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August 20, 2010

Supply Chain Management of Zara

Executive Summary Globalization has open doors of opportunities for firms to reach and explore new markets. Now more than ever, supply chain management plays a key role for organizational success for those that aim to expand their market reach around the globe. This paper discusses perhaps one of the most excellent organizations when it comes to supply chain management. Zara is known around the world as one of the most successful provider of fashion products. This paper presents a description of supply chain management including its elements and components. The different stages of Zaras supply chain and their contributions to the overall efficiency and effectively of Zaras business model are discussed. Lastly, the paper discusses the different metrics that are used by the firm in measuring supply chain performance. Introduction Zara is one of the most notable fashion stores in the world. Notable for its products and notable for its excellent supply chain management. This paper discusses the supply chain management at Zara, tackling the different areas of supply chain and their contribution to the companys success. Supply Chain Management Supply chain refers to all the value adding operational activities involved with supplying to an end user with a service or product (Lowson 2002). A supply network is defined by Christopher (1992) as an interconnection of organizations which relate to each other through upstream and downstream linkages between the different processes and activities that produce value in the form of products and services to the ultimate consumer (cited in Lowson 2002). Porter (1985) is among the earliest influences upon an integrated supply network. According to Porter, the organizations value chain is embedded within a value system comprising suppliers and buyers. The linkages within this chain or system provided the building blocks of competitive advantage. Conversely, supply chain management involves partnerships that are developed between organizations performing adjacent, linear steps in the chain. The

supply chain is viewed as a whole rather than a set of fragmented parts in order that activities, the basic units of competitive advantage, can be configured, confined and performed in different ways to rival chains (Porter, 1996). Supply chain or value chain management is composed of the operational or tactical activities and can be defined as managing the entire chain of raw material supply, manufacture, assembly and distribution to the end consumer (Jones 1989 cited in Lowson 20002). Christopher (1998) defines supply chain management as the management of upstream and downstream relationships with the suppliers and customers to deliver superior consumers value at less cost to the supply chain as a whole. Components of the Supply Chain The supply chain has four basic components: Production Businesses focus on how much to produce, where to produce it and which suppliers to use. Inventory Businesses decide where to store their products and how much to store. Distribution Businesses address questions about how their products should be moved and stored. Payments Businesses look for the bets ways to pay suppliers and get paid by customers. Elements of the Supply Chain Structures - these are the organizational units within the supply chain that interact. They include a company, its suppliers, its customers, distribution channels, design and engineering centres, manufacturing and service centres.

Processes - the operational activities that transform inputs into outputs. These can involve demand and supply planning, forecasting, sourcing, purchasing, manufacturing and service operations, logistics, order entry, materials management, and new product or service development.

Linkages - connecting process to structure via communication, usually in the form of shared information and continuous communication (Lowson 2002). Inditex

In 1963, Amancio Ortega started a small company in Spain that manufactured womens pajamas and lingerie products for garment wholesalers. In 1975, after a German customer cancelled a sizable order, the firm opened its forts Zara retail shop. The original intent was simply to have an outlet for cancelled orders but the experience taught the firm the importance of a marriage between manufacturing and retailing a lesson that guided the evolution of the company ever since. From a starting point of 6 stores in 1979, the company established retail operations in all the major Spanish cities during the 1980s. In 1988 the first overseas Zara store opened in Porto, Portugal, followed shortly by New York City in 1989 and Paris in 1990. But the real step-up in foreign expansion took place during the 1990s when Inditex entered 29 countries in Europe, the Americas and Asia (particularly during 1998 to 2001 when it entered 21 of these 29 countries). In parallel with its overseas expansion, Inditex diversified its retail offering by adding and acquiring new brands in order to target different customer segments. Each brand operates independently, with its own stores, ordering system, warehousing and distribution system, subcontractors, and organizational structure (Inditex 2006). Zara is the largest Inditex division accounting for more than 75 percent of total Inditex sales. Zara at a Glance: Operations and Supply Chain Management The first Zara clothing store opened in 1975 in Spain as a small retailer selling mens and womens clothing. Since then Zara chains have grown into retailing giants with almost 1000 stores worldwide and an impressive sales record. The success of Zara is partly to do with the appeal of its mens and womens and childrens fashions and accessories that display unique style but at real world prices. But it is also partly as a result of their collaborative, digital networks that link Zara with its suppliers and customers. These advances have enabled Zara to deliver tailored products quickly and reliably, creating what the company terms a value net for all the firms in the supply network. This value net is a key part of the operations strategy, allowing customer choices to be simultaneously transmitted to all supply partners who then deliver components as need by other partners. The company at the center of the operations strategy coordinates all activity, provides continual updates to all players, and captures significant value for its efforts. The particular operation strategy used by Zara helps it respond quickly to shifts in customer demand and build a powerful brand. Zara estimate that it takes only two weeks to convert design

