A case study analysis of Zaras Operations Strategy

Zara is the largest division and flagship brand of the Spanish retail group
Inditex [1] . It sells up-to-the-minute fashionability at low prices, in
stores that are clearly focused on one particular market. (Slack,
Chambers, Betts, & Johnson, 2006)
The first store opened by accident in 1975 due to a large pyjamas order
cancellation. This typically can be said to be an emergent strategy as the
Zara store today was not an intended strategy. [2]
As described in a case study of Zaras supply chain, the company is
vertically integrated, controlling most of the processes in its supply chain.
On the average, 50% of its products are manufactured in Spain, 26% in
the rest of Europe and 24% in Asian countries. Zara outsources products
of high labour intensive processes but maintains in-house capital intensive
processes, protecting knowledge and know-how. It takes less than two
weeks for a skirt to get from Zara's design team in Spain to a Zara stores
in any part of the globe, as much as 12 times faster than the competition.
And with shorter lead times, Zara can ship fewer pieces, in a greater
variety of styles, more often and they can more easily cancel lines that
don't sell as well, avoiding inventory backlogs. (Upadhyay, 2009)
Zaras quick response capacity is made possible by the fact that it
controls the 3 main stages of its operations that define the competitive
edge of the company: design, manufacturing and distribution. This
strategy is embraced to focus on the operations which can enhance cost
efficiency while boosting service delivery and value proposition. As a
fashion imitator, Zara s priority was to focus its attention on
understanding the dynamic fashion trends, aligning these changes to
meet its customers wants rather than on promoting predicted season's
trends via fashion shows and similar channels of influence, which the
fashion industry traditionally used. Other production activities are
completed via a network of about 500 subcontractors in close proximity to
Zaras operations at La Coruna. [3]
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'. (Slack & Lewis, Operations
Strategy, 2008)
This paper uses the models and frameworks of the Operations Strategy
module to describe & analyze how Zaras operations strategy led to a
sustainable competitive advantage in the global apparel industry.
What is Operations Strategy?
Just as there is no consensus on the definition of strategy means,
operations strategy cannot be explicitly defined. In their book,
Operations Strategy, Nigel Slack and Mike Lewis described the four
distinct perspectives on operations strategy, that have emerged, as
illustrated in Fig. 1 (Slack & Lewis, Operations Strategy, 2008, p. 2):
Operations Strategy Perspectives:
Figure 1 showing the four perspectives on operations strategy
(Nigel Slack, 2008)
Top down vs. Bottom up:
Zara boosted its innovation in a fast changing market by adapting the
bottom up perspective of strategy in its operations. This is a key driver of
competitive advantage through constant innovation to develop new-
products that provide customers with new perceived benefits.
Zara did not only depend on the fashion trends in the industry but
leveraged word-of-mouth information to create clothing that will appeal to
its customers. Another bottom-up strategy was that its store managers
could report directly to the Zara headquarters, the feedback on
preferences from their customers. Through these means, sales forecasts
were pragmatic and product launches were swift as Zara was equipped
with the information needed to be competitively agile in copying and
launching products to align with emerging trends in the fashion industry.
This agility is defined by Martin Christopher as
a business-wide capability that embraces organizational structures,
information systems, logistics processes, and, in particular, mindsets.
(The Agile Supply Chain: Competing in Volatile Markets, 2000)
Zara has demonstrated this characteristic of by its flexibility.
Market Requirements vs. Operations Resource:
Whatever the operations strategy of an organization, it must in some way
reflect the requirements of the organizations market. The fashion market
is a fast changing one characterized by quick shifts in consumer demands.
As described by Inditex CEO, Jose Maria Castellano, "the fashion world is
in constant flux and is driven not by supply but by customer demand. We
need to give consumers what they want, and if I go to South America or
Asia to make clothes, I simply can't move fast
enough." [4] (123helpme.com, 2008)
Zaras Resource Utilization and Competitive Advantage
In an article written by John Fernie and Leigh Sparks, (Zara: Time-Based
Competition in a Fashion Market, 2004) they described Zara as:
A company with rapid growth and ongoing success in a fiercely
competitive environment. These are based on the dual objectives of
working without stocks and responding quickly to market needs. It does
this as well as, or even more effectively than, its internationally
acclaimed rivals such as Benetton or Gap, with one of the most effective
quick-response systems in its industry.
