Supply Chain Case Study: Zara

Zara’s Supply Chain Case Study – Zara

Abstract

The competition of current clothing industry is very fierce and Zara has many competitive advantages in this competition. This paper will analyze on about how the information technology help Zara to make decisions and make their performance more speed. First, a case review from Harvard Business Review will be covered in the introduction to show an overview of current Zara’s business model. Second is the Michael Porter’s model analysis based on Zara that including three generic strategies and five forces.

Third, some of IT applications are really help the Zara to make their usiness more efficient, the applications will be applied in the Enterprise Resource Planning (ERP), Supply Chain Management (SCM) will emphasize a speed supply chain for Zara, and Customer Relationship Management (CRM). Finally is about the relationship between Zara and Peter Drucker’s theory, Zara and Andrew McAfee’s theory, Zara and Heys theory. The last part will conclude where is Zara today and make brief recommendations.

Table of Contents

• Introduction 4
• Zara and Michael Porter’s Model 5
• Generic Competitive Strategies Analysis for Zara 5
• Five Forces Analysis for Zara 6
• Suppliers Bargaining Power 6
• Buyer Bargaining Power 7
• Threat of New Entrants 7
• Threat of Substitute 8
• Industrial Competitors 9
• The Value Chain of Zara 10
• Enterprise Resource Planning (ERP) 11
• Supply Chain Management (SCM) 11
• Customer Relationship Management (CRM) 13
• Zara and Peter Drucker’s theory 13
• Zara and Andrew McAfee’s theory 14
• Zara and Tony Heys Theory 1 5
• Conclusion 16
• Recommendations 16
• Appendix 18
• References 19

Introduction

Inditex is a largest fashion ground in Spain and owns 9 brands around the world, such as Zara, Massimo Dutti, Bershka and so on.

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Zara is the most successful brand or the Inditex group. The data from Harvard Business Review shows that Zara’s sale revenues Is aoout 3 Y/3M Euros (aoout 4 Inditex’s sale revenues at the beginning of 2003 (Mcafee, Dessain & SJoman, 2007). The last update of Inditex official website shows that there are 1,603 Zara stores around the worlds in 2011 (Inditex, 2011). Zara became so famous today due to their fast fashion. In other words, Zara can design a new product and deliver it to the store all over the world in only two weeks (Tiplady, 2006).

The case “Zara: IT for fast fashion” which from Harvard Business Review analyzed ore details about the basic model of Zara business, the operation process, and IT development. The first idea came up with Zara business is get the information or request from the customer, and then link with the design center and manufacture, finally link the manufacture to the distribution. The operation processes are operating with a group called “commercials” and the process as follows. First, the store managers directly order the items from La Coruna.

Second, another group is responsible to fulfill the orders that they put these finished goods together and shop it to the stores. The last group is design and manufacturing. Zara has a large design group, which has more then 200 cloth designers and no one is senior cloth designer. Zara has their own factories and other outsourcing factories to do the manufacture requirement. For the IT development, Zara is not due with couple of days, but they experienced many years to research and improve their Information Technology system (Mcafee, Dessain & sjoman, 2007).

Zara and Michael Porter’s Model

Generic Competitive Strategies Analysis for Zara

According to the Michael Porter’s Model represent that there are three generic ompetitive strategies in the current business world that are overall cost leadership, differentiation, and focus strategy and every firm have to select one of these three strategies to apply to their firms as their leading strategy (Porter & Millar, 1985). Zara has applied all these three strategies to their business, and each of strategy is actually help Zara to gain the competitive advantage. Zara has many ways to lower their cost such as the raw material and production line.

For the raw material, 50% fabric that Zara buy it as original fabric and cut and dye the color by their own factory. Intditex has one subsidiary company that called Comditel and it provide most of fabric to Zara, the volume is more than other 200 suppliers who provide other raw materials for Zara. On the other hands, there are 85% of production processes working in their own factory where in the La Coruna. Compare with other competitors only have 0% – 20%. So they can control manufacture cost through their in-house production (Ghemawat & Nueno, 2006).

