Zara is a Spanish-based retail chain owned by the group Inditex who has taken a new approach in the industry and has completely changed the fashion world. Zara specializes in inexpensive fashions for women and men between the ages of 16 and 35. Zara has created a competitive advantage: they own their in-house production and they have an impressive logistic strategy. By owning its in-house production, Zara is able to be flexible in the variety, amount, and frequency of the new styles they produce.
Although Zara has a successful business model that differs from that of traditional retailers, it also has problems that can affect its sustainable growth. The purpose of this paper is to analyze Zara’s business model and to identify their strengths and weaknesses especially in the logistics area which is, in our opinion, one of the main sources of its competitive advantage. To better understand its competitive advantage, it’s important to analyze its supply chain processes and how they add a good value to its customers, suppliers and stakeholders in general.
Theoretical Analysis. In this project the company analyzed, Zara, is going to be focused in the logistics and supply chain management area. To begin with, we have to define the area of interest, but to define logistics we have to define a supply chain management first. Since the term “supply chain” contains the word “supply”, many people naturally assume that supply chain must have something to do with suppliers like purchasing or procurement. While it is true that supply chain management does encompass the purchasing and procurement functions, supply chain management actually extends well beyond those areas.
Supply chain management is the practice of manufacturing and distributing physical goods as efficiently as possible. Supply chain management encompasses the entire process of manufacturing and distributing physical goods, from supplier’s supplier to customer’s customer. Business functions that are within the realm of supply chain management include: forecasting and planning, procurement and purchasing, manufacturing and assembly, warehousing and distribution, shipping and transportation, returns and refurbishment, inventory management and order management. Or, stated ore simply, supply chain management includes the functions: plan, buy, make, store, move, sell and return. Now, establishing the environment we can focus on our area. Logistics is the portion of supply chain management that encompasses distribution, transportation and inventory management. To put it in context with the simplified description given above regarding the supply chain management functions of plan, buy, make, store, move, sell and return, logistics is the “store” and “move” functions. In some industries it is not unusual for transportation costs alone to be more than 10% of revenue.
For many companies, transportation is the single largest cost element on their financial statements. Transportation costs are often double the expense of warehousing and inventory carrying costs, which means that warehousing and inventory costs can be 5% of revenue. So, the bottom line is, why don’t corporations focus more attention on streamlining logistics to reduce costs? Inditex Organization SWOT Analysis Strengths-They own their in-house production. -Logistics and supply chain: Just in Time Strategy-Rapid response to new trends. -Flexibility in the customer service. Small stocks-Prices perceived as low by the consumer. -Concept of “exclusivity” in the store. -Huge variety-200 young talented designers at the base of their operation. -International Standardization-Zara’s CEO (Amancio Ortega) image as “Fashion Guru”. -Huge international presence with 1,100 stores in 68 countries. -“European Image”-Current use of technology innovation. -They don’t need to have an expensive advertising campaign to sell their products. -Their margin is 15% superior to that of their competitors. (Margin of 85%)-Constant innovation: High investment in R;D. Weaknesses-High initial investment costs.
-Difficulty to supply the huge volume needed. -High logistic costs because they transport all the merchandise by airplane. -Need of a lot of workforce for the daily store operation. -Competition between Inditex brands (ex. ZARA vs. Bershka)- Lack of control vs. their explosive growth. -Inditex has big fix assets but low liquidity. | Opportunities-Majority of women population. -“Teenage” is starting earlier, girls show interest for Zara’s product at younger age. -Develop a “Junior” clothing line for girls that are neither kids nor young adults. To install a productive plant in the USA to efficiently supply this huge market. -Expand to Eastern Europe and Germany. -Change the penetration strategy to enter to the Asian market. -Scale up the distribution system. -Develop a USA style line. | Threats-Current economic crisis. -Prices going down-Strong competition from similar brands such as Mango, H;M and Sphere. -Unemployment- Intellectual property restraints getting tougher. – Volatility in transport costs due to the fluctuations in oil prices. -Protectionism in some countries. Legal aspects and regulations such as tariff barriers. -Retailing overcapacity| Case Analysis Zara`s Business Model ; Logistic Strategy Today’s competitive global markets require that companies add value to their customers. More and more companies become aware of the fact that this could be achieved through well-functioning logistics system/supply chain management and global sourcing which allow companies to reduce costs and increase quality. Zara is a highly internationalized company with a deep level of vertical integration and a high capital intensive company.
