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Tuesday, September 2, 2008

Zara operation management, A business case!

1- Executive Summary

Operations management is in regard to all operations within the organization related activities
including managing purchases, inventory control, quality control, storage and logistics. A great
deal of focus is on efficiency and effectiveness of such processes. An example of successful
operations management in retail sector is obvious in Zara business model which is elaborated
and discussed here by a team of MBA Strathclyde students.
From one shop in La Coruña, the Zara empire has expanded to more 50 countries. While other
giants in the business squeeze their profit margins by manufacturing in bulk and lowering prices,
Zara understood that most of the customers are willing to pay for clothes if they feel they are
getting exclusive and fashionable clothes. The company can design, manufacture and get a piece
of clothing on the shelves in almost two weeks. This rapid supply chain allows Zara's copies to
be in their stores before designers even have them in theirs.
In summary, Zara has closed the loop from manufacturing to customers¶ hands. They are
obsessive about control. Mr. Ortega the CEO of the Inditex, the parent company of Zara, once
said that the secret to retail success is to 'have five fingers touching the factory and five touching
the customer'.

2 - Introduction
Zara is the flagship brand of the Spanish retail group, Inditex SA, one of the super-heated
performers in a soft retail market in recent years. The first Zara shop opened its doors in 1975 in
La Coruña, GaliciaSpain, the city that saw the Group's early beginnings and which is now home
of its central offices. Its stores can now be found in the most important shopping districts of more
than 400 cities in Europe, the Americas, Asia and Africa. With year-on-year sales increasing at
around 25% over the last 5 years, it has become one of the world¶s fastest growing retailers. As
of late last year, Zara had 350 shops in Europe, 18 in the Middle East, 52 in the Americas and
five in Asia. With roughly 40% of Inditex shops, Zara brings in about 80% of the group's
revenue. (Zara founder makes a mint, 2001)
As retailers like Marks & Spencer and Gap join retailers in reporting falling profits, what makes
a Spanish retailer to announce profit and Growth and assume this post as forthcoming leader in
the fashion retail industry? What Ortega, the founder of Inditex, saw that others didn¶t see? What
is Zara Business Model? What is Zara strategy? What are the factors behind the success of Zara?
How scalable its model is? What are the challenges? How Zara would cope with the challenging
environment of fashion retail business faced nowadays by the leaders in this industry?
Amancio Oretga thought that customer would regard clothes as perishable commodity ± no
different from yogurt or bread- to be consumed rather than stored in closets, and has gone about
building a retail business that provides ³freshly baked clothes ³. By Focusing on apparel as
product for consumption Zara compete on speed. This business is all about reducing response
time. In fashion stock is like food it goes bad quickly. So, Zara concentrates on three winning
formulas: Offering fashionable variety with limited supply at affordable price (cost) with a quick
response to market.(Devangshu Dutta 2002)

3- Zara Vertical integrated Supply Chain

An efficient supply chain is becoming more and more key success factor for companies. Henry
Ford assembly line was the event of mass industrial production. Is supply chain management the
new differentiation for companies?

According to McMillan and Mullen (Operations Management Vol-2, 2002), ³the purpose of
SCM is to integrate all tasks associated with the bi-directional flow of materials, information and
finance into organized, coherent, managed processes in order to provide end-to-end management
and control.´

To analyze ZARA supply chain, it is interesting to look closely at the product design, inventory
management, evaluation of suppliers and vendors, logistics management, material management,
time scheduling, information systems which are the main contributors in allowing Zara to offer
cutting edge fashion at affordable prices.
It is also interesting to consider other key performance indicators of Zara comparing to other
peers in the retail market.

3.1- Design and Production

ZARA has been able to deliver fashionable and trendy cloth addressing all tastes through a
controlled design and integrated process. ZARA designs all its products itself. Concurrent
method design could be an adjective to the of product design process which involve the whole
commercial team , designers, market specialist, procurement team as well as continuous
feedback from store managers.

Young Designers (26 average) draw the design sketches then discuss it with market specials and
planning & procurement staff. Designs inspiration is copied from different sources (trade fairs,
catwalks, magazines) from all around the world. It is worth to mention that out of 40,000 designs
only 10,000 are approved. This illustrates the flexibility of ideas generation and on the other
hand the huge number of designs reflects the ability to meet almost all the fashion requirements
by customers of all ages (up to 55).

