Zara Supply Chain

Zara “Possibly the most innovative and devastating retailer in the world” - Daniel Piette, Fashion Director of Louis Vuitton - LIM College Center of Graduate Studies & Continuing Education Supply Chain Management (MNGM 605) Introduction Since globalization is an important asset to the world of fashion, significant developments have improved processes within the industry. It has been challenging for consumers to find clothing “Made in the USA” as transformations in the apparel business have caused changes in the supply chain distribution procedure.

Accordingly, globalization has created new opportunities to improve production and distribution practices, which gave room for the growth of the “fast-fashion” concept. Fast-fashion can be defined as the quick production of “apparel with a low cost, chic look now dominating the retail world. Fast fashion is mass-produced, reasonable in price for most consumers, and easy to obtain, making it simple for anyone to look stylish” (Mhm, 2010, p. 55). Zara: Spanish Retailer Zara, the Spanish firm owned by Inditex (Industria de Diseno Textil), is the first company to control the fast fashion market in the United States after its success in Europe.

In 2009 Zara went beyond Gap and became the world’s largest clothing retailer. In 1975, Zara established itself as a lingerie-clothing store in La Coruna, Spain, and in 1985 became part of Inditex. The company went public in 2001 and in 2012 was named Best Retail Brand in Spain by Interbrand, with 8% increase in brand value from 2011 to 2012 (Interbrand, 2012). Zara being the flagship brand of Inditex is accountable for Inditex’s global success as it reports for more than 60% of the company’s sales (Hoover’s Database, 2012).

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Globalization increased the challenges to coordinate shipment by road, rail, sea, and air and now it broadened to include the Internet. An American consultant in the fashion industry, Thomas Freese, explains, "Supply-chain management is an evolution of logistics. Logistics tends to be tactical, supply-chain management is strategic. Supply chains are becoming not only longer but also more enveloping" (Mhm, 2010, p. 57). Zara owns the majority of its stores (90%), and to expand overseas has adopted three different methods.

Owning subsidiaries is the most expensive strategy and represents high risk if the firm decides to exit the market; however, it involves high levels of control. This strategy is used in European and South American countries. Joint ventures are a co-operative strategy where the manufacturing facilities and the know-how of the local company merge with the expertise of international firms in the market. This strategy is applied in large and competitive markets were purchasing property to arrange a retail outlet is a challenge and the assistance of local companies is needed.

Finally, franchising is the strategy chosen for high-risk countries that are culturally distant or have low sales forecast such as Saudi Arabia, Kuwait, Andorra, and Malaysia. Zara’s franchisees apply the same business model as its own subsidiaries concerning product, store location, interior design, logistic, and human resources. Also, they are responsible for investing in fixed assets and recruiting staff. Since Zara gained management control of the franchisees located in Japan, Germany, and Italy, such stores have been incorporated in the group of owned stores (Leong, et. l, 2009, p. 280). Zara utilizes a “store-centric business model”. Unlike other fashion companies, in which the design or sales functions tend to dominate others, Inditex places the retail function at the center of its corporate structure (Business Source Complete Database, 2008). Proof of this is that Zara’s store management function takes center stage, not only managing all the store staff, but also making orders (and discussing them with designers and market specialists), providing feedback and making requests to the design team.

Additionally, operations, wholesale, logistics and sourcing are all at their service. The Spanish retailer also relies its retail strategy on a dynamic assortment capability (Caro, 2009), which is a firm’s ability to revise its product assortment during the selling season. To do so, Zara keeps production volumes low at the beginning of the season and reacts quickly to orders and new trends during the period; after all, “we are in the fashion business - not clothing” says a Zara manager (Ferdows, 2003).

This way, the store is always supplied with the most up-to-date designs, receiving new merchandise twice a week. The policy of avoiding markdowns during the selling season also plays a center role in Zara’s strategy (Caro, 2009). The items that are not sold for more than two weeks are usually transferred to another store in the same country, shipped back to Spain or to Lefties (Zara outlet). This allows the company to charge nearly 85% of the product’s full price, while the industry’s average product makes only 60% to 70% of its full price (Ferdows, 2003).

