[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

AGEMENT
Pro
jec
t
Re
por
t

INSTITUTE
OF
MANAGEMEN
T
TECHNOLOGY
, NAGPUR
P
G
D
M

Supply
chain
practices
of Zara

2
0 Course
Facilitator: Prof.
0 Krishnamurthy
8 Venkatramanan
2
0
Submitted by:
1
0 Nadeshwar Mukherjee
(08FT040)

Nandi Ananya Sujit

(08HR031)

SUP
PLY
CHAI
N
MAN

Sorubh Janmeja
(08HR094)
Rahul Mohata (08IT028)
Sunita Rani (08IT039)

Prajakta Shinde
(08IT057)

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

without the support provided by our

course facilitator, Prof.
Krishnamurthy Venkatramanan.
Moreover, we are highly indebted by
the internet facilities provided by the
members if IT lab.

Project Group
PGDM 2008-2010

ACK
NOW
LED
GME
NT

This report on Supply

chain practices of
Zara would never
have been completed

[SUPPLY CHAIN PRACTICES OF ZARA] August 31, 2009

TABLE OF CONTENTS
SL.NO.

PARTICULARS

PAGE NO.

Acknowledgement

Executive summary

Zara Company Profile

Fashion Industry Overview

Fashion Industry Growth Drivers

Zara Customer & Product Mapping

Zaras key factors of success or winning formulae

10

Zara Logistics & Supply Chain

12

Is Zaras competitive advantage sustainable?

19

10

Learning

22

11

Zara In Sum

22

12

Bibliography

23

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

length.

These

include

the

methodology used to react to recent

EXECUTIVE
SUMMARY

changes rather than predicting it,

production methods, distribution

This project aims atmethods and use of information

understanding
thetechnology at various stages of
supply chain practicessupply chain.
followed by the fast
fashion

collectionFinally, it is discussed whether the

manufacturing
competitive advantage that Zara has
company Zara, Spain.is sustainable or not. The various
It
takes
intolearning from Zaras supply chain
consideration

themanagement has also been jotted

profile of the companydown In the end.

and the characteristics
of fashion industry and
on what factors does it
future growth depend
upon.
Then the report moves
on to concrete on the
various key factors of
success of Zara. The
time

cycle

of

the

products of Zara, what

it

offers

to

its

customers

including

the

customer

segmentation has been

considered. Then the
logistics and supply
chain mechanism has
been

considered

at

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

stores.

ZARAS
PROFILE

Zara is a vertically integrated

retailer. Unlike similar

apparel

Zara is the flagshipretailers, Zara controls most of the

chain store of Inditexsteps on the supply-chain: It
Group
owned
bydesigns, produces, and distributes
Spanish

tycoonitself. The business system that had

Amancio Ortega. Zararesulted was particularly distinctive
is

the

mostin that Zara manufactured its most

internationalized
offashion-sensitive
products
Inditexs chains. Theinternally. Zara did not produce
group is headquartered"classics", clothes that would
in A Coruna, Spain,always be in style. In fact, the
where the first Zaracompany intended its clothes to
store opened in 1975.have fairly short life spans, both
As of August 2009,within stores and in customers'
there are more than
1,500

Zara

stores

around the world.

It is claimed that Zara

closets.

FASHION INDUSTRY
OVERVIEW

needs just two weeks

to

develop

newThe

fashion

industry

is

product and get it tocharacterized as a chain, in which

stores, compared withprofits

derived

a six-month industrycombinations

from
of

unique
high-value

average, and launchesresearch, design, sales, marketing,

around

10,000

newand financial services that allow

designs each year. Zararetailers, branded marketers, and

has

resisted

industry-wide
towards

thebranded manufacturers to act as

trendstrategic brokers in linking overseas

transferringfactories with markets.

fast fashion production

to low-cost countries.There are various types of fashion
While it spent little on and each type has its own
ads, it spent heavily oncharacteristics. e.g. Fast fashion is

one of them which are the ones that are presented in

used

to

clothing

describevarious fashion week organized

collectionsaround the globe.

which are based on the

fashionFashion is a thing which constantly
trends,
whereaschanges. Its value depreciates
slowly after the time is gone. In the
classical fashion on the
time period when the product has
other hand describes
just become out-of-fashion till its
those
clothing
value
collections which are
most

recent

evergreen. The recent

trends are generally

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

becomes zero, the

product is generally
sold on sale. As a result,
this industry tends to
extract as much profit
as possible when the
product is in fashion
then give heavy
discounts.

