SUPPLYCHAIN&PURCHASINGMANAGEMENT

GROUPQUIZ

CASE ANALYSIS:

Fast Fashion

FENNY LOLYTA
ARIEF AWAD CHANDR ROSMELI
AKHDAN OKBAH A NA
15066993 15067725 15067727 15067729
01 93 82 71

UNIVERSITAS INDONESIA
 SUPPLY CHAIN & PURCHASING MANAGEMENT

MM-MBA 2015
INTRODUCTION
Zara was founded and established 1975 by Spanish born Amancio Ortega Gaona.
Major priority of Zara and its parent group Inditex, is customer and a demand centric
supply management. Though Zara is a global multi-national company, but it is a
subsidiary of Inditex which is worlds biggest apparel retailer. The Inditex group owns
more than 100 textile companies. Zara is the flagship brand of Inditex, captivating
maximum sales. Zaras retail concept depends on the regular creation and rapid
replenishment of small batches of new goods. Zara's designers create approximately
40,000 new designs annually, from which 10,000 are selected for production. Some
of the goods are high fashion looks-alike, but much cheaper and lower quality and
that in many cases allow Zara to beat high fashion designers in sales and profit
amounts.
Zara is not a world leader in cloth designs, but it is a high sensitive and flexible
fashion trend follower. Zara has design staffs that get fashion inspiration by
interacting with potential customers from competitors' stores, clubs, fashion shows,
university campuses and any other events or venues related to the lifestyles of the
target customers. Zara's networked business designs enable the frequent digital
communication from stores to designers, and centralized distribution allow the within-
14-day deliveries to ensure the satisfaction of consumers, comparing with the
average length of 9 months for the competitors.

Q1. Explain the Elements of Supply Chain Strategy of ZARA.

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

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Customers
From the article, Zara customers approach is based on Approach B or The
Customer Focus Approach with this cycle :

Zara in its system has successfully changing the time frame-work for producing
the fashion itself. In this graph below, we can see how fast it works. From creative
departments to customers hands. Zara has cracked the formula needed to
differentiate itself from competitors by performing their supply chain activities
differently that it gives them competitive advantages over their competitors.
Instead of procuring fabrics after design and development, Zara turned this
process the other way around. Designs are based on available fabrics and
materials, which eliminates the time consuming process of fabric formation.

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015
 SUPPLY CHAIN & PURCHASING MANAGEMENT

Internal Assessment
SWOT Analysis for Zara:

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015
 SUPPLY CHAIN & PURCHASING MANAGEMENT

External Megatrends
There are seven game-changing trends, namely:
Trend 1: Collaboration
Trend 2: Lean & Six Sigma Applied to the Supply Chain
Trend 3: Aggressive Management of Complexity
Trend 4: Network Optimization
Trend 5: The Global Supply Chain
Trend 6: The Sustainable Supply Chain
Trend 7: The Focus on Cost and Working Capital

Trend 1: Collaboration
S&OP (Sales and Operations Planning) is the best practice for internal
collaboration between in-house functional silos. It is the groundwork for
integrated demand and supply chain planning.

It allows marketing, sales, logistics, manufacturing and procurement to

communicate, plan and identify every opportunity to replace inventory with

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015
 SUPPLY CHAIN & PURCHASING MANAGEMENT

information. Zaras internal collaboration in the form of sales and operations

planning (S&OP) enables it to have an integrated supply chain planning. Five
different teams (design, product, merchandising, sourcing, and patterns) share
the same space and work closely together. Zaras designers continuously tracked
customer preferences and placed orders with internal and external suppliers. This
type of centralized decision making reduces the bullwhip effect on the overall
supply chain. Information is also centralized allowing permeability amongst the
different layers in the supply chain. Demand is easily met and manufacturing is
easily achieved, leading to high product turnover.

Trend 2: Lean and Six Sigma

Pioneered by Toyota, Lean and Six Sigma eliminates wastes through minimizing
inventory holding costs, production time and by reducing defects. Nowadays
Lean and Six Sigma is utilized in almost all the manufacturing units and lean
thinking across supply chain and business operations. Zara has pursued Fast
Fashion focusing on reduced response time and minimize inventory as
production took place in small batches. For this model to work, the supply chain
has very short lead times and Zara states that it is able to go from design to final
product delivery in 14 days. Zara always focus on reducing time. Zara holds 6
day-worth of inventory, while H&M holds 52 days, and average Spanish Retailer
holds 94 days of inventory.
Trend 3: Aggressive Management of Complexity

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015
 SUPPLY CHAIN & PURCHASING MANAGEMENT

