Supply Chain Management - Zara Company - Case Study Example

Supply Chain Management-Zara Company Name: Institution: Date: Table of Contents PART 1: Business Purpose 2 1.1. Supply chain management and competitive strategy 2 1.2 Customer fulfillment and environmental scanning 4 1.3. Supply chain processes thinking and order fulfillment 7 PART 2: As-is Supply Chain 9 2.1. Strategic supply chain costing and performance measurement 9 2.2. Competencies and outsourcing 10 PART 3: To-Be supply chain 14 3.1. Supply chain relationships 14 3.2. Sharing information across the supply chain 15 PART 4: The Supply Chain Road Map 16 4.1. Supply chain mapping 16 PART 1: Business Purpose 1.1. Supply chain management and competitive strategy 1. a. Industry of operation Zara revolutionized the world of fashion through bring out a huge number of collections every season as opposed to two seasons every year-spring-summer and fall-winter. The fast fashion trend within the clothing industry has been revolutionized in recent times by companies like Zara. Consequently, factors influencing the clothing industry at large will at the same time influence the fast fashion clothing industry. Within an apparel industry the demands of customers differ with regard to their ages. Population sizes impact demand within various apparel categories (Mihm, 2010). A population that is aging can increase demand for loose-fitting styles. Increase in birth rate can stimulate growth of maternity clothes and baby clothes. Demographic trends play a major role in deciding the direction of the fashion and clothing retail industry. 1. b. Company’s position is the market Zara is a world leader in the manufacture of fashionable clothes and enjoys a competitive advantage in the fast fashion. The firm is a brand that is reputable for trendy and high quality products. Zara is a Spanish clothing and accessories retailer that is based in Arteixo, Galicia. The firm was established in 1975 by Rosalia Mera and Amancio Ortega. Zara opened its first store in La Curuna, Spain following twelve years of work by Amancio Ortega who is Inditex founder (Cortez et al, 2014). The firm has kept up with the latest fashion across various parts of the world like the USA, Italy, Canada and Japan. The company has kept on adapting to fashion a round the world at very quick pace. Zara has over two thousand stores which are strategically located in leading cities across ninety three countries. Zara’s customers and designers are inextricably linked. A team of specialist gets instant feedback regarding decisions that customers are making at any Zara store. The feedback is used to inspire creative team which comprises of two hundred professionals (Cortez et al, 2014). Zara strives to meet the immediate need of its customers while it assists to inform their tastes, trends and ideas. The purpose is sharing responsible passion for fashion across a diverse range of cultures, people and ages. 2. Zara supply chain Zara supply chain is depicted below: 1.2 Customer fulfillment and environmental scanning 1. Creating value through SCM Companies look for ways to develop distinctive advantage as well as differentiate themselves within the mind of the consumer. The customers seek value in terms of cost, quality, flexibility, delivery and innovation. Quality includes both design as well as manufacturing elements. Fashion products have to go beyond the expectations of the customer. Manufacturing has to conform to specifications of design during production. Quality has to be experienced and built in the company’s processes and products. Innovation establishes new markets as well as changes in industry standards. Customer satisfaction defines whether a service or a good has met or exceeded the prior expectations of the customer. It is crucial to understand the needs of the customers in order to produce unique products that meet those needs. Customer satisfaction has to be engraved in the firm’s structure and culture. Zara prides itself in providing quality and trend products at affordable prices. Products that are not sold in one store are transferred other stores that are needed more. Changing of stock so often increases flexibility making the customers to always anticipate something new from Zara. The low inventory levels enable the company to cut down on cost within the supply chain and hence provide quality products at affordable prices. The products are delivered in time as compared to other stores that take months to change their stock. Zara makes delivery within 48 hours from placement of the order. Innovation is a big part that drives business at Zara. Designers act on the information that is gathered directly from the consumers to produce products that meet immediate needs. Zara creates value for its customers through supply chain management using flexibility, delivery and innovation. Zara focuses on offering value to customers through feeling them fashionable at reasonable prices as well as quality. The main target of Zara is young fashion. It works on a pricing strategy of product sale that ignores mark down with low inventory and low product cost. Apart from having its unique models, the majority of items from Zara are imitation of high-end brands. The purpose of designers of Zara is not for product innovation but reorganizing fashion components of existed products on their purpose and changing them into new types of products. The designers interpret the fashion rather than creating fashion. 