ZARA business is organized around processes not functions, to close the information loop. All
team is involved in all processes. This method minimizes the time as decision is conducted in
one room, and in direct proximity to the information. As a result, Zara reduces the inherent
uncertainty associated with new designs in this industry that is characterized by long lead times
and very high variability of demand e.g M&S could need a whole season to get a new item to
stock

3.2- Procurement
ZARA manufactures 60% of its products. By owning its in-house production ZARA is able to be
flexible in the amount, frequency, and variety of new styled products. ZARA has outsourced less
manufacturing than its peers. It has 22 factories and runs many of them often only in one shift
leaving extra capacity to respond quickly to seasonality and unforeseen demand. Comparing to
peers which rely heavily on overseas suppliers/manufactures which don¶t provide same
flexibility as these suppliers could request orders to be placed few months in advance.

Zara is outsourcing all the labour intensive tasks mainly the sewing, while the cutting is done in-
house. This produces of saving labour cost, flexibility of meeting deadlines, keeping the
designs/fashions strictly controlled.

Labeled and priced goods are immediately hanged upon arrival-Zara Burjuman, Dubai, July
2005

3.3- Information Systems

Information systems at Zara are one of the drivers of the quick response communication strategy
at Zara.

- Zara stores managers carry handheld Casio computers to send online information to
headquarters like selling trends, customers comments, or placing orders.

- Designers send their design suggestions to factory and to distribution department by scanning a
design into a computer and electronically transmit to factory computers including computers
controlled cutting equipment.

- Designers input the designs patterns into CAD systems which automatically feed into the
cutting machines in the factories ensuring the required quality of outputs and having a minimum
fabrics waste.
(J. Hammond, April 2001)

3.4- Inventory Management

Zara¶s parent company, Inditex, had the lowest inventory, as a percentage of annual sales,
compared with its nearest global competitors, such as Gap, Benetton, and H&M (based on 2000-
2001 figures, Kasra Ferdows) ZARA avoids building inventories in any part of its supply chain
from raw materials to end user.

Notably, Zara designs around 10,000 new models every year and replenishes ranges within every
one of its 650 retail stores twice per week, but in strictly limited quantities of stock. This ensures
Zara¶s brand promise to customers of exclusivity, and also of design freshness. But it also avoids
build-up of large quantities of unpopular stock.

3.5- Centralized Logistics and Distribution

Zara controls and optimizes across different steps of the supply chain, not within them, even
though it may increase costs at some steps, ³Zara sticks to a deep, predictable and fast rhythm,
based around order fulfillment to stores.´ says Professor Ferdows.
There are two orders per week from each store on specific days and hours, with shipments in La
Coruna usually prepared overnight. Trucks leave at specific times (like a bus schedule) and
shipments arrive in stores at specific times. Garments (even those shipped by air), are pre-hung,
already labeled and priced.

³As a result of this clearly defined rhythm, not only every stage of the supply chain ± from
design to procurement, production, distribution, and retail ± know their activities, but even the
regular customers know to visit stores more often on shipment days for the fresh designs.
This large and high-tech facility also has extra capacity on hand to enable Zara to react to weekly
and monthly demand fluctuations. For example, it operates typically 4.5 days per week, around
the clock on full capacity, and extra shifts and temporary personnel are added when needed.

It is interesting to know that ZARA can get the product from the sketch to the store in 2 weeks
time, where the industry standard is 6 months, the design and production process is very efficient
and harmonized due to the use of the different methods that suites their line of business and set
new model to look for. See chart below.
In addition to the analysis of the supply chain, it is important to look at other competitive
advantages of Zara such as people and marketing strategy.

3.6- People at ZARA

People at ZARA are one of the components behind the unique efficient and quick response
system. People are highly motivated which reflects ZARA HR policy. As per the Store manager
(Hassan) at ZARA, Burjuman, ZARA hires young people, provides training and fair incentive
schemes which result in high and effective communication. The employee that we met first at
Burjuman showed a cooperation and help in a friendly manner.
People at ZARA also sell and market the name and represent the fashion. The store manager we
met at ZARA was dressed in a fashionable way. ³We sell fashion´, he says.
People plays a vital role in Zara business model whether designers, buyers, logistics and sales
staff. For example the store manager is a key player of the decision to make a specific model.

