Secret story behind Zara's Success!

Hey Hello Readers..!😇I'm Saradha Preethi from Amrita School of Business, Welcoming you back to my seventh week of the Supply Chain Blog.👇 

In today's retail industry, fast fashion wins over the hearts and wallets of customers. Looking beyond the contentious aspects of fast fashion, such as unnecessary waste output and unregulated production standards, today's buyers have instead sided with the benefits of fast fashion, such as the rapid turnaround of style trends and budget-friendly items.

What do you think Zara's competitive advantage?

🠊 Yes, It's their Supply Chain! Ensuring that all this works smoothly is what Zara does best – managing more of its production and supply chain than any of its competitive counterparts.

Zara was founded in 1974 in Spain by Amancio Artega. In 2019, the company was ranked as the 46th most valuable brand in the world by Forbes. They target women in the age range of 24 - 35 years old. Short production runs build scarcity of designs and produce a sense of urgency and purpose to purchase while stocks last. As a result, Zara doesn't have a lot of surplus inventory, nor does it need to make a major mark-down on its clothing products. 

⮞ Raw Materials - Zara buys fabric in only 4 different colors, designs, and cuts its fabric in-house.

⮞ Suppliers - They are all close to their factories so Zara can order on a need basis.

⮞ Manufacturers - Clothes are ironed in advanced and packed on hangers, with security and price tags affixed.

⮞ Distributors - Overnight trucks are used for delivering to European stores and air freight is used to shift to other countries.

Company's Manufacturing Operations

🠊 Zara competes on flexibility and agility instead of low cost and cheap labor. They employ about 3,000 workers in manufacturing operations in Spain at an average cost of 8.00 euros per hour compared to the average labor costs in Asia of about 0.40 euros per hour.

🠊 Zara factories in Spain use flexible manufacturing systems for quick change over operations.

🠊 50% of all items are manufactured in Spain

🠊 26% in the rest of Europe

🠊 24% in Asia and Africa

How does Zara approach their Supply Chain?

1. Procurement Methodology

    The Zara Sourcing team does not work on the number of finished garments but works on the number of raw materials required to produce garments. This helps minimize waste, as you can re-use fabric, but don't resell a piece of clothing that didn't meet your standards. A perfect example of how sustainability can be improved in tandem with cost reduction.

2. Deep Collaboration

    Suppliers are all near to the Zara factories and work closely together so that Zara can order on a regular basis.

3. Production feedback

    Store managers provide feedback to consumers on a regular basis to industry experts, who then relay the information to development and design teams. This rapid feedback loop enables a fast and agile business response.

4. Local Manufacturing

    Zara's strategy is significantly different from that of its rivals. Instead of exporting its output in Asia or Eastern Europe, it planned to produce its goods in Galicia. Although lower cost output may be done in other areas, faster time on the market, reduced shipping costs and a low level of exposure to changing tariffs and policies are more than just one factor. This lowers the overall supply risk, with a more narrow collection of risks than the wider global supply chains. It also helps to minimize the global carbon emissions by drastically lowering shipping costs.

5. Spare Capacity

    Zara voluntarily leaves up to 85 percent of its plants idle in order to maximize the response to shifts in demand around the world. Another fascinating strategy, very different from the rivals who are seeking to optimize use.

6. Demand Forecasting

    Zara reaps the benefits of very powerful inventory management models that help them assess the exact quantity of items required for each store. Twice a week, they ship very small batches. As a consequence, there is a sense of scarcity, very few products are not sold, and if the experiment fails, there is a lot of time to try new models. Eventually, this makes Zara find the right product almost every time.

The success story of Zara shows the strength of its operations. Its cross-functional operations approach, combined with its vertically integrated supply chain, enables mass production under pressure, leading to well-managed inventories, lower trade-offs, higher profitability, and value creation for shareholders in the short and long term.

Reference

• https://edited.com/resources/supply-chain-management/
• https://www.scmglobe.com/zara-clothing-company-supply-chain/
• https://www.tradegecko.com/blog/supply-chain-management/zara-supply-chain-its-secret-to-retail-success

Happy Learning with Sara :)

#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