Logistics and Supply Chain Management - Case Study Example

 Introduction This paper will start off by introducing the concept of Supply Chain Management and its importance in the world of business. It will then take a step ahead by discussing, analyzing and explaining in detail the supply chain management of Spain-based retail store, Zara as an example. It will discuss its logistics and in conclusion, it will put forward a few propositions that might help Zara make its supply chain management further efficient. Zara is a leading Spanish Flagship Chain Store that deals in Women and Men’s clothing. It opened its first store in 1975 and since then has taken retail fashion by storm. I have selected Zara as my organization because of the fact that the secret behind the success of Zara was prominently its efficient Supply Chain Management. According to Harvard Business Review, Zara has hit on a formula for supply chain success that works. By defying conventional wisdom, Zara can design and distribute a garment to market in just fifteen days. (Ferdows et. All, 2005) According to The Economist, Zara is ahead of other big stores because of its supply chain which is more responsive to customer demand. (The Economist, 2006) Main Body It is critical for international companies to efficiently supply their products all over the world in order to be successful. Therefore, it is absolutely essential for them to have well-organized supply chains, from raw materials to work in progress and from work in progress to finished products. For this, they need to have a Supply Chain Management System which would make it all possible. According to Birgit Dam Jespersen and Tage Skjott-Larsen in their book ‘Supply Chain Management: In Theory and Practice’, Supply Chain Management is the management of relations and integrated business processes across the supply chain that produces products, services and information that add value for the end customer. (Birgit Dam Jespersen and Tage Skjott-Larsen, 2005) A supply chain may not be used to only cut costs. Instead, it could also be used to increase revenues and hence profits. The costs could still remain the same. It gives an organization a competitive advantage against its competitors. It does not allow any sale to be lost. When the customer wants something, an effective supply chain would ensure that it is available. This increases the customer’s interest in the company and encourages brand loyalty. It also helps keep a close contact with the suppliers which ensures that maximum advantage can be gained out of doing business with them. Zara is one of the largest brands, by the Inditex Fashion Retail Group, that has 723 stores in 56 countries making sales of Euro 3.8 billion (India Supply Chain Council, 2006). Zara has a very high product turnover. It makes more than 11,000 products annually. The annual report of Zara (Inditex) for the fiscal year 2006 covers all activities from February 2006 to January 2007. Zara opened 138 new stores during the past year, increasing its selling area by 15%. The sales were an increase of 21% at Euro 5,352 million. It earned net profit of Euro 1 billion (Safe G., 2007) an increase of 25%, was in contrast to last year’s profit. The sales in Europe, with exception to Spain, were 40.6% of the total. (Inditex Annual Report, 2007) After considering all this impressive data and the number of shops, it is clear why a widespread company like Zara needs a supply chain which is efficient. Zara’s fashion is based on imitation; it copies designs from the catwalk and other spots and brings them to their customers at low prices in as little as a couple of weeks. Since this is all the time that is given to them, the whole process of designing, ordering, producing and delivering the clothes to the stores must be quick and timely. If this is not done, Zara will not have enough new items to bring to the shelves (which is its technique) every two weeks. Since Zara does not advertise, this is the only way it can attract customers. When the customers would not get attracted and would not anticipate, hence, they will lose interest and Zara’s sales will fall. However, as mentioned above, it carries out this whole process in only 15 days. 15 days is very less time for getting an inspiration, putting the inspiration on paper in form of the design, explaining the design to the producers, getting the raw materials ready, producing it, accepting or rejecting it, ensuring that the quality of goods produced is up to the set standards and lastly delivering the product to each store which requires that particular design. We have to keep in mind that the process of delivering can get a bit complicated considering that the central distribution centre has to ensure that the right amount of the right product is delivered at each store by cross checking with the data provided to them by the store managers and these stores are located all over the world from Australia to the United States of America. The important question being how does it do it? Most of the production of Zaras products is done within Europe. Since Zara is a Spain-based retail company, 22 of Zara’s factories are located in Spain. These 22 factories produce 50 percent of its total products and these products are mostly those which require more detailing and are high in fashion content. The rest of the products are made by its 400 suppliers. Out of