Operations Management: Fashion Retailer Zara - Case Study Example

 Operations Management: Fashion Retailer – Zara EXECUTIVE SUMMARY Many retailers across the globe seek outsourcing opportunities as a means to improve costs, streamline operations, or simply to provide lower-cost support for the administrative functions of the business. Zara, a rather revolutionary fashion retailer, has managed to avoid outsourcing by having the internal competencies and intelligences to successfully build a solid fashion procurement and manufacturing model which is being benchmarked by many top-name retailers. This report identifies why outsourcing has not been pursued by Zara and offers recommendations based on the report’s findings in areas of operations such as supply chain, marketing, human resources, profitability, and external stakeholder relationships. Case study in operations management: Fashion retailer – Zara Introduction Zara is a fast-fashion retailer devoted to providing fashion products which are in-line with current social and cultural trends in an environment where rapid inventory turn-around is everyday business practice at the operations level. Fast fashion business models utilise in-house factory talent to produce garments with the understanding that some clothing varieties will maintain a very short life cycle based on trend-conscious consumers shifting their buying values. These life cycles can range from two weeks to a few months, however Zara must remain focused on producing fashion products in a quick turnaround environment, therefore aspects of supply chain must be managed, as well as marketing expertise, which are both components of operations management. Some businesses, in fast-turnaround environments, seek outsourcing as options in order to reduce costs, save internal labour costs, or simply to streamline existing business models. In other fashion-producing businesses, outsourcing in areas such as production occurs due to the economic advantages of using foreign labour as opposed to domestic factory workers. Zara, however, seems to like to take advantage of having control over aspects of supply chain and their strong vendor relationships, therefore these functions remain internal and are leading to business success at this fast-fashion retailer. This report highlights the many reasons why Zara is not seeking outsourced business assistance due to their competitive strengths in areas of operations management. Zara and operational strategy Zara maintains tangible ownership of much of their supply chain (Hines, 2004). The areas which are not owned by Zara are pressured by the retailer to conform to their rapid turnaround business model, as to do business successfully with this retailer, the supply chain vendors must work within a short lead time. This does not give them the luxury of long-term forecasting to improve operational efficiency in areas of production and distribution, however Zara’s buying power in the marketplace is strong and they can demand efficiency from their local suppliers. When the business’ buying power is able to drive better supplier productivity and meet their demands, Zara does not require the outsourcing assistance in areas of purchasing. Zara’s efficient supply chain has been awarded and is often benchmarked for its ability to deliver high quality fashions at reasonable prices, especially in cost of goods sold. Zara’s trend clothes, those produced in rapid fashion, make up roughly half of the company’s total fashion volume in relation to production (Grichnik, Winkler and Tothfeder, 2008). The very short lead times associated with Zara’s purchasing schedule could likely not be handled by outsourcing representatives, especially considering that Zara is considered to be an innovator in areas of supply chain in this industry and marketplace. Zara is not looking to produce products at a cheaper price, which is often the fundamental goal of retail outsourcing in areas of operations, the retailer’s mission is to produce items which fit the consumer lifestyle and speak of quality. Stevenson (2008) identifies the inter-linked relationship between operational strategy and marketing strategy, offering that one cannot exist without the other in operations management. In areas of marketing, Zara also excels with their dedication and focus around providing fashions which are both relevant and dynamic in their consumer marketplaces. The target audience is the 18-35 year old consumer which is a fiercely competitive market environment (Fernie and Sparks, 2004). Zara seems to understand their target buyers and is able to link operational strategy with long-term strategic marketing goals, thus creating an efficient marketing and promotional strategy. For example, it is well-known that consumer sentiment can shift virtually overnight, especially in this fickle market group of youths, therefore “the value of your product plummets if you miss the latest trend” (Sull and Turconi, 2008, p.4). This target group is often price-conscious yet still demand higher fashion, therefore their buying behaviours tend to lean toward this type of lower-cost clothing. Zara has managed to create a rather revolutionary marketing strategy by linking trendiness in a way that has “democratized couture” (Sull and Turconi, p.4). Zara realizes, in areas of marketing, that “one big flop can ruin everybody” (Smith, 2008, p.1). Therefore, Zara recognises what is driving current cultural trends for this target audience in relation to clothing purchases and seeks, in a quick-response production and logistics environment, to deliver these fashions to avoid being labelled as a boring or tired clothing brand. Outsourcing in areas of marketing would not produce as effective