August 20, 2010

Supply Chain Management of Zara

Executive Summary

Globalization has open doors of opportunities for firms to reach and explore new markets. Now

more than ever, supply chain management plays a key role for organizational success for those

that aim to expand their market reach around the globe. This paper discusses perhaps one of the

most excellent organizations when it comes to supply chain management. Zara is known around

the world as one of the most successful provider of fashion products. This paper presents a

description of supply chain management including its elements and components. The different

stages of Zara’s supply chain and their contributions to the overall efficiency and effectively of

Zara’s business model are discussed. Lastly, the paper discusses the different metrics that are

used by the firm in measuring supply chain performance.

Introduction

Zara is one of the most notable fashion stores in the world. Notable for its products and notable

for its excellent supply chain management. This paper discusses the supply chain management at

Zara, tackling the different areas of supply chain and their contribution to the company’s success.

Supply Chain Management

Supply chain refers to all the value adding operational activities involved with supplying to an

end user with a service or product (Lowson 2002).

A supply network is defined by Christopher (1992) as an interconnection of organizations which

relate to each other through upstream and downstream linkages between the different processes

and activities that produce value in the form of products and services to the ultimate consumer

(cited in Lowson 2002). Porter (1985) is among the earliest influences upon an integrated supply

network. According to Porter, the organization’s value chain is embedded within a value system

comprising suppliers and buyers. The linkages within this chain or system provided the building

blocks of competitive advantage. Conversely, supply chain management involves partnerships

that are developed between organizations performing adjacent, linear steps in the chain. The

supply chain is viewed as a whole rather than a set of fragmented parts in order that activities,

the basic units of competitive advantage, can be configured, confined and performed in different

ways to rival chains (Porter, 1996).

Supply chain or value chain management is composed of the operational or tactical activities and

can be defined as ‘managing the entire chain of raw material supply, manufacture, assembly and

distribution to the end consumer (Jones 1989 cited in Lowson 20002). Christopher (1998)

defines supply chain management as the management of upstream and downstream relationships

with the suppliers and customers to deliver superior consumers value at less cost to the supply

chain as a whole.

Components of the Supply Chain

The supply chain has four basic components:

o Production – Businesses focus on how much to produce, where to produce it and which

suppliers to use.

o Inventory – Businesses decide where to store their products and how much to store.

o Distribution – Businesses address questions about how their products should be moved

and stored.

o Payments – Businesses look for the bets ways to pay suppliers and get paid by customers.

Elements of the Supply Chain

o Structures - these are the organizational units within the supply chain that interact. They

include a company, its suppliers, its customers, distribution channels, design and

engineering centres, manufacturing and service centres.

o Processes - the operational activities that transform inputs into outputs. These can involve

demand and supply planning, forecasting, sourcing, purchasing, manufacturing and

service operations, logistics, order entry, materials management, and new product or

service development.

o Linkages - connecting process to structure via communication, usually in the form of

shared information and continuous communication (Lowson 2002).

Inditex

In 1963, Amancio Ortega started a small company in Spain that manufactured women’s pajamas

and lingerie products for garment wholesalers. In 1975, after a German customer cancelled a

sizable order, the firm opened its forts Zara retail shop. The original intent was simply to have an

outlet for cancelled orders but the experience taught the firm the importance of a marriage

between manufacturing and retailing – a lesson that guided the evolution of the company ever

since.

From a starting point of 6 stores in 1979, the company established retail operations in all the

major Spanish cities during the 1980’s. In 1988 the first overseas Zara store opened in Porto,

Portugal, followed shortly by New York City in 1989 and Paris in 1990. But the real ‘step-up’ in

foreign expansion took place during the 1990s when Inditex entered 29 countries in Europe, the

Americas and Asia (particularly during 1998 to 2001 when it entered 21 of these 29 countries).