these 400 suppliers, 70 percent are located in Europe while the rest are located in Asia. The location of these factories is very strategic which allows its supply chain to respond quickly. (Li Li, 2007) Fashion is very unreliable and keeps on changing. Since, these factories are owned by Zara itself; it can easily change the designs and the product range. The suppliers located in Asia gives Zara a cost advantage as they buy low value products with less fashion importance from these places. These include t-shirts, woolens etc and have less cost of manufacturing in only areas like Asia. These are then shipped to Zara’s central distribution centre. (India Supply Chain Council, 2006) Zara’s strength is its high speed supply chain. It has an extraordinary communication channel which cuts down the production schedule. The managers give reports to the head office and are constantly in contact with them. The mangers inform the head office which products are successful and which are not being sold. (Safe G., 2007) this enables the product range to be continually updated and any products (couple of) that do not do as well are taken off the shelves. It’s secret lies in having complete control over each and every part of the store and the supply chain. The employees of the store and office are in contact with the head office in Spain always. Zara’s supply chain is faster because of its vertical integration. (Anderson, K., Lovejoy, J. 2007) Zara controls its upstream supply chain which includes raw material suppliers of clothes, dyes etc. It buys directly off from its suppliers and this makes it flexible, which helps it cope with changing customer demands. Zara has 200 designers who design clothes based on the latest trends in fashion shows. Once the order is placed by Zara, the factories producing raw materials start working on it immediately. (Li Li, 2007) These raw materials are ready for production in minimum time and reach the factories located in Spain. The head quarters at Spain know how much of what exactly is required because of Zara’s superior communication system. The factories are told what to produce. The central distribution centre has 3 distributions, one for women, one for men and one for children. Zara makes it a point to run these three divisions simultaneously. Each divisions’ members are dedicated towards their own design and sales etc. Although, this procedure may be expensive, it saves time for the information to get from the store to the central distribution centre. The information flow is faster, clearer and direct and this makes the supply chain quicker to respond. (Ferdows et. All, 2005) For cuts and patterns, the factories use Just in Time production schedule. Just in Time efficiently controls the raw materials or inbound logistics. One can know how much is required by analyzing the demand and that amount of inventory will be available to them just in time of the production process. Whatever amount of inventory is required and demanded can be ordered at the time it is needed. The clothes are produced in small batches unlike most other clothing companies. This allows them to change and modify their products easily. After the cloth is cut, it is sent to smaller factories or small scale industries also known as family workshops. These are located in Spain or Portugal. These smaller factories are responsible for tailoring and processing and are allotted similar products. This allows faster production. (Li Li, 2007) As soon as the production is complete, the products are sent to Zara’s central distribution centre or the head quarters located in Spain. This central distribution centre has knowledge about all the stores located all over the world. It knows which store requires how much of what products. It also knows which products are not successful in what part of the world. By using the help of an optical reading device these products are organized. On average, 60,000 products are sorted an distributed an hour. These headquarters deliver the products to each store through a logistics company. Within Europe, trucks are used for distribution. These trucks come to the central distribution centre and distribute 75 percent of the products. (India Supply Chain Council, 2006) For international markets, these products are mostly transported by using air transport or they are also sometimes shipped. According to a Zara manager, Zara has Web-based Suppliers Management Platform. This platform allows the headquarters to continuously monitor the goods that are sent and know the status of these products. This also allows them to have knowledge of all the formalities related to customs etc that are a part of this whole procedure. This speeds up the whole process. (Li Li, 2007) The transportation results in minimum losses in terms of shrinkage and flaws. According to India Supply Chain Council, the shipments had no flaws and were accurate 98.9 percent of the time, while shrinkage losses were only 0.5 percent. (India Supply Chain Council, 2006) Zara’s downstream supply chain is what is keeping them going. It is well-organized which is its strength. According to a Harvard Business Review, every time a product is sold to a customer, the store managers inform the central distribution that the store is short of this one piece. The central distribution instantly checks its stocks. If the product is available, it is instantly delivered to