The operations are becoming more and more complex with multiple sources of production and assembly that goes to one centralized distribution system. Supply chain management includes all the activities and processes from the raw materials to selling goods to the end customer. In Zara stores, customers can always find new product but they’re in limited supply. There is a sense of exclusivity; since only a few items are on display even though stores are spacious (the average size is around 1,000 square meters). A customer thinks, “This shirt fits me, and there is one on the rack.
If I don’t buy it now, I’ll lose my chance. ” Zara knows its customers and moves quickly. Like many apparel retailers, it has two seasons—fall/winter and spring/summer—but selections change frequently within those periods. Items spend no more than two weeks on the shelf before making way for new merchandise, and stores are replenished twice a week. Another important element is Zara’s ability to respond rapidly to the fast changing fashion market relies on accelerated communication of information between customers, managers, warehouse directors and suppliers. Zara aims to reduce unnecessary ureaucracy in the flow of information, be it through their operational procedures, performance measure and even their office layout. They have a high inventory rotation that allows them to minimize from 15% to 20% markdown merchandise compared to a traditional retailer. Nowadays, Zara is growing 20% per year which is huge, but its business model is becoming more difficult to implement and less sustainable in daily operation. Zara is not a franchise, their market penetration strategy consists of buying the physical place of the store and saving the rental costs, they are owners of all their stores.
Zara has currently 1,100 stores located in 68 countries which mean that to replenish all those stores weekly, there is a huge volume flow through the supply chain. Zara’s business model was based to accomplish three main goals: * Develop a system that requires short lead time * Decrease the quantity produced to decrease inventory risk * Increase the number of available styles or choices. Zara’s competitive advantage relies on their rapid response to customer trends in fashion, producing clothing often and with short life spans (10 wears in average).
Zara’s fantastically integrated supply chain has enabled them to deliver on their positioning and offers affordable, trendy clothes to its fashion conscious target market in quick time. To achieve this and to provide more value for their customers, Zara has developed a competitive advantage in the areas of product development, strategic partnerships, cost of production, advertising and marketing, information, technology and infrastructure. The final customer is placed at the center of Zara’s operation; its target market is distributed as follows:
As we mentioned before a very important competitive advantage for Zara is it’s amazing logistics management. The logistics management is an important aspect of the distribution of product and the ease with which it can be made available to the customer. Many elements are involved in the process, such as how the merchandise is bought, transported, stored and distributed. In its supply chain, Zara applies the just in time strategy, which consists of having small stocks that are constantly renewed.
The components and raw materials are supplied by the vendor just before the moment they are needed in the manufacturing process. This enables the company to make sure that it is not buying stock that is in excess of their needs, and thus to reduce waste in the supply chain. All their merchandise is created and manufactured in Arteixo, near La Coruna except for the shoes, which are manufactured at Elche in Alicante. Their amazing logistic strategy allows taking the merchandise from Spain to any store around the world in 48 hours maximum.
This means that they have all their stocks in Spain and they send them from that point to all over the world. Zara consists of a single, centralized design center situated in La Coruna, Spain. Here, the designs manufacture three distinct lines, one for women, one for men and one for children, applying different sale and production strategies to each line, reducing excess information flow between them. All the information coming from individual stores is relayed directly to La Coruna in order for it to adjust its production appropriately.
This unimpeded flow of information allows them to constantly update and adapt to the market; Zara modifies up to 50% of its original production whereas in most companies this is closer to 20%. They have three logistic platforms, one located in Arteixo, the second in Zaragoza and the third in Meco (near Madrid). In Arteixo they have the responsibility for Women and Men clothes for the US, Midwest and the rest of the Spanish Peninsula. The rest of the world operations correspond to Zaragoza and Meco is in charge for Zara home and children clothes operations.
Their shipping strategy relies on trucks and trains in Europe, seeing how transport is easily affected in this manner throughout Europe. As concerns their method of distribution to North America, they employ planes which, while increasing their cost, allow a rapid distribution of product and therefore maximal customer satisfaction and fidelity. As soon as the head office in La Coruna receives an order, the product is assembled and shipped within 48 hours. Each store receives shipment twice a week, which means the store is constantly evolving to suit the costumer’s desires.
They send the clothes already hanged in the case of coats, blouses and dresses and already ironed and ready for their in store placement to reduce time. They have an identification system that sends the exact clothes requested by the store managers in every sales point in the world. With this formula they adjust the maximum possible stock to the demand which is one of their competitive advantages. The company had its suppliers around a close distance radio: Galicia (Arteixo), Portugal and Morocco.
