logistics assignment due in 17 hours

3

Zara's secret to retail success - its supply chain!

This assignment uses part of an article that was posted by Clara Lu on 4 Dec, 2014 at tradegecko.com/blog/zara-supply-chain – and materially edited by Dr. A. Forgione for Logistics Assignment 4 – the quick due date attempts to replicate the logistics of FAST FASHION

Zara is a multinational fashion brand based in Spain and owned by the distribution group Inditex. Amancio Ortega founded the Zara brand in 1975 in order to improve access to world markets for his fashion merchandise. A decade later, Ortega formed the corporation, Inditex, to serve as a parent company for the Zara stores operating globally as subsidiaries. Zara became the main subsidiary and brand for the global company owned primarily by Mr. Ortega.

Zara originated in Spain, and now has stores in 86 countries - in Europe, the Americas, the Middle East and Asia. In this article “Zara” is used in place of Inditex because it is the public face or brand of its public company. Inditex owns other brands as well but Zara is by far the largest brand within the Inditex umbrella of companies and brands. In 2012, Inditex reported total sales of US$20.7 billion with Zara representing 66% of the company’s total sales (US$13.6 billion).

Synergy between business and operations strategy

For Zara, speed and responsiveness within the company’s supply chain are incredibly important success factors. In comparison to other brands that churn out “fast fashion”, Zara attempts mind-spinning, supersonic production of fashion goods.

The Zara brand is renowned for its ability to deliver new clothes to stores quickly and in small batches. Twice a week, at precise times, store managers submit orders for clothes to be delivered to their stores, and twice a week, on schedule, new garments arrive. The company produces about 450 million items a year for its 1,770 stores in 86 countries.

To achieve its mind-spinning, supersonic production of fashion goods, Inditex exerts greater control of its manufacturing and supply chain for Zara in comparison to other retailers. For Zara, its supply chain is its competitive advantage.

Zara’s overarching strategy is to achieve growth through diversification of product designs and clothes. Zara also utilizes vertical integration within its supply chain to adapt haute couture designs so that clothes can be manufactured, distributed and be on the retailers’ shelves within 2 weeks of the original design first appearing on catwalks.

Since Inditex owns or exclusive licenses major parts of its supply chain, Zara competes favourably with other brands because of its speed to market. Zara literally embodies the idea of “fast fashion”.

Store managers communicate customer feedback on what shoppers like, what they dislike, and what they’re looking for. That data is instantly funneled back to Zara’s designers who begin sketching on the spot. This strategy allows Zara to sell more items at full price because the company exudes responsiveness and exclusivity. Zara gets 85 percent of the full price on its clothes, while the industry average is 60% to 70%. Unsold items account for less than 10% of Zara stock compared with an industry average of 17 to 20 percent.

“Most companies are riddled with penny-wise, pound-foolish decisions to reduce cost,” says Kasra Ferdows, a professor at Georgetown University’s McDonough School of Business. “Zara understands that if they don’t have to discount as much, they can spend money on other things. They can see the benefit of this certainty and rhythm in the supply chain.” By not engaging in price discounts like other brands, Zara can afford the extra labor and shipping costs needed to accommodate and satisfy changes in seasonality and customer demand.

Zara’s strong distribution network enables the company to deliver goods to its European stores within 24 hours, and to its American and Asian outlets in less than 40 hours.

Just in time production and Inventory management

Zara is a retail giant that delivers fashionable and trendy numbers catered for different tastes through a controlled and integrated process – this process is referred to as just-in-time production. According to Nelson Fraiman, a Columbia Business School professor who wrote a 2010 case study about Zara, the retail giant will typically develop a product from concept and deliver to store in just 15 days, while the industry standard is 6 months.

Instead of “outsourcing”, Zara keeps a significant amount of its production in-house. Zara’s own factories utilize a “Master Production Schedule” that expressly reserves about 85% of the company’s “capacity” for in-season adjustments. In-house production allows the organization to be flexible in the amount, frequency, and variety of new products that may be launched by Zara from time to time.