results, especially considering that Zara maintains the ability to control most aspects of supply chain from start to finish, thus their operational strategy is more worthy of benchmarking than to seek outside expertise. Further in relation to marketing, and its inter-linkage with operational management, consumers are drawn to aspects of the marketing mix related to place. In essence, they want goods which are new and exciting, delivered to a convenient, trendy sales environment (Tokatli, 2008). Fast fashion “requires short development cycles, rapid prototyping, small batches, and variety so customers are offered the latest designs in limited quantities to appeal to exclusivity” (Tokatli, p.23). Zara recognises that buyers do not want to be wearing mass-produced garments which would be commonly found on other peers in their social and academic environments. There is an aspect of marketing involving cultural impact on buying decision-making and it is known that the influence of peers in this age group strongly impacts areas of fashion buying decisions and other fashion-oriented purchases (Hines, 2004). Since Zara owns most of the supply chain and finds more efficiency and rapid response through this ownership, they are able to create rapid marketing promotions which actually deliver on new fashions and stock options. The promotional materials highlight the appropriate fashions, indicate their arrival to Zara, which all rests on the proverbial back of operations to ensure that inventories will be delivered on time, in limited quantity, and with the variety consumers demand. There are no other fast-fashion retailers which can compare to Zara and its international brand marketing reach, therefore to outsource these functions would not make good operational strategy especially since the company already has a proven track record of operational success in marketing areas. Also related to the consumer, Zara maintains a team of 200 talented, young, somewhat obscure designers to create the latest fashions based on templates of other fashion competitors in real-time catwalk environments or other fashion hotspots (Kumar and Linguri, 2006). Having an internal group of designers provides Zara with in-house expertise and a resource which can, at short notice, redesign a garment to represent a changing or unexpected consumer trend. It is likely that an outsourced designer, which would handle many different clients thus making a business have to work around the designer’s schedule, could not provide the efficiency in quick design and quick change processes which would be part of the total operations management focus at Zara. Seeking outsourcing help in areas of clothing design would be a wasted expenditure due to having quality, in-house talent to coordinate these operations-related product features and benefits. Zara has, to its benefit, enlisted the assistance of Professor Jeremie Gallient of the MIT Sloan School of Management in order to create inventory optimisation models for use in Zara’s fast paced operational environment. “Together, they defined mathematical algorithms that would optimize Zara’s replenishment processes” (Gentry, 2007, p.100). Internally, Zara maintains the in-house expertise and leadership which recognises when opportunities for partnerships and strategic alliances are important in order to improve operational strategy and the overall operations management models. Recognising that the use of mathematics and technology could improve function was a quality decision made by Zara’s senior leaders in order to optimize areas of replenishment and meet further, changing consumer demands. Zara’s partnership with Professor Gallient (and associates) indicates that the retailer does not need the outsourcing expertise in areas of information technology support, instead their leaders take a more interactive role in building a more efficient, fast-turnaround fashion model by creating worthwhile relationship marketing with external talent. It seems that Zara is more concerned about teaching their internal staff the competencies necessary to develop a more efficient operations process than to seek outsourcing, on a permanent basis, areas of data and technology. This builds a more efficient operation-focused staff and does not require Zara to rely on outsourcing expertise in order to assist with operational improvements, such as the aforementioned inventory control. Interestingly, also related to marketing, Zara does not give itself much of an ad budget, instead they rely on the tangible store front and windows for attracting attention of consumers in their desired target market (Brand Strategy, 2006; Andres, 2004). This is a much more traditional approach to advertising which is unique from competition which often rely on heavy print and on-air media to promote their product’s unique identities and clothing varieties. Zara is looking to create, for the lower-income-bracket consumer, a boutique-style environment at a price that is affordable, something other competition has not been able to effectively accomplish. Zara has found sales success using this in-store advertising, thus saving a tremendous volume of financial resources which can be better invested in other areas of operations including more efficient production tools or inventory control technologies. There is no need to outsource the advertising function as the business has a proven model of in-store advertisement which successfully appeals to their desired target customers, the 18-35 year old. Outsourcing in this area would represent a waste of operational funds and strategic profitability. Some retail organisations even outsource as a means of gaining additional expertise, such as hiring an external business