Zaras operational goals to achieve short lead times, lower inventory and
increase variety of styles/choice, together with its focus on creativity and
quality is a key driver of the sustainable competitive advantage that it
enjoys in the industry today.
Figure 2 Zaras internal operations and resource utilization that
help meet the market demands.
Adapted from (Nigel Slack, 2008)
From the above illustration in Figure 2, we can deduce that operations
strategy is concerned with the reconciliation of market requirements and
operations resources.
Key drivers of this reconciliation are the importance of setting appropriate
performance objectives and understanding the decision areas that
determine resource deployment.
Reconciliation of Market Requirements with Operations Resources
Figure 3 Reconciliation of Market Requirements with Operations
Resources
Using the framework in fig 3, Zaras operations along its value chain is
analysed as follows:
Factors affecting Zaras Strategic Decisions
Capacity
Zara employs a chase demand capacity management [5] in its operations.
Spare manufacturing capacity is mirrored in the company's storage
function, where up to 400 extra staff can be drafted in during busty
periods. As new stock delivery schedules are regimented, customers know
when new stock is due and traffic in stores is heavier at such times. As a
result, the company is able to adjust its resources to match the demands
as appropriate. Procurement and production planners make preliminary,
but crucial, estimates of manufacturing costs and available capacity. The
cross-functional teams can examine prototypes in the hall, choose a
design, and commit resources for its production and introduction in a few
hours, if necessary. (Ferdows Kasra, 2005)
A small change in retail orders, for example, can result in wide
fluctuations in factory orders after it's transmitted through wholesalers
and distributors. In an industry that traditionally allows retailers to
change a maximum of 20 percent of their orders once the season has
started, Zara lets them adjust 40 percent to 50 percent. In this way, Zara
avoids costly overproduction and the subsequent sales and discounting
prevalent in the industry.
Supply Networks
The vertical Integration advantage can be seen in Zaras centralized
logistics and distribution.
According to Kasra Ferdows, Michael A. Lewis and Jose A.D. Machucas
article in the Havard Business Review, (Ferdows, Lewis, & Machuca, 2005)
Zaras designers create approximately 40,000 new designs annually, from
which 10,000 are selected for production. With about 5 to 6 colours in
most garments of five to seven sizes, Zara's system has to deal with
something in the realm of 300,000 new stock-keeping units (SKUs), on
average, every year. As part of its vertical integration, Zara maintains a
very high control of its supply networks as a strategy in achieving fast
response. It supplies products to its 650 retail stores twice per week (Rice
& Hoppe, 2001) in strictly limited quantities of stock. This ensures Zaras
brand promise to customers of exclusivity and design freshness, thereby
minimising inventory of old stock in any part of its supply chain from raw
materials to end user.
In 2004, a University of Philadelphia article by Craig et al (Craig, Jones, &
Nieto, 2004) identified Zaras strategy as internalization whereby
majority of the processes in its operations are handled by the company
while outsourcing only labour intensive tasks has set Zara milestones
ahead of its competitors in the apparel chain. In contrast to Zara,
Express, a US traditional retailer owned by Limited Brands outsources all
of its production while focusing on distributing and retailing those goods.
This is due to the fact that the global apparel industry is highly labour-
intensive rather than capital-intensive and most competitors seek to cut
costs in production as a profit boosting measure than explore other
strategies as Zara has done. (Craig, Jones, & Nieto, 2004, p. 4)
Process Technology
Zaras communication and coordination through high technology
information systems is one of Zaras success factors relative to its
competitors. In 2002, Accenture (a global management consulting,
technology services and outsourcing company) published an article by
Roger W. Dik and Hans Von Lewinski on its website on how Zara
reconstructed its supply chain so that daily sales data are immediately
shared with its stores, its headquarters and its concentrated production
network by providing the shops with the necessary technology such as
customized handheld computers and logistics capabilities to collaborate
with other partners in the company's supply chain. These computers
process data on orders, sales trends and consumer reactions to products
in stores. (Dik & Lewinski, 2002), (Ferdows, Lewis, & Machuca, 2005).
The updated real time data exchange between the stores and
manufacturing units helps Zara mitigate the risk of the bullwhip effect.
