Improving the Supply Chain Performance - Essay Example

Logistics and Supply Chain Management> Improving the Supply Chain Performance Case Study: Zara and Section # of Abstract This paper analyzes the upstream and downstream supply chain of the Spanish fashion retailer Zara. It is divided into four major parts. Firstly, a literature review on the significance of measuring the performance of a company’s supply chain and whether there is a positive relationship between efficient supply chain management and the performance of the organizations. The second part of the paper studies the various suppliers that Zara has and measures their Key Performance Indicators. The last two parts of the paper focus more on Zara’s downstream supply chain. It studies how it can be improved and gives recommendations. Since Zara is one of the industry leaders and has one of the best supply chains, it required fewer recommendations for improvement. Finally, the paper analyzes the location of the company’s plants and distribution centers to see whether they are optimal. In Zara’s case, they are in the short run but may cause problems in the long run. Table of Contents Contents Contents 3 Background and Introduction 4 Importance of Measuring Supply Chain Performance 5 Key Performance Indicators for Supplier Evaluation 8 KPI’s for direct material suppliers 9 KPI’s for Indirect Materials 10 Improvement of Downstream Supply Chain 12 Location 14 Conclusion 16 References 18  Background and Introduction Zara is a Spanish flagship store of the Inditex Group and a key player in the European fashion retail market. It started operations in 1975 by opening its first store in La Coruna and since then has been operating as a fast fashion company. It 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). Its business model is simple; it imitates fashion off the runway and distributes it to the customers in the shortest time possible, even before designers themselves can reach the customers. Therefore, it has shorter lead times, more styles but scarce supply of these styles. To manage this kind of efficiency, Zara’s supply chain management must be efficient and that, it is. Zara uses a vertical supply chain management system, one of the best in the industry that allows it to implement its business model of fast fashion effectively. Zara’s position is an industry leader in the fashion retail market. It has a very high product turnover – it produces more than 11,000 products annually. It caters to the trendy, middle class man and woman of ages 14 to 35. The mother buys Zara because it is affordable and the daughter buys from Zara because it is trendy (Dutta, 2002). This paper will study Zara in the light of its Logistics and Supply Chain Management. It will be broken down into four main parts. First of all, the importance of measuring the performance of Zara’s Supply Chain will be analyzed. Secondly, key performance indicators or KPIs will be identified that will allows us to evaluate the performance of Zara’s supplier. Thirdly, Zara employs an outstanding downstream supply chain management system but it will be critically examined to see how it can be improved on. Lastly, this paper will study whether Zara’s facilities or plant location are suitable for the efficiency of its supply chain. Importance of Measuring Supply Chain Performance The importance of measuring the supply chain performance can be realized from the fact that it is one of the core functions of an organization. Especially, for a manufacturing concern the supply chain plays a vital role in the overall success of the business . Both upstream and downstream channels affect the bottom line and the sales, which in turn affect the revenues. Furthermore, in recent times of financial recession is becomes even more important for organizations to make decisions about the balance between cutting expenses and continuing to provide good service. Hence, by measuring the performance of the supply chain, an organization can determine the efficiency of its supply chain and then can ensure its improvement in a number of ways. As a result, if Zara focuses on improving the core competencies of their supply chain they will be able to get a competitive edge over their rivals (Prahalad & Hamel, 1990).. Therefore, measuring supply chain performance during financial recession is one ways that can create the difference between decline and growth during and after a low period (Logistics Management). Some reasons to measure supply chain performance include managing the supply chain because according to Bill Hewlett,  “you cannot manage what you cannot measure” (House & Price 1991). Similarly, if organizations measure suppliers and distributors they will improve their services, organizations will be able to remove hidden wastage, minimize wastage, and uncover hidden cost drivers in the supply chain. Furthermore, by measuring performance a company can facilitate supplier performance improvement and can increase competitiveness by reducing order cycle times and inventory levels. And above all the organization will be able to make informed decisions about its functions. Therefore, by employing supply chain performance measurement systems the company will be able to streamline its processes (Neely, 1999, p. 212). Other reasons for measuring the performance of the supply chain is answering a critical management question that is, has the time, money and effort that was put in the supply chain management paid off in terms of in terms of revenues and growth? In order to gauge the effectiveness of their investment and to ensure the continued reliability the