3.7- Low marketing / advertising cost

Fashion retailers spend on average 3.5% of revenue on advertising their products, while Zara's
parent company Inditex spends just 0-0.3%. Zara depends on word of mouth. ³In fact, this is the
way I personally knew about Zara- ³from a friend of mine´, says Mariam.
ZARA relies on its stores to project its image. ³We have three coordinators whose main task is to
change the layout of the shop every week. An item that you see it today at the right side of the
shop next week (if not sold yet) will be displayed at some other side in some other way´, Says
Adel Hassan (Store Manager- ZARA, Burjuman).

4- Integration between Business strategy and operations

Zara strategy is growth through diversification with both horizontal and vertical integration. Zara
copies fashion by adapting couture designs. It manufactures, distributes, and retails clothes
within 2 weeks of the original design appearing on catwalks. It owns the entire value added chain
and competes on the basis of speed to market, having invented the concept ³fast fashion´. Finally
it is important to highlight the smooth integration between Zara business strategy and it is
operation strategy.

- Zara operations are in line with the strategy.

- Zara manufacturing and distributions systems enable delivery from concept to store within 14
days.
- Ownership and control of manufacturing facilities in Spain allows for quick response.
- Ownership of high tech distribution systems allow for very fast delivery from factory to stores
all over Europe.
- Zara¶s use of sales staff for market research purposes allows quick response to customer
preferences and local differences.

5- Financial performance Indicators

It is very important to highlight the result of the efficient operation strategy has resulted in an
excellent financial status. Inditex, ZARA parents¶ company has outperformed most of its peers;
this edge on financial performance has given ZARA prospects for future sustainable growth.
Turnover Growth: Average 25% for the last five years.

Operating Profit: Average 15% - higher then H&M, Benetton,

Working Capital: Is one of the lowest (20 m Euro compared to H&M 1035 m Euro ± the net
operating revenue are comparable) since Inditex is capable of turning capital quicker and have
higher assets.

Cost: Inditex cost is low. Operating cost, cost of goods, inventory, marketing cost, employee/
store are examples of an effective and controlled cost management.

6- Customer survey @ Zara Dubai

The Zara survey is an attempt to reflect the specific segment of Zara customers and their level of
satisfaction, accessibility and usage as a comparative tool to what the company¶s claim on the
statements such as ³we are selling fashion and not clothes´. By that, a questionnaire designed
and tested on 20 subjects of which 14 were female and 6 male. The average age was 27. All the
interviewed subjects were selected among those who were familiar with the brand and purchased
at least one item from Zara during the last six months as inclusion criteria. The main objective of
such data collection was to get the brand feedback and reputation. Also the subjects were always
allowed to select more than one box in the questionnaire. For example one might be interested to
purchase all Shirts, T-Shirts and Trousers from Zara and so on. Some major points in the
interview then analyzed and visualized as follows:

Question: What do you like in Zara?

Question: Have you ever visited the Zara¶s website?

Question: How do you evaluate the quality of the clothes in Zara?

The quality seems to be acceptable- low to medium. But it requires further investigations.

7- Key Success Factors behind Zara

7.1- Fashion and Variety

ZARA main competency is selling Fashion and Trendy cloth with high range of variety. Zara
designers are on a constant lookout for new ideas to keep the product line fresh. Zara introduces
11000 new garments in a typical year. Many lines will only be available for a matter of weeks
before being replaced.
As per Adel Hassan (Store Manager at Zara- UAE, Burjuman center), ³We do sell fashion. We
ask our customers what they want, and then we give it to them.´

7.2- Affordability

³I can get a fashionable outfit at ZARA at a price which is half the price of a similar design and
fabrics at any branded shop in Dubai´, Daad Jumblat says. ZARA prices are affordable for
people of different income class.

7.3 - Speed and responsiveness to Market

ZARA is geared around speed and responsiveness providing fresh baked products. Store
managers communicate customer feedback on what shoppers like, what they don¶t like and what
they¶re looking for. That data is instantly funneled back to ZARA¶s designers who begin
sketching on the spot. The responsiveness effects the customer behavior as it plays role in
pushing the customer to buy quickly and have higher visits frequency as new models arrive very
frequent. (The Secret to Zara¶s success, Store Magazine, Fall/Winter 2004)

8- Zara Challenges

ZARA has unique model which differentiates them from competition and made them very
sustainable. In order to maintain the growth and enter new markets ZARA may capitalize on the
success factors and needs to face some challenges. To point out the weaknesses of ZARA it is
important to remind the main strengths analyzed above

Zara Strengths:

- Vertically Integrated Supply Chain

- Quick Response System
- IT integration
- Synergy between Business and Operation Strategy
- Efficient Distribution Facility
- Low advertising Cost
- Global Reach
Although ZARA has a successful business model it also has some weaknesses which could limit
its scalability and ambitious growth.