2. SWOT analysis (SCM issues) Zara as a brand value their responsiveness and speed to the latest fashion trends. Environment scanning reveals the following strengths, weaknesses, opportunities and threats with regard to supply chain management. Strengths Weaknesses 1. Information technology investments that is effective to help in reducing cost 2. Responsive and fast communication within the entire supply chain 3. Minimal inventory creates a sense of exclusivity. 4. Fast, inspired and responsive design team 5. Designs that are up-to-date at attractive prices 1. Resist outsourcing that creates high labour costs 2. Minimal budget for advertising 3. Low in-story inventory that can lead to shortage Opportunities Threats 1. Fast-growing demand within Asian markets. 2. The advantage of Spain being a member of the EU creates more opportunities. 3. Outsourcing whenever it is necessary to further bring down costs. 4. Launching more campaigns for advertising. 1. Fierce competition from fashion retailers The Gap and H&M. 2. Increasing costs of labour at its manufacturing facilities. 3. Changing consumer behavior. 4. The saturation of retailers in the clothing industry. 3. Forces of changes impacting the company supply chain strategies Agility is injected being a response to dynamic as well as turbulent markets and customer demand. It affects the supply chain directly and it is why such concepts like fast fashion and supply chain emerged. The quest to decrease lead times and realizing flexibility in fast fashion introduced suppliers’ involvement in the process as being fundamental to their ability to achieve high degrees of customer satisfaction (Slack et al, 2007). For the purpose of reacting on rapid change in the demand of consumers, Zara has established efficient agile supply chain having all buyer experts, designers and management being in one place and facilities of production close by ensuring agility and flexibility. Zara’s objective is to meet the requirements of the fast changing and dynamic fashion market. Zara has strong core competencies that help them in the maintenance of the brand image. Zara’s employees are committed to their jobs owing to flexible system at the place of work (Slack et al, 2007). Commitment of employees to their jobs demonstrates long-term retention rates of employees through addressing their need and motivation through training and development as well as the existing reward system. 1.3. Supply chain processes thinking and order fulfillment 1. Strategies used by Zara Zara uses both differentiation and cost leadership as part of their supply chain management strategies. The company is versatile and makes imitations of brands to meet the demand of customers. Consequently, differentiation through production of different designs and style is an important aspect at Zara (Fernie, 2014). The company spends little budget on advertising and depends on world of mouth by consumers to reach potential target consumers. The company is able to offer stylish products at affordable prices to reduced costs within the supply chain and product production. Price variation is widely used at Zara. New technologies permit the price of a product to change couple of time within a day with regard demand and supply. The technologies permit monitoring of the entire process. For Zara, procurement is a value adding process as opposed to a cost center. The supply chain management puts a lot of focus on procurement. Cost effectiveness is achieved through outsourcing and subcontracting (Fernie, 2014). Procurement has an influence on company profits. Every penny saved in the course of purchasing is a gain whereas every sale brings about cost of sales. Supply chain management is a key factor to success in the fashion industry. Within the fashion industry whereby companies are competing on time, the need of new abilities is raising. Agility is the capacity to rapidly respond to unpredictable changes in demand. 2. Order fulfillment process applying SCOR model elements Supply chain operations reference model (SCOR) is a tool for management that used to improve, address and communicate supply chain management decisions in a firm and with suppliers as well as customers of a company. The model explains the business processes needed to satisfy the demands of customers. It assists in explaining the processes across the entire supply chain and offers a basis of improving the processes (Fernie, 2014). The first step comprise of planning, sourcing, making delivering and returning. Return refers to handled defective products, return containers or packaging. There is proper planning for Zara as information is gathered from the ground and sent to the company’s factories to produce the designs. The company source materials that it developed into various designs that the customers need. Delivery is made within the shortest time possible as compared to other players in the industry. Zara products are shipped from the