Zaras Success for Fast Fashion - Case Study Example

Zara’s success for fast fashion Introduction Zara, the flagship brand of Inditex, a holding company located in Spain, has in a very short time become the second largest clothing retailer with 2692 stores in 62 countries worldwide as at January 2006. It has developed its own unique but effective practices and has been acclaimed as the most innovative and devastating retailer in the world (CNN, 2001). They have conquered the world of fashion using a low-cost approach (Heyden, 2007). The apparel industry involves a whole range of activities like designing, manufacturing, distribution and marketing the products. The apparel industry is also marked by demand uncertainties. Managing supply chain in today’s world is challenging. The complexity is enhanced when the uncertainties are high while the product life cycle is small and the entire process involves several partners in the manufacturing, distribution and logistics (Christopher & Lee, 2001). These expose a company to higher risks in the supply chain. Zara has retained direct control over the entire process. It is hence interesting to evaluate Zara’s formula for success in the supply chain management which allows the company to design and distribute a garment in the market in just fifteen days. The global supply chain in the apparel industry The global textile and apparel industry accounts for ten percent of world’s manufactured exports (Diaz, 2005). Globalised supply chains face intense competition and rapid technological changes. The global commodity chains can be either producer-driven as in the automobile industry or buyer-driven. In the apparel industry it is a buyer-driven commodity chain where the large retailers, branded marketers and branded manufacturers play an important role in setting up decentralized production networks mostly in he developing nations (Gereffi, 1999). The buyer-driven commodity chains are locally owned but globally dispersed production system and hence they derive their profits from their design, sales and marketing services. The retailer or the brand owner must have capability to shape mass consumption via strong brand name. This became the trend in 2000 as the rationale was to cut inventory and reduce risks. Retailers concentrated on reducing the unit cost and the not the lead time. Sourcing from low-wage countries reduces the labor costs but the lead time increases (Diaz, 2005). Zara’s competitors have to plan their launches months in advance and hence are unable to react to demand changes in the market. The upstream supply chain at Zara The upstream supply chain is dominated and influenced by technology and equipments. The upstream production supply consists of fabric designing, cutting, dyeing, sewing, and finishing. It is basically labor intensive which is the reason that with increased competition most apparel manufacturers source their manufacturing from low-wage countries, which means they are distant from the consumer market (Diaz, 2005). Fresh fabrics introduced every season, new and original designs created every now and then, mark the fashion and clothing industry today. Their product life cycles are three weeks, twelve times faster than industry average (Diaz, 2005). Zara maintains 80% of its production processes in Europe, 50% in Spain, which is very close to its headquarters (Slashdoc, 2005). While its competitors outsource manufacturing, Zara keeps almost half of its production in-house. It does not push its factories in maximizing output but intentionally leaves extra capacity. It does not choose economies of scale but produces in small batches. It is thus able to manage the designing, warehousing, distribution and logistics function itself. Zara has an unorthodox and cutting edge approach and applies the sense and respond business model. This helps the company to respond to the rapidly changing markets. They have a super responsive supply chain in which they control everything what happens to products till the customer buys them (Ferdows, Lewis & Machuca, 2004). Usually companies collect data but analyze it monthly or fortnightly while Zara responds to the changing needs on a weekly are daily basis. They sense the need and respond to the changing consumer demands. To respond is to take action whether it is changing product mix or capacity allocation which is essential in the fast changing fashion industry (Clifford, 2005). Zara produces 300,000 stock keeping units, or SKUs and the garments come in garments come in five to six colors and five to seven sizes (Ferdows, Lewis & Machuca, 2005). Their designing and production areas are combined where the designers sit amidst the production process. Against an industry average of 20 designers, Zara has about 200 designers sitting right in the midst of the production process. The designers work in close connection with market planners. They have the latest fashion magazines around and a small prototype shop in each hall so that everyone is free to comment as soon as one design is ready. This enhances the speed and quality of the design process. Thus they involve everyone is their designing and manufacturing process which is not possible if the manufacturing is outsourced. Zara uses the latest information technology to facilitate informational exchanges. It employs specially designed hand-held devices or PDAs at all its stores, which facilitates rapid and accurate exchange of market data. They are thus able to keep track of the total order fulfillment process – plan procurement and production requirements, monitor warehouse inventories, allocate production to various factories and other suppliers, keep track of shortages and oversupplies (Ferdows, Lewis & Machuca, 2004). Because of this control it is able to react fast to the changing consumer tastes. They are able to compete in manufacturing – quality, design, logistics, flexibility and political