This effect is defined by Cachon et al (Cachon, Randall, & Schmidt, In
Search of the Bullwhip Effect, 2007) as
the phenomenon of increasing demand variability in the supply chain
from downstream echelons (retail) to upstream echelons
(manufacturing). Information Technology has helped Zara to minimize
production volatility that may arise from the bull-whip effect, hence
bringing about a highly positive correlation in the demand and supply of
products. Zaras strategy qualifies its operations as a Type A Product-
Process Mix, with high flexibility, low inventory volumes and high variety
as in Figure 4 below:
Figure 4 showing Zara as a type A Product Process Mix with
high flexibility, low inventory volumes and high variety
Development and Organization
As further described by Ferdows et al in their article, Zara's Secret for
Fast Fashion, Zaras development and organization facilitated an easy
flow of information from customers to store managers, from store
managers to market specialists and designers, from designers to
production staff, from buyers to subcontractors, from warehouse
managers to distributors, and so on. (Zara's Secret for Fast Fashion,
2005). By having operations in close- proximity to its headquarters
allowed for better and faster communication between functional areas for
faster decision making.
Key Success Objectives for Zaras Performance
Speed
Speed and responsiveness to Market, Zara has changed the way clothing
industry works where deigning, production and delivery to the retailers
requires period of six months. The design and distribution cycle of the
company takes just 10-15days in the whole process. Zaras speed to
market in product development exceeds the capabilities of its
competitors. This in itself provides additional value to stakeholders,
customers, and stores in producing quality clothing at affordable prices.
The proximity of their manufacturing and operational processes allows
Zara to maintain the flexibility necessary to design and produce over
12000 new items annually. This capability allows Zara to achieve their
strategy of expedited response to consumer demand. The process of
obtaining market information and relaying it to design and production
teams expedites product development by shortening the throughput time
of their products from design to store.
Dependability
Due to Zaras ownership and control of production, they ensure timely
delivery and service. Although most of their stores run out of stock,
signifying that they have low dependability in terms of product
availability, another perspective of dependability in terms of keeping to
date with fashion is achieved.
Quality
Zara brand has been said to be synonymous with the cutting edge of
fashion at affordable prices. (123helpme.com, 2008)
Another Quality advantage is the added sense of quality to the product as
the tags would be labelled with made in Europe rather than made in
China due to Zaras trade-off between Low labour costs in Asia and
operational efficiency.
Flexibility:
Designers (of average age 26) draw the design sketches then discuss it
with market specials and planning & procurement staff illustrating a
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). This adaptive model rather than
traditional merchandising is very different from its competitors. Many
competitors rely on a small elite design team that plans both design and
production needs well in advance. Stores have little autonomy in deciding
which products to display or put on sale because Headquarters plans
accordingly and ships quantities as forecasted.
Zara owned many of the fabric dying, processing and cutting equipment
that provided Zara added control and flexibility to adopt new trends on
demand. The added flexibility helped Zara on two fronts: shorter lead
times and fewer inventories. (OPPapers.com, 2009)
Cost:
Zara produces most of its products in Europe. Compared to their
competitors, they outsource very little to Asia [6] . Though the cost of
production in Spain is 17-20% more expensive than Asia, Zara does have
a competitive advantage over its competitors in regards to operations.
Though there is a cost advantage in their approach in regards to labour,
the lack of flexibility in changing orders based on current trends hinders
their operational efficiencies. Inventory costs are higher for competitors
because orders are placed for a whole season well in advance and then
held in distribution facilities until periodic shipment to stores. Lower
inventory cost is a key sustainable advantage as it enables Zara to
manufacture and sell its products at cheaper prices.

Conclusion
Adapting the Slack & Lewis Strategy Matrix (Nigel Slack, 2008) for Zara,
The supply networks, capacity and Process technologys speed is critical
to the organizations performance as shown in Fig 5.
Figure 5
The smooth integration between Zara business strategy and it is
operation strategy as illustrated in the strategic matrix above brought
about a promotion of innovativeness through a blending of its
performance objectives and decision areas. (Grant, Lambert, Stock, &
Ellram, 2006) This aligned Zara operations with its business strategy,
ensuring comprehensiveness, correspondence and coherence to achieve
its mark in the garment industry as a world leader today.
Appendices
Appendix 1: Mintzbergs Concept of Emergent Strategy
Appendix 2: typical Zara empty stores
Appendix 3: Zaras Capacity utilization (Ferdows, Lewis, & Machuca,
2005)
References
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from Scribd: http://www.scribd.com/doc/37281774/Zara
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