supply chain, companies need practical means of measuring effectiveness. It is a difficult task to effectively measure the supply chain performance but is can be achieved by measuring growth of the supply chain and the organization (Easton et al., 2002, p. 123). The measurement of growth is done with respect to four business processes and they are demand and supply management, procurement, manufacturing and logistics. The first key factor is to measure the growth with respect to demand and supply management . Growth can only be measured by taking into account the current consumer base and the current service level. This can be measured by comparing the percentage of orders filled against the ideal order rate, which itself can be measured as the percentage of completed orders for which no errors are recorded through fulfillment to billing (Industry Market Trends, 2001). Growth in procurement can be measured by determining the amount of materials arriving in time for production purposes and lead times. It can also be measured using raw material requisition against receipt cycle time. For a manufacturing concern quality is the first priority when measuring growth, as quality is the factor that plays the most important role in the mind of the consumer. Quality itself can be measured using various methods but the important point is not the method but the actual level of quality that is being provided to customers. In the area of logistics growth can be measured by looking at the effectiveness of the companys delivery process, i.e. how well the downstream function of the supply chain is functioning. Again there may be numerous ways to measure this for example, the amount of time the orders spend in transit, order accuracy and the percentage of orders delivered to customers on time. In conclusion if a company is not measuring its supply chain performance then it is most probably not making the best use of its investments and neither is it striving to create a competitive advantage against its’ competitors (BITS, 2005). According to the Council of Logistic Management companies that measure their supply chain performance actually perform a lot better than the ones’ that do not monitor progress (Council of Logistic Management, 1995). By considering the factors such as growth, delivery process and the efficiency of the downstream suppliers companies can improve their overall supply chain process. Similarly, by taking into account the upstream supply chain factors such as purchasing decisions etc, a company can improve its supply chain (Jahns, n.d). Other factors that can also be used to improve the performance are relying on information technology and using the data gathered to improve existing processes (Mooraj, 2007). Key Performance Indicators for Supplier Evaluation Traditionally, Key Performance Indicators (KPIs) have been used to measure and manage suppliers in the supply chain. These suppliers are broadly categorized in to two distinct categories and they are direct material suppliers and indirect material suppliers. It is relatively easier to monitor and manage the direct material suppliers because they are more suitable to KPI’s, however measuring the effectiveness of the indirect material suppliers is trickier. Measuring direct material suppliers is easy because they direct materials are more tangible and can be measured fairly easily. On the other hand, professionals are challenged with establishing measurement methods for the indirect materials suppliers but even then quite a few KPI’s are in practice for such suppliers. This paper will discuss the KPI’s for both direct material suppliers and indirect material suppliers. KPI’s for direct material suppliers A listing and brief description of the KPI’s used for direct material suppliers are as follows:  Inward material quality: Measuring the quality of the materials or goods being provided by the supplier. For a manufacturing firm like Zara, the inward material quality if of prime concern and hence is measured and recorded at all locations where materials arrive. Proper quantity of materials delivered: Measuring the quantity of goods delivered against the number of goods ordered and keeping a track of inconsistencies if there are any (Prabir et al, 2007). Timely delivery of materials: Keeping a record of the delivery times and also keeping track of the number of late deliveries. Procurement unit cost: The fixed cost of procurement per unit of various materials that are supplied. Material inventory level: Recording the material inventory at hand, and ensuring that material inventory always has adequate materials for the ongoing production cycles (Top Ten Supply KPI’s). Material stock outs: Keeping a track of stock outs of various materials that are provided by the supplier. Pareto’s Principle: The percentage of suppliers accounting for 80% of material supplies Rejections: The number and times when goods of a certain type were rejected due to any reason. Average variable cost of placing order with supplier Account payable days: The flexibility shown by the supplier in terms of collection of dues. KPI’s for Indirect Materials Similarly, there are KPI’s for indirect material suppliers. Since, both direct and indirect suppliers offer the same fundamental service, the KPI’s are generic but with indirect material suppliers there are contracts and agreements as compared to the direct material suppliers. A list of the KPI’s for the indirect material suppliers is as follows: Contract Compliance Actual cost versus budget: How did the supplier perform against budget – under or over the budgeted amount? Performance