ideas into products on the shelf to satisfy its young, hip, clientele with fashion for the masses. Store employees regularly tour urban hot spots looking for new trends and reporting back to designers. Knowing whats in today may be out next month is the secret of the success of the Spanish retailer as is the ability to apply operations strategy that puts new fashion concepts on the shelf twelve to fifteen days. As part of this strategy, capital-intensive steps are executed in factories owned by Zara, while labor intensive operations are outsourced to small shops and manufacturers with whom Zara have collaborative partnerships that include providing them with the necessary technology and logistics capabilities. Customers seem to relish the results of this high velocity operation and are often seen queuing outside stores on designated delivery days a phenomenon dubbed as Zaramania (Lowson 2002). Supply Chain at Zara For Zara stores to be able to offer cutting edge fashion at affordable prices requires the firm to exert a strong influence over almost the entire garment supply chain: design, purchasing, production, distribution, and retailing. Design and Order Administration The design and order administration at Zara is very effective and efficient. The company ensure product quality by designing its own products. Zara has almost 300 people working in its headquarters in Spain. These talented people include designers, specialists and buyers. Together they produce designs for approximately 40,000 items per year from which 10,000 are selected for production. Unlike their industry peers, these teams work both on next seasons designs and, simultaneously and continuously, also update the current seasons designs. Extensive feedback from the store network also forms an integral part of the design process. Womens, mens and childrens designers sit in different halls in a modern building attached to the Inditex headquarters. 1. Designers the supply chain starts with the designers. Based on information and inspirations gathered from different resources such as trade fairs, fashion shows, magazines and more importantly customer feedbacks, the designers draw out design sketches by hand and then discuss them with colleagues including market specialists, planning and procurement people. This process helps to retain an overall Zara Style. The sketches are redrawn using a CAD system where further changes and adjustments, for better matching of weaves, textures, and colors are made. Before moving further through the process, it is necessary to determine whether

the design can be produced and sold at a profit. The next step is to make a sample, often completed manually by skilled workers located in the small sample making shop in one corner located in the small sample making shop in one corner of each hall. If there are any specific questions or problems, they can just walk over to the designers and discuss and resolve them on the spot. 2. Market Specialists Each market specialist has responsibility for dealing with specific stores. These market specialists have wide experience. The market specialists work in close contact with store managers, especially by phone, discussing sales orders, new lines and other matters. Stores rely heavily on discussions with Market Specialists before finalizing orders. 3. Buyers Final decisions concerning what products to make, when, and in what volumes are normally made collectively by the relevant groups of designers, market specialists, and buyers and after the decision is taken, the buyers take charge of the total order fulfillment process. The buyers are responsible in planning procurement and production requirements, monitoring warehouse inventories, allocating production to various factories and third party suppliers and keeping track of shortages and oversupplies. Production 1. Suppliers Zara manufacture approximately 50 percent of its products in its own network of 22 Spanish factories but use subcontractors for all sewing operations. These factories generally work a single shift and are managed as independent profit centers. The other half of its products are procured from 400 outside suppliers, 70 percent of which are in Europe and most of the rest in Asia. Many of the European suppliers are based in Spain and Portugal, and Zara exploit this geographical proximity in order to ensure quick response to Zara orders which is critical for fashion products. From Asia, Zara procure basic products and those for which the region has a clear cost or quality advantage. With its relatively large and stable base of orders, Zara is a preferred customer for almost all its suppliers. For its in-house production, Zara obtain 40 percent of its fabric supply from another Inditexowed subsidiary, Comditel (Zara account for almost 90 percent of their total sales). Over half of these fabrics are purchased undyed to allow faster response to mid-season color changes. To facilitate quick changes in printing and dyeing, Zara also work closely with Fibracolor, a dyestuff producer part owned by INditex. The rest of the fabrics come from a range of 260 other

