place twice a week and by integrating the design teams into the process, the company ensures that with each distribution, new models are always included. This enables the stores to constantly refresh their product range and this in turn attracts customers who know that they will see something new on each visit to the store. The Zara customer calls in on the shop on average 17 times annually wheras the average for other high street retailers is 4 times. With stars such as kate Moss and Victoria Beckham popping into Zara stores, others will follow suit knowing that they can buy exactly the same items at exactly the same reasonable prices. This in itself gives the stores an enormous marketing advantage over retail fashion outlets that rely on longer range planning and distant outsourcing for their products. The constantly changing range of products has the added advantage that unpopular items won't hurt profits. This logistics system is based on a software package designed by the company's own teams, and it enables the company to reduce the time between receiving an order at the distribution centre to the delivery of the goods in the store to average of 24 hours for European shops and a maximum of 48 hours for American or Asian stores. Company Stores and the franchise business model As mentioned above, central to the company's management strategy is the fact that the point of sale is by no means the end of the process but rather its restart, and this is because one of the main aims of the stores and their staff is to act as market information gathering terminals, providing feedback to the design teams and reporting the trends demanded by customers. Advertising is one of Zara's main strengths - in that it doesn't advertise and it spends no money on advertising. In common with other retailers in the industry, it relies essentially on word of mouth and its shop frontages to advertise its profits. Like all other fashion retailers, the shop frontage is designed to attract and the design of both the interior and exterior of the store is given the highest priority. The shop windows play a major role and is a valuable piece of company advertising. The interior function is designed to reduce any barrier between the customer and the produce and in this, the company follows best practice in common with other major fashion retailers. The interiors are well lit, easy on the eye, comfortable and functional. The main difference in this respect from rival retailers is that the stockroom at a Zara store is very much smaller. An important development for the Inditex sales format is the opening of stores in which inditex is the sole or main shareholder. In 2004, 90% of stores were company-managed and represented 90% of the Group's turnover. There has been some change however in some smaller or culturally different markets where the Group has extended the store network through franchise agreements with leading local retail companies. At the end of the 2004 financial year, there were 263 franchised shops out of a total of 2.244 stores. The main characteristic from the point of view of the Inditex franchise business model is the total integration of franchised stores with company-managed stores in terms of window-dressing, product, human resources, training, logistical optimisation and so on. This ensures uniformity in Inditex's management and global image in the eyes of customer around the world. (Press brief 2005). Corporate and social responsibility in the business model Corporate social responsibility and human resource management are important parts of the business model developed within the group. Zara, as a member of the Inditex Group defines itself as a responsible and socially committed company and has therefore developed its business model so that it can convey its values through the production and sales chains. Consequently, the business strategy is directed towards extensive sustainable principals, reconciling the legitimate desire for profitability in terms of results with formulas for dialogue with its stakeholders: the customers, employees, suppliers, shareholders and society in general. The guiding principles behind Inditex's commitment to corporate responsibility are good faith in establishing relations with stakeholders, constant dialogue with stakeholders and social organisations, and, finally, transparency in its business activities and, more specifically, in the development of its sustainability strategy. The development of the business model has not been static and improvements to the system are always encouraged. Over the last few years, new management policies and systems have been designed and put into practice which have affected the three areas of the company's existence: economic, social and environmental. These activities are audited by external agents in order to provide greater objectivity in Inditex's actions in the field of corporate responsibility. Transparency is Inditex's fundamental management value and enables a frank, open relationship to be established with all groups that hold a stake in our business. The success of this strategy is evident in international recognition and in 2002 Inditex drew up a Sustainability Report in compliance with the standards of the Global Reporting Initiative (GRI), an independent organisation committed to transparency in business. The Inditex Sustainability Report summarises and explains Inditex activity under the triple perspective of the economic, environmental and social dimensions. This attention to detail enables Zara to react to customer concerns as well as customer requirements. Recent concerted worldwide protests over the use of fur products in fashion were monitored by Zara and the company withdrew the use of rabbit fur on its clothes as this had attracted the ire of campaigners. In the move, Zara promised to take fur off the shelves at the time of the announcement in 48 of the 54 nations in which it operates and the rest by the new year. The company had reacted previously to concerns over the use of fur and had on previous occasions removed fur items from the shelves in 2003. Following this, the company reintroduced fur again in 2004. (BBC online news 2004). This shows a genuine conflict between corporate and social responsibility which the company prides itself on, and market opportunities which ultimately prevail in this fast reacting group. Following the recent decision to remove fur, demonstrators have stated that they would no longer target Inditex group stores such as Zara. Only the fact that Zara has a business model that allows it to chop and change the contents of its stores in such a rapid way, allows it to accommodate rapid decision making like this and this enables it to keep ahead of most of its rivals who in this example would be stuck with store rooms full of unsaleable fashions items incorporating fur. Store autonomy Inditex group has segmented its approach to the market and to facilitate this has developed eight fashion distribution chains of which Zara is one. Each segment shares the same commercial