In parallel with its overseas expansion, Inditex diversified its retail offering by adding and

acquiring new brands in order to target different customer segments. Each brand operates

independently, with its own stores, ordering system, warehousing and distribution system,

subcontractors, and organizational structure (Inditex 2006).

Zara is the largest Inditex division – accounting for more than 75 percent of total Inditex sales.

Zara at a Glance: Operations and Supply Chain Management

The first Zara clothing store opened in 1975 in Spain as a small retailer selling men’s and

women’s clothing. Since then Zara chains have grown into retailing giants with almost 1000

stores worldwide and an impressive sales record. The success of Zara is partly to do with the

appeal of its men’s and women’s and children’s fashions and accessories that display unique

style but at real world prices. But it is also partly as a result of their collaborative, digital

networks that link Zara with its suppliers and customers. These advances have enabled Zara to

deliver tailored products quickly and reliably, creating what the company terms a ‘value net’ for

all the firms in the supply network. This value net is a key part of the operations strategy,

allowing customer choices to be simultaneously transmitted to all supply partners who then

deliver components as need by other partners. The company at the center of the operations

strategy coordinates all activity, provides continual updates to all players, and captures

significant value for its efforts.

The particular operation strategy used by Zara helps it respond quickly to shifts in customer

demand and build a powerful brand. Zara estimate that it takes only two weeks to convert design

ideas into products on the shelf to satisfy its young, hip, clientele with fashion for the masses.

Store employees regularly tour urban hot spots looking for new trends and reporting back to

designers. Knowing what’s in today may be out next month is the secret of the success of the

Spanish retailer as is the ability to apply operations strategy that puts new fashion concepts on

the shelf twelve to fifteen days. As part of this strategy, capital-intensive steps are executed in

factories owned by Zara, while labor intensive operations are outsourced to small shops and

manufacturers with whom Zara have collaborative partnerships that include providing them with

the necessary technology and logistics capabilities. Customers seem to relish the results of this

high velocity operation and are often seen queuing outside stores on designated delivery days – a

phenomenon dubbed as ‘Zaramania’ (Lowson 2002).

Supply Chain at Zara

For Zara stores to be able to offer cutting edge fashion at affordable prices requires the firm to

exert a strong influence over almost the entire garment supply chain: design, purchasing,

production, distribution, and retailing.

Design and Order Administration

The design and order administration at Zara is very effective and efficient. The company ensure

product quality by designing its own products. Zara has almost 300 people working in its

headquarters in Spain. These talented people include designers, specialists and buyers. Together

they produce designs for approximately 40,000 items per year from which 10,000 are selected

for production. Unlike their industry peers, these teams work both on next season’s designs and,

simultaneously and continuously, also update the current season’s designs. Extensive feedback

from the store network also forms an integral part of the design process. Women’s, men’s and

children’s designers sit in different halls in a modern building attached to the Inditex

headquarters.

1. Designers – the supply chain starts with the designers. Based on information and inspirations

gathered from different resources such as trade fairs, fashion shows, magazines and more

importantly customer feedbacks, the designers draw out design sketches by hand and then

discuss them with colleagues – including market specialists, planning and procurement people.

This process helps to retain an overall ‘Zara Style’. The sketches are redrawn using a CAD

system where further changes and adjustments, for better matching of weaves, textures, and

colors are made. Before moving further through the process, it is necessary to determine whether

the design can be produced and sold at a profit. The next step is to make a sample, often

completed manually by skilled workers located in the small sample making shop in one corner

located in the small sample making shop in one corner of each hall. If there are any specific

questions or problems, they can just walk over to the designers and discuss and resolve them on

the spot.

2. Market Specialists – Each market specialist has responsibility for dealing with specific stores.

These market specialists have wide experience. The market specialists work in close contact with

store managers, especially by phone, discussing sales orders, new lines and other matters. Stores

rely heavily on discussions with Market Specialists before finalizing orders.

