Principles of Supply Chain Management

This chapter is from the book

Essentials of Supply Chain Management, The: New Business Concepts and Applications

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This chapter is from the book

This chapter is from the book 

Essentials of Supply Chain Management, The: New Business Concepts and Applications

Learn More Buy

Zara’s Rapid Rise as a Cool Supply Chain Icon

This case was written based on various published stories about Zara and inspiration from the toolbox of the Council of Logistics Management.

New Heights in the Fashion Industry

Founded in 1975, Zara is the world’s largest clothing retail chain and is based in Galicia, Spain. Its parent company, the Inditex group, reached annual sales of 16.7 billion Euros in 2013, twice as much as its annual sales of 8.2 billion Euros in 2006 (http://www.inditex.com/investors/investors_relations/financial_data).

According to Investing.com, Zara’s inventory turnover ratio is 29.58, as compared to an industry norm of 5.29 in 2013. Its gross profit margin (26.57%) is substantially higher than its major competitors. Thanks to its recent achievement, Zara is on the list of the Forbes world most valuable brands in 2013. Zara’s remarkable success is attributed to the “fast fashion” philosophy in which the latest, trendy but inexpensive fashions are quickly distributed into its retail stores based on constant dialogues with the customers. Zara focuses on “putting the customer in control” in that it monitors customer reactions carefully by noting what they buy and do not buy. This differs from the traditional method of forecasting fashion trends and then promoting the clothing line through fashion shows, news media, and magazines.

Zara constantly records customer feedback given to the staff, and that feedback is relayed to its headquarters daily. Based on such feedback, its team of in-house designers quickly introduces new designs and then its factories manufacture clothes based on those designs (Levin, 2013). Zara’s key customer bases are college-age kids and young females under the age of 30 who look for inexpensive but stylish fashions. Zara also sells men’s clothing lines, aiming at the stylish and youthful. In Europe, Zara has attracted a cult following from many young people. Most U.S. young adults have rarely shopped at Zara, but that seems likely to change in the near future. In 2008, Zara overtook Gap as the biggest apparel retailer in the world. Zara opened an additional 360 stores in just 2012 alone. Zara has grown from 179 stores, mostly in Spain, to more than 6,100 stores with 116,110 employees in 86 countries, including the U.S., Canada, and Russia (Reuters, 2013). With its eyes on U.S. customers, Zara can offer these customers an option previously unavailable to them, thus competing head-to-head against established U.S. brand apparel stores such as Gap, Abercrombie & Fitch, and J. Crew. It has a unique, youth-oriented, no-advertisement marketing strategy in which logistics plays an important role. Zara’s supply chain process defies conventional wisdom, as illustrated in Exhibit 1.1.

Exhibit 1.1. Comparison of Zara’s Supply Chain Process with Conventional Wisdom

Zara’s Cool Supply Chain Practices

Zara manufactures more than half of its clothing lines in Europe (primarily Spain and Portugal), with most of the remaining lines being produced in or sourced from other continents, including Morocco in Africa, Mexico in North America, and China in Asia. These worldwide manufacturing operations pose many supply chain challenges. In particular, Zara’s expanding global reach may derail its focus on its fast fashion (speed-to-market) strategy. Zara’s fast fashion strategy allows it to introduce a new style from concept to store shelf within 10 to 14 days in an industry where nine months is the norm. Typically, based on the fixed distribution schedule, Zara’s store managers order new clothes twice a week and expect to receive their orders twice a week. This means that the inventory changes often, with most items staying on the shelf for only a month or less. As such, a short lead time is crucial for this strategy. However, unlike its primary European markets, where its stores are located close to each other and concentrated in the center of downtown, many retail stores are typically spread out throughout the country in the emerging U.S. and Chinese markets. Also, Zara has to ship via air from Europe to North America. Ocean shipping is not a viable shipping option for Zara because it would add at least another ten days to the time it takes to get the product into the customers’ hands, thus undermining the speed-to-market (“quick-response” logistics) and “rapid-fire” fulfillment strategies. In an effort to reduce order cycle time and enhance supply chain efficiency, Zara’s store managers utilize handheld electronic ordering devices that relay the order information to its distribution and manufacturing sites on a real-time basis. Such electronic ordering practices helped Zara’s headquarters update and maintain spare transportation, warehousing, and production capacity (e.g., unfilled trucks, a mega distribution hub, and extra manufacturing capacity). This kind of strategy enhances Zara’s supply chain visibility and allows it to introduce a new line of apparel following the latest fashion much faster than its rivals. For example, it takes less than two weeks for a new skirt to get from the Zara design team in Spain to a Zara store in Paris or Tokyo, as much as 12 times faster than its competitors, as of 2001 (Newsweek, 2001).

