Zara Introduction

"You need to have five fingers touching the factory and five touching the customer." Amancio Ortega, Zara founder, on retail success Zara is the premier brand of Inditex Corporation and began in La Coruna, Spain in 1975. Since then, Zara has grown to become the largest retailer in the world and now operates 1557 stores in 78 countries in Europe, the Americas, Asia and Africa (Clark & Keeley 2008). While many multinational retailers reported falling profits in the wake of the economic recession, Inditex attained a net profit margin of 13.87% in the 2010 financial year, an increase from 12.04% in 2008. Zara has emerged as a profitable company of fast-growth in a competitive retail industry due to its highly responsive and tightly controlled vertically integrated supply chain that has leveraged its speed and flexibility to achieve international success. Operations Strategy Zaras operations strategy involves maintaining tight control over all operational aspects to allow for high flexibility and to be able to rapidly respond to changing fashion trends to meet the needs of their customers. Zara is an externally supportive operation where operations management is seen a central element to its competitive strategy and success. Vertical integration is high, with the company managing all aspects of design, storage, transport, logistics, and the majority of production. Analysis of the Four Vs illustrates that Zara differentiates itself from other large multinational low-priced retailers who traditionally use mass production by offering low volumes of individual items with a high variety of garments and accessories with high variation, which is typically characteristic of specialized or bespoke boutiques, yet dissimilarly has low visibility.
L H H H Volume Variety Variation in Demand Visibility H L L L

Figure 1. Dimensions of Zara plotted on the Four Vs

Zara Although lower volumes of individual garments result in higher unit costs, Zaras inhouse design and manufacturing team allows a high level of control and efficiency. Garments can be quickly created to meet the latest fashion trends; design, production, and delivery of a

new product to stores worldwide takes 15 days on average, making Zara twelve times faster than Gap, a major rival, despite offering around ten times as many unique items (Gallaugher 2008). Zara also offers a high variety of items, a tendency of low volume operations. Each store has multiple departments, and within each department there is further segmentation. The womens department consists of TRF, trendy casual wear; Zara Woman, higher-end casual and business wear; as well as Zara Studio, which are more luxurious and higher priced garments. Within each segment different styles of footwear, handbags, and other accessories can also be found, resulting in literally thousands of products being offered in a Zara store at any given time. The high variation in consumer demand is confidently met by Zaras flexible operations of high variation. The extensive vertical integration of Zaras processes is the backbone of its operations strategy, and distinguishes it from competitors such as H&M, which has 900 suppliers and no factories of its own while almost 60% of Zaras products are produced in-house (Gallaugher 2008). The vertical integration is so comprehensive that Zara itself creates 40% of its fabrics and purchases most dyes from its subsidiary company, and allows for flexibility by ordering approximately half of its fabrics undyed in case of any trend shifts in colour or pattern (Gallaugher 2008). Despite Zaras tendency to occupy positions on the scales left side, visibility is low. Zaras employees and operations facilities are typically not seen or monitored by customers, unlike in boutique stores with ample contact with sales associates. Zaras retail employees are usually behind the sales counter or in the change rooms, but do not frequent the sales floors to aid customers in locating sizes or make suggestions as typical retail stores do as part of a service based operations strategy.

Performance Objectives Using the five key performance indicators (KPIs) illustrates that each performance objective has a relationship with the other objectives. Zaras focus on speed, flexibility, and

Zara dependability increases the cost of its products, albeit not to the extent that it is out of line with its competitors. To mitigate costs, quality of products and service is reduced.
Quality

