Zara Operation Management

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       Tuesday, September 2, 2008 Zara operation management, A business case! 1- Executive Summary Operations management is in regard to all operations within the organization related activities including managing purchases, inventory control, quality control, storage and logistics. A great deal of focus is on efficiency and effectiveness of such processes. An example of successful operations management in retail sector is obvious in Zara business model which is elaborated and discussed here by a team of MBA Strathclyde students. From one shop in La Coruña, the Zara empire has expanded to more 50 countries. While other giants in the business squeeze their profit margins by manufacturing in bulk and lowering prices, Zara understood that most of the customers are willing to pay for clothes if they feel they are getting exclusive and fashionable clothes. The company can design, manufacture and get a piece of clothing on the shelves in almost two weeks. This rapid supply chain allows Zara's copies to be in their stores before designers even have them in theirs. In summary, Zara has closed the loop from manufacturing to customers¶ hands. They are obsessive about control. Mr. Ortega the CEO of the Inditex, the parent company of Zara, once said that the secret to retail success is to 'have five fingers touching the factory and five touching the customer'.

2 - Introduction Zara is the flagship brand of the Spanish retail group, Inditex SA, one of the super-heated performers in a soft retail market in recent years. The first Zara shop opened its doors in 1975 in La Coruña, GaliciaSpain, the city that saw the Group's early beginnings and which is now home of its central offices. Its stores can now be found in the most important shopping districts of more than 400 cities in Europe, the Americas, Asia and Africa. With year-on-year sales increasing at around 25% over the last 5 years, it has become one of the world¶s fastest growing retailers. As of late last year, Zara had 350 shops in Europe, 18 in the Middle East, 52 in the Americas and five in Asia. With roughly 40% of Inditex shops, Zara brings in about 80% of the group's revenue. (Zara founder makes a mint, 2001) As retailers like Marks & Spencer and Gap join retailers in reporting falling profits, what makes a Spanish retailer to announce profit and Growth and assume this post as forthcoming leader in the fashion retail industry? What Ortega, the founder of Inditex, saw that others didn¶t see? What is Zara Business Model? What is Zara strategy? What are the factors behind the success of Zara? How scalable its model is? What are the challenges? How Zara would cope with the challenging environment of fashion retail business faced nowadays by the leaders in this industry? Amancio Oretga thought that customer would regard clothes as perishable commodity ± no different from yogurt or bread- to be consumed rather than stored in closets, and has gone about building a retail business that provides ³freshly baked clothes ³. By Focusing on apparel as product for consumption Zara compete on speed. This business is all about reducing response time. In fashion stock is like food it goes bad quickly. So, Zara concentrates on three winning formulas: Offering fashionable variety with limited supply at affordable price (cost) with a quick

response to market.(Devangshu Dutta 2002) 3- Zara Vertical integrated Supply Chain An efficient supply chain is becoming more and more key success factor for companies. Henry Ford assembly line was the event of mass industrial production. Is supply chain management the new differentiation for companies? According to McMillan and Mullen (Operations Management Vol-2, 2002), ³the purpose of SCM is to integrate all tasks associated with the bi-directional flow of materials, information and finance into organized, coherent, managed processes in order to provide end-to-end management and control.´

To analyze ZARA supply chain, it is interesting to look closely at the product design, inventory management, evaluation of suppliers and vendors, logistics management, material management, time scheduling, information systems which are the main contributors in allowing Zara to offer cutting edge fashion at affordable prices. It is also interesting to consider other key performance indicators of Zara comparing to other peers in the retail market. 3.1- Design and Production ZARA has been able to deliver fashionable and trendy cloth addressing all tastes through a controlled design and integrated process. ZARA designs all its products itself. Concurrent method design could be an adjective to the of product design process which involve the whole commercial team , designers, market specialist, procurement team as well as continuous feedback from store managers. Young Designers (26 average) draw the design sketches then discuss it with market specials and planning & procurement staff. Designs inspiration is copied from different sources (trade fairs, catwalks, magazines) from all around the world. It is worth to mention that out of 40,000 designs only 10,000 are approved. This illustrates the flexibility of ideas generation and on the other hand the huge number of designs reflects the ability to meet almost all the fashion requirements by customers of all ages (up to 55). ZARA business is organized around processes not functions, to close the information loop. All team is involved in all processes. This method minimizes the time as decision is conducted in one room, and in direct proximity to the information. As a result, Zara reduces the inherent uncertainty associated with new designs in this industry that is characterized by long lead times and very high variability of demand e.g M&S could need a whole season to get a new item to stock 3.2- Procurement ZARA manufactures 60% of its products. By owning its in-house production ZARA is able to be flexible in the amount, frequency, and variety of new styled products. ZARA has outsourced less manufacturing than its peers. It has 22 factories and runs many of them often only in one shift leaving extra capacity to respond quickly to seasonality and unforeseen demand. Comparing to

