Zara: Managing Stores for fast fashion

ESI 6323: Models for Supply Chain Management Case Study

August-13-2011

Prepared by: Tim Carson Khori A. Hunter Annie Malpartida Neville Sicard-Gregory

Introduction
Zara is the largest and most popular brand for retailer corporate group Inditex created by

Spanish entrepreneur Amancio Ortega Gaona. The first Zara store opened in 1975 in Coruna, Spain selling stylish apparel at affordable prices. 10 years later Gaona created the corporate group Inditex, and during the 90s started to expand outside of Spain by acquiring and developing new brands. Inditex went public in 2001 and by 2008 it was an 8 brand group with over 4200 stores, 89,000 employees, and worth 10 billion Euros. Zara was still at the heart of the

companys success and in 2008, there were over 1500 Zara stores operating in 72 countries around the globe and generating 6.8 billion euros in revenue the same year. Zara initiated the concept of fast fashion that could be summarized in mid-quality fashionable products that are manufactured in a fast manner and sold at low prices. Considerable autonomy within stores under an overall corporate control allows best practices while maintaining the Zara culture. In fact Zara was renowned for its responsive supply chains ability to deliver fashionable products to meet changing customer demand. Zaras quick reaction to demand is supported by supply chain oriented to three product lines: womens, mens and childrens. Each of these lines is managed independently from separate regional managers at the country level down to separate section managers within the store. Tremendous autonomy is given to the store managers. This is key as it not only allows for quick decision making, but also allows each store to adapt to it cultural environment, and independent ideas for improvement. At the same time, the corporate offices maintain overall control and ensure consistent presentation across all its stores. Suppliers located in Europe, America, and Asia ship all products, regardless of origin or destination, to logistics centers in Spain for further distribution to stores worldwide. Two

logistics centers in Spain manage all merchandise for the Womens and Mens line, while a single separate center managed the entire childrens line. Close proximity to suppliers with short lead times allow Zara to deliver new fashions quickly. This is important for its high fashion line with unpredictable demand. Suppliers with longer lead times manufacture the basic products since forecast is more predictable and costs are lower. Stores in Europe receive their deliveries within 24 hours while their counterparts in Asia and Americas expect their orders within 40

hours; however, deliveries almost never match the order due to limited inventory in logistic centers.

Problem context
Although the company is very successful, it does have some opportunities for improvement.

As explained before Zara is known for is fast delivery of highly fashionable clothes.

Its

competition has about a six month window from production to storefront; Zara does the same in less than three weeks. This allows them to produce around 11,000 items in a season compared to 2,000 4,000 by its competitors. Faster moving items are produced utilizing nearby suppliers with short lead times and shipped all over the world by air. This method of transportation represents about one percent of an items selling price. Slower moving basic items use cheaper suppliers with longer lead times and cheaper methods of transportation. Regardless of final destination, all products move through a logistics center in Spain before being shipped to its final store destination. This means that if an item is produced in Asia and is also needed by a store in Asia, that item will be transported to Spain first and then back by air to Asia. Zara manufactures 49% of its own products and this number is growing. By owning its own production Zara can be flexible with variety, amount, how often and the various styles they produce. Another key component to Zaras manufacturing is that much of it is done through season. Most traditional retailers manufacture products just several times a year. Since Zara is constantly producing new and updated designs they are in affect purposely creating a rapid product turnover. This in turn produces a climate of scarcity in Zara stores in which the consumer feel they are getting a piece of clothing that is not only fashionable but one in which they know they will not run into anybody wearing the same outfit they just bought. The climate also ensures consumers visit the stores to buy products again and again. In addition, Zaras scarcity climate allows the company to sell more items at full price. Zaras managers and sales associates play a large role in communicating sales information, store trends and product cycles to the designers and managers in the corporate office. This practice has allowed the company to consistently meet customer demand with fashionable and trendy products. Zara has no IT system to help them with store-inventory data. Instead section

managers knew the inventory of their stores through spending time on the selling floor. Although every store receives inventory relatively quickly, they never received exactly what they ordered. It will be really challenging to calculate the precise amount of lost sales due to unavailability of items at logistic centers for orders that were not fulfilled. Fashionable and new products forecasts have more variability than basic items especially when they become really successful. Hence, it seems that the suppliers for non-basic items, located in Europe, are not reacting fast enough to changes in demand immediately perceived by stores. Zara has an amazingly successful business model that is different from any traditional retailer. However, Zaras disadvantages are also different from a traditional retailer. Zara recently consolidated transportation across the different brands. With all of the products being delivered through just one of two distribution centers in Spain, Zara is captive to any disruptions in that region. This leaves them no way to circumvent any unforeseen issues that could disrupt the flow of products to its stores. This also means that Zaras supply chain cost is tied to the Euro and this leaves them extremely susceptible to any financial vulnerabilities that are created as the Euro strengthens or weakens Additionally, the logistics of the physical inventory receipt at the store proves to be an ongoing issue as well. Products are frequently shipped on the wrong hangers, plastic around each item, and the same item may show up in multiple boxes. This makes it an extremely time consuming task to unpack, group, and put merchandize out on display before customers arrive. Zara also has a policy that requires stores not to display items unless all sizes were available for display. If all sizes are not available, the entire line is put in the backroom until all sizes are available. With high fashion items moving fast, and deliveries being in accurate, a set of items could be stored in the backroom for quite some time, which could lead to lost sales for those items. It has become evident that most of the sales associates work was managing in store logistics as opposed to selling products. Inditex as a whole has the need to improve efficiencies throughout the organization. Although they have suffered less of an impact during the recession than its competitors, it has noticed its growth has slowed down.

Analysis and Recommendations

Americas. In addition, the Asian market showed an aggressive growth of 92% between 2006 and 2008, therefore trend and growth patterns indicate that markets outside of Europe will be larger in few years. As much as possible, supply has to meet variability of demand on time. A faster response when fulfilling orders for new and/or fashion sensitive will enable a reduction of lost revenue due to under stocked items. Taking into consideration the fast fashion concept and the fact that supply chain is linked to appropriate use of transportation, Zaras could make the following supply chain enhancements: y Open 2 distribution centers in Americas and Asia aiming to reduce the current air traffic and to add flexibility to delivery of items produced y Decentralize fashion sensitive items production to 2 suppliers in Asia and America allowing faster reaction to markets demand

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Conclusions

Figure 1

Figure 1: Zara s Vertical Supply Chain