against Service Level Agreement (SLA) or Statement of Work (SOW): How quickly does the supplier resolve issues relative to stated performance in an SLA or SOW? How quickly does the supplier deliver relative to their SLA or SOW? Return rate: How many items are returned? How often? Technical Support: Is the company getting the support that was promised? Is it useful? (Fedele et al, 2004) As a result of these KPI’s measuring the supplier performance becomes easier and the data from these records is used to make critical decisions about the supplier retention or supplier rejection. Hence, the amount of time and the resources that are being used to gather and maintain data related to these indicators are being utilized efficiently. A comparison of the different suppliers of Zara is done on basis of selected KPI is summarized below: KPI Importance of the KPI (0–low, 10-high Turkey India China Egypt Spain (Comditel) Inward quality 8 8.5 9 8 9 9 Procurement Unit Cost 7 3 2 2 5 3 Labor Cost 6 2 8 8 ) 6 1 Value Addition 8 12 2 0 2 14 Timely delivery of material 9 8 7 8 7 9 Total supplier score 269 213 198 222 292 Source of data: “The Textile and Clothing Industry in the EU”(2001). Comditel is the largest supplier of Zara, and accounts for over 40% of raw material supplies. The rest of the material is procured from different regions from the world, like Turkey, India, China and Egypt. Suppliers in these regions are analyzed using the above mentioned KPI’s. Improvement of Downstream Supply Chain Downstream supply chain, as mentioned earlier, is that part of the supply chain that deals with taking from the manufacture to the customer. This includes distribution of products to the customer. Therefore, flexibility in the supply chain means an organization’s ability to ship goods from the distribution centers or manufacturer to the market (Raturi & Subramani, n.d.). For Zara, downstream activities include its network of outsourced workshops where clothes are stitched along with its distribution center. Together, products are delivered to the market, in the stores, from the very scratch in about two weeks, thereby, meeting customer demand effectively (Walker et al, 2000). Zara has a centralized distribution system. Its distribution center in Artexio is centrally located around fourteen factories in Coruna (Shehzade, n.d.) (Craig et al, 2004). This central distribution system ensures that no clothing item gets to sit at the distribution center for too long – shorter lead times. In order to increase the speed of delivery, air and land shipping is done according to timezones. The average distribution time from the distribution center to the market in and outside of Europe is 24 to 48 hours (Craig et al, 2004). On the other hand, having a centralized distribution center could increase costs because shipping from one distribution center alone requires shipments, usually by air, to be carried out frequently. Also Zara ships in small quantities from the distribution center in Spain (Shehzade, n.d.). Cost is likely to increase especially considering the fact that Zara’s distribution center is a place where goods are moving and not stored (Craig et al, 2004). Approximately, 2.5 million garments move through the distribution center on a weekly basis (Shehzade, n.d.). This can become costly especially if Zara is coming up with more styles. The more the number of styles, the more they have to shipped to the market within 15 days. Therefore, in response to this, Zara might want to consider opening another distribution center in another region, so that it can save up on delivery costs in the long run. Moreover, Zara has a large number of stores in Europe. This allows it to achieve logistics efficiencies (Shehzade, n.d.). In places close to the factories, trucks are used as a means of shipment. This is done in smaller quantities and hence, more frequently. For stores that are not close to the distribution center, air is used as a means of shipping garments. This is done in larger quantities (Shehzade, n.d.). This allows Zara to save on distribution costs. This is different than what most fashion retail counterparts do; they save on manufacturing costs and instead pay more for distribution and inventory management. The only concern here is that, distributing from perhaps one more center might further decrease costs for Zara in the long run. However, for now, this model seems to be working perfectly for Zara. Moreover, using this distribution system allows Zara to better control and manage its inventory. Since goods are so frequently moved within and out of the distribution center, no inventory is ever held. Therefore, Zara’s downstream supply chain is efficient and cost effective, both at the same time. It leads to more efficient logistics and better inventory management. However, having another distribution center for other regions such as Asia could be beneficial for Zara and may further streamline its supply chain processes and reduce costs. Location All of Zara factories are located in Spain, where there is only one distribution center. Most of the manufacturing at Zara is done in its own factories with the exception of sewing and stitching that is outsourced to subcontractors (Dutta, 2002). The factories are in close proximity to the distribution center in Artexio (Craig et al, 2004). This reduces distribution costs since transporting finished products from the factories together with outsourced workshops to the distribution center is easy because of close proximity of all the entities. Therefore, the location of the factories, with respect to the distribution center