peers which rely heavily on overseas suppliers/manufactures which don¶t provide same flexibility as these suppliers could request orders to be placed few months in advance. Zara is outsourcing all the labour intensive tasks mainly the sewing, while the cutting is done inhouse. This produces of saving labour cost, flexibility of meeting deadlines, keeping the designs/fashions strictly controlled.

Labeled and priced goods are immediately hanged upon arrival-Zara Burjuman, Dubai, July 2005

3.3- Information Systems Information systems at Zara are one of the drivers of the quick response communication strategy at Zara. - Zara stores managers carry handheld Casio computers to send online information to headquarters like selling trends, customers comments, or placing orders. - Designers send their design suggestions to factory and to distribution department by scanning a design into a computer and electronically transmit to factory computers including computers controlled cutting equipment. - Designers input the designs patterns into CAD systems which automatically feed into the cutting machines in the factories ensuring the required quality of outputs and having a minimum fabrics waste. (J. Hammond, April 2001) 3.4- Inventory Management Zara¶s parent company, Inditex, had the lowest inventory, as a percentage of annual sales, compared with its nearest global competitors, such as Gap, Benetton, and H&M (based on 20002001 figures, Kasra Ferdows) ZARA avoids building inventories in any part of its supply chain from raw materials to end user. Notably, Zara designs around 10,000 new models every year and replenishes ranges within every one of its 650 retail stores twice per week, but in strictly limited quantities of stock. This ensures Zara¶s brand promise to customers of exclusivity, and also of design freshness. But it also avoids build-up of large quantities of unpopular stock. 3.5- Centralized Logistics and Distribution Zara controls and optimizes across different steps of the supply chain, not within them, even though it may increase costs at some steps, ³Zara sticks to a deep, predictable and fast rhythm, based around order fulfillment to stores.´ says Professor Ferdows.

There are two orders per week from each store on specific days and hours, with shipments in La Coruna usually prepared overnight. Trucks leave at specific times (like a bus schedule) and shipments arrive in stores at specific times. Garments (even those shipped by air), are pre-hung, already labeled and priced. ³As a result of this clearly defined rhythm, not only every stage of the supply chain ± from design to procurement, production, distribution, and retail ± know their activities, but even the regular customers know to visit stores more often on shipment days for the fresh designs. This large and high-tech facility also has extra capacity on hand to enable Zara to react to weekly and monthly demand fluctuations. For example, it operates typically 4.5 days per week, around the clock on full capacity, and extra shifts and temporary personnel are added when needed. It is interesting to know that ZARA can get the product from the sketch to the store in 2 weeks time, where the industry standard is 6 months, the design and production process is very efficient and harmonized due to the use of the different methods that suites their line of business and set new model to look for. See chart below. In addition to the analysis of the supply chain, it is important to look at other competitive advantages of Zara such as people and marketing strategy. 3.6- People at ZARA People at ZARA are one of the components behind the unique efficient and quick response system. People are highly motivated which reflects ZARA HR policy. As per the Store manager (Hassan) at ZARA, Burjuman, ZARA hires young people, provides training and fair incentive schemes which result in high and effective communication. The employee that we met first at Burjuman showed a cooperation and help in a friendly manner. People at ZARA also sell and market the name and represent the fashion. The store manager we met at ZARA was dressed in a fashionable way. ³We sell fashion´, he says. People plays a vital role in Zara business model whether designers, buyers, logistics and sales staff. For example the store manager is a key player of the decision to make a specific model. 3.7- Low marketing / advertising cost Fashion retailers spend on average 3.5% of revenue on advertising their products, while Zara's parent company Inditex spends just 0-0.3%. Zara depends on word of mouth. ³In fact, this is the way I personally knew about Zara- ³from a friend of mine´, says Mariam. ZARA relies on its stores to project its image. ³We have three coordinators whose main task is to change the layout of the shop every week. An item that you see it today at the right side of the shop next week (if not sold yet) will be displayed at some other side in some other way´, Says Adel Hassan (Store Manager- ZARA, Burjuman). 4- Integration between Business strategy and operations Zara strategy is growth through diversification with both horizontal and vertical integration. Zara copies fashion by adapting couture designs. It manufactures, distributes, and retails clothes