that particular store. If it is not, the factories are given the order to manufacture it. Once it is produced, it is then delivered to the store where it is required. Some people argue that this method is expensive but Zara in return claims that the loss is not as great as the loss from lost sale that would occur if the piece was not available in the store when it was required. (Mckenty, F., 2007) In my opinion, the factories and the suppliers are located at a very advantageous location. They are near the head office and the central distribution centre. These centers can constantly check on the factories and as a result, the quality of the clothes produced is impressive. It also speeds up its supply chain by selecting and locating its suppliers where it will benefit the most. It will select those suppliers which will be able to respond to their manufacturing orders promptly. Geographically, 65 percent of the production is done in Europe which enables it to be close to the central distribution centre. (Supply Chain Brain, 2008) Zara is also making use of cheap labor and workers who specialize in the field from these factories. If it were to locate its factory else where, say in England where its market is huge, it would have cost them a lot because of expensive land and labor. The transportation cost is high but since this is done in large amounts and twice a week, it makes use of economies of scales in the sense that the logistics company they use, give Zara discounts because they transport the clothes in bulk. Also because of the concentration of stores in Europe, the logistics achieves efficiency. Even though Zara is doing remarkable with the way it is operating at the moment but they can change their production schedule slightly which will make it even better. Instead of using Just in Time, they can move a step ahead and go for Just in Time-II. This is a concept recently introduced which is almost the same but has some additions to Just in Time. In this system, the raw material’s supplier’s sales representative is present at the production site. The sales representative is available at all times who can change and alter the production schedule according to the market conditions. Also, the sales representatives of the suppliers can also apply their knowledge of the materials they are supplying, which will help the increase efficiency as the right materials will be ordered. Lastly, these implants could provide value to Zara by getting involved in processes like new product development projects, manufacturing requirement planning, etc. But on the other hand, it must make sure that this sales representative is closely monitored. It must limit the access to sensitive information by the sales representative so that he does not change the production schedule according to the raw material’s supplier’s convenience. This new method will help Zara have a closer contact with upstream supply chains. Conclusion In conclusion I would once again like to emphasize on the importance of supply chain management for an organization. It is absolutely necessary for an organization to have an effective supply chain as this allows the organization to have a competitive advantage. We can take an example of Zara in order to prove this. Zara does not use any kind of advertising with popular celebrities or any other kind of promotional schemes. Despite this, it has a very high amount of sales revenue coming in and it is becoming strong competition and threat to bigger stores like Marks and Spencer. How does it do it? It maintains a supply chain that decreases its average cost and at the same time it allows all groups related to the supply chain to be in contact with one another at all times. Because of this, all the activity that goes on in the supply chain is very organized, planned, prearranged, and hence successful. It has a very good communication system which allows the whole organization to carry out every activity efficiently. There are still a few changes that Zara could add to its supply chain which will ensure that the production schedule is quicker and more efficient. References 1. Anderson, K., Lovejoy, J. (2007) The Speeding Bullet: Zara’s Apparel Supply Chain [Internet], Tech Exchange. Available from: [Accessed June 11, 2008]. 2. Ferdows, K. et al. (2005), Zara's Secret for Fast Fashion [Internet]. Harvard Business School Working Knowledge. Available from: [Accessed June 11, 2008]. 3. Jespersen, B and Skjott-Larsen, T., (2005). Supply Chain Management: In Theory and Practice. Copenhagen Business School Press DK. 4. Li Li, (2007). Fashion Magnates' Supply Chain Contest, [Internet] China Business Feature. Available from: [Accessed June 11, 2008]. 5. Safe G. (2007) Zara Leads Fast Fashion Rush [Internet], The Australian Business. Available from: [Accessed June 11, 2008]. 6. (2007), Inditex Annual Report for the Fiscal Year 2006. Available from: [Accessed June 11, 2008]. 7. (2006) Zara Supply Chain [Internet], India Supply Chain Council. Available from: [Accessed June 11, 2008]. 8. (2008) Combining Art With Science, Zara Competes With ‘Fast Fashion’. [Internet], Supply Chain Brain, Available from: [Accessed June 11, 2008] 9. (2005) You Only Have One Supply Chain? [Internet] Harvard Business Review. Available from: [Accessed June 11, 2008] 10. (2006) The physical internet [Internet], The Economist. Available from: [Accessed June 11, 2008] Read More