- Inditex over dependence on ZARA

ZARA constitutes around 80% of Inditex business ( 8 companies) which means a failure in
ZARA can put the whole group at a risk.

- American Consumer Taste

American consumer view of ZARA differs from the European one who view ZARA as
fashionable house. If ZARA needs to grow in American market it needs to address specifically
the American needs and perception of fashion

- American Supply Chain

ZARA supply chain in Europe proved to be extremely efficient. However , ZARA has not built a
distribution strategy in America which is a constraint to the selling ability in US.

- Vertical Integration Limitation

Vertical Integration is a main advantage in ZARA business model. Still it might have some
limitations as it might lead to the inability to use economies of scale. ZARA can not have the
advantage of discount rate for higher order quantity. New product production might implicate
higher R&D cost, higher cost due to change in production techniques, higher training cost for
new techniques,«While a traditional retailer who relies on outsourcing wont experience increase
in cost in such areas.

- Increase in Euro Rate

An increase in Euro rate will increase the consumer selling price in US dollar based economies,
consequently Zara will loose price advantage against relative competitors outsourcing in US
dollar based economies.

- ZARA extensive shops strategy

ZARA intend to over open shops in some areas where the draw back could be that shops
competes to have the same market especially if they have no product differentiation. It worth to
add that ZARA choose high class expensive locations and large space

- Main Competition potential

1) H&M (Hennes and Mauritz) could be the closet potential competitor of ZARA as H&M is
financially very strong, very fashionable, has strong distribution network and has Global reach,
more appealing to international taste. However, H&M offers cheaper rates, spends more on
advertising, and might take advantage of economy of scale.

2) Another threat a copycat of ZARA model located in ASIA (India or China) which have a
substantial lower operating cost. ZARA intend to over open shops in some areas where the draw
back could be that
Shops competes against the same $ especially if they don¶t have product differentiation.

- Multiple Scenario analysis

It would be also a good way to look at Zara Future, by drafting different scenario of the future
and be aware of all alternative choices.

In view of above challenges is ZARA model scalable? How can ZARA sustain its growth?
How ZARA can enter new markets starting from where ZARA today is?

9- Recommendation:

- Distribution center for America

To seek and develop new opportunities in the Americas ZARA most likely should develop a
second central distribution center as an expansion of their smaller distribution center in Latin
America
- Ecommerce
Internet retailing is growing, in the states consumers like to have the comfort of shopping from
their own homes at any time. If ZARA wants to expand and compete in the US market it is
inevitable for them to develop their internet selling strategy noting that e-selling would increase
the sale time to 24/24 , 7/7. Since ZARA product cycle is of the most dynamic the ability of the
consumer to be able to see the new line of ZARA products online is definitely an added value for
ZARA.
- Differentiation between local stores
To motivate customer visit more stores and as a strategy to create traffic ZARA should
differentiate its stores by offering different product lines in different shops.

In conclusion, Zara has the potential for sustainable growth due to its competitive advantage and
its ability to face the challenges of the apparel industry. The company keeps its operating income
elevated, has a strong and unique business model, and has various opportunities or expansion in
the retail industry. To many Europeans, Zara is a familiar face with consistently
trendy, well-priced new apparel every week. To Americans, it is a company that is just getting its
feet wet in the American market. Though, the Inditex branch is researching and developing new
methods for expansion, the company must continue to re-invent and innovate themselves in order
to stay fresh in the apparel industry. Today, many companies are looking to Zara as the new
industry standard for how to run a retail business, which shows that Zara¶s business model is
becoming the wave of the future.

10- Conclusion
Zara, the fashion follower has become the leader in the fashion retail industry due to strategic
model and operations. Having a unique model and the experience in the industry, ZARA should
be able to sustain the growth if it capitalizes on the strengths, take advantage of the opportunities,
and face the challenges.
Zara model succeeded in Europe and it may succeed in other markets if it keeps on offering the
fresh apparel at right time and at a competitive price.
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