Based on the information provided by Hoover’s Database (2012), Zara and Inditex’s (parent company) major competitors are H&M (Hennes & Mauritz), and The Gap Inc. This criterion is based on both their volume of sales and the industry that these companies belong to (clothing stores). Euromonitor Database (2012) also includes TJX Companies within Zara’s major competitors. Table 1 presents Zara’s basic data together with that of its competitors (Hoover’s Database, 2012).

Tinsley and Ormsby (2010) agree on the idea that Zara does not seek to create tendencies or looks through fashion shows and other distribution channels. Zara is perceived as a fashion imitator and therefore, the goal of the company is to understand the trends and styles that are used, develop products based on this knowledge and deliver them to the consumer as quickly as possible. H&M and Gap also operate with a comparable strategy. Zara is a chain of retail stores characterized by its low prices and quick response to fashion trends, which accounts for the company’s success (Hoover’s Database, 2012).

The Gap Inc. has produced basic apparel for women, men and children since 1969 and in search of expanding its target market and product categories has developed chic brands such as Banana Republic, Old Navy, amongst others. H&M designs chic apparel for women, men and children; yet, the prices of its merchandise are lower than those offered by Zara (Lexis Nexis Database, 2012). Both, Zara and H&M, have followed the same growing trend when introducing brand extensions such as Zara Home and H&M Home (Hoover’s Databse, 2012). The Gap Inc. is ranked as one f the top global clothing vendors; however, Inditex as parent company of Zara has managed to operate more stores worldwide (Hoover’s, Database 2012). Inditex's production system truly differentiates Zara from its competition. While Gap and H outsource most of their manufacturing, Zara produces 60% of its merchandise in-house. Its own factories, which primarily produce the most fashion-forward garments, are mainly located in Spain and Portugal. The others contractors are typically located in Asia and in other European countries. From Asia, Zara imports basic products and those for which the region has a clear cost or quality advantage.

Zara obtains the majority of its fabric supply from another Inditex subsidiary (Ferdows, 2003). Over half of these fabrics are purchased undyed to allow faster response to mid-season color trends. While fabric supply, making and cutting, and the final finishing of garments are made in-house, Zara subcontracts the sewing stage to other specialized firms (Euromonitor, 2012). Finally the fabric is sent to local shops to be assembled. All products pass through Zara’s major distribution centers in La Coruna, Zaragoza and Barcelona before being shipped around the world.

These distribution centers employ some of the most sophisticated and automated systems. Orders for each store are typically ready for shipment 8 hours after they have been received. Stores in Europe normally receive their orders in 24 hours, United States in 48 hours and Japan in 48 to 72 hours (Ferdows, 2003). Clearly, speed is a major concern. This combination of real-time information sharing and internalized production means that Zara can work with almost no stock and still have new designs in the stores twice a week, as opposed to the six weeks that it traditionally takes most competitors.

Dan McCue states “changing retail and consumer behaviors are putting increased pressure on supply chains to deliver” (McCue, 2010). Zara certainly uses the Just in Time strategy when it comes to having fashion and trendy items available for the consumer. This business model indeed differentiates from that of Gap, H, and other major competitors (McCue, 2010). The three companies, Zara, H and Gap, target the same market and consumer base with the same product categories that differentiate amongst themselves by price, quality, availability, and style.

Similarly, TJX targets consumers with middle to upper incomes that want to wear fashion items, but due to the economy downfall, are more conscious about the money they spend (Hoover’s Database, 2012). It is important to note that discounting and off-price retail clothing stores like TJ Maxx offer multi-brands generally in single markets as it allows them to build economies of scale that will generate profit, instead of bigger margins (Global Briefing, 2011).

Both Zara and Gap sell private label products that are exclusively manufactured for both companies. Still, Inditex exerts a strong influence over almost the entire garment supply chain, which operates at a record-breaking speed. Zara is described as a vertically integrated retailer, directly controlling design, purchasing, production, distribution and retailing. Therefore, within Zara’s competitive advantages it is important to highlight the power to sell a high quality product that has a tight margin at a reasonable price.