Cost

Speed

Flexibility

Dependability

Figure 2. Zaras performance plotted on the Key Performance Indicators

Speed and flexibility are paramount to Zaras operations strategy and are likewise key performance objectives. Zaras success has been the result of their responsiveness to fluctuating customer demands, which explains its decision for high vertical integration. Zaras senior managers maintain that capital asset investment in production and distribution facilities increases flexibility by allowing scheduling control impossible to achieve if the organization was dependent on distant external supplier. Zaras flexible cross-functional teams, which are regularly rotated, can design, revise, and commit resources to a finalized new product design in mere hours (Ferdows et al. 2004). This flexibility means that Zara can react to unexpected demands faster than rivals and capitalize on this speed by designing new garments that have evidence of customer demand throughout the season, unlike competitors who design months in advance and must hope that consumers deem their on-trend. Personal digital assistants connect retail store managers and the stores point-of-sale system to market specialists in Zaras La Coruna headquarters to transmit orders, as well as customer input and trends noticed by staff in sold and unsold items so designs can quickly be improved or production increased (Bonnin 2002). Distribution is also fast: shipments of pre-priced and security tagged items that are already hung on display racks from La Coruna reach most European stores in 24 hours, American stores in 48 hours, and Asian stores in 72 hours so that once received, store managers can immediately place them on the sales floor (Ferdows et al. 2004). The speed and flexibility of Zaras operations are

order winners as Zaras on-trend items have short lead times and are often in stores before competitors, attracting fashionable customers who want to be the first wearing a new trend.

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Dependability is another key performance objective, and is reinforced by Zaras tight control policy. The entire supply chain moves quickly as outlined above, but is predictably timed. Store managers follow a stringent order deadline, that if missed cannot be rectified. Southern

European stores must place their orders by 15:00 Wednesday and 18:00 Saturday, while 15:00 Tuesday and 18:00 Friday deadlines apply for all other stores (Gallaugher 2008). A missed Tuesday deadline means a store manager must wait until Saturday. La Corunas central

warehouse prepares all the shipments that the trucks or airplanes rush to stores on consistent schedules that store managers are aware of. Regular customers also know the days that new deliveries reliably arrive, and on these days will visit stores more frequently, making Zaras dependability another order winner. Quality is adequate at Zara, but is not a main objective for operational strategy. With regards to products, items are typically made using cheaper synthetic fibres or cotton instead of higherquality natural fibres such as wool or silk, and fabrics are not as colourfast. As well, because they are made so quickly made, quality control is not strict. A 2010 Beijing Consumer Association test found that Zara down coats had 18.5% lower down content than labelled (Jia & Yan 2011). However, many of Zaras customers do not value quality but instead the design or style of a product, which are of high quality: though rarely unique, they mimic haute couture designs that consumers covet. With regards to service, quality is also not a strategic focus. The Fashion section of the Telegraph reported that the service level is on a par with Burger King, describing Zaras low visibility and contact with customers (Portas 2011). The middling quality at Zara conforms to the middle-priced fashion retail industrys standards, and thus is an orderqualifier, but not necessarily an order-winner. All the above KPIs have implications on cost, the most important aspect of an organizations operations. To attain the speed, flexibility, and reliability of Zaras responsive vertically

integrated operations major capital investments have been made in technologies and in production and distribution facilities. Twice weekly deliveries across the world by truck and airfreight are expensive, but are required by Zaras fast fashion strategy. However, Zaras IT expenditure is less than a quarter of the fashion industry average, and targets their technological investments at areas in the supply chain that will derive the most impact (Sull & Turconi 2008). Zaras small batch production of items is costly, but minimizes the risk of unpopular

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merchandise, such as during 2003s unseasonably warm autumn (Tinlady 2006), and has created a sense of exclusivity for customers, who are conscious that once an item is sold out, it is gone. As a result, Zara stores have a quick inventory turnover, eliminating the need for sales; 85% Zara products are sold at full price, while the industry average is only 50% (Ghemawat 2001). The frequent exclusive designs facilitated by the flexibility and reliability of Zaras operations has also decreased advertising costs; Zara spends only 0.3% of revenue on advertising, while the average for fashion retailers is 3.5% (CNN 2001). The average Zara customer will visit a store 17 times annually because merchandise changes so frequently, but only visit competitors three times (Kumar & Linguiri 2006). The reduced quality of Zaras fabrics and service also maintain costs at a moderate level. For consumers, price is an order-qualifier as they are on par with similar competitors or higher due to Zaras lack of sales, though compared to the high-fashion the firm imitates, prices are significantly lower.