stability issues. Manufacturing has to be close to the market to be able to respond to changes in demand. Zara does not follow the rigid line flow in production but has batch flow which allows it to customize its products with high quality and low prices (Heyden, 2007). The designers at Zara create about 40,000 new designs annually out of which about 10,000 are selected for production. They are thus able to beat the high-fashion houses to the markets as they can offer the same products at cheaper price by opting for less expensive fabric. They not only have three weeks turnaround time, none of their designs stay I the store for more than four weeks (Watson, 2004). Thus, Zara does not use the global push-based supply chain which is slow, ineffective but cost effective. It uses the local, pull-based supply chain which is fast and flexible to delay design decisions till the demand uncertainty is revealed and they are able to the required changes (Diaz, 2005). The downstream supply chain The costs in the apparel retailing supply chains are concentrated on the downstream supply chain and arise from demand uncertainty, inventory and distribution costs (Diaz, 2005). They do not sell through the conventional method of selling through the retailers. Their delivery and restocking methods are like those found in the grocery stores and not in the fashion industry. Zara has two distribution centers - one at La Coruna to serve the Iberian, American and Asian markers and the other at Zaragoza to cater to the European market (Diaz, 2005). In addition, they have three regional distribution centers at three different locations in South America. They have no warehouses as their goods are either in transit or on the shelves at their stores. This helps to decrease the inventory risk and inertia in the distribution pipeline. In its distribution also Zara has its own unique strategy. They do not hold orders until an economic order quantity is achieved. They have their own fleet of trucks operating in Europe and for the rest of the world they send their cargo by air. They follow strict periodic delivery schedules even if it would mean sending half-empty truck across Europe. This results in almost zero variance in delivery and no delay in meeting demands. Their orders from the stores are not placed with the warehouse but at the central distribution point so that the production unit receives the information simultaneously. Since there is a constant flow of data they are able to mitigate the bull-whip effect in supply chains. Discussion Both the upstream and downstream supply chain at Zara is vertically integrated as it has control over the entire process – from the designing stage to the final sales. Competitors like Gap have a vertically integrated downstream supply chain but most of their manufacturing is outsourced. Competition cannot be based on price alone as that would leave the suppliers vulnerable to competition. The differentiation should be in the quality, design and the logistics, which means the overall service. As per Tyler, in fashion products, quick response is essential. Zara has adopted this technique rather than follow the traditional approach of holding high inventory. It does not need to protect itself against supply disruption and since it efficiently manages its supply chain it does not have to bother about decoupling departments for easier management. Sense and respond can be compared to the JIT approach adopted by Japan in their manufacturing processes. The traditional approach was to have a buffer stock and the accountants considered it as asset but today with shorter product life cycles these become a liability and it also becomes difficult to respond to changes in consumer demand. High inventories require extra controls and also demonstrates resistance to change. The company gains because it never has a stock-out position and there are no lost sales oppurtunities. Its entire production process is well laid out as they have identified the processes, the different stages, the dependencies. To save time, the designers sit amidst the production unit. In case of any changes/suggestions no time is lost over bureaucratic attitude. They do not follow the sales forecast approach and have real time data available to plan their production. Thus they are able to take into account last minute changes demanded by the market. They are also able to avoid costly overproduction and need not offer discounts just to get rid of stocks. If the supply chain is fragmented, the lead time increases as happens with most apparel retailers who have outsourced their manufacturing to low-wage countries. Conclusion The apparel industry faces challenges due to globalization where demand changes by the minute and competition has intensified. Because of demand uncertainty they follow the local pull-based business model which enables them to cater to the last minute orders and changes. Their supply chain model gives them complete control over the entire process and has not yet been replicated by any other fashion retailer. They incorporate information technology to speed the entire process and utilize the information that is collected. They do not forecast sales and follow the sense and respond model. Since their shipments are small, their inventory is small and hence the risks are small too in terms of capital investment. 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Heyden, L 2007, Business Model Innovation - M&S vs. Zara, INSEAD. Retrieved online 28 December 2008, from www.solvay.edu/FR/Programmes/documents/ulb_gestd201_MSvsZARA.ppt Slashdoc, 2005, Zara; should they change their IT infrastructure to remain sustainable? retrieved online 28 December 2008, from http://www.slashdoc.com/documents/49095 Watson, R 2004, An Evolutionary Approach to Innovation, retrieved online 28 December 2008, from http://www.fastcompany.com/resources/innovation/watson/080904.html Read More