manufacturing factory in Spain by Corunna depot or Zara Logistica. Inventories are not usually stocked but distributed to Zara stores twice per week. For distribution abroad, the inventories are transported to Spain border, where the logistic carrier of the country ships it to the stores (Deogratias, 2009). The stores order more stock from offers, the commercial manager takes down the order and conveys it to the logistics that is in charge of stock. The stores are usually ranked according to accuracy of orders and their sales; this ranking controls their priority level for order supplies. This translates to no stock being piled up hence low cost supply chain. If a product or good is not moving fast in a particular store, the company disengages production of the product. This stops unnecessary stocking of inventory of unsold goods. The entire process adapts to consumer preference in the shortest time possible. PART 2: As-is Supply Chain 2.1. Strategic supply chain costing and performance measurement 1. Strategic cost management principles Strategic cost management make use of cost management techniques for the purpose of reducing organizations costs as well as improving profit while at the same time supporting its value proposition. Three important elements of strategic costs management include supply chain analysis, Value Proposition analysis and cost driver analysis. Supply chain analysis describes the evaluation of the management of flow of information, processes, cash flows, and inventory from the first supplier to the final consumer including the disposal process. Value proposition analysis is fundamental for corporate strategy and determines how any firm chooses to compete in markets. The generic value propositions comprises of differentiation strategies and cost leadership. Firms are at liberty to make use of a combination of value propositions. Various strategic business units within the same organization can choose to use different value propositions. Value propositions can change over the life cycle of the product. Cost driver analysis points out processes, decisions and activities which actually create cost for the supply chain. The cost drivers vary over time as well as among various products and services. Those activities which cause costs to be incurred as known as cost drivers. Some of the generic cost drivers include the scale of operations, use of nonstandard parts, components and material, level of outsourcing within the company, and high levels of finished good product mix. Huge manufacturing operations must exhibit high stable volume (Dalton, 2010). The small manufacturing operations can be unprofitable at high-volumes owing to overtime costs inefficiency within operations, maintenance issues and machine breakdowns. The more options the firm providers to its customers, the more volume of inventory it has to carry and more flexibility in production operations. Companies which outsource can experience high costs from additional services as compared to using internal operations. Overall costs can be lower in case demand exhibit erratic tendencies. Custom items become more costly owing to low economies of scale. Customer parts can possess lower operating costs or exhibit better performance. Cost drivers are not inherently bad or good. Strategies for cost reduction have to analyze various costs drivers with relation to their effect on the value proposition. 2. Measurement of sourcing, operations and logistic processors and its customer satisfaction Information System is the core system used for inventory management, product pricing and tracking of sales. Clothing items at Zara are priced based on the demand in the market as opposed on cost of manufacture. The shortened lead times for delivery of extraordinary fashion items coupled with short production runs enable the firm to provide customers with more choices and styles, and further create a sense of urgency of buying since items sell within a short time. A specific item or style may not be stock again after it runs out. The company sells 85% of its items at full price than the industry average of selling about 60% of items at full price (Cowe et al, 2011). Every year there is 10% of inventory that remained unsold than the industry average of between 17 to 20%. Zara spends money on launching new stores rather than spending on advertisement campaigns. Factories can decrease and increase production within a short time hence there is fewer inventories within the supply chain and less requirement of financing that inventory using working capital. Customer satisfaction is realized because the customer need is identified and designs made to cater for this need. Customers are satisfied if products are responsive to their needs. 