consultant to help maximise employee efficiency. When outsourcing a management style function, it is important to identify whether internal competencies already exist in this area which can be exploited through several operational strategies such as training or coaching. At Zara, “store managers must comply with strict ordering deadlines, where delivery schedules are similarly regimented” (Fowler, 2006, p.12). Zara understands that its managers must be involved in many areas of operations at multiple levels of the business, therefore it invests the training efforts and cost investment into building more well-rounded professionals able to handle multiple roles. Outsourcing areas of purchasing, or the consulting expertise to train in-store managers, is not necessary with the sound leadership and workable operational strategy already in place at Zara. There does not seem to be an internal deficiency regarding training and development know-how, thus consulting third-party outsourced experts would not serve Zara successfully. Also in relation to consulting outsourcing, Zara went public on the stock market in 2001, giving investors a first-time look into a well-managed supply chain network with lead times of less than 15 days on most fashion items (Reda, 2004). This represented a revolution to investors, thus Zara was provided with investor confidence right from the time of their public launch on Wall Street and similar international indices. A business which is having problems with their overall brand image or their investor-perceived relationships, can pursue consulting outsourcing as an option to improve areas of quality, strategic focus, or how to handle investor relationships. The in-house leadership talent, as far as strategic planning and focus in relation to internal operational strategy, has been recognised more than once for their efficiency and innovation in providing a better retailing model. Consultancy services, in relation to investor relationships and brand image, would not be beneficial to Zara because the organisational structure and organisational hierarchy provide efficiency in all areas of operations using human capital to achieve operational goals. Harson (2005) offers that cheap Chinese textile imports are currently threatening Europe’s entire textile industry. Why? Lower cost Chinese fabrics and other textiles create a more inviting purchasing solution for other retailers, thus they would not providing economic stability to local, domestic textile producers. Zara, unlike its competitors, does not have to rely on these issues as maintaining control over most areas of supply chain management gives them flexibility when they observe that a textile trend is occurring. Zara can make adjustments to their distribution and purchasing systems in order to avoid being caught in competitive, foreign import problems and ensure that they are receiving an adequate supply of materials at the right time. From a competitive standpoint, it would not make sense for Zara to outsource in areas of purchasing since they already maintain a high competitive advantage with being able to avoid common supply issues which other retailers are facing in dynamic, difficult-to-manage business environments. Zara has also created significant changes in the competitive marketplace regarding how other retailers should benchmark their own operations. Analysts in international stock markets began to realise that a two week lead time, in retail, was possible when other retailers struggled with six to eight month lead times (Strategic Direction, 2003, p.25). This has created pressure from investors to perform an internal analysis on what is driving lead times in the retail industry and attempt to improve operational and financial performance through fashion risk investigation and to shorten their lead times to be more in-line with Zara’s efficiency in operations. When the business has developed a superior method of shortening retail lead times in such a large scale over that of competition, and is able to set the standard by which other retailers measure their operations efficiency, outsourcing talent is not a need when working within a tried-and-tested operational model. The Zara production and logistics operations contribute highly to profitability and satisfying consumers in the process. In this area, it would seem that Zara could be hired as an outsourced client themselves rather than consider external improvement advice from outsourced partners. Operations management also requires having knowledge of the budget and costs of operations. Sales increases or decreases might indicate trends in quality or quality deficiency, therefore a strategic-focused manager must be consistently looking at costs and measuring spending on different operational projects or developments. Zara, through its commitment to constant improvement, recently experienced a 20 percent increase in sales (Carruthers, 2004) during a time when other retailers were finding difficulty in a highly competitive marketplace. Interestingly, very well-known, international brands have sought outsourcing expertise from Management Horizons Europe such as Monsoon and Benetton in an effort to improve their operations (Carruthers). The highly competitive business environment often drives companies to look for assistance or external outsourcing advice in order to help them with competitive improvements. In the case of Zara, sales increases when competition is declining represents a strong internal leadership team and operational focus which does not rely on outsourcing partners. Zara replenishes it stores twice weekly, something which is unparalleled in most retailers across the globe. Zara does not focus on building