Release new product for amazing pace and keep it low inventory is the main differentiation for Zara. Zara spend 30 million dollars to restructure the IT system, nd merger about 1200 manufacture firms as strategic alliance plus a big design group with about 200 designers to keep fast production line for Zara. These designers can call the copy edition members, because every time when the new fashion appeal in the published areas, such as Paris, New York, or Milan and so on, these designers will be able to copy the similar style and release it in only two weeks.

I nese are tne OITTerent processes compare wltn otner competltors Based on Zara’s differentiation strategy, their target market almost focus on young people who seeking the fresh style and also the relatively low cost. The main idea of Zara is let the ordinary people to enjoy the very new fashion with lower cost than some professional brand. For many consumers, they cannot image that they can wear high-grade brand because of high price, but Zara can give them similar experience (Ghemawat & Nueno, 2006).

Five Forces Analysis for Zara

Suppliers Bargaining Power

Zara has relatively superiority within negotiation power of suppliers. Zara has their own machine to cut the material and each computer-controlled machine can cut 1,000 layers at one time. Hence, Zara only need to send these cut materials to the sewing company. There are lots of choices for the current sewing companies, so the negotiation power of suppliers for Zara is very low. On the other hand, Zara always purchase the fabric with no colors, which means they dye the color by they are own, and the data shows they dye about 50% fabric in their own factory.

As mentioned before, Intditex also owned a fabric company, which called Comditel. So this also can lower the bargaining power of fabric suppliers, because they can purchase the unprocessed fabric for many fabric companies or purchase it from subsidiary company (Chen, 2011).

Buyer Bargaining Power

Normally, the shopper always has more negotiation power when they shopping, for example, in the mall, there are so many choices for the most shoppers, but for Zara’s customer may have lower bargaining power since Zara update their merchandise very fast.

When people walking in the Zara’s store, people had better to buy the clothes or other items if they like it at the first seeing, because it might gone in the next time. The Zara’s customers also need to visit their stores more often since Zara always has new designs either for the totally new product or existing one (they might change or add new color within existing garment). Zara says they has about 11,000 new designs per year, compare with their competitors only have 2,000 – 4,000. They change the goods in about three or four weeks, and about 75% goods will be changed.

They also has very low inventory and even their clothes will not be designed highly lasting. Fresh fashion always keeps in their mind and the Zara’s shoppers also still live by this idea (Mcafee, Dessain & SJoman, 2007).

Threat of New Entrants

Even though the current apparel industry be in fierce competition and it truly easy to start apparel business, but Zara still has low risk with most new entrants since they as efficient IT support. For any other new apparel companies do not have enough budgets to create or develop an efficient information technology system.

The only thing they can that establishes a basic IT system to keep their business on track. On the other hand, even some new company has enough budgets to establishes a more professional IT department to support their daily business, but the point is that they do not have enough experiences to let it working with high efficient. In other words, the new company Just starts with new business and they ao not Know wnat wlll nappen In any processes, sucn as manuTacture department, upply chain management, or the sales in the any stores. Again, Zara’s IT department was not created by one or two days, they experienced many situation for many years.

Ever time when they found a problem or new function, they will fix it and add it to make their IT system working more efficient. Hence, Zara has more competitive advantage by their IT support and this also are the threat for the new entrants. (Chen, 2011).

Threat of Substitute

The customers of Zara are more focus on low-cost fashion that means customers will spend less money but enjoy the trendy garment, this point also makes Zara do not eally care about the threat of the substitute because they design and release the merchandise very fast.

As Zara mentioned before, they can release new design and distribute to the store in only two weeks, in other words, they will has new items every single week. Therefore, even some of other competitors introduce the similar garment with Zara at the same time, but Zara may Just sold out and replenish by other new designs since they has very less inventory. The stocks of Zara always keep about 10% unsold and they replace the merchandise all the time rather than put the same merchandise in their stocks.

In this point, even Zara do not need to care about the substitute from other competitors, but they still need to considering about the inferior goods of the product since the high quantity may not bring the high quality for them (Chen, 2011).