2.2. Competencies and outsourcing 1. Core competencies of Zara and their justification Core competencies refer to a set of skills, activities or advantages which makes a company to stand out from its contemporaries. It is the collective learning within the organization particularly on coordinating diverse production skills as well as bring together streams of technologies that are very diverse (Deogratias, 2009). In order for a firm to compete successful in the global market, the company has to be extraordinary good at one thing that the target customer values dearly. Major leaders in various industries build their core competencies around some essential skills. One important core competencies of Zara is the capability to apply ‘just in time’ manufacturing to fashion production. Manufacturing is mostly done close to its home base around and in Iberian Peninsula. The process of garment making is subcontracted to specialists whose factories that are automated persistently create unfinished colourless goods (Cowe et al, 2011). As soon as Zara makes a decision on a new design, colourless goods are sent into finishing shops of Zara where they are turned into products that are marketable. High European manufacturing costs are normally offset by cost saving attributed to fast turnarounds. Distribution is conducted twice a week to make sure store inventories are persistently kept unique and fresh. The logistic system making use of proprietary software makes sure that the time from receiving an order at distribution center to the worldwide delivery of goods within the store is from 24 to 48 hours (Fernie, 2014). The company has a distribution system that is centralized with every single item of clothing coming through the distribution center in Spain. This ensures orders’ consolidation to individual stores. Zara designs, produces, distributes as well as sells its collection within four weeks than the many months that most of its competitors take to carry out the process (Dalton, 2010). This translates to updating the stores with latest designs within a week as well as keeping low inventory levels. Low inventory levels leads to reducing costs within the supply chain. Zara has reached his highest level to adapting with technology and principles of customer value as well as modernization. Market qualifiers and winners are main determinants of various approaches of agile and lean and services. Figure 1: Zara Supply Chain core Competencies Zara is in charge of key resources that provide competitive advantage. It possesses key resources like centralized distribution, design, customer’s observation as well as feedback process, and fresh stock offering by online platform. Zara has achieved financial capacity that provides them with a competitive advantage over other contemporaries within the fashion industry (Chan, Ngai & Moon, 2016). The firm’s core competencies in changing single women fashion into global fashion is attributed to core competencies within the part of excellent distribution channel offering fast changing fashion accessories and clothes. Zara further focuses on vertical integration which is an advantage to the firm as it leads to cost reduction since they do not outsource their product to any other distribution channel. This result into a core competency since it creates a monopoly for Zara products within the fashion market and eliminates conflict that would have emanated from multiple distribution channels. The success is certain since it does not rely on outside channel and distributes products in small batches. Zara manages all other functions such as storing stores, designing, logistics and distribution (Agha, Alrubaiee & Jamhour, 2012). Zara is regarded as the first firm to set a benchmark standard for conducting diverse business within the fashion industry. The aspect of working with flexibility in the workplace creates an environment of opportunity and scarcity with fast fashion system. The human resource system at Zara assist in the attainment of the core competencies through deploying quick responding system comprising of information technology focusing on customer demands (Cowe et al, 2011). Zara owns its store chain and does not franchise for the goal of avoiding the standard problems. The agile supply chain leads to quick response to new trends and emerging customer needs. 2. Outsourcing and why companies outsource Outsourcing is the decision of moving a part of production, service or business function from the organization to another supplier from outside. Outsourcing by government public agency is referred to as privatization. Companies outsourcing for the purpose of focusing its attention on things that better satisfy the needs of the customer (Deogratias, 2009). Other benefits of outsourcing include capital conservation, cost saving, performance improvement, access to affordable resources or low-cost labour and benefit from expertise from the outside. There are several potential risks which are associated with outsourcing. First, outsourcing of activities that are strategic can cause loss of a competitive position. This comes about because there will be another firm or firms that can provide the outsourcing activity and the company losses control over it hence loss of competitive position (Fernie, 2014). There is also chance of strategic risk that is attributed to the loss of knowledge associated with core activities. The increased dependence on suppliers for knowledge makes weak the relative bargaining power of buyers. Outsourcing can make a firm loss track of market trends hence unable to meet satisfactory the needs of target customers (Christopher, 2016).  