Eng. M.

Yasser

ZARA
“Supply Chain Practices of Zara”
Sales

15

10

5
Zara
Gap
0
H&M
2003 2004 2005 2006 2007 Benetton

Sales in B illions of $
 Profit

2000 Zara
Gap

Profit in millions

1000

0
2003 2004 2005 2006 2007
Inventory to Sales
Gross Margin Return on
Inventory Investment
(GMROII)
 GMROII= GM% x (Sales/Average
Value of Inventory)
 GM%= (Selling Price-Cost)/(Selling
Price) * 100
GM% Inventory GMROII
ZARA (Assumed)
60 Turnover
14.2 852
MATALA 60 10 600
N
H&M 60 8 480
GAP 60 7.14 428.4
ZARA vs. Average Product
Life Cycle
Fashion Cycle
Markdown

Pro Pro
fit fit
Mar Mar
gin gin

Profit Margin PM

Ret Mar Ret

ail kdo ail
wn

Markdown
Regular Retail Zara’s Model
Fashion Industry
Overview
 Fashion is a thing which constantly
changes it’s value depreciates
slowly after the time is gone
 This industry tends to extract as
much profit as possible when the
product in fashion then gives
heavy discount.
Inditex in Details

Z a ra a ch ie ve s m o re th a n 7 5 % o f In d itex ’ s to ta l
sa le s.
ZARA’s Profile

 ZARA is the flagship chain store of

Inditex group
 The group’s headquarters is in A
Coruña, Spain
 ZARA needs only 2 weeks to develop
a product and get it to stores,
compared with 6 months (Industry
Average)
 ZARA launches ~10,000 new design
annually.
History of ZARA
Store Locations Globally

25%
2% 50% 2%
13%

8%
ZARA’s Key Factors of
Success or Winning
Formula
 ShortLead Time=More Fashionable
Clothes
 Lower Quantities=Scarce Supply
 More Styles= More Choices and More
Chances of Hitting it.
ZARA’s Core Competitive
Advantage
 High products turnover
 Low level of inventory due to fast
supply chain
 Efficient distribution system
 Commitment of it’s employees
 Scanning of the fashion and market
trends, and meeting the consumer
demand relating to fashionable
clothes
 Flexible production system
ZARA’s Strategy

 Low volumes per style and quickly

changing products in stores
minimizes discount costs
 This strategy closely emulates
“make to order environment”
 This strategy builds up customer’s
anticipation of the next products to
be released
 This strategy creates an artificial
scarcity.
React Rather than
Predict
Fashion is
Fun
Again ! ! !

Exclusivity on rarity
. . . instead of Price
 by Kasra Ferdows, Michael A. Lewis and Jose A.D. Machuca
Editor's note: With some 650 stores in 50 countries, Spanish clothing retailer Zara has hit on a formula for supply
chain success that works by defying conventional wisdom. This excerpt from a recent Harvard Business Review profile
zeros in on how Zara's supply chain communicates, allowing it to design, produce, and deliver a garment in fifteen days.
In Zara stores, customers can always find new products—but they're in limited supply. There is a sense of tantalizing
exclusivity, since only a few items are on display even though stores are spacious (the average size is around 1,000
square meters). A customer thinks, "This green shirt fits me, and there is one on the rack. If I don't buy it now, I'll
lose my chance."
“Consumers in central London visit the average store four times annually,
Such a 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 them
but Zara's customers visit its shops an average of 17 times a year. The
resemble the latest couture creations. But Zara often beats the high-fashion houses to the market and offers almost the
same products, made with less expensive fabric, at much lower prices. Since most garments come in five to six colors and
high traffic in the stores circumvents the need for advertising…”
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. This "fast fashion" system depends on a constant exchange of information throughout every part of
Zara's supply chain—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. Most
companies insert layers of bureaucracy that can bog down communication between departments. But Zara's organization,
operational procedures, performance measures, and even its office layouts are all designed to make information transfer
easy.
Zara's single, centralized design and production center is attached to Inditex (Zara's parent company) headquarters in
La Coruña. It consists of three spacious halls—one for women's clothing lines, one for men's, and one for children's.
Unlike most companies, which try to excise redundant labor to cut costs, Zara makes a point of running three parallel,
but operationally distinct, product families. Accordingly, separate design, sales, and procurement and production-planning
staffs are dedicated to each clothing line. A store may receive three different calls from La Coruña in one week from
a market specialist in each channel; a factory making shirts may deal simultaneously with two Zara managers, one for
men's shirts and another for children's shirts. Though it's more expensive to operate three channels, the information
flow for each channel is fast, direct, and unencumbered by problems in other channels—making the overall supply chain
more responsive.
Zara's cadre of 200 designers sits right in the midst of the production process.In each hall, floor to ceiling windows
overlooking the Spanish countryside reinforce a sense of cheery informality and openness. Unlike companies that
sequester their design staffs, Zara's cadre of 200 designers sits right in the midst of the production process. Split
among the three lines, these mostly twentysomething designers—hired because of their enthusiasm and talent, no prima
donnas allowed—work next to the market specialists and procurement and production planners. Large circular tables play
host to impromptu meetings. Racks of the latest fashion magazines and catalogs fill the walls. A small prototype shop
has been set up in the corner of each hall, which encourages everyone to comment on new garments as they evolve.
The physical and organizational proximity of the three groups increases both the speed and the quality of the design
process. Designers can
ZARA Supply Chain

 ZARA operates using a vertical

supply chain
 ZARA has total control of various
business activities of garment
supply chain, which gives the
company total business
management.
ZARA Garment Supply
Chain
Design and Order
Adminsitration
Commercial Team

 Designers
 Market specialists
 Buyers

Zara Collection

 60% Women’s section

 20% Men’s section
 20% Children’s section
Fabrics Supply

 ZARA obtains 40% of it’s fabrics

supply from another Inditex owned
subsidiary.
 50% of the fabrics are produced
undyed
 60% of the fabrics come from a
range of 260 other suppliers
Ownership and Control of
Production
 ZARA manufactures 50% of it’s
products in it’s own network of 22
Spanish factories
 18 of which are located in and
around the La Coruna complex
 These factories use 500 sewing sub-
contractors in very close proximity
to La Coruna
 The other half of it’s products are
produced from 400 outside
suppliers, 70% are in Europe.
 European vs Asian
Production
Europe Production Asian Production

Cost: $$$$$$$$$$ Cost: $$

Fashion Value: ZZZZZZZZZZ Fashion Value: ZZZZZ

High fashion suits & skirts Commoditized eyeware and plain

shirts
 20%
60% Europe 20%
Spain Asia

Production Facilities
Does ZARA Follow JIT?

 ZARA has a true Just_In_Time system

 From to design, production, and
fabric manufacturing
 Customer’s pull not designers’ push
is what drives the system

Keeping Costs Down

 ZARA Relies more on having prime

retail location than on advertising
for attracting costumers
 ZARA spends 0.3% of it’s sales on
advertising compared to an
average 3.5% of competitors
 Only about 18% of ZARA clothing
doesn’t work with it’s costumers
and has to be discounted, that’s
half of the industry’s average
 % of Sales
Benetton 3
Diesel 4
H &M 4
Gap 5 .5
Macy’s 6

Ad Budgets of
Retailers

Zara 0.3
Good Case Practices
from ZARA
 Reduction in mark-down can more
than make up for the increase in
labor cost.
 Planned shortages can induce more
future demand
 Good store location, layout, and
product display can substitute
advertising
 Faster response eliminates inventory
risks.