We might think that all the clothes at produced in Spain, but the fact is that 50% of their clothes are actually manufactured in Spain, 14% are manufactured in other European countries such as Turkey, Bulgaria and Rumania. The rest of the production is manufactured abroad: 34% in Asia, and 2% in Latin American countries such as Brazil, Argentina, Uruguay and Mexico. They are currently implementing a Just-in-Time strategy. Whereas this strategy definitely has its advantages, it also contains an elevated risk.
Indeed, if a required part is not delivered on time, the whole manufacturing chain is delayed and the merchandise is not available on time. Thus, a competent management and a disciplined workforce are essential for the supply chain to function efficiently and, in doing so; successfully eradicate unnecessary waste and cost. The just in time strategy also enables them to have a rapid turnover in the products that are in stock in a particular store at a particular moment, enabling them to have a constant rotation of new clothes, adding to the sentiment of exclusivity that they aim to cultivate concerning their product.
This strategy integrates itself well to the desires of the modern customer, whose fashion is rapidly and constantly evolving. In having a rapid turnover, the management can quickly eliminate styles which were not popular and refurbish those that are, reducing unneeded production in the process. A technique by which Zara succeeds in speeding up its supply chain is through the “proximity model”. This model aids in the process of selecting and locating suppliers on the basis of their geographical proximity and the ease with which the product can be obtained from them.
This is why the majority, almost 65%, of Zara’s suppliers are concentrated within Europe, mainly in Portugal, Spain and Morocco. The model is superior to previous technique which was headed by a human-decision making council, in that it allows the management to consult the quantity of stock remaining in the warehouse, in the stores as well as the recent history of sales in a matter of seconds, allowing them to refurbish the right stores at the right moment as quickly as possible.
In doing so, fewer products are stored in the warehouse and more remains on the store floor, successfully eliminating superfluous back and forth between the warehouse and the stores. Zara’s supply chain strategy is effective and original in that it capitalizes on the advantages of the stock-out. Having their stock in low quantity, they reduce cost and minimize waste and help sell their incoming styles seeing as the older ones are no longer there to choose from.
Customers are not bothered by this rapid turnover of product, seeing as there is always something new to buy. In this way, Zara encourages its clientele to return to their stores often, maintaining their interest and upholding their standards of quality. Proposal Zara is at the moment in a boiling point, it has an amazing success and every new Zara store opened in the world turn to be a hit, but that is also causing problems. It is becoming more and more difficult to sustain this model in the daily operations and if they don’t do something they could lose control.
Their logistic costs are enormous because they only send by airplane all the merchandise, from Spain to the world and since they have a very high inventory rotation there’s not time to lose. USA and Asia are big potential markets not fully exploited currently by Zara. The proof is that in November 3, Zara inaugurated their biggest store of the US in the city of Chicago, Illinois. This is not the only store they are planning to open in this city and the expansion in the rest of the country is expected since they already have 47 stores located in the most important American cities.
Our suggestion is to decentralize a little their operations, because the logistic costs to transport everything by plane to the different countries are huge. We propose to expand the productive plant in Mexico because of its privileged location near the huge United States market. In that way they could produce in Mexico and send it directly to the US or to any Latin American country reducing the transportation costs. Another proposal is to create a distribution platform directly in the U. S. market even if the workforce is more expensive because they could save time, penetrate the market in a more efficient way and cut logistic costs. They can not only reduce logistic costs and increase production capacity, but also distribute the responsibilities of the other manufacturing plants better because there is a clear problem of operations management since all the plants are working at full capacity; this fact definitely restraints expansion and growth.
The creation of a new plants and a distribution center in Mexico also supports their objective of creating an online store. The customer will have the possibility to buy the products directly on the web and the delivery will be absorbed by him. The costs will be more attractive if there is a distribution center closer to their location.
References
Helen Lee. “The case of Zara”. (2009) Retrieved from: http://www.oppapers.com/essays/Zara-Case-Study/207736 K.Ferdows, M. Lewis,J. Machuca.“Zara’s secret for fast fashion”. Harvard Business Review. (2005) Retrieved from: http://hbswk.hbs.edu/archive/4652.html “Combining Art With Science, Zara Competes With “Fast Fashion”. February 07, 2009. Retrieved from :http://www.supplychainbrain.com/content/nc/industry-verticals/apparel/single-article-page/article/combining-art-with-science-zara-competes-with-fast-fashion/ http://www.grupocsl.org/wordpress/?p=2984
http://www.elmundo.es/mundodinero/2009/11/03/economia/1257273529.html http://logistics.about.com/
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