Profitability of the company depends upon the company’s effective management. Effective management includes productive resources of the company which generally are raw material, resource planning, human resources, equipments and goods manufacturing facilities or services delivered by the company. This effectiveness in Operations gives competitive advantage to the company. In today’s world of competition, lack in operations management could lead to failure in company’s productivity.
What is Fashion?
Fashion is a way of acting differently from the rest community. If community likes it then they start acting in the same way and we say it’s a new fashion trend. But in the mean while if community comes across the new fashion then they start following them as everybody wants to be different than the others. “Fashion expires, much the same way yogurt does”, The Inditex Chief executive Jose Maria Catellano comments. (Wall street Journal, 2001).
Zara has picked up the fashion trend in a smarter way creating a supply chain reacting to the trend in a faster way. This made Zara to be successful in many countries like Europe, Asia etc. The distinctive supply chain management gives competitive advantages to Zara and this was the inspiration to me to take the case study of Zara.
1.2 COMPANY PROFILE:
Zara is a subsidiary of famous and biggest fashion distributor Inditex. It became the world’s biggest retailer over taking Gap in August 2008 (The Guardian, 2008). Zara contributes to 2/3 of sales of Inditex Group.
According the Data obtained from Company website, we can see the Origin and Evolution of Zara as follow,
Amancio Ortega Gaona formed Inditex in 1963 as textile manufacturer. It started with several manufacturing centers distributing products to various European countries in the next decade of 1963 – 1974. The first Zara store is opened in 1975 on a central street in A Coruña (Spain). From 1976 till 1984, Zara grown his business and captured the Spanish market with attracting major public. In December 1988, Zara went outside the Spain and opened his first international store in Oporto (Portugal). In 1989, Zara took next step on internalization opening its first store in New York (USA) and his second in worldwide market. Also it came up with a store in Paris (France) in 1990.
In 1991, Inditex opened new subsidiary called Pull and Bear chain Acquiring 65% of capital from Massimo Dutti. Inditex keep on going ahead and ahead in International market opening its stores in Mexico (1992), Greece (1993), and Belgium & Sweden (1994). In 1995, Massimo Dutti’s entire share capital acquired by Inditex opening the groups first store in Malta and in Cyprus on the consecutive year. After 1996 till 2008 Zara captured 73 countries opening 1292 store on prime locations on major cities proving national borders cannot stop sharing of single fashion culture. But there were some important dates for Zara and its parent company Inditex. These are 23rd May 2001, when Inditex listed on Spanish stock market also in 2002, construction work of new Zara logistics centre were started in Zaragoza (Spain). Inditex opened Zara home store in Russia, Slovakia, Slovenia, and Malaysia (2003) also in the same year Zara’s second distribution centre opened in Zaragoza (Spain) contributing in the work of Zara’s first distribution centre in Arteixo (A Coruña, Spain). Zara’s 1000th store opened in Florence (Italy) in 2007. Till 2008, Inditex opened 4000 stores of Zara and other sister concerns in almost 73 countries.
2.0 PROBLEM IDENTIFICATION AND FISHBONE DIAGRAM.
Most of the organizations face some or the other kind of problem to run their system efficiently. They can affect production and quality of the product in the company. This is the reason for company to have close look on the problem and get it resolved as soon as possible.
Zara has a different business model than the traditional retailers which is quite successful as well but this can affect the sustained growth of the company. Zara’s weaknesses also differs from the traditional retailers. “Zara holds around 86% of Inditex total international sales” (Craig et al, 2004, Page 3). This is the reason why Inditex is concentrating on Zara more than their other products and also invest most of their capital in Zara. Failure of Zara can make Inditex rethink about their firm’s strategies and cause an internal meltdown.
Zara is facing inability to penetrate the American market due to different tastes of Americans and Europeans. Also they don’t have strongly developed strategy to capture U.S. market. The major threat of Zara for their sales in U.S. is lack of distribution facility in America. Although they are running 1000 retail stores efficiently their Centralized logistics model may not be able to supply more stores in U.S.
Vertical integration reduces the possibilities of producing large quantity of goods in economic rate (Craig et al, 2004). There is also increase in cost due to speedy & recurrent introduction of new products. Also they have higher research & development cost. Creation of different apparel lines causes constant changeover of production techniques resulting in higher elevated cost and also increase in the employee training cost to enable them in order to use new manufacturing techniques.
Zara has a bigger threat from the competitors when they try to enter the new market. Almost every retailer is competition for Zara as they have wide range of products. But their main competitors are Gap and H&M as they have similar kind of product range with them. Also the H&M products are less costly than Zara. H&M opens a distribution centre in the country they enter to respond the demand quickly.
Zara is also facing the problem due to cannibalization (Craig et al, 2004). All the Zara stores in one city will have the same product range. This means Zara is selling same product range to the customers in same city. This can affect them resulting in loss of sales.