This also gives the company the expertise about the production process of a piece from beginning to end, which results in lower costs and superior efficiency, that is later on transformed into a differentiator within the market (Quadrik, 2010). Zara produces only a limited quantity of each design, providing small inventory and a constant renewal of its collections with new models and designs. Based on sales, stores report costumer’s feedback to designers who elaborate future garments.

In this sense, Zara launches around 10,000 new designs per year, while the industry produces between 2,000 and 4,000. Constant change in designs makes the consumer perceive Zara as a store with the latest fashion (Tinsley, & Ormsby, 2010). Similarly, TJX’s strategy has been that of managing tight inventories with high inventory turnover so as to attract more consumers to their stores (Hoover’s Database, 2012). According to Bovet, Zara introduces two to three new lines each week, with around eleven inventory turns a year, compared with rival H, which has seven or eight.

He says he would be surprised if any retailer in the UK is higher than this, and believes many probably turn their inventory four to five times a year (Retail Week, 2001). Zara puts a lot of effort to locate its stores in the most up-market, high traffic and prestigious locations, even if prices are very expensive. These attributes are particularly important for Zara because it spends relatively little on advertising compared to its peers (Business Source Complete Database, 2008). Zara’s advertising strategy is that of zero advertising; alternatively, heir main communication channel is the store’s window. Again, this emphasizes their store-centric business model. On the other hand, H marketing strategy consists of attracting consumers through the endorsement of celebrities and joint ventures with big name designers (Hoover’s Database, 2012). TJX Companies operates TJ Maxx and Marshalls, which represent two of the largest cut-price clothing retails stores in the United States, therefore, the approach of the company is to target those consumers that are looking for discounted prices (Euromonitor Database, 2012).

The competitive advantage of this stores are the selling products 20% to 60% below the price of comparable items at other department stores (Hoover’s Database, 2012). Finally, what really differentiates Zara from its competitors is its emphasis on fashion, as opposed to value, which has successfully appealed to the growing middle class (Global Briefing, 2011). Zara derives its competitive advantage from an astute use of information and technology as all of its stores are electronically linked to the company's headquarters in Spain (Retail Week, 2011).

Conclusion In order to improve its supply chain management, Zara should further develop its online sales presence. Research indicates that online apparel retailing sales are expected to grow (Euromonitor, 2012). Zara has a strongly underdeveloped presence in Internet retailing, which accounts for less than 1% of Inditex’s total revenue, while global apparel internet sales made up about 5% of the industry’s total sale (Euromonitor, 2012). Therefore, the Internet could be a huge advantage for the company, as many countries still don’t have a Zara’s online store.

As stated previously, overall, Zara has many advantages over its competitors, specially regarding logistics and supply chain. However, the need for new distribution centers may turn into an issue in the future, as Zara has to remain fast, efficient and effective while penetrating new markets and consolidating its presence in existing ones, such as the US and Asia. Table 1 [pic] References Caro, F. (2009, July 13). Felipe Caro. Retrieved from http://www. youtube. com/watch? v=CGrT_zqfj2U Duns, S. (2006, June 28). What is really new in supply chains?. The Bangkok Post, p. 1A. Euromonitor Database. (2012).

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The International Business & Economics Research Journal, 9(6), 55-63. Retrieve June 14, 2012, from the ProQuest Central database. Quadri, K. (2010). What Are the Real Benefits of Vertical Integration in a Retail Supply Chain? Retrieved on June 13th, 2012 from: http://blog. technologyevaluation. com/blog/2010/04/15/what-are-the-real-benefits-of-vertical-integration-in-a-retail-supply-chain/ Retail Week. (2001). Supply chain: Zara streaks ahead. Retrieved June 13, 2012, from Business Source Complete Database. The "Inditex Way" Business Model. (2008). Black Book - Inditex: Best-in-Class Mass-Fashion Retailer, 35-43.

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