Last Updated 08 May 2020

Zara’s business model

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Zara's business model is to link customer demand to manufacturing, and to link manufacturing to distribution. Their supply chain is run almost entirely within the company, with very little outsourcing and use of 3PL and 4PL providers. The business strategy drives the logistics and supply chain. Zara owns everything in the supply chain right from the plants, to the trucks, to the retail stores.

The only thing they source is the raw materials needed (fabric), and the only thing they outsource is the sewing of the garments. They are able to use the point of sale terminals (POS) and handheld personal digital assistants (PDAs) to track actual sales data at each of their retail locations. This data is transmitted to the information systems at La Coruna to help them make decisions on what to manufacture. Digital order forms are transmitted to all the stores' PDAs 24 hours before each order deadline based on sales data and predictions of sales for that location. This links the customer demand to the distribution of goods for each location.

Zara competes through low cost goods and production, and through innovation. They are able to introduce large numbers of new fashion items that are affordable very quickly; these items are also specifically tailored to the trends in the marketplace. Their strengths are that they can quickly determine what the demand for certain styles and demographics are in each of their locations, produce specific product lines tailored to that demand, and deliver it quickly.

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Their company, supply chain, and factories are very flexible, being able to respond to the changing tastes of the customers. They can use their network to move a new design from conception through production and into their distribution centers in as little as three weeks. Flexibility, agility and efficiency are all key components in a good supply chain, and Zara has managed to develop a system that excels at these components. They are able to reduce demand uncertainty by producing small quantities of clothes to test the market. Once a product has been deemed to be viable, Zara can quickly ramp up production of that item and rapidly distribute it to the stores.

Zara uses integrated development teams in their supply chain. They have linked all the key function of the supply chain into their development teams by including product design, production, distribution and marketing. These teams of commercials usually consist of two designers and two product managers, who purchased material, placed production orders with the factories and set prices. Each team is dedicated to a section of the store (men, women and children). A second group of commercials called store product managers sit close by the teams and serve as the link to Zara's stores worldwide.

The store product managers collect feedback from the stores and bring it to the design teams. This helps determine what items will be developed and how many to manufacture. This arrangement is shown in Exhibit 3. This setup assists in linking the supply chain to the business objectives of the company. Since the store product managers are in contact with the retail stores almost every day, they are able to determine customer demand in each of their locations and pass this information over to the other commercials. They can then design what will be produced, order any materials required and place an order with the factory. This layout and process contributes to the low lead times and to matching what Zara supplies to customer demand.

The supply chain is based around three fundamental ideals. Short lead time leads to more clothes that are in style, rather than having huge inventories of clothes that are outdated. Produce lower quantities to create a scarce supply, thereby driving up demand for those items. And finally, more style equals more choice, increasing the chances of producing a popular product and limiting the risk of producing something unpopular. If Zara produces something that fails, it is statistically a small portion of the overall production and sales that it has a minor impact. For their competitors, having a product fail has major impact since they carry a smaller number of product lines.

One of Zara's success factors is that they make sure they have the right product, at the right time, in the right place. This key mantra of supply chain management and business is achieved by Zara through their supply chain. Assess strengths of Zara's supply chain in terms of critical supply chain elements discussed in class such as risk management, cycle time management, demand forecasting, inventory management, customer service, logistics, etc. Zara's supply chain is very strong and effective for one that goes against most supply chain theories. However, it still incorporates the critical supply chain elements

Risk management is a big part of Zara's supply chain and business strategy. Having a large capital investment increases their risk, as does producing and shipping the goods themselves. However, this risk has had huge payoffs for Zara in terms of reducing lead times and increasing their agility and flexibility to react to market demand. They have reduced their risk by producing smaller quantities of styles. They also created artificial scarcity, and in fashion anything that is scarce becomes more desirable and sought after. As well, if a style does sell well and is not popular, there is a lower inventory that has to be sold at a discount or discarded at the end of the season.

The supply chain and distribution system at Zara has not been designed with costs in mind, but rather with developing a system to support fast and frequent changes of products. This includes reducing cycle time wherever possible; that is, they reduce the total time elapsed to complete their business processes. Zara has reduced the cycle time in the three basic flows in supply chain management. The POS terminals and set ordering times have reduced the cycle time in the ordering process. Shipments can be delivered within two days of the orders being placed, so the cycle time and turnaround is extremely quick.

The case does not really go into the payment flow, but since the retail stores are part of Zara and Inditex, payment within the company should occur in a short period (mainly electronic accounting entries). These short cycle times are a great strength in the supply chain since the faster the order is placed, the faster the shipment is made, the faster the payment is sent back to the head office, and the faster the customers can buy new goods.

Demand forecasting is one of the greatest strengths for Zara in the fact that they don't do it. Zara reacts to customer demand rather trying to forecast for demand. Their supply chain is flexible and agile enough to assess what the customers want and quickly produce goods to match that demand. Since customer demand for styles is always changing in the fashion world, reacting to it is better than trying to forecast for it.

Zara mainly uses a pull-based strategy where demand determines replenishments, production and the design of new goods. They do use a push-pull strategy for some of the more basic goods, such as men's dress shirts. They design/manufacture certain quantities of these goods and push them out to the retailers. Then customer demand will pull inventory through the system to replenish these items when stock starts to run low.

Inventory management is a big strength for Zara. Their strategy of producing lots of styles, yet reducing the complexity of the supply chain is very different than that of their competitors. Zara can introduce over 11,000 new items in a typical year, which would lead one to believe that they would have large amounts of costs associated with inventory and warehousing. However, Zara produces very small quantities of these goods and ships them out to the stores immediately. They also change out around 75% of their stock every 3 to 4 weeks. They chose not to sell clothes over the internet due to the way their DCs are configured; they are unable to pick and pack for individual consumers.

However, they are able to use continuous replenishment through the fact that basic products are automatically replenished, and new products are constantly being produced and shipped out to the retailers. Since there is very little inventory in the supply chain, and stock-outs are almost encouraged, there would be very little in the way of safety stocks to buffer variability in demand. Zara has very low inventory costs, which is due to less variability than their competitors due to better information on changes in supply and demand conditions. Carrying low inventories reduces the costs of physical warehouse facilities, costs of management and coordination, frees up capital, and mitigates the risk of product obsolescence, theft and damages.

The bull-whip effect does not cause inventory problems in Zara since the effects of the bull-whip effect are minimized. The POS data is transmitted directly to headquarters and the factories, so there are no members in the supply chain that can exaggerate or inflate the numbers. The bull-whip effect is caused by demand forecast updating, order batching, price fluctuations, and rationing and shortage gaming. The simplicity of the supply chain, POS data, sharing information and centralized demand information help mitigate the bull-whip effect.

Due to the business model of Zara, they should focus on having the perfect order (received on time, complete, damage free, filled and billed accurately. These are the ideal shipments, and Zara would strive to always have the perfect order. If the order is not on time, or is missing products or has damaged products, then the stores will not always be stocked how they should be. However, given that stock-outs are tolerated, it is not as essential that they always have the perfect order. Companies like Gap and H;M would look for more perfect orders than Zara as it will have a bigger impact on their stores than it will on Zara's. However, companies are always looking for the perfect order, or at least having a very high fill rate.

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