suppliers, none account for more than 4 percent of Zaras total production in order to minimize dependency on sungle suppliers and encourage maximum responsiveness form them. 2. Procurement and Production Planners The make or buy decisions are made by the procurement and production planners. The key criteria for making this decision are required levels of speed and expertise, cost-effectiveness, and availability of sufficient capacity. If the buyers cannot obtain desired prices, delivery terms, and quality from Zara factories, they are free to look outside. 3. Subcontractors - After in-house CAD controlled piece cutting, Zara use subcontractors for all sewing operations. The subcontractors themselves often collect the bagged cut pieces, together with the appropriate components (like buttons and zippers) in small trucks. There are some 500 sewing subcontractors in very close proximity to La Corua (in the Galicia region) and most work exclusively for Zara. Zara closely monitor their operations to ensure quality, compliance with labor laws, and above all else adherence to the production schedule. Subcontractors then bring back the sewn items to the same factory, where each piece is inspected during ironing (by machine and by hand). Finished products are then placed in plastic bags with proper labels and then sent to the distribution center. A system of aerial monorails connects ten of the factories in La Corua to the distribution center. Completed products procured from outside suppliers are also sent directly to the distribution center. Zara use a sampling methodology to control the incoming quality. Distribution 1. Distribution Center all products pass through Zaras major distribution center in La Corua. The 5-storey, 50,000 square meter distribution center employs some of the most sophisticated and up-to-date automated systems. With a workforce of 1200, the distribution center normally operates four days per week with the precise number of shifts depending on the volume of products that have to be distributed. Orders for each store are packed into separate boxes and racks (for hanging items) and are typically ready for shipment 8 hours after they have been received. 2. Logistics (Contractors) In 2001, the distribution center shipped 130 million pieces. 75 percent of these shipments were to stores in Europe. Fashion garments represent around 80 percent of Zaras products and the rest are more basic items. Contractors using trucks bearing Zaras name pick up the merchandize at La Corua and deliver it directly to Zaras stores in

Europe. The trucks run to published schedules. Products shhiped by air are flown from either airport in La La Corua or the larger airport in Santiago. Typically, stores in Europe receive their orders in 24 hours, the United Sates in 48 hours and Japan in 48 to 72 hours. Compared to similar companies in the industry, shipments at Zara are almost flawless 98.9 percent accurate with less than 0.5% shrinkage. Retailing 1. Store/Customer Stores usually place their orders and receive shipments twice per week. Orders have to be placed at pre-designated times. The store plays an important role in the Inditex business model that ranges from production up to end distribution. The overall experience of the customer in the store in considered. Apart form the fashion supply, the interior design of the store, coordination of collections, maximum care over window displays and customer care are some of the elements that guarantee this experience. The stores where Zara concentrates the majority of its investment are the essence of the groups chains, for which reason the location in the main commercial areas of cities and care over interior design take on vital importance for the company. The store is Zaras main image vehicle. Apart from its location, its window designs and interior design, customer care is one of the elements that Inditex takes most care of: its relationship with consumers. Personnel receive specifi c training on customer care as one of the main intangible values of the store. Inditex establishments are thought out so that the encounter between the customer and fashion can take place in a pleasant environment. Store personnel with supervisors as the main drivers of quality of service, encourage freedom and comfort of the visitor by taking an active role in the shopping process exclusively when the customer requests this (Inditex 2007). Zaras Supply Network Zara can move from design to in-store availability in a matter of weeks as a result of closely connected, highly synchronized arrangements with out-sourced suppliers. Zara relies on a local supply network, which it largely owns and controls. That network can design and replenish hot-selling fashion products in the stores within three weeks. Zaras supply network entails a near-vertically integrated company the owns retail, products design, dyeing,

and fabric cutting operations. Only sewing operations are outsourced (Korhonen and Hartiala 2006). Zara use flexible arrangements with a wide supply base. Zara has achieved high levels of customer responsiveness by working closely with specialist, often small, manufacturers. The strategy at Zara is that only those operations which enhance cost efficiency through economies of scale are conducted in-house (such as dyeing, cutting, labeling and packaging). All other manufacturing activities, including the labor intensive finishing stages, are completed by networks of more than 300 small subcontractors, each specializing in one particular part of the production process or garment type. These subcontractors work exclusively for Zaras parent, Inditex. In return, theyr receive the necessary technological, financial and logistical support required to achieve stringent time and quality targets. The system is flexible enough to cope with sudden changes in demand (Christopher et al 2004). Supply Chain Performance Measure Order Lead Time The total order cycle time, called order delivery cycle time, refers to the time elapsed in between the receipt of customer order until the delivery of finished goods to the customer. The reduction in order cycle time leads to reduction in supply chain response time, and as such is an important performance measure and source of competitive advantage. Zara produces clothes that resemble the latest couture creations, but they beta the designers to market. Because they use less expensive fabrics, they can also provide the product at a lower price. To achieve this type of competitive advantage, Zara controls most of its supply chain, by managing all design, warehousing, distribution, and logistics functions. Operational Level Measures Operational level measures include ability in day to day technical representation, adherence to developed schedule, ability to avoid complaints and achievement of defect free deliveries. Zara design the organization, operational procedures, performance measures and even office configurations to make information and product transfer easy. Because Zaras merchandise is produced in small quantities, provided on predictable schedules, and displayed in the stores for only a short amount of time, customers visit Zara stores more frequently. This has an added advantage of helping Zara avoid the cost of advertising.