Industrial Competitors

The top four fashion chain firms in current world are Hennes and Maurizt H&M from Sweden, Gap from USA, C&A from Holland, Marks and Spencer from United Kingdom, and Inditex Zara from Spain. Compare with these five firms, H&M is the major competitor for Zara based on the similar product definition.

During 2001 to 2003, H&M increase their stores about 40% all over the world, their sales revenue also increased by 60%, and their profit even increased 150% with additional 57 billion Swedish Krona. From the data also shows that there are 945 stores all over the world and there are 123 stores in Sweden and 822 stores in other countries in the beginning of 2004. For the Zara’s parent company Inditex has 1,922 stores all over the world and covered by 48 countries. Their net sales revenue is about 4,598. million Euros in 2003 and Zara has about 70% sales revenue of Inditex with 3,219. 6 Euros and has 626 stores in 40 countries (Guercini & Runfola, 2011). Hence, there is no big different if only compare with numbers of store between H and Zara. Both of them have wide sale approach, so their turnover and profit are two things that they need to consider with it. Based on their manufacture processes, Zara would like more in-house design and manufacture, these term are all working in the La Coruna. Compare with H, most of production processes of H are outsourcing (almost 99%).

H produce their product in many low labor cost countries, such as China, India, or Africa. So the retail price will be lower than Zara (Tiplady, 2006). On the other hands, Zara spend very less budget with their advertising, is about 0. 3% of the revenue and compare with their competitors is about 3%-4% (Mcafee, Dessain & SJoman, 2007).

The Value Chain of Zara

As mentioned before, a group of people called “commercials” and the operation process has three parts that are ordering, fulfillment, design and manufacture. Each process related with a main information system, the commercials will send 11,000 items a year to production epartment, and the department will send the finished product to the fulfillment. The fulfillment distributes the product to the stores and the stores also send back the unsold product. The suppliers provide material twice a week to the production department. Zara use PDAs and POS to connect each stores to La Coruna.

These processes are all covered in the Enterprise Resource Planning (ERP), Supply Chain Management (SCM), and Customer Relationship Management (CRM). An amazing pace of supply chain is the main factor for entire value chain (Mcafee, Dessain & sjoman, 2007).

Enterprise Resource Planning (ERP)

Zara utilize Enterprise Resource Planning to manage the entire IS work. Each store manager has a handheld device that PDA, this PDA collect all the information from the shopper’s performance, and send it to the central database then send it to design group by the internal network.

The designers will send the new product back to the IS and also manufacture department. Then the manufacture department will complete manufacture processes and set the price, then they will report it to the IS and fulfillment. The fulfillment distribute the finished products to each stores based on their demand. The distribute information also be collected by IS. The suppliers connect with IS and manufacture department (Mcafee, Dessain & SJoman, 2007). The IS of Zara provide very enough resources for analysis.

The stores managers has the most information, because they can directly send the customer feedback to the IS, and another point is stores managers decide the orders directly to the Zara headquarter, so the analysis will based on the different demand from different stores. On the other hand, the distribution center also provides helpful information for Zara because of their better Supply Chain Management (SCM). Therefore, the ERP ystem of Zara not only helps their business work more efficient, but also offers lots of valuable information for analysis.

Supply Chain Management (SCM)

Zara plays an amazing speed for their entire supply chain. Most of competitors such as H&M and Gap, most of production processes of these firms are outsourcing in some low labor cost countries. Unlike these competitors, Zara owns mostly retailers around the world, and investing huge capitals to built their own factories (owns 22 factories so far) and logistics system. Actually, there are 80% of Zara’s manufacture are working in the Spain where the headquarters of Zara, and 50% of these anufacture are owned by themselves.

As motioned before, Intidex also owned a material supply company that called Comditel and provide 40% fabrics for Zara. Hence, Zara can control most of manufacture processes and make their operations are very flexibility (Venkatramanan, 2010). Two groups of commercials play important roles in the supply chain management, one is the design and manufacture and another is fulfillment. Buy the calculation, Zara’s design group has 200 people and design about 1 ,OOO new styles every month, therefore, for one designer will create 60 new styles per year ana It Is 1-2 styles per week.