3. Buyers – Final decisions concerning what products to make, when, and in what volumes are

normally made collectively by the relevant groups of designers, market specialists, and buyers

and after the decision is taken, the buyers take charge of the total order fulfillment process. The

buyers are responsible in planning procurement and production requirements, monitoring

warehouse inventories, allocating production to various factories and third party suppliers and

keeping track of shortages and oversupplies.

Production

1. Suppliers – Zara manufacture approximately 50 percent of its products in its own network of

22 Spanish factories but use subcontractors for all sewing operations. These factories generally

work a single shift and are managed as independent profit centers. The other half of its products

are procured from 400 outside suppliers, 70 percent of which are in Europe and most of the rest

in Asia. Many of the European suppliers are based in Spain and Portugal, and Zara exploit this

geographical proximity in order to ensure quick response to Zara orders which is critical for

fashion products. From Asia, Zara procure “basic” products and those for which the region has a

clear cost or quality advantage. With its relatively large and stable base of orders, Zara is a

preferred customer for almost all its suppliers.

For its in-house production, Zara obtain 40 percent of its fabric supply from another Inditex-

owed subsidiary, Comditel (Zara account for almost 90 percent of their total sales). Over half of

these fabrics are purchased undyed to allow faster response to mid-season color changes. To

facilitate quick changes in printing and dyeing, Zara also work closely with Fibracolor, a

dyestuff producer part owned by INditex. The rest of the fabrics come from a range of 260 other

suppliers, none account for more than 4 percent of Zara’s total production in order to minimize

dependency on sungle suppliers and encourage maximum responsiveness form them.

2. Procurement and Production Planners – The make or buy decisions are made by the

procurement and production planners. The key criteria for making this decision are required

levels of speed and expertise, cost-effectiveness, and availability of sufficient capacity. If the

buyers cannot obtain desired prices, delivery terms, and quality from Zara factories, they are free

to look outside.

3. Subcontractors - After in-house CAD controlled piece cutting, Zara use subcontractors for all

sewing operations. The subcontractors themselves often collect the bagged cut pieces, together

with the appropriate components (like buttons and zippers) in small trucks. There are some 500

sewing subcontractors in very close proximity to La Coruña (in the Galicia region) and most

work exclusively for Zara. Zara closely monitor their operations to ensure quality, compliance

with labor laws, and above all else adherence to the production schedule. Subcontractors then

bring back the sewn items to the same factory, where each piece is inspected during ironing (by

machine and by hand). Finished products are then placed in plastic bags with proper labels and

then sent to the distribution center. A system of aerial monorails connects ten of the factories in

La Coruña to the distribution center. Completed products procured from outside suppliers are

also sent directly to the distribution center. Zara use a sampling methodology to control the

incoming quality.

Distribution

1. Distribution Center – all products pass through Zara’s major distribution center in La Coruña.

The 5-storey, 50,000 square meter distribution center employs some of the most sophisticated

and up-to-date automated systems. With a workforce of 1200, the distribution center normally

operates four days per week with the precise number of shifts depending on the volume of

products that have to be distributed. Orders for each store are packed into separate boxes and

racks (for hanging items) and are typically ready for shipment 8 hours after they have been

received.

2. Logistics (Contractors) – In 2001, the distribution center shipped 130 million pieces. 75

percent of these shipments were to stores in Europe. Fashion garments represent around 80

percent of Zara’s products and the rest are more basic items. Contractors using trucks bearing

Zara’s name pick up the merchandize at La Coruña and deliver it directly to Zara’s stores in

Europe. The trucks run to published schedules. Products shhiped by air are flown from either

airport in La La Coruña or the larger airport in Santiago. Typically, stores in Europe receive their

orders in 24 hours, the United Sates in 48 hours and Japan in 48 to 72 hours. Compared to

similar companies in the industry, shipments at Zara are almost flawless – 98.9 percent accurate

with less than 0.5% shrinkage.

Retailing

1. Store/Customer

Stores usually place their orders and receive shipments twice per week. Orders have to be placed

at pre-designated times.