Processes The responsiveness and flexibility of Zaras operations above illustrate why it can be deemed a lean, if not agile, operation. Zaras store level data collection, shared using PDAs, allows headquarters to quickly react to changes in demand. Using a closed loop system,

customers are treated as an integral part of Zaras pull system of just-in-time (JIT) manufacturing, allowing for continuous improvement and eliminating waste, such as overproduction or the resources used in unpopular designs. Design and manufacturing

processes commence when customer demand pulls the need for new merchandise, or corrective action to existing designs, which keeps inventory levels manageable at all times, and reduces the need for extensive markdowns to make space for new products. JIT production has been very effective in complementing Zaras operation strategy by reducing lead-times, and frequent, small deliveries drive sales as loyal customers check frequently for new shipments. Zaras beginnings in La Coruna are still today the home to The Cube, a modern glass building housing a centralized design and production centre. The facility is divided into three halls: one each for womens, mens, and childrens merchandise. Each area runs parallel While

processes but maintains distinct design, sales, procurement, and production staff.

expensive, the three channels allow for information to flow quickly and directly across vertical

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and horizontal boundaries, allowing for overall greater responsiveness from the supply chain (Ferdows et al. 2004). Each hall uses a cell layout, with each cell in a process layout. Cells can be thought of as the areas designers, market specialists, procurement, production staff sit. However, all cells are close in proximity, and informal boundaries make communication more accessible throughout the organization. Large circular tables can be found throughout the halls, which host impromptu meetings for different team members highlighting the organic nature of Zaras design (Ferdow et al. 2004). The physical proximity of the cell layout is appropriate as it increases the efficiency and flexibility of the design and manufacturing process because dynamic work teams can quickly and informally check ideas with one another. Once designs are finalized, specifications are sent directly to cutting machines whose cut pieces are tracked by barcode as they progress through additional steps, or cells, of the production and distribution process using a batch system (Ferdows et al. 2004). Retail stores also operate in a cell layout, with aesthetically pleasing distinct areas for mens, womens, and childrens merchandise, with sub-cells for accessories and shoes. Stores use a mass service system where employees typically repeatedly perform similar tasks. Technology plays a large role in Zaras processes, most of which are vertically transferred as all of Zaras major production and distribution facilities are in Spain. However, globalization has seen Zaras retail stores open all over the world, sometimes requiring a horizontal transfer of technology. This is generally a simple point-to-point transfer involving operations, equipment, and procedure training for new retail employees to use the point-of-sale and personal digital assistant hardware and software in stores, technologies critical to Zaras strategic responsiveness.

Capacity Management Strategies Zara engages in an active chase demand capacity management strategy due to the firms high variation, making the ability to quickly amend capacity of output to meet demand necessary to fit with its operations strategy of flexibility and speed. In its headquarters, capacity is

measured by the inputs of cutting and dyeing machine hours available and output of volumes produced per week. However, Zara does not seek to maximize their machine utilization, and instead deliberately manufactures at low capacity to maintain a large capacity cushion. Though retail stores are deprived of merchandise, Ortega explains that working to full capacity does not

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leave enough flexibility to react quickly enough to changing demands (How Zara Fashions its Supply Chain 2005). Zara actively seeks to reduce time between production and consumption by sending store level statistics such as sales figures and anecdotal customer feedback at the end of each day to designers and production staff to allow for continuous improvement of designs. Uneven demand rates, uncertain consumer demands, and changing product mix of Zaras high variation operations necessitates great flexibility. Holding surplus capacity by not utilizing all machines allows Zara to meet unexpected customer needs and increase the speed of new designs, as well as maximise revenues through the sales of these new designs.