Complexity in the supply chain can take the form of product complexity or
process complexity. Some amount of complexity is unavoidable. For instance,
customers routinely drive complexity by demanding more choice in products and
services. Zara has about 11,000 distinct items produced during the yearseveral
hundred thousand SKUs given variations in color, fabric, and sizescompared
with 2,0004,000 items for key competitors. To add to the complexity, Zara caters
for females, males, adolescents, and children. It also has several divisions such
as Zara Home, Zara shoes, and Zara accessories. This can increase complexity
with the necessity to store more product variety at more accessible locations.
Trend 4: Network Optimization
All firms that move product among physical locations must deal with a number of
major issues, such as how many warehouses they should have; where those
warehouses should be located; what size they should be; and which customers
retail stores should be served from each warehouse. Zara has number of
warehouses to store their garments and circulate them efficiently. In 1990, Zara
made major investments in manufacturing logistics and IT, including
establishment of a just-in-time manufacturing system, and a 130,000-square-
meter warehouse close to corporate headquarters in Arteixo, outside La Corua.
In 1996, it expanded that central warehouse to cope with the increase in the
number of points of sale. In 2003, Zara began construction of 120,000 square
meters of warehouse space in Zaragoza at a cost of 88 million close to the local
airport and with direct access to the railway and road network as well.
Trend 5: Global Supply Chain
A supply chain strategy clearly must accommodate the global environment. As
developing countries and emerging markets grow dramatically in power in a world
that is increasingly without economic boundaries, the idea of a truly global supply
chain has become a reality.

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015
 SUPPLY CHAIN & PURCHASING MANAGEMENT

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015
 SUPPLY CHAIN & PURCHASING MANAGEMENT

The World Retail Congress also recently named Inditex as International Retailer
of the Year for its best practice in global retailing.
Trend 6: Sustainable Supply Chain
The 1,725 suppliers and 6,298 factories that make up the Inditex supply chain are
located in over 50 countries, all of which are bound by the social and
environmental responsibility values that define Inditex and which are set out in its
Code of Conduct for Manufacturers and Suppliers. Inditex has a Strategic Plan
for a stable and sustainable supply chain 2014-2018, which delves further into
the Groups work in recent years in issues of responsibility of the supply chain.
Trend 7: The Focus on Cost and Working Capital
The culmination of all Game Changers is in managing costs and working capital,
while continuing to improve product availability and service to your customers. By
managing costs and working capital together, companies are striving to increase
the EVA (economic value add) of operations to shareholders. EVA is a metric
(trademarked by Stern Stewart) that measures financial performance of a
company and is of chief importance to investors and corporate valuators, having
been shown to be closely correlated to stock price. Zaras operating working
capital was negative at most year-ends, although it typically registered higher
levels at other

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015
 SUPPLY CHAIN & PURCHASING MANAGEMENT

times of the year given the seasonality of apparel sales. Plans for 2002 called for
continued tight management of working capital and 510560 million of capital
expenditures, mostly on opening 230275 new stores (across all chains).

Competitors

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015
 SUPPLY CHAIN & PURCHASING MANAGEMENT

Technology
In 1990, Zara has made major investment not only in manufacturing logistic but
also in IT, including establishment of a just-in-time manufacturing system. Since
then Zara has been benefited from the used of advanced IT. They utilize its
advanced telecommunications system to connect headquarters and supply,

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015
 SUPPLY CHAIN & PURCHASING MANAGEMENT

production, and sales locations. Zara use the advanced technology to improve
coordination between its store and manufacturing in order to increase the speed
and flexibility of responses to market shifts. The technology also reduce forecast
errors and inventory risks by planning assortments closer to the selling season,
probing the market, placing smaller initial orders and reordering more frequently,
and so on. The technology enable Zaras designers continuously tracked
customer preferences by knowing what customers bought at each store and
placed orders with internal and external suppliers.
Risk
1. Supply Risks
Supply risks refer to the possibility of a failure of inbound supply that renders
a company unable to meet customer demand within anticipated costs. Zaras
fast fashion especially in markets far away from Europe is more risky than its
home market due to its highly centralized distribution system which is done
from Spain. The costs for frequent delivery to those markets are considerably
high, which may lead to Zaras less competitiveness in terms of products
pricing.

2. Demand Risks
Demand risks arise from the movement of goods from the firm all the way to
the final customer. Being in fashion industry, Zara is more susceptible in
variations in demand (caused by fads, seasonality, and new product
introductions by competitors). The competition is getting fierce by the day.
3. Operational Risks
Operational risks affect the firms internal ability to produce goods and
services, the quality and timeliness of production, and/or the profitability of the
company. Sources of operational risk may include a breakdown in core
operations. Since Zara has only one main distribution center, any internal
disruption is extremely risky and could prove fatal to Zaras production. Thus,
another distribution center would be beneficial not only because it can
facilitate excess demand brought about by expansion, but also because
having a single factory to manage all of your distribution is extremely risky. A
solution to this problem would be to locate another distribution center near a
promising new market. In order for this distribution center to be worth the

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015
 SUPPLY CHAIN & PURCHASING MANAGEMENT

immense fixed investment for construction, the new market would have to be
vast and promise high returns.

