Zara: Apparel Manufacturing and Retail

Zara is a chain of fashion stores owned by Inditex, Spain’s largest apparel manufacturer and retailer. In 2009, Inditex reported sales of 11 billion euros from more than 4,700 retail outlets in about 76 countries. In an industry in which customer demand is fickle, Zara has grown rapidly with a strategy to be highly responsive to changing trends with affordable prices. Whereas design-to-sales cycle times in the apparel industry have traditionally averaged more than six months, Zara has achieved cycle times of five to six weeks. This speed allows Zara to introduce new designs every week and to change 75 percent of its merchandise display every three to four weeks. Thus, Zara’s products on display match customer preferences much more closely than the competition. The result is that Zara sells most of its products at full price and has about half the markdowns in its stores compared to the competition.

Zara manufactures its apparel using a combination of flexible and quick sources in Europe (mostly Portugal and Spain) and low-cost sources in Asia. This contrasts with most apparel manufactures, who have moved most of their manufacturing to Asia. About 40 percent of the manufacturing capacity is owned by Inditex, with the rest outsourced. Products with highly uncertain demand are sourced out of Europe, whereas products that are more predicable are sourced from its Asian locations. More than 40 percent of its finished-goods purchases 

and most of its in-house production occur after the sales season starts. This compares with less than 20 percent production after the start of a sales season for a typical retailer. This responsiveness and the postponement of decisions until after trends are known allow Zara 

to reduce inventories and forecast error. Zara has also invested heavily in information technology to ensure that the latest sales data are available to drive replenishment and production decisions.

Until 2002, Zara centralized all its European distribution and some of its global distribution through a single distribution canter (DC) in Spain. It also had some smaller satellite DCs in Latin American countries. Shipments from the DCs to stores were made twice a week. As Zara has grown, it has built another DC in Spain. In 2009, Inditex distributed to stores all over the world from eight DCs located in Spain. The group claimed an average delivery of 24 hours for European stores and up to a maximum of 48 hours for stores in America or Asia from the time the order was received in the DC to the time it was delivered to the stores. Shipments from the DCs to stores were made several times a week. This allowed store inventory to closely match customer demand. 

Questions

What advantage does zara gain against its competitors by having a responsive supply chain?

It allows zara to match demand for fickle trends more accurately. This in turn means that they can sell products at full price and thus secure their margins and make a profit.

It also increases customer loyalty to the brand as zara builds a reputation for being up to date on trends which increases demand products.

It also allows zara to reduce inventories and forecast error.

Why has Inditex chosen to have both in-house and outsourced manufacturing?

In-house manufacturing is used as part of a responsive pull supply chain strategy and also as the final leg of its manufacturing process. After the sales season has started Inditex begins to use in-house manufacturing as a way of quickly responding to trends. It either makes new products or turns incomplete products made from its outsourced manufacturers and turns them into specific finished-goods in response to market demands. Outsourced manufacturing is used to create non-specialised products that can be produced in bulk.

Why does zara source products within uncertain demand from local manufacturers and products with predictable demand from Asian manufacturers?

Products with uncertain demand will most likely be produced at a lower volume to products with a certain demand and therefore sourcing from local manufacturers provides zara the speed it needs to test and deliver these products before they become obsolete and have to be sold at a discount. It is part of a responsive pull strategy.

Predictable demand products are made in Asia due to low labour costs and high volume of products needed. It is more cost effective to manufacture in bulk due to the fact that predictable demand products have a larger window with which to deliver products without becoming obsolete. It also means that they can be made before the season starts as part of a push strategy

What advantage does Zara gain from replenishing its stores multiple times a week compared to a less frequent schedule?

This makes sure that store inventory is always up to date and that new designs can be introduced often to meet trends. It also means that products can be replenished if demand is high and can be taken away if demand is low. Furthermore, it is responsive to the fickle nature of the fashion market if a new trend comes into fashion zara need to be able to adapt their quickly and change their in store merchandise to meet customer demand.

How does the frequency of replenishment affect the design of Zaras distribution system?

The frequency of replenishment has made zara increase the size and also centralise its distribution design by handling its global operations through 8 Distribution canters based in Spain. This centralised structure means that products can be distributed rapidly from in house manufacturing in order to meet worldwide demands in as little time as possible.

Do you think Zara’s responsive replenishment infrastructure is better suited for online sales or retail sales?

Whilst its quick distribution system allows zara to respond to trends very quickly its lack of decentralised distribution means that it is better suited to retail as online sales tend to have more a diverse product demand and customers expect quicker delivery times. Companies such as amaazon are able to respond quicker to online sales due to the fact that they have distribution centres all around the world and can offer same day delivery. Zaras 24 hour delivery times from Spain to outlets all around the world may not be as efficient with online sales as it is with retail sales.

What information infrastructure does Zara need in order to operate?

Zara needs a constant flow of information in the form of sales data to accurately forecast demand and respond quickly. They need a centralised information infrastructure in order to coordinate distribution and obtain information close to real time. 

Gbade Adewole

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