2.2 FISHBONE DIAGRAM
According to the current business industry the apparel manufacturer can face the problems which are shown in the fishbone diagram and these can be the main area of concern for the organization.
3.0 OPERATIONAL MODEL IN ZARA
Shifting from “mass standardisation” to “customisation” on a global scale is the most interesting aspect of the Zara’s model. The founder highlighted Zara’s approach to fashion which is unique, like food, must be consumed immediately rather than rot in a cupboard. Thus the production of fresh new clothes is in response to the consumer’s preference (Dutta, 2002). Zara’s business model (see appendix 3) enables their operations to be more successful and achieving the goal of customers’ satisfaction. Its operational model generally encompasses many elements like Vertical Integration, Company structure, Just in Time, etc. which finally contributes to Total Quality Management (TQM) of the Company.
3.1 COMPANY STRUCTURE:
In which there is Chairman and followed by the other directors below him. The directors or managers will act as Cell leader for the cells below them. Each cell be reporting to its cell leader and finally cell leader will report to the head.
Inditex has Flat organization structure (see appendix 1). In which Amancio Ortega as a Chairman is a head of all cell leaders and there are different directors who acts as a cell leaders e.g. Deputy Chairman and CEO will be the cell leader for tax advisory, finance and management control etc. This helps to keep track of the processes going in the company easily. With this structure Inditex can actually keep a close watch on the processes and quality in the company.
3.2 VERTICAL INTEGRATION:
Vertical integration means merging of two businesses that are on different stages of production (Hindle, T., 2009). This leads the business closer to the customers. It controls access to input and to control the costs, quality and delivery times of inputs. It is usually very hard to vertically integrate the organization because this process being expensive and hard to reverse. It is generally found that many companies integrate with distributors to secure market of their output.
Lack of existing channels to Spanish consumer in 1980s caused Zara being forced into control of production, distribution and sales. Zara’s success lies in its vertically integrated system (see appendix 5). This highly synchronized system gives extraordinary speed and design litheness. This is the reason behind success of Zara’s strategy. Zara’s Strategy is to give mid-market pricing, niche fashion and rapidly changing product range to the customers. This has also helped Zara to reduce ‘Bullwhip effect’ (Ghemawat, P., 2003). Further Ghemawat (2003) has described the bullwhip effect as the tendency to fluctuation in final demand to get amplified as they were transmitted back up the supply chain. As a vertically integrated company, Zara always able to keep close look on the quality and delivery of the product to its retail store. Zara has developed such a strategy that they will manufacture 40% of the fabric in house and 60% they will get it from external supplier. Zara will then manufacture the designed the fabric in the house and send out to the external supplier for sewing and then again it comes to Zara where it is checked for its quality and then labeling will be done. Then the product goes to the central warehouse of Zara from where it is distributed to the stores.
Disadvantage of this vertically integrated system to Zara is elevated costs for manufacturing in Europe, deficiency in moving plant to different location.
3.3 PUSH AND PULL SYSTEM:
When a new designs being pushed in the market based on fashion market trend is referred as PUSH system and when design changes has been done on the customers feedback, but at a lightning fast speed, which emphasizes on customer satisfaction then its referred as PULL system(Urugray, M., 2005). In the push system generally the new design is created by the designer team of the manufacturer and then it will be produced in mass which will be promoted in the stores and market. This increases the demand in the market and customers will be attracted to the store to get the stuff. Zara’s designer team generally launches there seasonal collection late in the market (see appendix 4) which enables them to get know about the designs being launched by manufacturers and their demand accordingly as well as they attend fashion shows for readymade clothing where they get the idea of the designs being launched in the market and accordingly they launch their design in the market (Ghemawat, P., 2001). Sometimes Zara also launches the new collection forecasting the demand of the product e.g. when Madonna visited Spain for the stage show, Zara launched the new collection of design which was replicating the design used by Madonna in the past which distinctively increased the demand of the product.
Pull system generally works on customers demand, this demand is generally transmitted to the design team which will then create the design and send back to the market to satisfy their demand. There is another approach manufacturers can take in which they advertise the product on mass level which will increase the demand for the product resulting in the increase of the sales (Anon, 2007).
3.4 JUST IN TIME (JIT):
Just in time is invented in Japan. Japanese ship builder introduced this concept by lowering their steel inventory from one month stock to three days stock. The first writing on JIT is done by Toyota’s Vice president Taiichi Ohno. But this writing was in Japanese so it was difficult to understand so it has been converted in English. Excessive inventory storage is wasteful in the current manufacturing scenario causes JIT philosophy (Mejabi, O. et al, 2001). Further it says JIT encourages the adaption of methodologies to generate the order of material and intermediate products only when required. The transformation to JIT is not instantaneous, but rather it occurs in steps over the time (Schroer et al, 1985). In the current manufacturing scenario removing of waste is important. JIT helps to make small batch production and is also helps to keep commitment towards continual process & product improvement. In the current market scenario, deliver the high quality and low cost product to capture most of the market share is main concern for many organization. JIT helps to solve this concern for most of the companies. JIT helps to reduce the cost for the companies because it saves the cost of storing the inventory and maintenance of the inventory. Generally in ‘Pull’ management JIT is used which helps to keep supply in time when there is high demand.