I ne TulTlllment nas to matcn up a huge number of finished good and send to the right stores, so in their DCs have less labor working for match up, instead, more automation or computerization device will help them to finish these Jobs. Their optical reading devices can select and match up 60,000 items per hour, it makes Zara’s fulfillment more efficient (Venkatramanan, 2010). After the orders arrived in the store, each of Zara’s stores displays the new items at about one or two days.

Two Spanish DCs will distribute the orders from stores in the Western Europe by truck. The stores where in the Latin will be distributed by their ocal smaller DCs. Some other stores are far from Spain will be distributed from Spanish DCs by air, such as Asia or North America. Any of Zara’s DCs will not keep the product so long because they seek fast. Zara never forecast what is the next fashion, they Just find the ideas from fashion published area, then design it, produce it, and then deliver it to the customers (Mcafee, Dessain & SJoman, 2007).

Customer Relationship Management (CRM)

Zara release new garment not only based on their big design group find the idea from fashion published areas, but also based on their customer thinking. The most mportant things for Zara are the communications and information technology. They always collect the customer’s idea and get to know what they need for the fashion product. Each store managers has a handheld device that is PDA. The store manages use PDA not only order the merchandise from headquarters, but they also collect the ideas or feedback from customers and send it to the database of headquarters.

This is one of the most important daily Jobs for each stores managers. The huge information from customers make the design groups are able to create new styles based on these customers thinking (Venkatramanan, 2010).

Zara and Peter Drucker’s theory

IT is changing the current organizations and the processes of new organizations will be information based, and the new issues and concerns will be generated. Many areas of organization have been changing by IT, such as decision-making processes and communication area.

The new structure of organization will has less management, which means one leader only and middle management divide by many groups and each group has more specialist. This is the main statement for Drucker’s theory (Drucker, 1988). Zara actually is following the Drucker’s theory and some of areas totally have been changed by IT. The senior manager is not the decision maker for new releasing, instead, the design group making decisions based on new fashion from world and customers thinking.

The communication area of Zara is based on two devices that are PDA and POS. Each manager has a PDA to send the orders to headquarters, and the POS has the sales information for each store, and the senior managers of La Coruna are able to check this information at anytime. The whole control is wide because they can share the information. The information system of Zara is very important and has more availability, because the performance of each department is based on the IS. Their 11,000 new designs per year will not exist without IS.

Zara and Andrew McAfee’s theory

The article covered two major statement, one is the new IT tools became basic infrastructure for new organizations, but he pointed out the new tools are not the main factor to help the organizations to generate competitive advantages, moreover, the organizations can found innovations from IT development is the key thing.

Another point is that each organization needs to know how to transform the right to others, because somebody others may bring an amazing changing or benefit to the organization rather than only senior managers (McAfee & BrynJolfsson, 2008). Zara is following this theory from McAfee that the IT support is the heart for them and it helped them has been become more and more successful. For Zara, investing in IT is not means buying any professional software from the market, instead of it, most of applications are written by the IT department.

Salgado says that, who is the head of IT for Intitex hought that the commercial packages do not match the company business, because the company has the owe business model. The IT department covered three departments for Zara that are stores, logistics, and administration. There are 50 staffs working with Zara’s IT department and only 1 person left (Mcafee, Dessain & SJoman, 2007).

Zara and Tony Heys Theory

The article from Tony Hey says that in the big databases including helpful data, but some of data may not useful, so the people have to know how to select it from a huge number of data.

Some of data may not useful right now but it may helpful by ombine with other data. People today are facing many problems that cannot solve with it. However, the solution may already be covered in the very big database. The only thing need to do is found the related data and mix it to found the answer, it also called data mining (Hey, 2010). Zara has a huge information system, and it cover many data either from internal or external. The internal data cover the sales revenue of each store, and the POS reports it from each store. These data can help the headquarters for analysis.

The external data include both customers thinking from stores managers and new fashion from he world. The design group could select the valuable information from these two databases to help them to create new styles.

Conclusion

The fierce competitiveness still exist in the current apparel industry, Zara today actually own many competitive advantages due to high efficient of supply chain and successful marketing plan. Zara todays successful cannot working without the IT support, the entire IT system linking every department and working processes, it likes the heart of the Zara.

