Case 10
Zara
Global Supply Chain Keeping Ahead of Competition
Zara is a clothing brand of garments for men, women and children. The brand is present in 77 countries and has a network of 1, 608 shops (in 2009). Zara relies on its creative team of more than 200 professionals.
Zara gives high importance to the customer. Each employee pays attention to the customer's desire and tries to answer it as soon as possible. Also, the brand is able to adapt the product to the demand in a very short time compared to competition. A specific system enables this flexibility, that is, the vertical integration. The Spanish brand controls all the steps of the fashion process: design, manufacture, logistics and distribution to its owns shops, which are also managed by the firm. Concerning the design, the Zara flexibility system allows adapting the offer to the demand rapidly. Over 200 designers are able to provide new models for each season based on information received from the shops. On an average, they design more than 40, 000 products each year of which 10, 000 are produced. That is why the designers’ teams are constantly working on both current (updating of the old designs) and future collections. The designing process is very unique. Designers draw out a new product by hand and then talk about it with their colleagues (others designers, market specialists, planning and procurement people). It helps to have a global view of the product and to get a feedback of it. Then this product is drawn with a software, which allows making some changes and adjustments, to adapt materials and colours. Some samples are then made and shown in the office so that everyone can give suggestions and the problems can be noticed.
Each market specialist deals with a specific area of stores and should establish a personal relationship with store managers because they are constantly in touch with them to discuss new trend and orders. The final decisions on the products and new designs are taken by the group of designers, market specialists and buyers. Finally, the buyers are in charge of the total order fulfilment process which covers planning procurement, production requirements, monitored warehouses inventories, allocated production to different factories and third-party suppliers and track of shortages and oversupplies. The major part of the production (50 per cent of its products) is made in the network of 22 Spanish factories. They manufacture the most creative garments. The other half part is procured from 400 suppliers (in Europe and Asia). The group takes care of the fabric supply, marking and cutting and the garment's finishing.
Logistics is a key element in Zara strategy. The distribution of the production to a logistical centre is made according to the origin. Each store receives the products twice a week that allows providing new models to customers. Zara has four distribution centres in Spain: Arteixo (La Coruna), Onzonilla (Leon), Meco (Madrid) and Zaragoza.
Each product passes through the major distribution centre located in La Coruna, which employed 1, 200 people. The own team designed the logistic software, which enables to deliver a product with a delay of 24 hours in Europe and a maximum of 48 hours in America or Asia. Each order of a store is packed in one box and is ready 8 hours after the order receipt. For Zara, distance is measured not in kilometres, but in time.
At Zara 3, 00, 000 SKU's are made available in the market every year. Eighty per cent of the production is fashion garments, while the rest are more basic products. The major part of the transportation in Europe is made by trucks. International transportation is made by plane from La Coruna airport or Santiago airport.
The retailing is a key process in Zara. The stores have to place orders at a specific time; for example in Spain and in Southern Europe it is done on Wednesdays before 3 pm; in the rest of the world on Tuesdays by 3 pm and Fridays by 6 pm. If they miss their deadlines they have to wait for the next week. In fact, Zara keeps this strategy in order to minimize the risks of oversupply by retaining a low production volume at the beginning of the season and then during the season, reacts quickly to order. Concerning the pre-season inventory commitment, Zara keeps the level of production and procurement (in July for fall/winter season) between 15 per cent and 20 per cent, while in the industry it is around 45–60 per cent. And similarly, the in-season commitment at Zara is 40–50 per cent and in the industry it is a maximum of 20 per cent.
Zara's strategy in the supply chain is to work with relevant and precise information and forecast in order to react rapidly. The point of sale is also an important place for Zara, because it allows giving a feedback to the designers and to have some information on the trends asked by the customers. Zara does not have a lot of return of clothes from the client. Everything is done to make customers comfortable within the store to enable a link between the garments and the clients. The design and the organization of the store are changed every 4 years to be more creative and innovative.
Managers decide of the location of the garments inside the store in order to sell some products in priority. Zara uses stores and word-of-mouth to do the advertisement of the brand (only 0.3 per cent of the sales turnover is allocated on advertising). Concerning prices, this decision is taken by the head office which decides for prices applied in all the stores. Zara is one the garment supply chain wherein they have a low level of inventory as compared to its competitors. This means that the store's entire stock is on display. The stores have a benefit of rapid replenishment of new garments from the factories. This has a positive effect on the sales because it influences the customer to buy the product on the spot.
Zara tries to work by using a vertical supply chain. This is an uncommon strategy in the fashion industry. Vertically integrated business undertakes a variety of activities from designing, manufacturing, sourcing and distributing to retail stores around the world. When a company works with a vertically integrated system, it has a control over its business activities When its competitors outsource, Zara favours local production. The brand, therefore, controls its entire production chain (design, production, logistics and sales) with the aim to increase flexibility and responsiveness. Eighty per cent of products are manufactured in Europe, 50 per cent in the 14 factories. The rest of the manufacturing is outsourced from cooperatives or plants located nearby. Zara is implementing an integrated production strategy, that is, dyeing and printing of manufactured parts are held in the factories of the brand at the last moment, according to fashion and demand (personalization). This is also called postponement strategy.
The heart of Zaras SC strategy is the logistics centre of Corunna. Every year, more than 120 million units are shipped from this warehouse. Quality control, ironing, packing and labelling items is done here. At HO, a team of 120 designers works on 11, 000 models per year. Marketing actions are done via a team located in La Coruna and connected to the team of stylists. The communication aspect is very less; it represents 0.35 per cent of net sales of Zara, against 3–4 per cent on average for large retail clothing. Thus, the brand does not work on advertising and does not provide services for online sales.
Zara has established a direct communication system between all business functions through a fully automated information system. This communication allows real time information from all the stores on sales figures and customer feedback. The production is managed by the La Coruna centre and is directly related to the creation and a quick delivery of products between stores and the creation of models to meet customer requirements.
The supply chain of Zara is pervasive and directly linked to the creation of value. The brand continues to distinguish itself from its competitors by identifying emerging trends in the world of fashion, and making available quickly the new models at an affordable price. The whole culture of organization and information system of the company is geared towards this goal. Daily needs of production and allocation between stores and promotions are well adjusted, while the design team adapts models (colours, details trends) based on sales.
Real-time information coupled with innovative supply chain strategies is key to Zara's global supply chain which transformed Zara into a major international fashion company with the brand known world over. The strategy developed by Zara is to renew the shelves of shops every 15 days. For this, the company controls the entire supply chain. The organization of Zara is highly centralized at the Headquarter of La Coruna, with a minimum of functions distributed in each country, where the brand is present. Zara's business model also relies on a strong vertical integration from production to distribution, through to logistics and marketing. The entire value chain is controlled in order to control costs and increase responsiveness.
REVIEW QUESTIONS
- Map Zara's supply chain and explain how it is helping Zara to create value for its customers.
- Discuss the various practices in Zara's supply chain.
- What are the differentiating factors in Zara's supply chain?