Zara is a chain of fashion stores owned by Inditex, Spain's largest apparel manufacturer and retailer.
In
2004, Inditex reported sales of 13 billion euros from more than 2,200 retail outlets in 56 countries. The
company opened a new store for each day in 2004. In an industry in which customer demand is fickle,
Zara has grown rapidly with a strategy to be highly responsive to changing trends with affordable prices.
Whereas design-to-sales cycle times in the apparel industry have traditionally averaged more than six
months, Zara has achieved cycle times of five to six weeks. This speed allows Zara to introduce new
designs every week and to change 75 percent of its merchandise display every three to four weeks. Thus,
Zara's products on display match customer preferences much more closely than the competition. The
result is that Zara sells most of its products at full price and has about half the markdowns in its stores
compared to the competition.
Zara manufactures its apparel using a combination of flexible and quick sources in Europe (mostly
Portugal and Spain) and low-cost sources in Asia. This contrasts with most apparel manufacturers, who
have moved most of their manufacturing to Asia.
About 40 percent of the manufacturing capacity is owned by Inditex, with the rest outsourced. Products
with highly uncertain demand are sourced out of Europe, whereas products that are more predictable are
sourced from its Asian locations. More than 40 percent of its finished-goods purchases and most of its in-
house production occur after the sales season starts. This compares with less than 20 percent production
after the start of a sales season for a typical retailer. This responsiveness and the postponement of
decisions until after trends are known allow Zara to reduce inventories and forecast error. Zara has also
invested heavily in information technology to ensure that the latest sales data are available to drive
replenishment and production decisions.
Until 2002, Zara centralized all its European distribution and some of its global distribution through a
single distribution center (DC) in Spain. It also had some smaller satellite DCs in Latin American
countries. Shipments from the DCs to stores were made twice a week. This allowed store inventory to
closely match customer demand. As Zara has grown, it has built another distribution center in Spain.
The following questions raise supply chain issues that are central to Zara's strategy and success:
i. What advantage does Zara gain against the competition by having a very responsive supply chain?
Answer:
Zara’s value chain is one of a kind comparing to competitors, despite the variability in clothing
trends, fashion tycoon is adaptable in reacting to the preference of customers. The secret of
Zara’s responsive strategy revolves around “real-time demand tracking”, “fast production cycle”
& “effective distribution system”, this strategy permits company to understand buyer needs and
demands, introduce new designs within amazingly lower lead times and to deliver across all
stores twice a week, which is unprecedented in apparel industry.
Products are shelf more frequently in stores with more choices of new designs attract costumers
most and creates more value for them in contrast with the competitors who usually take six
months to introduce new designs. Zara encourages costumers to visit stores more frequently
with the idea of scarce production of new designs, this builds customer satisfaction and brand
loyalty. Zara changes 75% display in its stores almost every 3-4 weeks and sells most of its
products at full prices which results in less inventories and high profits margins.
Fast fashion design Match demand Low inventories High profit margins
ii. Why has Inditex chosen to have both in-house manufacturing and outsourced manufacturing? Why has
Inditex maintained manufacturing capacity in Europe even though manufacturing in Asia is much
cheaper?
Answer:
Inditex prefers speed and responsiveness over cost, hence maintained manufacturing capacity in Europe
even though manufacturing cost is cheaper in Asia. In-house production accounts for 40% which is mainly
to produce products with highly uncertain demand, allows company to be able to respond quickly to the
changing trend and helps postponement of decision until after trends. A robust information system helps
them make quick product decisions and drive replenishment. Outsourced model is usually utilized to cater
the demand which is mostly predictable and for the general, common and out season products. In-house
factories are located near distribution center in areas of Spain which have relatively cheap labor resulting
in cost saving of labor & product delivery cost. Manufacturing capacity in Europe helps manufacturers
offer fast and flexible sourcing and such products are to be delivered quick instead of at Asia which helps
Inditex reduce inventories and improve forecasting.
In-house factories – uncertain demand fast response time brand image
Outsources factories (Asia) – predictable demand more time to produce and deliver more profit
iii. Why does Zara source products with uncertain demand from local manufacturers and products with
predictable demand from Asian manufacturers?
Answer:
The manufacturing strategy at Zara is that it sources products with variable/uncertain demand from local
manufacturers because local manufacturers can quickly supply products to the need of each store in
Europe. This helps responding to the changing needs and to improve customer satisfactions & loyalty.
One more reason for Zara to produce goods in Europe because it provides opportunity to test the demand
for new innovative design before making it available to worldwide market. On the contrary, products with
predicable demand are sourced from Asia manufacturers because these products have certain demand
with the large volume of production which is an opportunity to have greater profit margin and that is in
60% of its overall manufacturing, such predictable products have a larger window to deliver products
without becoming obsolete.
In-house – Uncertain demands Low Volume Quick response time
Outsource – Predictable demand High Volume Cheap manufacturing cost