Effectiveness of Scheduling Techniques Scheduling refers to the time or date on which activities are to be undertaken. Such fixing determines the manner in which resources will flow in an operating system, the effectiveness of which has an important impact on production and thus supply chain performance. The scheduling techniques of Zara is very efficient. Centrally Managed Inventory controlled and timely delivery of clothing to all stores across the world Reduced Design Cycle Time timely response to items that sell well and ability to quickly alter or enter new designs Strong IT System allows almost immediate communication of sales and inventory information across enterprise Logistics and Distribution clothes move within hours to their destination, efficient scheduling of shipments Flexibility of Delivery Systems to Meet Particular Customer Needs This refers to flexibility in meeting a particular customer delivery requirement at an agreed place, agreed mode of delivery and with agreed upon customized packaging. Conclusion Zara is an example of how a firm can design and manage its supply chain to gain competitive advantage. Zara is considered a retailing giant with almost 1000 stores worldwide. In order for Zara to provide cutting edge fashion at affordable prices, the firm exerts a strong influence almost the entire garment supply chain: design, purchasing, production, distribution, and retailing. The retailing success of Zara can be partly attributed to its excellent supply chain management. Zara makes sure that each element of the supply chain network adds value to the entire operation. Zara makes sure that it streamline its supply chain, removing steps that does not contribute to the achievement of the companys goals and developing those elements that add value. Recommendations 1. Total Quality Management

The idea of total quality management (TQM) emphasizes planning for quality, including designing the product in such a way that consistent quality is more easily obtained and more easily measured. The impetus for a company to devote significantly more resources to quality through a TQM program comes from a trend that most companies are now experiencing an increased competitive pressure that leads to higher costs associated with poor quality. The product must be designed in such a way that it can be produced consistently without losing sight of the design aspects demanded by the customer. The production process must be designed with quality in mind (Summers 1998). 2. Quick Response Quick Response (QR), a program developed by textile and apparel manufacturers and retailers around 1985 as a way to cope with problems challenging the apparel industry, uses a combination of strategies to reduce inventory levels, improve merchandise quality, increase worker productivity, increase stock turnover, and reduce merchandise markdowns and inventory costs. Fundamentally, QR is a way to gather information about consumer preferences and to reflect them in production decisions in a timely manner. To comply with consumers needs, QR relies on sales data. Through computerized information systems, sales data are transmitted and transformed as useful information that reveals consumers preferences and reactions, and decisions are then made promptly to respond to what consumers want (Kang and Sullivan, 1999). The QR strategy links all activity to real time demand. It is customized by the individual retailer or manufacturer and is particularly suited to small and medium-sized firms. It is designed to be context specific and to be contingent upon the setting. Quick Response as an operations strategy is designed to overcome the impact of seasonality in operations. References Annual Report 2006, Inditex, viewed 17 September, 2008, < http://www.inditex.com/en/shareholders_and_investors/investor_relations/annual_reports> Annual Report 2007, Inditex, viewed 17 September, 2008, < http://www.inditex.com/en/shareholders_and_investors/investor_relations/annual_reports> Christopher, M 1992, Logistics and Supply Chain Management, Pitman Publishing, London. Christopher, M 1998, Logistics and Supply Chain Management: Strategies for Reducing Cost and Improving Service, Pitman Publishing, London.

Christopher, M C, Lowson, R and Peck, H 2004, Creating Agile Supply Chains in the Fashion Industry, International Journal of Retail and Distribution Management, vol. 32. Jones, C 1989 Supply Chain Management - The Key Issues, BPICS Control, vol. 15, no. 6, p. 23. Kaipia, R, Korhonen, H, and Hartiala, H 2006, Planning Nervousness in a Demand Supply Network: An Empirical Study, The International Journal of Logistics Management, vol. 17, no. 1, pp. 95-113. Kang, J K and Sullivan, P 1999, Quick Response Adoption in the Apparel Manufacturing Industry: Competitive Advantage of Innovation, Journal of Small Business Management, vol. 37, no. 1, p. 1. Lowson, R H 2002, Strategic Operations Management: The New Competitive Advantage, Routledge, New York. Porter, M E 1996, What is Strategy, Harvard Business Review, pp. 61-79. Summers, M 1998, Analyzing Operations in Business: Issues, Tools, and Techniques, Quorum Books, Westport CT.
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