Supply chain management at zara fast fachion

Zara, a clothing manufacturer in Spain was launched in 1975 as a local store. Today, it is the third largest manufacturing company in the world (Chemawat & Nueno, 2006). The company, Inditex, has over twenty manufacturing plants in Spain and more than 1,000 stores in over 30 countries in the world. The highly applauded manufacturing strategy was envisaged by owner Amancio Ortega Gaona. He demonstrated that lean inventories and flexibility may be even more crucial than cheap labor, a notion that just revolutionizes the exodus of manufacturing jobs from the west. His insight was successful because the company is now a case study at business teaching institutions from Wharton to Harvard and the IESE in Spain. This paper is going to discuss how Zara uses technology to improve operational responsiveness to customer expectations, and at the same time to cut down costs in certain areas and also the factors Zara bases on determining the price of her products.

• Use of technology

Identification of fashion trend at Zara is part of the culture. A point-of sale (POS) system is used in the stores and the information gathered is sent to Inditex. Also, the POS technology has allowed to tight up the links between vendors and led to improvements in the ordering process, in deliveries and in the distribution system as a whole, thus contributing to increase the level of responsiveness of ZARA. Moreover, “managers consult personal digital assistant on daily basis to check the availability of new designs and to place their orders to what they think will be much appreciated by their customers. By so doing, the store managers assist shape designs” (Innovels, 2008).

Information and communication protocols at Zara are radically different from its competitors. The company spends less than 0.5 percent of total revenue on information technology and employees in the IT department account for only 0.5 percent of the company’s total workforce (Chemawat & Nueno, 2006). This differs from their competitors who spend about 2 percent of their total revenue on information technology and have 2.5 percent of their total workforce dedicated to IT (Ferdows, 2004).

Zara makes use of human intelligence and information technology such as their PDA devices to come up with a hybrid model for flow of information from stores to the headquarters. For instance, the company’s managers utilizes handheld devices to send formalized information concerning feedback from customers and ordering needs straight to in-house designers. Apart from keeping Zara’s designers informed on fast-changing demand and trends, this technique also provides the company with imminent on less-desirable products. Unlike Zara’s hybrid model (which combines IT application and human intelligence), competitors rely mostly on information technology.

The hybrid model results into well managed inventories, reduced costs from obsolete products, linkages between supply and demand, nevertheless, there is still room for upgrading in their IT processes to realize more reliable management of inventory levels. Therefore, this unique approach of human astuteness assisted IT solution provides cost advantages to the company’s operations and assists Zara to abide by her primary principle to be in a position to quickly respond to changes in consumer demand (Chemawat & Nueno, 2006).

The SKU system allows the gathering of data to help identifying and producing garments sought by customers, and in the right quantities, thus improving the ordering system at the distribution center. ZARA, then, successfully maintain control of its inventory while keeping inventory costs at a lower level.

Zara also made considerable investments to improve its logistics system and to develop its IT infrastructures. ZARA chose to implement a Just-In-Time (JIT) manufacturing system as well as to invest in a sophisticated telecommunication system, thus improving the information flow between headquarters and supply, production and sales sites and thus avoiding any type of bureaucratic structure. Furthermore, this system allows ZARA to take appropriate and quicker decisions due thanks to the information flow being very fluent. The JIT system allows ZARA to improve quality, to diminish manufacturing time, to eliminate waste, to increase productivity and to have better relationships between suppliers, thus improving its overall responsiveness.

The use of a consumption information system linking together the merchandising and the back-end processes is an original technique used by ZARA that permits designing teams to possess relevant information about customers’ preferences. This technology contributes without doubt to ameliorate the responsiveness of ZARA: indeed, the data gathered by this system allow teams to propose new designs that match consumers’ expectations, and in a timely manner.

A high-tech mobile tracking system speeds up the distribution system by proceeding high numbers of garments in a short period of time, thus minimizing intervention of labor force while increasing productivity. As garments did not stay for a long time in the warehouse, the company is able to cut down storage costs.