The store plays an important role in the Inditex business model that ranges from production up to

end distribution. The overall experience of the customer in the store in considered. Apart form

the fashion supply, the interior design of the store, coordination of collections, maximum care

over window displays and customer care are some of the elements that guarantee this experience.

The stores where Zara concentrates the majority of its investment are the essence of the group’s

chains, for which reason the location in the main commercial areas of cities and care over

interior design take on vital importance for the company. The store is Zara’s main image vehicle.

Apart from its location, its window designs and interior design, customer care is one of the

elements that Inditex takes most care of: its relationship with consumers. Personnel receive

specifi c training on customer care as one of the main intangible values of the store. Inditex

establishments are thought out so that the encounter between the customer and fashion can take

place in a pleasant environment. Store personnel with supervisors as the main drivers of quality

of service, encourage freedom and comfort of the visitor by taking an active role in the shopping

process exclusively when the customer requests this (Inditex 2007).

Zara’s Supply Network

Zara can move from design to in-store availability in a matter of weeks as a result of closely

connected, highly synchronized arrangements with out-sourced suppliers.

Zara relies on a local supply network, which it largely owns and controls. That network can

design and replenish hot-selling fashion products in the stores within three weeks. Zara’s supply

network entails a near-vertically integrated company the owns retail, products design, dyeing,

and fabric cutting operations. Only sewing operations are outsourced (Korhonen and Hartiala

2006).

Zara use flexible arrangements with a wide supply base. Zara has achieved high levels of

customer responsiveness by working closely with specialist, often small, manufacturers. The

strategy at Zara is that only those operations which enhance cost efficiency through economies of

scale are conducted in-house (such as dyeing, cutting, labeling and packaging). All other

manufacturing activities, including the labor intensive finishing stages, are completed by

networks of more than 300 small subcontractors, each specializing in one particular part of the

production process or garment type. These subcontractors work exclusively for Zara’s parent,

Inditex. In return, theyr receive the necessary technological, financial and logistical support

required to achieve stringent time and quality targets. The system is flexible enough to cope with

sudden changes in demand (Christopher et al 2004).

Supply Chain Performance Measure

Order Lead Time

The total order cycle time, called order delivery cycle time, refers to the time elapsed in between

the receipt of customer order until the delivery of finished goods to the customer. The reduction

in order cycle time leads to reduction in supply chain response time, and as such is an important

performance measure and source of competitive advantage.

Zara produces clothes that resemble the latest couture creations, but they beta the designers to

market. Because they use less expensive fabrics, they can also provide the product at a lower

price. To achieve this type of competitive advantage, Zara controls most of its supply chain, by

managing all design, warehousing, distribution, and logistics functions.

Operational Level Measures

Operational level measures include ability in day to day technical representation, adherence to

developed schedule, ability to avoid complaints and achievement of defect free deliveries.

Zara design the organization, operational procedures, performance measures and even office

configurations to make information and product transfer easy. Because Zara’s merchandise is

produced in small quantities, provided on predictable schedules, and displayed in the stores for

only a short amount of time, customers visit Zara stores more frequently. This has an added

advantage of helping Zara avoid the cost of advertising.

Effectiveness of Scheduling Techniques

Scheduling refers to the time or date on which activities are to be undertaken. Such fixing

determines the manner in which resources will flow in an operating system, the effectiveness of

which has an important impact on production and thus supply chain performance.

The scheduling techniques of Zara is very efficient.

o Centrally Managed Inventory – controlled and timely delivery of clothing to all stores

across the world

o Reduced Design Cycle Time – timely response to items that sell well and ability to

quickly alter or enter new designs

o Strong IT System – allows almost immediate communication of sales and inventory

information across enterprise

o Logistics and Distribution – clothes move within hours to their destination, efficient

scheduling of shipments

Flexibility of Delivery Systems to Meet Particular Customer Needs

This refers to flexibility in meeting a particular customer delivery requirement at an agreed

place, agreed mode of delivery and with agreed upon customized packaging.