Improvements and Conclusion Zara has enjoyed great success in the retail industry, but can still seek to improve its operations. Despite the increasing globalization of its retail stores, the organizations two

distributions facilities are both located in Spain. This should be a great concern to operations managers because any disruptions in the region such as a natural disaster could shut down operations. Political and labour unrest is particularly uncertain at present due to Spains

economic crisis, with national unemployment at 21.5% (Reuters 2011). Rising fuel costs pose a threat to Zaras twice weekly global shipments by truck and aircraft. Asia now makes up 15% of Zaras sales, and North American sales are increasing (Global Stretch 2011). Zara should establish new production and distribution facilities in Asia and the Americas to serve these growing markets, which would significantly decrease the cost of air shipments, and could increase flexibility by taking cultural preferences into account when designing new garments. Providing a more comprehensive service package by training employees in customer service could increase revenues, as service quality could become an order winner. Under current normal operating conditions however, Zara has proven its dominance in the fashion retail industry by capitalizing on the synchronization between its operations strategy and practices that leverage its speed and flexibility, and is certain to remain profitable in the future.

Zara References Journal Articles Bonnin, A 2002. The Fashion Industry in Galicia: Understanding the 'Zara' Phenomenon, European Planning Studies, 10, 4, pp. 519-527, Business Source Premier, EBSCOhost, viewed 11 November 2011. Caro, F, Gallien, J, Daz, M, Garca, J, Corredoira, J, Montes, M, Ramos, J, & Correa, J 2010, 'Zara Uses Operations Research to Reengineer Its Global Distribution Process', Interfaces, 40, 1, pp. 71-84, Business Source Complete, EBSCOhost, viewed 11 November 2011. Ferdows, K, Lewis, M, & Machuca, J 2004, 'Rapid-Fire Fulfillment', Harvard Business Review, 82, 11, pp. 104-110, Business Source Premier, EBSCOhost, viewed 11 November 2011. 'Global stretch' 2011, Economist, 398, 8724, p. 76, Business Source Premier, EBSCOhost, viewed 11 November 2011.

"How Zara fashions its supply chain: Home is where the heart is" 2005, Strategic Direction, Vol. 21 Iss: 10, pp.28 31 Sull, D., and Turconi, S. Fast Fashion Lessons. Business Strategy Review. Summer 2008. Tiplady, R 2006, 'Zara: Taking the Lead in Fast-Fashion', Businessweek Online, p. 3, Business Source Premier, EBSCOhost, viewed 11 November 2011 Online Articles Clark, Andrew and Keeley, Graham 2008, Zara overtakes Gap to become worlds largest clothing retailer, The Guardian, viewed 12 Novemeber 2011 <http://www.guardian.co.uk/business/2008/aug/11/zara.gap.fashion> CNN 2001, Zara, a Spanish Success Story, CNN, viewed 12 November 2011 <http://edition.cnn.com/BUSINESS/programs/yourbusiness/stories2001/zara/> Gallaugher 2008, Zara Case: Fast Fashion from Savvy System, viewed 8 Novemeber 2011 <http://www.gallaugher.com/Zara%20Case.pdf> Ghemawat 2001, Zara Fast Fashion, viewed 20 November 2011 <http://www.carlospitta.com/Courses/Negocios%20Internacionales%20y%20EBusiness/Readings%20and%20Papers/Parte%209/Zara%20(Harvard%20Case).pdf> Inditex. 2011. Stores around the world, Inditex, viewed 12 November 2011 <http://www.inditex.com/en/who_we_are/stores> Inditex. 2011 Inditex Consolidated Annual Accounts 2011, Inditex, viewed 12 November 2011 <http://www.inditex.com/en/downloads/11_informe_gestion_grupo.pdf> Jia, Cui and Yan, Wang 2011, Top brands fail to pass quality test, China Daily, viewed 24 November, 2011 <http://www.chinadaily.com.cn/cndy/2011-04/20/content_12358979.htm>

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Portas, Mary 2011, Shop! Mary Portas at Zara, The Telegraph, viewed 2 December 2011 <http://fashion.telegraph.co.uk/news-features/TMG8293959/Shop-Mary-Portas-atZara.html> Reuters 2011, Timeline: Spain's economic crisis, Reuters, viewed 20 November 2011 <http://www.reuters.com/article/2011/11/20/us-spain-election-economyidUSTRE7AJ08D20111120>