and managerial focus: to be leaders in their segment through a flexible business model and an international vision. However, each of the chains has a great deal of autonomy in managing its business; their management teams are independent in commercial decision-making and in the way they administer their resources. Nonetheless, the fact that they belong to a group spread over 58 countries (Zara is in 54), provides a great number of organisational and knowledge-management synergies. Thus, each management team can concentrate on developing its business in the knowledge that certain support elements are covered by the Group's accumulated experience. Inditex, as the parent company, is responsible for the central corporate services, i.e. those services shared by the eight chains and which facilitate international growth: administration, the use of logistics technology, the general HR policy, legal issues, and financial capacity, among others. This autonomy and central back up gives field managers the time to concentrate on realising the vision without getting bogged down in the detail. He can ring up the central office and tell them that a fashion item that is selling extremely well but that customers had been asking for it in another colour. Head office will have that item to the store in the new colour within days. Remember, the vertical business model and self manufacturing enable Zara to tweak fashion items to exactly what the customer wants. This sureness of touch in about identifying or responding to trends is crucial to the company's success in sustaining profits. Many shoppers are also attracted by the Zara range of accessories which complement the clothes and many shoppers relate that at Zara, you can buy a whole outfit for a hundred pounds and it will look a lot more. Again it comes back to the fact that providing newness in the stores is what Zara excels at and for the shopper it is probably the one feature that keeps them ahead of rivals such as Gap or H&M. Conclusion So far, analysts see the Zara story as a win win situation. Its share prices continue to rise, profits continue to soar in 2005. Several years ago, the trend was set when during the share sale in 2001, share prices showed an increase in share price of 26%. When these shares were sold internationally, they were more than 53% oversubscribed. In 2004 little had changed, net profits rose 29% from the same period a year earlier and a rise in sales of up to 25% was expected. Little has changed but in the fashion world no less than in the business world generally there are always dangers ahead. So is Zara vulnerable to change and will competitors be able to match the company in innovation and sales It is still a race against others and other companies are starting to catch on. For many it won't be so easy. It makes good business sense to manufacture clothes in Galicia, it doesn't in the UK. Outsourcing to cheap areas such as the Far East therefore will remain a feature of the business plans of other companies. Logistics operations will also continue to be a problem for other companies. Those who outsource to the Far East will always have longer lead times than companies such as Zara. Clothes travelling such distances will probably not arrive in stores when they are required or in a state to be immediately put on display. But in many other respects, Zara's competitors in the same market are learning fast. They are at least trying to abandon horizontal business models that rely on a wide ranging outsourcing. Even with outsourcing, they know they have to react to market trends more swiftly and so are developing shorter lead times both in terms of supply and design. They are cutting costs and learning from Zara's example that word of mouth advertising is worth more than expensive advertising campaigns. Also, other companies are beginning to learn that an accurate flow of information from customer to head office is all important and that they must have five fingers touching the factory So what are the most important aspects of the Zara business model Firstly it must be the founder's original premise that only by strict control of manufacturing in house and on local premises can a suitable a reaction to the exigencies of the fast changing fashion world be met. Secondly, his insistence that creative in house design teams are able to react equally swiftly to changing demand so that an item can be changed from a sketch to a piece of clothing in the shortest possible time, even if it means copying someone else's best selling product. Thirdly, his insistence that the logistical organisation is in house and able to provide a very tight, constant and scheduled operation unhindered by outside agencies. This enables swiftly produced items to reach the stores in time. Not quite in time is not good enough. Fourthly, customer feed back is an essential part of the Zara operation. Zara uses its stores as sounding posts or intelligence collection centres enabling essential customer information to flow from store to head office. If customers like an item but would prefer it to be fringed in red and not green, then red fringed items will arrive in quick time to satisfy their demand. By constantly changing their stock and models, the company attracts a more frequent caller into their stores than other companies and so this increases the flow of information. Finally, having a well developed vertical business model that has stood the test of time doesn't mean that the company will stand still in further development of this model and indeed there is room for further development. Analysts are predicting that as the company grows and its costs rise, the issue needs to be addressed and a tighter reign placed on costs. Also, as other groups imitate Inditex's business model and shorten their supply chains, Zara may lose some its competitive advantages. (UK fashionUnited news December 2005). Summary Zara has its own factories. They have their own production controls and checks. They operate from a low cost area in Galicia in Spain. They have their own system of information flow in their vertically arranged business model and they have been developing this model for 30 years since the inception in 1975 so they are now brilliant at it. But in this fast changing world, costs are rising and competitors are learning from the Zara experience and business model. The company will need to look hard at itself and must remain ready to further adapt and change with market trends in order to maintain its lead. It seems that they are willing to do this by working with McKinsey & Co on a five year strategy to ensure that the company has the right corporate governance and the development of the business going forward. They intend to double the size of the business. In order to ensure operational improvements, they need to have the right infrastructure in place. (UK FashionUnited news. March 2005). Reference List BBC news 2004. Zara chain takes fur off shelves. http://news.bbc.co.uk/go/pr/fr/-/1/hi/business/3683966.stm Inditex Press brief 2005. Read More