Problem
Zara: Apparel Manufacturing and Retail Zara is a chain of fashion stores owned by Inditex, Spain's largest apparel manufacturer and retailer. In 2012, Inditex reported sales of about 16 billion euros from more than 6,000 retail outlets in about 86 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 four 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. In some cases designs were sent out to third party suppliers for them to prepare samples (a 2-3 month process), or he paper pattern and then a sample garment were prepared in- house, with Zara's pattern makers and the seamstresses who made up the sample working in the same large, open design centre. Patterns once finalised could be made available to the computers that would guide the cutting tools. Based on samples, the initial collection for the sea-son was finalised and shown within Zara.
Zara's success relies on keeping a significant amount of its production in-house and making sure that its own factories reserve the majority of their capacity for in-season adjustments. In-house production allows the organization to be flexible in the amount, frequency, and variety of new products to be launched. The company often relies heavily on sophisticated fabric sourcing, cutting, and sewing facilities nearer to its design headquarters in Spain. The wages of these European workers are higher than those of their developing-world counterparts, but the turnaround time is miraculous. Thus, Zara's products on display match customer preferences much more closely than do those of 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 with 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 manufacturers, 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 predictable 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, along with the postponement of decisions until after trends are known, allow Zara 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. In 2012, Inditex distributed to stores all over the world from eight distribution centres located in Spain. The group claimed an average delivery time of 24 to 36 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 distribution centre (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 reduce inventories and match customer demand. Zara's success story shows the strength of its operations. Its cross-functional operations strategy, coupled with its vertically integrated supply chain, enables mass production under push control, leading to well-managed inventories, lower markdowns, higher profitability, and value creation for shareholders in the short and long term. Zara is all about staying on top of the hottest trends, and exuding an exclusive feel, but its supply chain is the real star of the show. These rockstar-level logistics take it from being just another fashion retailer to an industry example of fast fashion done right.
Complete the following tasks based on the following case study Zara: Apparel Manufacturing and Retail, knowledge learned in this unit and other relevant information.
Task
I. Discuss how Zara can manage service level, uncertainty, and safety stock of the products while sourcing from suppliers in European and Asian countries.
II. Discuss how two principles of 'economy of scale' and 'economy of distance' can help Zara to create an efficient transportation system between Spain, European and Asian countries.
III. Discuss what specific challenges Zara may face by its current sourcing strategies
IV. Based on your analysis, provide recommendations to Zara to reduce the cycle times of four to six weeks. Justify your recommendations.