within 2 weeks of the original design appearing on catwalks. It owns the entire value added chain and competes on the basis of speed to market, having invented the concept ³fast fashion´. Finally it is important to highlight the smooth integration between Zara business strategy and it is operation strategy. - Zara operations are in line with the strategy. - Zara manufacturing and distributions systems enable delivery from concept to store within 14 days. - Ownership and control of manufacturing facilities in Spain allows for quick response. - Ownership of high tech distribution systems allow for very fast delivery from factory to stores all over Europe. - Zara¶s use of sales staff for market research purposes allows quick response to customer preferences and local differences. 5- Financial performance Indicators It is very important to highlight the result of the efficient operation strategy has resulted in an excellent financial status. Inditex, ZARA parents¶ company has outperformed most of its peers; this edge on financial performance has given ZARA prospects for future sustainable growth. Turnover Growth: Average 25% for the last five years. Operating Profit: Average 15% - higher then H&M, Benetton, Working Capital: Is one of the lowest (20 m Euro compared to H&M 1035 m Euro ± the net operating revenue are comparable) since Inditex is capable of turning capital quicker and have higher assets. Cost: Inditex cost is low. Operating cost, cost of goods, inventory, marketing cost, employee/ store are examples of an effective and controlled cost management. 6- Customer survey @ Zara Dubai The Zara survey is an attempt to reflect the specific segment of Zara customers and their level of satisfaction, accessibility and usage as a comparative tool to what the company¶s claim on the statements such as ³we are selling fashion and not clothes´. By that, a questionnaire designed and tested on 20 subjects of which 14 were female and 6 male. The average age was 27. All the interviewed subjects were selected among those who were familiar with the brand and purchased at least one item from Zara during the last six months as inclusion criteria. The main objective of such data collection was to get the brand feedback and reputation. Also the subjects were always allowed to select more than one box in the questionnaire. For example one might be interested to purchase all Shirts, T-Shirts and Trousers from Zara and so on. Some major points in the interview then analyzed and visualized as follows:

Question: What do you like in Zara? Question: Have you ever visited the Zara¶s website?

Question: How do you evaluate the quality of the clothes in Zara? The quality seems to be acceptable- low to medium. But it requires further investigations. 7- Key Success Factors behind Zara 7.1- Fashion and Variety ZARA main competency is selling Fashion and Trendy cloth with high range of variety. Zara designers are on a constant lookout for new ideas to keep the product line fresh. Zara introduces 11000 new garments in a typical year. Many lines will only be available for a matter of weeks before being replaced. As per Adel Hassan (Store Manager at Zara- UAE, Burjuman center), ³We do sell fashion. We ask our customers what they want, and then we give it to them.´ 7.2- Affordability ³I can get a fashionable outfit at ZARA at a price which is half the price of a similar design and fabrics at any branded shop in Dubai´, Daad Jumblat says. ZARA prices are affordable for people of different income class. 7.3 - Speed and responsiveness to Market ZARA is geared around speed and responsiveness providing fresh baked products. Store managers communicate customer feedback on what shoppers like, what they don¶t like and what they¶re looking for. That data is instantly funneled back to ZARA¶s designers who begin sketching on the spot. The responsiveness effects the customer behavior as it plays role in pushing the customer to buy quickly and have higher visits frequency as new models arrive very frequent. (The Secret to Zara¶s success, Store Magazine, Fall/Winter 2004) 8- Zara Challenges ZARA has unique model which differentiates them from competition and made them very sustainable. In order to maintain the growth and enter new markets ZARA may capitalize on the success factors and needs to face some challenges. To point out the weaknesses of ZARA it is important to remind the main strengths analyzed above Zara Strengths: - Vertically Integrated Supply Chain - Quick Response System - IT integration - Synergy between Business and Operation Strategy - Efficient Distribution Facility - Low advertising Cost - Global Reach