associations with customers based on the Zara brand name, but have a production mindset that consumers should like the clothing and not the brand of retailer (Ferdows and Lewis, 2003). This represents another shift in focus from that of competitor retailers which try to link consumer sentiment with the retailer itself through extensive promotional materials. The success or failure of these promotions dictate the course of operational strategy in terms of logistics, production, and even costs savings in certain operational areas. The existing supply chain structure allows for rapid replenishment of products, therefore delivering on promises for new fashions, at affordable prices, and in limited quantity to appeal to the cultural dimension of buying behaviour in this group market. What this provides, since Zara is not focused on brand building for the Zara name, is an opportunity for the company to consistently upgrade production efforts and different textiles, thus producing new clothing on an on-going basis rather than by purchasing by an entire season. The efficiency of Zara’s distribution network, coupled with their focus on research and development linked with production, gives the business no need to pursue outsourcing for most of its operational strategies. For example, its lean inventory system allows for 85 percent of merchandise to be sold at Zara compared to the low 50 percent other retailers experience, thus they are not left with a high volume of surplus goods (Hardman, Harper and Notaney, 2007). No outsourcing supply or distribution partner could provide a superior benefit to what already exists within Zara’s efficient value chain and supply chain. “Managers and workers are the heart and soul of an organisation…if they are competent and motivated, they can provide a distinct competitive edge with their skills and ideas” (Stevenson, 2008, p.41). Developing a positive organisational culture and ensuring that workers are satisfied and better contributors to profit or organisational success is a factor in operations management which must be considered in order to maximise human capital. One major motivational strategy on behalf of Zara is the establishment of bonuses for store managers in order to act as incentive for reaching goals associated with sales forecasts. Because in-store advertisement is so critical to the business, it is important to come up with some form of human relations-focused operational strategy to build a more competent and dedicated workforce at Zara. In order to obtain the receipt of bonuses, managers are trained to identify areas of cost reduction, transfer costs, merchandising and product ordering (Ferdows, et al). Other retail organisations seek outsourcing of the human resources function in order to save costs, with these being handled at a centralised corporate headquarters. In this type of retail system, human resources support comes from memorandums or electronic/phone communications and is not effective for providing in-house talent and development. Zara devotes considerable time and effort, as well as financial investment, into internal management training and has the competencies to perform this alone. From a motivational perspective, Zara requires no outsourcing assistance in areas of human relations and internal incentives promotion to provide a more superior operational environment. Recommendations The goal of concentrated marketing and promotion is to ensure that higher profits can be achieved, which requires a sound operational strategy in order to meet consumer demand created by promotional strategies. Zara does not currently seek outsourcing in any of its business divisions, but relies on internal talent to handle relationship and consumer-oriented marketing and promotion even though the financial investment into this type of advertising is limited. With increases in sales attributed to promotion, operational strategy must be adjusted and in-house capacity examined in order to produce a competent and workable production forecast. Zara, with the business’ currently-flexible production model, could seize the opportunity to build a brand image for their clothing lines in order to create better consumer sentiment and build a better public image. It is recommended that Zara, first, continue to rely on its internal staff competencies related to operations, especially in areas of human relations, supply chain, and marketing and avoid outsourcing as a business option. The only noticeable problem at Zara, which is strongly linked to production and sales (both operational aspects), is the lack of desire on building a brand reputation for Zara. The target consumer is drawn to the type and style of fast-fashions offered by the company, however they maintain the potential to draw in different demographics by creating promotional materials which link lifestyle with positive thoughts of the retailer. Improvements in these areas, using in-house talent, would be to focus on differentiation strategies through appealing to the user, thus creating the idea that only a savvy and sophisticated customer would be interested in Zara’s upscale-oriented clothing lines. The benefits of extending internal marketing would be increases in consumer interest and sales volumes, thus giving opportunities to expand operations around the world or to simply improve existing process in relation to operational strategy. There is no need to outsource the advertising function for brand building, but can be conducted simultaneously with existing in-house advertising efforts. The end result would be a more responsive production process and a motivated sales team able to meet sales forecast objectives and receive bonus, which both contribute to operational