Supply chain managers, like you, have been looking to improve their supply chain to make it more resilient to unforeseen changesーfrom sourcing to demand spikes and dips. Staying on top of everything and reacting quickly across an ever-changing supply chain can provide your business with more benefits than just scenario planning and forecasting. To illustrate, improving your agility efforts had about 10 times better ROI when compared with dollars spent on planning and forecasting.
That distinction in ROI may not last forever, but during volatile circumstances like the current pandemic, it’s critical for companies and their supply chains to be agile.
So, the question that supply chain managers now have is: How can I make my business’ supply chain more agile?
Today, we will be focusing on Zara—a Spanish fashion designer and retailer that has a lean and agile supply chain. In this case study, you’ll see how they used these strategies to bring their business to new heights.
Zara’s Economic Growth
Before we get into Zara’s supply chain, let’s discuss the business and how it has grown over the years.
Zara is a family business that started in 1975 in Arteixo, Galicia. Then in the 1990s, Zara aggressively expanded into the global market by opening stores in the United States, France, Mexico, Japan, South Korea, Philippines, Australia, and many more.
If you don’t know, Zara is part of the fast fashion industry. Fast fashion refers to brands that design, manufacture, and produce high volumes of clothes rapidly. Traditionally, fashion retailers announced their designs each season and discarded the garments that weren’t sold at a heavy discount.
Now, what Zara did differently was it had more ‘seasons’ and shorter production runs than other clothing brands. Because of their scarcity model, consumers had to buy their favourite designs before they sold out. And the risk seems to have paid off.
Today, Zara has nearly 3,000 stores in 96 countries and has a brand value of approximately 14.7 billion US dollars. This growth is impressive, especially when you consider that the clothing company has a zero advertising policy. Instead, the company invests its money in opening stores in new locations.
Another reason it flourished is because Zara found a significant gap in the market that only a few clothing brands have effectively addressed. This is to keep pace with the latest fashion trends, offering high-quality yet affordable clothing collections for consumers who want the newest styles at reasonable prices.
Aside from its brand positioning, Zara has gotten ahead of its competitors through its lean and agile supply chain. If they weren’t able to adapt quickly, they wouldn’t be able to get their products out in time to align with the current trends.
Zara’s Supply Chain Approach
Zara is a clear leader in fast fashion, and many supply chain experts credit its success to innovative production. Its agile supply chain helped them become one of the most profitable fashion brands to date, sustaining rapid growth year after year.
Let’s take a look at the approaches Zara took to establish their successful, hybrid supply chain.
Local Manufacturing Instead of International Outsourcing
Zara, unlike its competitors, does not outsource their production to Asia or Eastern Europe. Instead, they manufacture most of the products they design and sell within their proximity markets—mainly in Spain, Portugal, and Turkey.
They still outsource items with timeless designs or those with more predictable demand to low-cost suppliers. For example, basic T-shirts will always be in style for their consumers. Still, the majority of their products are manufactured locally.
Centralised Distribution Management
On top of manufacturing locally, Zara has a unique distribution set-up. Unlike other clothing companies that have distribution centres in multiple locations, Zara only has one.
Zara handles all distribution from its Spanish warehouses. In these centres, its teams inspect, sort, tag, and load new items. Then, these manufacturers ship the goods to Europe, where the goods are redirected to stores worldwide. By doing so, Zara sources over 50% of their products with a shorter lead time, compared with the 20% to 25% for most European retailers.
The shorter production time and constant assessment of what products are in demand allow the company to meet customer wants fast—delivering new fashion items to the store within four weeks and modifying existing items in two weeks. Compare this lead time to the usual time of six months to produce new designs and bring fashion collections to market and you can see how Zara’s distribution system works to their benefit.
Controlled Production for Increased Efficiency
Through an integrated and controlled production, the retail giant delivers trendy clothes catered for different tastes. Zara made a conscious effort to optimise its supply chain and quickly address demand worldwide by keeping up to 85% of its factory capacity idle and enabling in-house production.
The in-house production allows them to be flexible in the amount, frequency, and variety of items to be launched. Moreover, by keeping 85% of their factory capacity idle, they can adapt their response to demand changes across the world. This is quite a different approach compared to other fast fashion brands that try to maximise the utilisation of their factories.
With this production model, Zara drops new products in small collections per season based on the current trends. For example, Zara only plans 15% to 25% of its upcoming collection six months in advance. Then, the company designs and manufactures the rest of its clothing collection within the same season. This gives them the ability to keep up with specific styles and designs that become popular during that exact time.
With its quick ability to introduce new products, Zara takes advantage of customers’ constantly-changing interests and tastes in clothing. As a result, the company increases its profits while minimising waste. By simply not producing large quantities of a particular design that goes out of style, they have less leftover stock. That means they have discounted goods less often and retain higher profit margins.
Lean Inventory Management to Avoid Over-stocking
Zara does not have any excess inventory or deadstock in its warehouses, which is mainly due to its implementation of lean inventory management. Zara releases new designs and delivers them to stores twice a week.
Its inventory management allows them to determine what products, how many, and which sizes to deliver to certain stores to avoid over-stocking of unpopular products. With fewer items in stores, they are able to design hastily to chase the latest trend. Plus, they don’t risk having a ton of unsold inventory when designs do not sell well.
- Determining Exact Quantities: Their inventory management, partnered with demand forecasting, allows them to determine the exact quantity of items to deliver to every one of its retail stores that go out twice every week. As a result, the stock is strictly limited. This shapes the customer’s perception of “exclusivity,” while preventing the build-up of unpopular stock.
- Sense of Scarcity for Full Price Items: Because of their business strategy of instilling the sense of scarcity and exclusiveness, they sell more of their items at full price. Zara makes 85% of the full price on its clothes, higher than the industry’s average of 60% to 70%. Their unsold items only account for less than 10% of stock, which is—again—lower than the industry’s average of 17% to 20%.
- Focusing on Raw Materials: In terms of procurement, Zara works on the number of raw materials needed to manufacture clothes rather than the number of finished garments.
With this approach, around two-thirds of their fabrics are bought undyed and purchased before finalising designs to have available raw materials when demand calls for it.
These are the key strengths of Zara’s supply chain that led them to become the global fashion giant they are today. Its cross-functional operations strategy, partnered with its flexible supply chain, makes Zara an excellent example of well-managed inventories, lower markdowns, higher profit, and outstanding brand value.
Strengthen Supply Chain for Business Success
Staying on top of the hottest trends and exuding an exclusive feel is what Zara is all about. But the real reason behind their fast fashion success is their supply chain—one that’s agile and flexible. Their company has successfully incorporated many lean characteristics into their business model, allowing them to maximise profits and reduce production waste.
While Zara’s supply chain approach may be considered untraditional, it’s also exceptional and highly inspiring. As a supply chain manager, take some pointers from its processes to see how you can improve your own supply chain. With the growing pressure for more companies to have agile, stable, and sustainable supply chains, Zara certainly offers many lessons to consider.
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