Zara

By, Group 11 Vaishvik Kale (17) Venkata Ashok (44) Vicky Kumar (45)

History of ZARA
First ZARA store in LA Coruna in 1975 by Amancio Ortega Gaona International Expansion began in 1989 ZARA is Flagship

Case Facts
Two seasons:- Spring/Summer and the Fall/Winter Collection 200 designers 11000 styles each year In house manufacturing was reverse for more current ( season) production ZARA do External sourcing for synthetics and more fashion fabrics

Cont..
ZARA owned a sourcing company Comditel in Barcelona, manage 40% of fabric procurement Sewing subcontracted with 400 smaller firms within Galacia and northern Portugal Overall turnover time for sewing for 1-2 weeks 50-60% production in advance and remaining will based on demand rolling Centralise distribution for both outsource and inhouse manufactured garments

Outsourcing Risks and Benefits

Economies of scale
Aggregation of multiple orders reduces costs, both in purchasing and in manufacturing

Risk pooling
Demand uncertainty transferred to the suppliers Suppliers reduce uncertainty through the risk-pooling effect

Reduce capital investment

Capital investment transferred to suppliers. Suppliers higher investment shared between customers.

 Focus on core competency

Buyer can focus on its core strength Allows buyer to differentiate from its competitors

Increased flexibility
The ability to better react to changes in customer demand The ability to use the suppliers technical knowledge to accelerate product development cycle time The ability to gain access to new technologies and innovation. Critical in certain industries:
Fashion where products have a short life cycle High tech where technologies change very frequently

Loss of Competitive Knowledge

Outsourcing critical components to suppliers may open up opportunities for competitors Outsourcing implies that companies lose their ability to introduce new designs based on their own agenda rather than the suppliers agenda Outsourcing the manufacturing of various components to different suppliers may prevent the development of new insights, innovations, and solutions that typically require cross-functional teamwork

Conflicting Objectives
Demand Issues
In a good economy
Demand is high Conflict can be addressed by buyers who are willing to make longterm commitments to purchase minimum quantities specified by a contract

In a slow economy
Significant decline in demand Long-term commitments entail huge financial risks for the buyers

Product design issues

Buyers insist on flexibility
would like to solve design problems as fast as possible

Suppliers focus on cost reduction

implies slow responsiveness to design changes.

Outsourcing and Procurement Roles

Dependency on capacity
Firm has the knowledge and the skills required to produce the component

Dependency on knowledge
Firm does not have the people, skills, and knowledge required to produce the component Outsources in order to have access to these capabilities.

Production Sourcing
About half of total garment production is sourced to third party Orders for production are given six months prior to store delivery Out of the total outsourced production, 60% comes from Europe and 30% from Asia Huge scope of sourcing to (low cost) Asian countries Fashionable and stylish manufacturing is done in house Basics and knits are outsourced

Drawbacks of outsourcing: Existing standardized production line Going away with 'Zara Model' - in time & customizable delivery Benefits of outsourcing: Huge reduction in cost Capacity expansion

 Zara commits 50% to 60% of its production in advance of season Remaining 40% to 50% production is done on rolling basis throughout the season as per demand

Production Allocation 1998 In house External 53% 47% 1999 50% 50% 2000 44% 56% 2001(expected figures) 40% 60%

4 Ps
Product - High Quality, fashion trend Price Based on comparables within target market Place Premier commercial streets and upscale shopping centres Promotion WOM, News paper ads (0.3% of sales)

Procurement Cost
2000 1999 1998 net sales 2044.7 1603.4 1304.2

EBIT

327.9

248.4

213

net profit margin To decreae procurement cost by 1% required increase in revenue

0.160366

0.154921

0.163319

6.24%

6.45%

6.12%

Modular for make/buy decisions

Product Dependency on Knowledge and Capacity Risky Very risky Independent for knowledge, dependent for capacity opportunity An option Independent for knowledge and capacity opportunity Not an option

Modular Integral

Zara is independent for knowledge and dependent for capacity to some extent. Most of its products are modular and hence Zara should outsource to reduce cost

Apparel Industry
Tier 1 : Fashion elements , quality of material and workmanship Ex: Ladies Suits Tier 2 : Little differentiation among producers and little time sensitive fashion Ex: Khakis Tier 3: Low quality segment. Products are like commodities Ex: Mens underwear

Component level outsourcing (Tier 1)

Criteria
Customer Importance Component clockspeed Competitive position Capable suppliers Architecture

Fabric Procurement
High High High Low Little Integral

Garment assembly and Finishing

High High High Low Highly integral

Component level outsourcing (Tier 2)

Criteria
Customer Importance Component clockspeed Competitive position Capable suppliers Architecture

Fabric Procurement
Medium Medium High High Highly

Garment assembly and Finishing

High High High Low High

Component level outsourcing (Tier 3)

Criteria
Customer Importance Component clockspeed Competitive position Capable suppliers Architecture(Modular or Integral)

Fabric Procurement
Low Low Low High Highly modular

Garment assembly and Finishing

Low Low High High Highly Modular

Kraljics matrix
High

Bottle neck items (Ensure Supply)

Supply Risk

Strategic Items (Form Partnerships)

Non Critical Items

(Simplify and automate)
Low Low

Leverage Items (Exploit purchasing power and minimize cost)

High

Profit Impact

 Fabric procurement Leverage Items Garment assembly Bottle neck item Finishing

Conclusion & recommendations

Maximum of 60% production which Zara produces in advance of season can be outsourced Remaining 40% of the production can be done in house throughout the year as per demand fluctuations Thus Zara will be able to meet demand fluctuations without need of maintaining excess inventory Zara will be able to benefit from low production costs by outsourcing to Asian countries At the same time, Zara will be able to meet customizable demands thereby preserving Zara's fashion forward image