Conclusion

Zara is an example of how a firm can design and manage its supply chain to gain competitive

advantage. Zara is considered a retailing giant with almost 1000 stores worldwide. In order for

Zara to provide cutting edge fashion at affordable prices, the firm exerts a strong influence

almost the entire garment supply chain: design, purchasing, production, distribution, and

retailing.

The retailing success of Zara can be partly attributed to its excellent supply chain management.

Zara makes sure that each element of the supply chain network adds value to the entire

operation. Zara makes sure that it streamline its supply chain, removing steps that does not

contribute to the achievement of the company’s goals and developing those elements that add

value.

Recommendations

1. Total Quality Management

The idea of total quality management (TQM) emphasizes planning for quality, including

designing the product in such a way that consistent quality is more easily obtained and more

easily measured. The impetus for a company to devote significantly more resources to quality

through a TQM program comes from a trend that most companies are now experiencing – an

increased competitive pressure that leads to higher costs associated with poor quality. The

product must be designed in such a way that it can be produced consistently without losing sight

of the design aspects demanded by the customer. The production process must be designed with

quality in mind (Summers 1998).

2. Quick Response

Quick Response (QR), a program developed by textile and apparel manufacturers and retailers

around 1985 as a way to cope with problems challenging the apparel industry, uses a

combination of strategies to reduce inventory levels, improve merchandise quality, increase

worker productivity, increase stock turnover, and reduce merchandise markdowns and inventory

costs. Fundamentally, QR is a way to gather information about consumer preferences and to

reflect them in production decisions in a timely manner. To comply with consumers’ needs, QR

relies on sales data. Through computerized information systems, sales data are transmitted and

transformed as useful information that reveals consumers’ preferences and reactions, and

decisions are then made promptly to respond to what consumers want (Kang and Sullivan, 1999).

The QR strategy links all activity to real time demand. It is customized by the individual retailer

or manufacturer and is particularly suited to small and medium-sized firms. It is designed to be

context specific and to be contingent upon the setting. Quick Response as an operations strategy

is designed to overcome the impact of seasonality in operations.

References

Annual Report 2006, Inditex, viewed 17 September, 2008,

< http://www.inditex.com/en/shareholders_and_investors/investor_relations/annual_reports>

Annual Report 2007, Inditex, viewed 17 September, 2008,

< http://www.inditex.com/en/shareholders_and_investors/investor_relations/annual_reports>

Christopher, M 1992, Logistics and Supply Chain Management, Pitman Publishing, London.

Christopher, M 1998, Logistics and Supply Chain Management: Strategies for Reducing Cost

and Improving Service, Pitman Publishing, London.

Christopher, M C, Lowson, R and Peck, H 2004, ‘Creating Agile Supply Chains in the Fashion

Industry’, International Journal of Retail and Distribution Management, vol. 32.

Jones, C 1989 ‘Supply Chain Management - The Key Issues’, BPICS Control, vol. 15, no. 6, p.

23.

Kaipia, R, Korhonen, H, and Hartiala, H 2006, ‘Planning Nervousness in a Demand Supply

Network: An Empirical Study’, The International Journal of Logistics Management, vol.

17, no. 1, pp. 95-113.

Kang, J K and Sullivan, P 1999, ‘Quick Response Adoption in the Apparel Manufacturing

Industry: Competitive Advantage of Innovation’, Journal of Small Business

Management, vol. 37, no. 1, p. 1.

Lowson, R H 2002, Strategic Operations Management: The New Competitive Advantage,

Routledge, New York.

Porter, M E 1996, ‘What is Strategy’, Harvard Business Review, pp. 61-79.

Summers, M 1998, Analyzing Operations in Business: Issues, Tools, and Techniques, Quorum

Books, Westport CT.

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