The perfect IT supports guaranteed every part of Zara’s business on track, and the more and more powerful databases help Zara to gain ore benefit in the future development. However, there is no one company can guarantee that the all departments or working processes are working perfectly and Zara also cover some issues. So the following content covered briefly recommendations.

Recommendations

One of the issues is that Zara has too much different products because Zara has new styles every day. They cannot guarantee that all the products are always popular with the customers.

On the other hands, many of inferior goods may exist in the market. Again, high quantity may not bring the high quality, Zara had better to reduce the ew product release and guarantee that each product has a high quality. This will help Zara to lower the cost and maximize the profit. Another issue is about the high cost of the supply chain, because most of production is in-house manufacture for Zara. This results in the logistics more complete and higher cost. In other words, customers need to pay for this extra cost. Therefore, the prices will be very different for different countries.

The data from Inditex shows that the price is 51% higher in other European countries such as United Kingdom, 109% higher in Americas, and in Japan even is 131% higher than the original price in Spain (Figure 1 provide more data for other countries) (Ghemawat & Nueno, 2006). Hence, Zara should better outsourcing some of production line in other countries such as in the Asia or Americas. That not only can make logistics more efficient, but also can lower the labor cost for the manufacture. The more unique styles for the products can makes the brand more valuable and lower the cost of the supply chain can help them gain more profit.

Therefore, Zara need to encourage the design group to create the product combine with the unique ashion styles and high quality. On the other hands, Zara should lower the cost of supply chain by extend the location of production line to other countries all over the world. These will help Zara to gain more market share from apparel industry.

Appendix

Figure 1: The price ofa T-shirt at Zara Source: Inditex, Adapted by the Author of Zara: Fast Fashion, from Harvard Business Review. December 21, 2006.

References

Chen, M. (2011). Business Strategy & IT. California State University Channel Islands (CSUCI).

Retrieved February 19, 2012, from: http://faculty. csuci. edu/minder. chen/MIS310/slide/Strategy. pt Drucker, P. F. (1988). The Coming of the New Organization. Harvard Business Review, 45-53. Ghemawat, P & Nueno,J. L. (2006, December 21). Zara: Fast Fashion. Harvard Business Review, Y Guercini, S. & Runfola, A. (2011). Sourcing Strategies in Clothing Retail Firms: Product Complexity Versus Overseas Supply Chain. Fashion – networks. Retrieved February 20, 2012, from: http://2011. fashion-networks. com/images/article_pdf/4548. pdf Hey, T. (2010, November). Data Mining. Harvard Business Review, 56-63. Inditex, (2011). Store Around the World.

Retrieved February 18, 2012, from: http://www. nditex. es/en/ who we are/stores Mbalib, (2011). Introduction of Zara. MBA Library. Retrieved February 23, 2012, from: http://wiki. mbalib. com/wiki/Zara Mcafee, A. , Dessain, V. & SJoman, A. (2007, September 6). Zara – IT for Fast Fashion. Harvard Business Review, 9-603-081. McAfee, A. & Bryn]olfsson, E. (2008, July). Investing in IT that Makes a Competitive Difference. Harvard Business Review, 99-107. Porter, M. E. & Millar, V. E. (1985). How Information Gives You Competitive Advantage. Harvard Business Review, 149-174. Tiplady, R. (2006, April 4). Zara: Taking the Lead in Fast – Fashion.

Bloomberg Business week. Retrieved February 18, 2012, from http://www. businessweek. com/globalbiz/content/apr2006/gb20060404 167078. ht m? chan=innovation_branding_brand+profiles Venkatramanan, K. (2009, August 31). Supply Chain Practices at Zara. From Institute of Management Technology (‘MT), Nagpur. Retrieved February 25, 2012, from: http:// www. scribd. com/doc/19488507/Supply-Chain-Practices-at-Zara 123 HelpMe. com. (2012). “Zara’s Business Model, Information and Communication Technologies, and Competitive Analysis. ” Retrieved February 23, 2012, from: http://www. 123HelpMe. com/view. asp? id=97642