is ideal. However, the location of the factories alone or the location of the distribution center alone is not ideal. This could also become an obstacle for Zara’s fast fashion business model in the long run when it decides to expand further more. If Zara opens more factories and distribution centers in other parts of the world where the logistics costs are high, they will improve their overall supply chain process. There are many countries such as Pakistan where Zara does not supply yet, unlike Next or Aldo. When it decided to expand into countries like these, it will need to work on the location of its distribution center and factories. More will need to be opened up or it will not be ‘fast fashion’ for the Pakistanis or Indians. In summary, the location of Zara plants and distribution center is ideal for now but will need to be relocated or more will need to be opened up very soon to cater to the rest of the global world. Zara operates using an unmatched vertical supply chain operation in the Europe which works for it ideally. However, due to limited locations it has the probability of not working as well for the rest of the world. Therefore, it is recommended that they should resort to more decentralized approach for other regions of the world. Conclusion Supply chain management is becoming one of the most important areas in business today. An efficient supply chain does not only help in bringing in revenue for the upstream and downstream members but it also plays a very important role in the growth and efficiency of an organization. At Zara’s the supply chain is being monitored effectively and therefore they are able to provide their consumers with the best quality products that people are fond of purchasing. It is all achieved through a continual process of investment and improvement and my measuring the performance of the supply chain based on certain key performance indicators. Hence, it is evident that a company can gain competitive advantage by making its supply chain more efficient. Although there are certain things that can be done in order to improve the supply chain process. They could start with using a decentralized system for delivery purposes. The decentralized system will enable them to cut down costs and provided efficient and timely delivery to intended shops. By using different distribution centres for different geographic locations Zara will ensure that their products reach all over the world at approximately the same time. Furthermore, by sending out larger consignments as compared to using small delivery networks they will be able to cut on logistics costs. Other ways to increase the efficiency will be to use automated systems such as enterprise resource planning etc that will enable the smooth tracking and management of suppliers and the delivery networks. References (2006) “Zara Supply Chain” India Supply Chain Council [Internet]. Available from [Accessed February 19, 2010]. Walker, B., Bovet, D., Martha, J. (2000), "Unlocking the supply chain to build competitive advantage", Journal of Logistics Management, Vol. 11 No.2 Shehzade, N. (n.d.) “Zara Spanish Apparel Brand” Scribd [Internet]. Available from http://www.scribd.com/doc/15561231/Zara-spanish-apparel-brand [Accessed February 19, 2010]. Craig, A., Jones, C. & Nieto, M. (2004). “ZARA: Fashion Follower, Industry Leader”. Philadelphia University [Accessed February 19, 2010]. Raturi, A. S. & Subramani, J. (n.d.) “Upstream vs. Downstream Flexibility in a Production-Distribution Supply Chain”. University of Cincinnati [Accessed February 19, 2010]. “Logistics Management”. [Internet]. Available from http://www.logistics-management-kpi.com/the-importance-of-measuring-delivery-performance-during-financial-recession.htm [Accessed February 19, 2010]. (2001). “Industry Market Trends”. [Internet]. Available from http://news.thomasnet.com/IMT/archives/2001/02/does_your_suppl.html [Accessed February 19, 2010]. Jana Prabir et al (2007). “Measuring Efficiency of Supply Chain –I”. [Internet]. Available from http://www.techexchange.com/thelibrary/measuring1.html [Accessed February 19, 2010]. “Top Ten Supply KPI’s”. [Internet]. Available from http://www.supplyexcellence.com/blog/2006/12/13/top-10-supply-kpis-aberdeens-view/ [Accessed February 19, 2010]. (2004). Fedele Karen et al “KPIs: Measuring Indirect Material Suppliers and Service Providers”. [Accessed February 19, 2010]. (2005). “Measuring Performance in Supply Chain”. Birla Institute of Technology and Science, Pilani [Accessed February 19, 2010]. (1995). “World class Logistics: The Challenge of Managing Continuous Change”. Council of Logistic Management, Oak Books, IL, 423 p. [Accessed February 19, 2010]. (n.d). Jahns, Christopher et al “Supply Performance Management”. Paper ID # 2 > [Accessed February 19, 2010]. (2007). Mooraj, Hussain et al “Using downstream data to integrated business performance”. Available from Oracle Univeristy Corporate Analyst Reports < [Accessed February 19, 2010]. Prahalad, C. K., Hamel, G., 1990. The core competence of the corporation. In: Harvard Business Review, Vol. 68, No. 3, pp. 79-91. Neely, A., 1999. The Performance Measurement Revolution: Why Now and What Next? In: International Journal of Operations & Production Management, Vol. 19, No. 2, pp. 205-228. Easton, L., Murphy, D. J., Pearson, J. N., 2002. Purchasing Performance Evaluation: With data envelopment analysis. In: European Journal of Purchasing and Performance Measurement, Vol. 8, No. 3, pp. 123-134. House, C. H.,Price, R. L.,1991. The Return Map: Tracking Product Teams. In: Harvard Business Review, Vol. 69, No. 1, pp. 92-100. Read More