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© INSEAD
Dynamic Supply Chain Design
The ZARA Case Study
Prof. Ludo Van der HeydenINSEAD
Industry Forum ConferenceLondon - Oct 18th, 2001
© INSEAD
Leveraging Business Process Design: ZARA
Waste & the impossibility of perfect forecastsZARA business conceptZARA customer experienceZARA process life cyclePerformance ??? (nobody knows exactly …)Contrast with GAP & DELL business modelsZARA positioning: Product/Process matrixIndustrialisation – step 2: introducing flexibilityRedefining the diagonal & classic trade-offsLink with the S-curve: disruptive techn change
© INSEAD
Why is profitability in textile so low, when margins are so high?
Excess stock:Value loss due to discount saleswhen actual demand is lowerthan expected
Excess demand:Value loss due to unrealised sales
when actual demand is higher
than expected
Perfect forecast:Does not exist
in real life!
Actual Demand
ExpectedDemand
© INSEAD
Classic textile Business Process:12 month lead time
DesignPurchase Raw Mat Mfg Dist Sell Discount
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Classic textile Design Process:
Creative
Design
Preliminary
Designs
FinalProductDesign
© INSEAD
Zara Business Concept“Integrated” fashion delivery:
Fashion at low cost
Get it approximately right Eliminate creative designDefine a fast-response
process incl design Finalise design knowing
material supply constraintOptimise the processManage follow-up (next
batch) and customer flows
Low cost Fashion
Store experienceCopy fashion Involve the
customers and his group/cohortCreate a
network/brand
© INSEAD
Zara Customer Experience
“Fresh/Fast” “Quality” Cost
Raw material: mediumKnit: poor
Look: grand!Customer satisfaction:
fashion at low price!
Fast copying Of leading styles
Fast delivery in own stores
Limited editions
Low monetary cost
Low time cost: “the Zara experience”
Flexibility
Limited customer variety:only what is on display –
and in limited choicesBut every customer is participating
in the process: helps determine the next batch
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Step 2: Simplify« hits » &
produce library of designs
Step 1: Scan fashionshows
Purchase Raw Mat
Step 3: Final Design
of nextbatch
Mfg
Shopping experience
Dist
ZARA Business Process:5 day lead time!!!
Step 3: Designers « pull » next RM batch
Step 2: Shoppers (and store mgers) « pull » next design
(shape) & designers « adapt »
© INSEAD
Why is profitability at Zara so high, when margins are so low?
Excess stock and unmet demand are avoided by stopping production when market saturates
Zara as a “Lean
Enterprise”
Actual Demand
ExpectedDemandSmall
batches
© INSEAD
Simplify & design new
product offer
Step 1: Dell scans market & current offer
Sell Pick Comps
« Mfg »
(Assembly)Dist
CompsSupply
Comparing with Dell Business Supply Chain: 2 day lead time!
Step 3: Customers« pull » RM resupply
CustomersSelectStep 2: Customers
« pull » product & supply chain adapts
© INSEAD
ZARA positioning:Industrialisation–Step 1: standardiz!
Process
ProductHigh
standardisationHigh
customisationSome
customisation
Mass merchants(Carrefour)
Brand Retailers (M&S)
High fashion(Chanel)
Manualshop
Batch flow
Continous Lineflow
© INSEAD
ZARA positioning:Industrialisation–Step 2: add customisation!
Process
ProductHigh
standardisationHigh
customisationSome
customisation
Mass merchants
M&SZARA
High fashion(Dior,
Chanel, …)
Manualshop
Batch flow
Rigid Lineflow
© INSEAD
Industrialisation: Step 2 –Strategic value gained from positioning
Process
Product High customisationLow volumeHigh unit marginHigh quality
High standardisationHigh volume
Low unit marginLow quality
M&S:Out of Fashion!
ZARA
High fashion:Out of price!Flexible
Process
Rigid Process
© INSEAD
ZARA: Industrial Process Life Cycle
Phase 1: Result of many years of experienceLEARNING and PROBING with an innovative formula
Phase 2: DEFINING the Zara process &IMPROVING process performance
Phase 3: Process improvement becomes moredifficult & LIMITS TO IMPROVEMENT APPEAR
Phase 4: Innovation then continues at theINTERFACES (shopping experience, internet, …)
Phase 5: Process eventually OVERTAKEN (but when?)
© INSEAD
Disruptive technological change 1: setup
Time
Performance:M&S quality(RM, cut, fit, variety … )
ZARA quality: as perceived by
M&S or « 50+ » ?
« 16/24 » ?
© INSEAD
Disruptive technological change 2: disruptionPerformance:ZARA quality (« freshness »)
M&S
ZARA
M&S is overtakenby a technology they consider « inferior » to
theirs!!!
Time
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Industrialisation–Step 2:redefinition of classic industry trade-offs
Process
Product High
customisationMedium
customisationLow
customisation
Manualshop
Mass merchants
M&SZARA
Chanel
???
Batch flow
Line Rigidflow
© INSEAD
Auto Industry Evolution:in the beginning …
Process
ProductHigh custom
High unit marginLow volume
Low customLow unit margin
High volume
All mfgers at the beginning
1
Flexible shop
Line Rigidflow
© INSEAD
Auto Industry Evolution:process & customisation!!!
Process
ProductHigh custom
High unit marginLow volume
Low customLow unit margin
High volume
Ford Model TBaton Rouge
plant 2
All mfgers at the beginning
1
Flexibleshop
Line Rigidflow
© INSEAD
Auto Industry Evolution:process & customisation!!!
Process
ProductHigh custom
High unit marginLow volume
Low customLow unit margin
High volume
Ford Model TBaton Rouge
plant 2
GM Multi-brand
strategy 3
All mfgers at the beginning
1
Flexibleshop
Line Rigidflow
© INSEAD
Auto Industry Evolution:process & customisation!!!
Process
ProductHigh custom
High unit marginLow volume
Low customLow unit margin
High volume
Ford Model TBaton Rouge
plant 2
ToyotaJust-in-time
5
GM Multi-brand
strategy 3
All mfgers at the beginning
1
Flexibleshop
Line Rigidflow
© INSEAD
Auto Industry Evolution:the long road to mass customisation!!!Product
High customHigh unit margin
Low volume
Low customLow unit margin
High volumeProcess
Ford Model TBaton Rouge
plant 2
Toyota Just-in-time
5
Renault, Toyota, GM … « New dist »
6
GM Multi-brand
strategy 3
All mfgers at the beginning
1
Flexible shop
Line Rigidflow