success at Zara and any other fashion retailer. Operational strategy is also concerned with areas of information technologies and how they are utilised to create profit and process improvements in the operational environment. The company’s website is not very user-friendly, with most link options constructed using an interactive software programme to view the online content. Slower browsers or Internet connections would likely have consumers abandoning the site if the content were inaccessible or difficult to open or navigate. How the business presents itself in the online environment is very much relevant to operational strategy as the sales lost because of online presentation tools represents a poor business decision when relying on virtual sales volumes. This is only one of two noticeable business areas which could benefit from outsourcing, even though Zara is against this idea fundamentally, as it would provide a more fulfilling consumer experience by using the knowledge of proven outsourced professionals. The website interaction is complicated, thus frustrating the process of browsing for company-related information or catalogue selections. Despite being edgy and stylistic in the site’s overall presentation, the inability to navigate through pages which take a considerable time to load could be a serious operational failure in relation to business strategy. Inditex, the parent company of Zara, and Tata Group have recently signed a launch agreement in India for new Zara stores by 2010 (zara.com, 2009). Zara will need to consider website development and content development for this region, like its other international customers, which is uniquely tailored for different buying preferences, languages, and expertise in navigating the online environment. Outsourcing in this area can provide Zara with a better functional website for purchasing and browsing in a method which is both convenient and without hassle. Research evidence did not uncover whether Zara currently has a devoted internal information technology support team for routine website development, however in order to improve operations and sales volumes, outsourcing investment in this area would provide Zara with a much better online sales medium to promote its products. It is also recommended that Zara consider outsourcing its consumer research efforts to external expertise in order to provide real-time consumer data regarding fashion, Zara, and associated competitors. Zara’s internal leadership is devoted to constant supply chain and production developments and would not, in a real-time environment, have time to devote to conducting focus groups, surveys, or interviews with desired target clients to receive their sentiment about different fashion buying options. Real-time consumer data is necessary in order to satisfy the buyers and improve the sales margin. Such research efforts, in elongated focus group environments conducted by outsourcing professionals, could provide valuable insight into fashion accessories or trends, thus allowing Zara to further diversify the business by offering non-clothing accessory options which appeal to the buying audience. Consumer research, as part of marketing intelligence, is also linked with operational strategy as sales volumes, production forecasts, and quality audits in this managerial role are impacted by buying behaviours and attitudes in the consumer segment. In order to act on the previous recommendation to build a stronger Zara brand name and reputation, strong, real-time consumer data is required to understand what drives their current lifestyle and retailing values. Outsourcing in this fashion would allow for external expertise to coordinate ongoing consumer research and still allow managers to remain focused on their existing operations-focused responsibilities. The end result could be a more targeted advertising or promotional campaign which meets with consumer values and is flexible enough to change with these social trends. Conclusion Zara is competent in virtually all areas of operations management, with leadership recognising how to compare budget restrictions with process capability, using their ownership and buying power on the market to drive supplier compliance to their rapid-turnaround needs. Zara is worthy of being benchmarked in multiple areas of business operations, thus seeking outsourcing opportunities are not practical nor would they likely provide much benefit considering that Zara is setting the trend by which other fashion retailers model in areas of operations. Outsourcing, except in areas of the Internet sales environment and consumer research-gathering, is not a favourable operational strategy likely to provide much return on the investment. Zara’s noticeable competitive edge is strongly linked with operations management and this retailer has managed to streamline and enhance operations strategy using human capital and process improvements as the starting point for efficiency in an ever-changing production and distribution model. This company is, quite simply, qualified to handle their existing business structure without the expertise of outsourcing partners, with this assessment justified by Zara’s ongoing receipt of benchmarking acknowledgements. No other retailer has a more competitive operational model, therefore Zara should be noticed for their internal knowledge and process efficiency. References Andres, James. 2004. Branding espana to the rest of the world. Brand Strategy, London. Mar, p.P12. Carruthers, Robert. 2003. Rapid response retail. Marketing, London. 3 Apr, pp.20-22. Ferdows, K., Lewis, M. and Machuca, J. 2003. Case Study: Zara. Supply Chain Forum, 4(2), p.63. 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