Although ZARA has a successful business model it also has some weaknesses which could limit its scalability and ambitious growth. - Inditex over dependence on ZARA ZARA constitutes around 80% of Inditex business ( 8 companies) which means a failure in ZARA can put the whole group at a risk. - American Consumer Taste American consumer view of ZARA differs from the European one who view ZARA as fashionable house. If ZARA needs to grow in American market it needs to address specifically the American needs and perception of fashion - American Supply Chain ZARA supply chain in Europe proved to be extremely efficient. However , ZARA has not built a distribution strategy in America which is a constraint to the selling ability in US. - Vertical Integration Limitation Vertical Integration is a main advantage in ZARA business model. Still it might have some limitations as it might lead to the inability to use economies of scale. ZARA can not have the advantage of discount rate for higher order quantity. New product production might implicate higher R&D cost, higher cost due to change in production techniques, higher training cost for new techniques,«While a traditional retailer who relies on outsourcing wont experience increase in cost in such areas. - Increase in Euro Rate An increase in Euro rate will increase the consumer selling price in US dollar based economies, consequently Zara will loose price advantage against relative competitors outsourcing in US dollar based economies. - ZARA extensive shops strategy ZARA intend to over open shops in some areas where the draw back could be that shops competes to have the same market especially if they have no product differentiation. It worth to add that ZARA choose high class expensive locations and large space - Main Competition potential 1) H&M (Hennes and Mauritz) could be the closet potential competitor of ZARA as H&M is financially very strong, very fashionable, has strong distribution network and has Global reach, more appealing to international taste. However, H&M offers cheaper rates, spends more on

advertising, and might take advantage of economy of scale. 2) Another threat a copycat of ZARA model located in ASIA (India or China) which have a substantial lower operating cost. ZARA intend to over open shops in some areas where the draw back could be that Shops competes against the same $ especially if they don¶t have product differentiation. - Multiple Scenario analysis It would be also a good way to look at Zara Future, by drafting different scenario of the future and be aware of all alternative choices. In view of above challenges is ZARA model scalable? How can ZARA sustain its growth? How ZARA can enter new markets starting from where ZARA today is?

9- Recommendation: - Distribution center for America To seek and develop new opportunities in the Americas ZARA most likely should develop a second central distribution center as an expansion of their smaller distribution center in Latin America - Ecommerce Internet retailing is growing, in the states consumers like to have the comfort of shopping from their own homes at any time. If ZARA wants to expand and compete in the US market it is inevitable for them to develop their internet selling strategy noting that e-selling would increase the sale time to 24/24 , 7/7. Since ZARA product cycle is of the most dynamic the ability of the consumer to be able to see the new line of ZARA products online is definitely an added value for ZARA. - Differentiation between local stores To motivate customer visit more stores and as a strategy to create traffic ZARA should differentiate its stores by offering different product lines in different shops.

In conclusion, Zara has the potential for sustainable growth due to its competitive advantage and its ability to face the challenges of the apparel industry. The company keeps its operating income elevated, has a strong and unique business model, and has various opportunities or expansion in the retail industry. To many Europeans, Zara is a familiar face with consistently trendy, well-priced new apparel every week. To Americans, it is a company that is just getting its feet wet in the American market. Though, the Inditex branch is researching and developing new methods for expansion, the company must continue to re-invent and innovate themselves in order to stay fresh in the apparel industry. Today, many companies are looking to Zara as the new industry standard for how to run a retail business, which shows that Zara¶s business model is becoming the wave of the future. 10- Conclusion

Zara, the fashion follower has become the leader in the fashion retail industry due to strategic model and operations. Having a unique model and the experience in the industry, ZARA should be able to sustain the growth if it capitalizes on the strengths, take advantage of the opportunities, and face the challenges. Zara model succeeded in Europe and it may succeed in other markets if it keeps on offering the fresh apparel at right time and at a competitive price. Ê