#Lessonsfromthebest : Speed-to-market

     

When a German wholesaler suddenly cancelled a big inner-wear order in 1975, Amancio Ortega thought that his fledgling clothing company might go bankrupt. His entire capital was tied up on this order and there were no other buyers. In desperation, he opened a shop near his factory in La Coruña, in the far northwest corner of Spain, and sold the products himself.

He called the shop Zara.

The lesson Ortega learned from his early scare on demand-supply gap was this: To be successful – in his words, 

“you need to have five fingers touching the factory and five touching the customer”

Simply put, it means: Control what happens to your product until the customer buys it. In these times, when supply chain flexibility is one of the hottest topics of discussion, I consider this example as a lesson on what goes a long way into building a robust and customer responsive supply chain for the future.

Story credits:  Zillion Consulting

                                                                                                                                   Photo credits: Procurify.com

Centralized order fulfillment is what keeps the company a market leader in the fast-fashion industry, enabling it to boast its agile supply chain.

The quick response time to the fashion trends comes from their own efficient, vertically integrated supply chain. Unlike the other retailers who have their manufacturing bases in Asia, Zara keeps its outsourcing vendors closely to its HQ in Spain. Since the production facilities are closer, shipments happen often and in smaller batches. This allows them to experiment on fashion trends liberally. Even if a fashion trend didn't pick-up, they would still have a low obsolescence stock to get rid of. Unsold items for Zara accounts for 10% of the total stock compared to an industry average of 17%-20%.

85% of Zara products are sold at full price compared to the industry average of 60%. Normally, the margin of a clothing company will be high (4-13%) but the net profit will be very low. Where does the money go, you ask?

Usually during the production planning, companies consider the balance between customer demand and the number of goods they produce. But no company can perfectly predict the market demand. If the prediction is too optimistic, there will be excess supply that will be sold at a discount. If the prediction is too pessimistic, there will be opportunity costs. Every company needs to balance these two outcomes. Most companies produce more than the market needs and then offer products at a discount later.

But not, Zara.

Zara always produces in small batches and keeps inventory low. It continually enters new design cycles and even has two new arrivals within one-week, luring customers to visit its stores more often and reducing the difference between predicted and real demand. This is a pull model from the consumer rather than pushing the product onto them. Consumers usually visit average high street stores around 4 times a year: This number is a staggering 17 times for Zara. 

Zara saves on discounts and on advertising – which is only 0.3% of its total sales and lower than the industry average of 3-4% – to spend on those frequent shipments and to pay its European workers with high labor costs compared to the Asian labor market.

Not only in its logistics process, but the responsiveness is also seen in its designing process as well. Each of Zara’s outlets operates like feedback portals and communicate what’s worn and left out, what trends are selling, what trends are emerging to the commercial team. They source limited varieties of fabric materials and don’t dye them until they know the fashion colors for the specific period. Designers then churn out cat copies of runway designs and they are fast-tracked within 10-15 days to the racks.

      INDITEX is the parent company of ZARA. Photo credits: IBTimes

But Zara has posted its first-ever loss as a public company.

·       1200 of 7200 stores will close permanently. Growing profits per store is now the focus so that the ROI is improved.

·       $ 1B will be invested in e-com growth and $ 1.7B in stores for better integration with their websites. This signifies the importance of the right investments.

·       Through flexible purchasing, Zara was able to reduce its inventory by 10% in the current quarter.

Zara has physical stores in 96 Markets while it has online stores in 202 markets. Despite this, the online sales account for only 14% of its total revenue. 60% of this comes from the EU and just 22% from Asia. The total online sales target is set to grow at 25% by 2022. 

Reactivity and flexibility for its store business worked well with centralized decision making, warehouse, and major factories located around each other. With the shift to online, let's see what the future holds in-store for Zara 😉

 

Sources for the stats:

·       The secret of zaras success a culture of customer co-creation

·       Zara owner to close up-to 1200 fashion stores around the world