In addition to this practice, Zara’s supply chain edge lies in the vertical coordination and integration of the supply chain by owning several layers in its global supply chain and performing flexible manufacturing practices. For instance, nearly 60% of Zara’s merchandise and 40% of its fabric are produced in-house or purchased from its own subsidiaries, including subcontract manufacturers, to reduce the risk of supply disruptions and quality failures. In other words, Zara wants to control all the steps of supply chain operations involved in the sales of stylish clothes: from design and sourcing to fabrication, distribution, and sales. This controlled manufacturing environment allows Zara to experiment with new technologies and leverage them for its productivity. One of those technologies includes robotics that Zara uses in cutting and dyeing fabric in 23 highly automated factories. Another distinguished feature of Zara’s manufacturing is a limited production run, which bring several benefits. First, limited runs allow the Zara-branded product to cultivate the exclusivity of its offerings and give its customers a sense of prestige because their clothes never look like someone else’s. Second, limited runs pressure customers to buy instantly at full price, because the clothes on its store shelf will be quickly out of stock or removed from the shelf to make room for something new. Finally, limited production runs allow Zara to minimize a risk of stockpiling unwanted clothes. Artificial scarcity created by limited production runs mean that there is not much to be disposed of at discounted prices or written off as obsolete inventory when the season ends or the fashion changes. Indeed, Zara sells 85% of its stock at the regular price, compared to the industry norm of 50% (Booz & Company, 2007).

Supply Chain Vulnerability

Despite the proven success of the aforementioned supply chain strategy, Zara is not problem free. To elaborate, its production is still heavily concentrated in Spain, where average wages are relatively high as compared to low-cost sourcing countries such as Bangladesh, and thus the current manufacturing practice may undermine its philosophy of offering affordable clothing lines. Any weather, labor, or terrorist disruptions to the area will have a serious impact on its global distribution, because there are few alternative distribution centers in Europe. Because production is carried out mostly in a small radius of Northern Spain, Zara is also vulnerable to financial instabilities in Europe as most of its cost base is denominated in Euros, which has been devalued due to recent financial crisis in Europe. Finally, unstable oil prices resulting from the political unrest in Middle-Eastern countries will affect profits because twice-weekly air express deliveries mean higher transportation costs.

Another challenge stems from its diversified product lines with multiple channel sales: online sales through its website (www.zara.com) or brick-and-mortar retail store sales. In comparison to its competitors’ 2,000–4,000 items, Zara puts 11,000–12,000 different items varying in color, size, and fabric on the store shelves in a single year (Ghemawat and Luis Nueno, 2006). Putting a variety of goods on the shelves in worldwide store locations requires an unusual (though not unique) logistics strategy for the company. Zara ships goods from its single distribution center (or hub) in Spain to other foreign markets via air express, usually in small batches. In the 1970s, The Limited used a similar logistics strategy to support its test marketing, air expressing small quantities of new styles from Asia to U.S. stores. In Zara’s case, however, the speedy shipments (e.g., 24- to 48-hour delivery to its stores from the distribution center) are its core business/supply chain strategy of “fast fashion,” not just test marketing. Under its Just-In-Time delivery and manufacturing principles, Zara also ships frequently, allowing lower inventories while serving its multinational market from a single distribution center in Spain. However, with rising fuel cost, this air express delivery strategy may backfire. To make this strategy more challenging, Zara’s products have multicountry labels and can be redistributed to another store in another country where they may fare better, if any particular product line is not selling well in any particular country.

Although Zara used to trade higher transportation costs for lower warehousing and inventory carrying costs thanks to the compact density of Zara’s store locations in Europe, it would not be feasible for the company to achieve the same level of logistics efficiency in less condensed store locations in North America. Notice that Zara’s small, boutique-type store that specializes in clothing lines with short shelf lives needs much faster turnaround time than others. Without any doubt, Zara’s fast transportation supports its speed-to-market strategy, which is the heart and soul of its new product development and market penetration strategy. However, the recent disruption of air express services resulting from unexpected events, such as a volcano eruption in Iceland in 2010 and 2014, has created another headache for this strategy.

New Directions

You are summoned to report to Zara’s CEO’s office to explain the reason for recent supply chain problems. Your boss has also made it clear he wants you to come up with immediate solutions to these problems. Zara’s taskforces have been assembled and informed that “quick and sensible solutions” are needed as soon as possible. As one of Zara’s management team, you should address the following questions:

• What are the most important prerequisites for sustaining Zara’s competitive advantages?
• Can Zara’s air express delivery strategy be sustained? If not, what would be the better alternatives?
• What is the extent of supply chain risks associated with Zara’s dependence on a single distribution center and in-housing manufacturing operations in Spain?
• Should Zara reassess its supply chain strategy to successfully penetrate the U.S. market?
• Do you think that Zara should consider modifying its pull supply chain strategy to overcome current supply chain challenges? If so, why? Otherwise, why not?