The suppliers who are the subcontractors can choose to share the knowledge about the firm with its competitors hence jeopardizing the competitive advantage even further. The customers end up indentifying themselves more with the supplier as opposed to the original firm outsourcing the service or component. Eventually the firms may loss the knowledge or technology of performing the activity internally if it continues to outsource. Outsourcing improves the supplier making them to develop unique expertise that is difficult to replicate hence realizing competitive advantage that was first held by the outsourcing firm (Hill & Jones, 2012). The firm may experience short-term supply shortages; hidden management or transaction costs; loss of schedule control, as well as price fluctuations in the short-term. PART 3: To-Be supply chain 3.1. Supply chain relationships 1. Right type of relationships with SC Members recommended for Zara There should be an intimate business relationship among the members of the supply chain for quick communication up and down the channel. Most of the brands operate by use of top-down approach whereby their designs are according to what they predict will become popular in the coming season. This is speculative and it may not pay off. Decisions are made by the top management in the firm and flow down to consumers. Zara make use a reverse approach. Zara constantly collect information concerning consumers from the source. Scouts are sent to the streets and cities’ malls to see for themselves what people are wearing. The store managers note down the tastes and preferences of customers and report to the headquarters. The bottom-up approach translates to designs being made based on feedback from consumers, and tailored according to preferences from various regions (Caro & Gallien, 2010). This strategy has allowed Zara to be popular across the world and meet directly the needs of consumers. The form of advertising used by Zara is also reverse strategy. The brand relies on the consumers to advertise by use of word-of-mouth as opposed to allocating huge advertising budgets. 2. Practices that promote successful alliance creation and management Practices that enhance successful alliance creation are effective communication and sharing of information. Information sharing is important to the supply chain since problems are identified in good time and rectified. Successful alliance creation has to involve sharing of information. The information has to be communicated properly through effective communication (Dalton, 2010). All members within the supply chain including the consumers have to be involved within the shortest time possible for the purpose of ensuring that information reaches the designers within good time. There should be trust among the players, senior management support, clear goals and ability to meet expectations. 3.2. Sharing information across the supply chain 1. SC-related information systems and information technologies used Information technology is important part of any organization or business. Many companies have added value through decentralization of value-adding activities through outsourcing as well as development of virtual enterprise (VE). Automation of processes reduces logistics and transport costs within the supply chain. There is also removal of redundant links within the supply chain through automation. Electronic data interchange describes information exchange between various users and can be conducted with the use of modern telecommunications. Integrated logistic support helps to streamline processes. Information technology is mandatory for effective control of the supply chain. Information technology makes it easy to track flows of information down or up the supply chain. Information technology offers opportunity to companies to expand more. Information technology ensures speed of gathering information. 2. Use of the Internet and e-commerce in supply chain management practices Companies use the Internet and e-commerce to gather information about emerging trends and the needs of customers. Most companies use the internet for speculative purposes in order to study social trends and produce products that the needs of customers. Companies use the internet to get feedback from customers about goods and services that they are offering. Feedback systems can be in form of surveys, questionnaires or a ranking system. E-commerce and internet is used to monitor information flow within the supply chain. E-commerce is used in integrating players within the supply chain in order to achieve an integrated system. There is a lot of information that is gathered through the internet and e-commerce to help companies in improving their supply chains. PART 4: The Supply Chain Road Map 4.1. Supply chain mapping 1. Mapping out supply chain Supply chain management gives companies an opportunity to focus on their peculiar skill sets. 2. Improving supply chain performance (1) Fulfilling customers’ needs Constant and early communication between supplier and customer can ensure better supply chain management. The partnership between the supplier and customer has to ensure constant exchange of important information about trends and customer needs that are emerging. Constant