Zara’s capabilities, concepts and strategic planning as demonstrated through their business model, tend to be heading in the right direction (Chemawat & Nueno, 2006). Their concentration on core operation as well as production capabilities, resistance to outsourcing, and focus on the fashion pulse have made this company one of the most victorious clothing retails.

Technology is present in all four crucial steps that makes ZARA’s responsiveness so fast.

(Illustration taken from Devangshu, D., 2002)

• From what you see in the case, does ZARA price on the marked or based on other factors?

Zara utilizes market-based pricing. In this method, the process is arrived at by bargaining among many sellers and many buyers in a competitive market. For market-based pricing, the fundamental question is: how can a product be valued by the market? The answer to this question is contextual and conceptually based; that is, it depends on a particular product category and a set product of reference. In some product categories such as clothing, Zara expresses value as monetized costs and benefits, and in purely economic terms. The fundamental concept is economic value to the customer. In real sense, rational customers add up the expected benefits, relate them to the coupled costs, and buy the company’s products if it provides enough benefits to justify the price, and the most complimentary relative to other spending alternatives. Managers at Zara try as much as possible to monetize all the costs and benefits and with economically rational customers, this pricing analysis is fundamentally straightforward.

That is, the customers make decisions basing on a multitude of factors that are crucial to them. Their decision may be a combination of both non-economic and economic factors that can be subjective or objective (Ferdows, 2004). In this more obvious case, during the starting point for deciding a price Zara’s managers first calibrate the implied importance of the acquired benefits and relate them with the price of the product in a competitive market (Chemawat & Nueno, 2006). They use an analytical technique called value mapping for framing the price benefits relationship.

Nevertheless, if a decision was taken to enter a specific market, buyers effectively turn off the extra expenses of supplying it from Spain. Prices were moderate, 40 percent higher in many other European countries than in Spain, 70 percent higher in the Americas, and in Japan the prices were 100 percent higher (Chemawat & Nueno, 2006). Zara had analytically marked local currency prices for all nations in which it has branches, on each clothing’s price tag, calling the latter ‘atlas’ with the expansion of its footprint. As major markets in Western Europe started using the euro at the beginning of 2002, the company simplified its price tags to list only the price in the local markets in which a specific clothing can be sold, even though logistics were complicated by this (Chemawat & Nueno, 2006).

Zara made use of joint ventures in bigger and more crucial markets where there were hindrances to direct entry, in many cases those related to the difficulty of getting enough retail space within the cities. At the beginning of 2002, many Zara stores abroad were managed through joint ventures. Interests in all joint venture were equally shared between Zara and their partners. With much lower prices in Spain and the information available to the public, a large percentage of Spain citizens afford Zara products. In a country such as Mexico, there is a narrower targeted customer base. This is due to informational and cultural reasons. Only the middle and upper class in Mexico can afford Zara.

• For an apparel retailer what are the advantages and disadvantages of online distribution? Can Zara make it work?

Responding to increased competition in the industry, to changing customers’ preferences and habits, as well as to a decline in High Street spending (BBC NEWS Business, 2010), it was crucial for ZARA to offer an online, e-retail distribution service.

In an article published by the BBC NEWS Business (2010), Julia Caesar wrote that “consumer confidence is waning and many fear a further economic slowdown. Online fashion sales, meanwhile, are proving resilient”. Online shopping has experienced a dramatic growth, as more and more people are being equipped with Internet connections. It has been widely acknowledged that contrary to traditional retail stores, online retailers benefit from more regular and stable revenues even in period of crisis. According to Forrester consulting group, “shopping on the net is expected to see sales grow to £94bn ($144 bn) in Western Europe by 2014, from £56bn in 2009”. Therefore the Internet presents great opportunities for the future. An online store is also a good way to complement existing traditional stores, because customers generally have access to a greater choice of products rather than when going to their local store. Thus, it can be perceived as being more convenient. An online retail store will offer the opportunity for people who do not have time such as business people to obtain the product they want before the next ZARA collection is brought to the market. Indeed, with ZARA’s rapid product turnover, introducing new collections twice a week, these people may not have time to get the product they want before the collection ends. An online retail store allows remedying to this problem. Moreover, an online retail store gives opportunity for ZARA to reach new markets without physically opening stores in these markets, thus saving real estate costs. It can also be used as an online market entry strategy to expand worldwide or to test the possibilities of doing commerce in a particular country. Moreover, E-retail distribution may satisfy customers who did not have positive customer service experience when shopping in-store and it may help reaching new customers who do not have easy access to physical stores. To finish, e-retail will give the opportunity to ZARA for gathering more information about customers and to develop personalized marketing tools, such as online relationship marketing, using diversified channels.