The company often relies heavily on sophisticated fabric sourcing, cutting, and sewing facilities nearer to its design headquarters in Spain. Although the wages paid by Inditex to its European workers are higher than those of their developing-world counterparts (such as Bangladesh), the turnaround time is relatively miraculous so it seems to be money well-spent.

Zara retains extra capacity within its production facilities to respond to demand as it develops and changes. For example, a Zara factory would operate typically 4.5 days per week around the clock at full capacity and production would have built-in flexibility with extra shifts and temporary labor added when and if needed. This type of production strategy translates to more frequent shipments to stores, but it also has an impact on inventory.

Zara also commits six months in advance to only 15 to 25 percent of a season’s line. And it only locks in 50 to 60 percent of its line by the start of the season, meaning that up to 50 percent of its clothes are designed and manufactured smack in the middle of the season. If a certain style or design suddenly become the rage, Inditex reacts quickly by designing or adapting new styles and arranging for delivery of the fashion goods into Zara stores while the trend is still peaking.

Zara is also fully aware of the saying, “inventory = death”. Inditex avoids piling up inventory in any part of its supply chain from raw materials to finished products.

Inventory optimization models are put in place to help the company to determine the quantity that should be delivered to every single one of its retail stores via shipments that go out twice every week. The stock delivered is strictly limited, ensuring that each store only receives the items they require. Refusal to overstock an item enhances the brand image of Zara being exclusive while avoiding the costs and risks of stockpiling inventory.

This quick in-season turnaround, from production facilities located close to Zara’s distribution headquarters in Spain, allows Zara to ship more often and in smaller batches. If the design Zara hastily creates in an attempt to chase the latest trend does not in fact sell well, little harm is done. Since Zara tends to produce small batches, there is generally not very much unsold inventory even if the product is not as successful as planned. So a failed product experiment is over in a jiffy, and there is still time to try a different style, and then a different one after that.

Centralized logistics and a Solid distribution network

“The secret to their success has been centralization,” says Felipe Caro, an associate professor at the University of California at Los Angeles’s Anderson School of Management and a business adviser to the company. “They can make decisions in a very coordinated manner.”

Zara sticks to a deep, predictable and fast rhythm, based around order fulfillment to stores. Each Zara outlet sends in two orders per week on specific days and timing. Trucks leave at specific times and shipments arrive in stores at specific times. Garments are labeled and priced upon destination. As a result of this clearly defined rhythm, every staff involved (from design to procurement, production, distribution, and retail) knows the timeline and how their activities pan out with respect to other functions. Zara customers by extension know when to visit their local store to shop for fresh new garments.

At Zara, change does not disrupt the system; rather change is integrated into the system. This brand’s success story shows the strength of its operations. Zara’s cross-functional operations strategy coupled with its vertically integrated supply chain enables mass production under a push control logistics process. The end result is well-managed inventories, reduced instances of markdowns, higher profitability and value creation for shareholders in the short and long term.

ASSIGNMENT 4 – DUE Sunday, March 31, 2019 (6 PM)

Question 1 > Chapter 10 of the course textbook discusses INVENTORY MANAGEMENT; in this article, it is stated that Inditex uses various “inventory optimization models” in the production of Zara-branded clothing. DESCRIBE at least two of the inventory management techniques (use terms or concepts from Chapter 10) that are used by Inditex in the production or supply of Zara products.

Question 2 > Research and provide a LOGISTICS definition for the following terms used in this article:

(a) production capacity; and

(b) Master Production Schedule.

Question 3 > Explain the benefits and costs of keeping too much inventory. What is meant by the saying “Inventory = death”? Do you believe that statement should be followed by all fashion companies?

Question 4 > There are two main types of production strategies studied in Logistics: Chase Production strategy and Level Production strategy. Please provide a definition, purpose and desired outcome for both of these strategie. Which of the two production strategies is Inditex/Zara more likely to follow and implement in the production of Zara branded clothing?

Question 5 > Explain or summarize how supply chain management and Zara’s management of inventory and other improvements of its logistics have created value for the shareholders of Inditex.

[Reminder that your total submission for this assignment must be minimum 500 words not including this article comprised of over 1,600 words]