gathering information from the market is important for successful supply chain management. As a director I will continue to do what Zara management is doing by having scouts gather information about emerging trends and needs of customers. I will seek to identify the gap existing in the industry and produce designs and accessories to fill the gap. I will ensure that the company adapt quickly to changing trends in the market in order to be profitable as pioneers. (2) Supply chain processes The supply chain processes have to be clear of any hitches and avoid any risks. As supply chain management director I will undertake to understand all bottlenecks that hinder successful flow information from the market to the factory. I will streamline the processes and ensure smooth transition from one level to another to avoid the company incurring more costs in the supply chain. I will maintain and boost the customer feedback center and invite any suggestions on the improvement of the supply chain management in order to achieve efficiency. (3) Strategic supply chain costing and performance measurement practices I will ensure that I implement of system of tracking cost throughout the supply chain management in order determine how much is lost through delays or misplaced orders. Performance measurement practices can be through the feedback systems and the amount of bad debts or goods returned due to wrong orders. In the long term I will ensure effectiveness so that very little budget is spent in getting products to the end users. (4) Core competencies and outsourcing practices As the SCM director I will maintain and boost the core competencies at Zara. Cost leadership is very important because it ensures that the company produces at minimal costs hence making its final products affordable. Staying in touch with the trends in the fashion industry is very important since it ensure the needs of customers are precisely met. I will outsource components or parts that may cost the company more to produce. Outsourcing has to be done when necessary in order to avoid risks associated by outsourcing. Outsourcing can make the company to loss its competitive advantage or leak information to competitors. In all circumstance I will try to produce everything internally and only outsource when pressed by limited resources or time. (5) Supply chain relationship management As a direct it is important to maintain respect and dependence among the players in the supply chain. Retailers have to realize the role of the whole sellers, designers and stores. Every player in the supply chain plays an important role that has to be recognized by everyone in the supply chain. Any withholding of information by one member about market trends can slacken meeting of immediate needs of customers. (6) Sharing information across the supply chain Sharing of information across the supply chain is key to success. I will put in place systems to ensure that members of the supply chain can easily access information about market trends and customer needs. It is important for the designers to receive information about markets trends in time. I will maintain the scouts on the ground to continue gathering information about market trends. It is important to maintain the studying of consumers in order to decide on the designs prior to commencing the process. Making merchandise close as possible to prevailing trends will mean increase in the sales volume. Information is important for making critical decisions. References Agha, S., Alrubaiee, L. & Jamhour, M. (2012). Effect of core competence on competitive advantage and organizational performance. International Journal of Business and management, 7(1), p.192. Chan, A.T., Ngai, E.W. & Moon, K.K. (2016). The Effects of Strategic and Manufacturing Flexibilities and Supply Chain Agility on Firm Performance in the Fashion Industry. European Journal of Operational Research. Caro, F., & Gallien, J. (2010, March). Inventory management of a fast-fashion retail network. Op Christopher, M. (2016). Logistics & supply chain management. Pearson UK. erations'Research,'58(2),257-273. Cortez, M.A., Tu, N.T., Van Anh, D., Ng, B.Z. and Vegafria, E., 2014. Fast-fashion quadrangle: An analysis. Academy of Marketing Studies Journal, 18(1), p.1. Cowe et al (2011) Sources of Competitive Advantage. 3rd edition, Essex, Pearson Education Ltd. Dalton (2010) Leadership and Management Development. Harlow, Pearson Education Ltd. Deogratias, H. (2009). Cultural Implications of Knowledge Sharing, Management and Transfer: Identifying Competitive Advantage: Identifying Competitive Advantage, IGI Global, Pg 144 Fernie, J. (2014). 02 Relationships in the supply chain. Logistics and retail management: Emerging issues and new challenges in the retail supply chain, p.35 Foss, N.J. & Knudsen, C., (2013). Towards a competence theory of the firm (Vol. 2). Routledge. Hill, C., & Jones, G. (2012). Strategic Management: An Integrated Approach, Cengage Learning, Pg 94- 109 Mihm (2010) Fast Fashion in a Flat World: Global Sourcing Strategies. International Business & Economics Research Journal, 9 (6) pp 55-63. Slack et al (2007) Operations Management. Fifth edition, Harlow, Pearson Education Ltd. Read More