Conversely, online retailing involves several disadvantages. The most apparent disadvantage, particularly in the apparel/fashion industry, is that customers cannot try the product and in case if the product does not fit, customers would have to send the product back to ZARA and make a new order or wait to get reimbursed. Even if this process can be shortened, this still takes time. A reporter from Fox Business News (2010) analyzed that “one of the snags of Inditex’s ‘fast-fashion’ business model could be the difficulty of reselling the typically large number of goods returned by online buyers because those goods could already be out of date”, thus adding another disadvantage to the choice of retailing online.

There might be a dilemma concerning returns for Inditex: the e-retailing accounts for an important amount of them. Also, this would hardly match with their “fast fashion selling” strategy which involves getting rid of the stock and selling the products very rapidly. ZARA may face a problem if stocks re-emerge weeks later thus affecting the sales flow of the company.

Another problematic is that ZARA may fail to attract different customers than youth in their 18-34, eager to proceed to online shopping contrary to older populations. Even so the launch of a website makes it virtually possible for anybody in the world to access it; ZARA would have to do extra efforts to attract both its existing customers who are presently shopping at physical stores, but also to attract new customers. This is not an easy task considering the vast choice of competitors who are only a click away from ZARA on the Internet and who have entered the Web much earlier. An interactive, attractive website, easy to use, would be the correct manner to adopt.

There are more general drawbacks linked to online retailing. Depending on the number of virtual shoppers, the website may be slow to load, thus frustrating customers. An e-retail store involves maintenance costs and may require hiring technical staff such as computer engineers. Because of the required maintenance, sections of the website or the website as a whole may not be available at certain moments. Privacy as well as security and protection of data may prevent customers from buying online. Indeed, Hoffman et al. (1999) have emphasized that 95% of Internet users have, at one time or another, refused to give personal information.

To make it work, Inditex would need to accompany the launch of the ZARA website with appropriate marketing campaign in order to ensure that customers are aware of such initiative. ZARA would also need to optimize its image on the Net, by investing in search engine optimization systems for example. ZARA would have to make sure that its customer service team is capable of providing adequate support to e-customers such as providing them with technical help. Another challenge for ZARA will be the integration of its e-business and online operations within its current supply chain. This might require reorganizing part of the supply chain by modifying existing machinery (to properly route online orders) or investing in new equipment in order to integrate this new e-shopping process. To finish, despite the fact that ZARA has invested in effective, high-tech IT systems, it seems that the company lacks of skills and experience in the field of the Internet, social networks and new technologies such as Smartphones, even so the company is present on all these media. By now, ZARA’s visibility and popularity on the Web testify from its success. However, ZARA, after having launched its website in September 2010, has been criticized because it was not compatible with all web browsers; also ZARA recently launched an application for Iphone that has been perceived as pretty disappointing by users, as price of products was not displayed, no contact information was provided, a store locator was absent, thus making the application rather obsolete. Therefore, as a key actor of the apparel industry, but also because of increased competition and of the opportunities it offers, ZARA had no choice but to be present on the Internet. However, ZARA might need consulting advice in order to sustain and develop its presence on the online platform and to develop new innovative tools, as well as to create a “buzz” in social networks and online communities that are booming nowadays.

Iphone application from ZARA

Conclusion

The best way for Zara to increase their sustainable growth is to look for new opportunities in the apparel market. With ever changing consumer trends that are due to globalization, there are growth chances for companies such as Zara to increase their growth. Even though they use both information technology and human intelligence they still need to invest much in technology. Their pricing strategy which is market based seems to be successful as it bases on consumer satisfaction, and is ever dynamic and changes with change in consumer behaviour.