Zara’s Design process is more focused on the public who uses Zara’s product. This information is generally collected by store manager or the store staff which is stored at the collection counter of each store and in the evening the collection details & the information stored is transmitted to the distribution centre (Gallaugher, J., 2008). This information transmitted to the Zara’s designing professional daily. Using this information the designer figures out what are customers needs and what are their main concerns which helps them to design the product carefully and reduce the customers concern. From design to the shelves it takes 6 weeks for Zara to introduce new design in market it is more effective than the normal 6 months cycle for any other organization (see appendix 2). According to Ghemawat, P. (2001), the short time cycle reduces working capital intensity and facilitates continuous manufacturing of new merchandise. In 2008, it was observed that “From design to the shelves it takes 15 days to Zara to bring the product in the market” (Gattorna, J., 2007). Also Zara purchase about one-half fabric in ‘Grey’ colour which gives them the maximum flexibility. The internal manufacturing plants of Zara are located in or around Zara’s headquarters. This makes designing and approval of the product very fast ultimately resulting in the faster production. These products then goes to the central distribution centre of Zara which further distributes the product to the stores twice in a week. This helps Zara to inventory and concentrate on customers’ requirement.
It means continuous improvement. Kaizen is Japanese concept and it’s a whole business philosophy. Kaizen is important for everyone in the organization and requires the same kind of participation from each employee (Imai, M., 1986). Customer always has some requirement, needs & expectation from the supplier and the output from the supplier has some characteristics relevant to the customer expectation, these characteristics are called as Quality characteristics (Rao et al, 1996). There is always a gap between customers’ need and quality characteristics. Implementation of Kaizen helps to reduce that gap and meeting customers’ expectation to the closest. Key elements of Kaizen are as follows:
Customer focus, Just in time, Kanban, Flexible workplace practices, Empowerment, Quality assurance, Leadership, Future thinking, High quality, Low cost, Reduction in wastage, Punctuality.
Zara as organization has almost all the elements of Kaizen. As we have seen, Zara has efficient Just in time running also they are more customer focused as there most of the designs are made according to the customers demand. With the efficient JIT system Zara has reduced the wastage in the company. Most of the Zara’s products are lower in cost with good quality. Zara always follows flexible workplace practices.
Competitive advantage and ability to face new challenges in fashion clothing industry gives Zara the potential growth. Zara has the key elements like just in time, its structure and Kaizen which enables them for having Total Quality Management (TQM) in the company. They also have the strong and unique business model which helps them to keep operating income elevated and gives the opportunity for growth in retail industry. They are known for their trendy and well priced new apparels every week. In the America they are seen as growing fashion retailers. The Inditex research and development team is continuously working on methods of expansion as well as keep themselves fresh in the fashion apparel industry and also quality improvement. Many fashion retailer industries trying to follow Zara’s business model.
Zara has to look for new expansion opportunity to maintain its growth. There is growth opportunity for Zara in the U.S. market with the constant change in behavior of the customers as a result of the globalization. Zara should think about opening the distribution centre in U.S. which can give them the opportunity to be the trendiest and low price retailer in U.S. Also this distribution centre will be the expansion of Zara’s centralized distribution centre. This can give them added income which Zara can use for other purpose like advertisement to capture the market.
To attract the U.S. market, Zara can take the online selling approach which will enable them to reach to the customers very efficiently. Although they won’t be able to whole product range available on internet but they can keep some trendy cloths with some basic cloths.
For the cannibalization Zara can offer different product range for the different geographical location. In this case each store will have some different range of product which can attract the customers to visit the different Zara stores in the same city.
Appendix 1: Inditex Management Structure
Appendix 2: Cycle Time Compression through quick response.
Appendix 3: Zara’s Business Model.
Source: Case writer.
Appendix 4: Product Precommitments: Zara vs. Traditional Industry.
Appendix 5: Zara’s Supply chain
Trend spotters search for new fashion trends and ideas for new designs.
Inputs from the sales personnel about customers’ demands.
Delivered to stores.
Fabric is cut and dyed, marked for sewing (outsourced) and marketed.
More than two hundred designers and production managers work on the new line.
Headquarter consolidates the information and decide on design, fabric, etc.
Garment production in Northern Portugal and Spain.
Sourced from: fashionnet.org