Q2. Identify the new Supply Chain Capabilities for Zara.

As per the case study, Zara as a company still believes that one approach will fit
all. This is seen from the decision to only have Europe-based DC & Factory. In this
globalization era, competition comes from all over the world. Zara has to always be
aware that at any time their leading position they have now could be taken by other
company. We are of the view that Networking Optimization and Inventory
Management are the new SC capabilities Zara needs to develop.

Network Optimization
Zara has been widely known for its centralization. Almost all of its factory and DC
are located in Spain. This is currently justified because Europe in general is still
Zara biggest market but with close to 90% of its new store are opened outside
the continent, this approach might no longer work in the long run as it increases
the transportation costs significantly as Zara often changing their merchandise on
display every 3-4 weeks. As of 2001, 75% of Zaras merchandise by weight was
shipped by truck by a third party delivery service to stores. It was only 25% of
merchandise that was shipped by air. If Zara maintains its only distribution
centers in Spain and expands deeply into countries outside of Europe, then the
percentage of merchandise shipped by air will need to dramatically increase;
since air shipment is significantly more expensive than by truck, their
transportation costs become significantly higher, especially since air shipments
will need to be made frequently.
Another problem to a single distribution center is the possibility of diseconomies
of scale. Right now Zara is extremely quick and efficient with its distribution
center. However, should Zara expand to another continent/country, there will be a
permanent surge of merchandise within the distribution center. Since the article
stated that no inventory stays in the center for more than three days, increasing
the moving merchandise volume would complicate the pseudo cross-docking
process within the distribution center even further. The excess volume may

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015
 SUPPLY CHAIN & PURCHASING MANAGEMENT

exceed the working capacity of the capital within the distribution center, and
render it incapable of handling the new as well as old order demand.
Network optimization is coming from the struggled of supply chain managers to
identifying the best locations for their warehouses, to rethink their distribution
network and reconsider how many warehouses they had, where those
warehouses were located, and which customers should be served from which
warehouses. This approach, in one way or another only applied by Zara in its
home country, Spain. They however seems to have missed to implement the
knowledge outside Spain, thus causing bloated price for Zaras goods outside
Europe.
Our proposal for this new SC capability is network optimization by
decentralization.

Inventory Management
What we suggest for Zara to implement is to run its ecommerce expansion
alongside adding new brick mortar store. We understand that retail area in
shopping mall are increasingly more expensive, thus in a market where strong
foothold is yet obtained, it is not wise to expand too fast and burning cash. Zara
already has a website but they must market themselves slightly more
aggressively to promote online shopping at their website. This approach can be
deemed successfully in North America where customer is considered less
fashionable than the Europe counterparts. This means visiting brick and mortar
store might not needed as if the customer satisfied with the product, the can
order it online.
Additionally, the selection and inventory can be updated instantaneously on the
website in order for Zara to quickly observe the effect of such changes in buyer
behavior. By doing this, Zara can save overhead costs and effort by not taking
the extra step of distributing to the retail level but instead have a more centralized

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015
 SUPPLY CHAIN & PURCHASING MANAGEMENT

distribution network from which to deliver their products via the well-established
delivery systems of Fed-Ex, USPS and UPS.

REFERENCES

Fernie, J. Logistics and Retail Management: Emerging Issues and New Challenges
in the Retail Supply Chain. 2009. Leigh Sparks
Ghemawat, Pankaj, Nueno, Jose Luis. ZARA: Fast Fashion. 2003. Harvard Business
School
Inditex website: https://www.inditex.com/
Infor. A Lean Supply Chain is Key to Fashion Business Success. 2012.
http://www.fibre2fashion.com/softtex2012/exhibitors/infor/download/aleansupplyc
hainis.pdf
Katigbak, Niko, et al. Zara: Fast Fashion Case Study. 2011. UC Berkeley.
https://www.scribd.com/doc/79423996/Case-Study-Zara-Fast-Fashion
Oliveira, Carolina Lago Barbosa Ortigo de. Zara: Marketing in Fast Fashion
A Case-Study. Nova School of Business and Economics
Sardar, Shaheen. Zara: The Largest Spanish Clothing Company Owned by Inditex.
Hanyang University. http://www.slideshare.net/p2045i/zaras-fastfashion-edge

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015
 SUPPLY CHAIN & PURCHASING MANAGEMENT

ZARA: FACULTY OF ECONOMIC & BUSINESS MM

MBA
FAST FASHION
14 UNIVERSITY OF INDONESIA 2015