FASHION
INDUSTRY
GROWTH
DRIVERS
There are many factors
on which the future
growth of fashion
industry depends:-

1. World GDP
The
GDP
growth
will
determine the
buying capacity
of people and
also
the
condition
of
other industries
on
which
fashion
industry
depends.
2. Policies As
many countries
are
plunged
into recession,
the
countries
are
changing

the import and export

policies. These policies will
have a major impact on the
industry growth as most part
of fashion accessories are
exported to other countries.

3. Development of logistics
Logistics is the backbone of
fashion industry. As the
better the logistics, faster
the product hits the market,
cheaper the cost, better it is
for the customers and so for
the companies.
4. Growth of retail chains
Most of the companies do
not have their exclusive
showroom
only.
They
depend a lot on multibranded showrooms across
the world to sell their
products. Hence the growth
and stability of the retail
chains will go on to improve
the condition of fashion
industry.
5. Development in IT Speed
of

the

customers

process,
order

the
from

ordering the raw material to

the final selling of the
product, greatly depends on
the technology used in the
system. E.g. use of RFID,
clipped tags, faster printers,
better

communication

channels etc. Better the

technology
available

and

used the better

the

people or computer) which

influence a lot the fashion
industry such as forecasting
etc.

responsiveness
of the fashion
industry
towards
customers
demands.

6. Others There
are
various
skills
(of
6

[SUPPLY CHAIN PRACTICES OF ZARA] August 31, 2009

ZARAS CUSTOMER AND PRODUCT OFFER

Zaras Customer Segment
LOW COST FASHION FOR THE 16 TO 24 YEAR OLDS

LOW COST

FASHION

Get it approximately right

Respond to what customers want create a

demand chain

Eliminate creative design

Copy trendy fashion fast

Fast-response supply chain including design

Create a store experience

Finalise design knowing material supply

Create a network/brand

constraint
Optimise the supply process for speed and cost
Manage follow-up (next batch) and customer
flows

Zaras Customer offer

FRESH/FAST
Fast copying of leading

QUALITY
Raw material: medium

COST
Low monetary cost

styles

Knit: poor

Low time cost:

Fast delivery in own stores

Look: grand!

the Zara experience

Limited editions

Customer satisfaction:
fashion at low price

FLEXIBILITY
Limited customer variety: only what is on display and in limited choices
But every customer is participating in the process: helps determine the next batch

[SUPPLY CHAIN PRACTICES OF ZARA] August 31, 2009

Zaras Product Offer

Product Offer
Supply Process

High customisation

High standardisation

Low volume

High volume

High unit margin

Low unit margin

High quality

Low quality

High fashion: Out of price

Flexible Process

Rigid Process

ZARA

M&S: Out of Fashion

Zaras Product Life Cycle Curve

Generally, a typical Product Life Cycle Curve looks like the one given in the diagram where
Sales decreases as the product moves over the time line. But as Zara is in a high fashion
industry and its product offering are the latest trends and designs with a life of maximum 5-6
weeks so its Product Life Cycle Curve becomes like the one given in next diagram.

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009
9

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

ZARAS KEY
FACTORS OF
SUCCESS OR
WINNING
FORMULAE
Zara concentrates on

three winning
formulae to bake its
fresh fashions:
S
h
o
r
t
L
e
a
d
T
i
m
e
=
M
o
r
e
f
a
s
h
i
o
n

a
b
l
e
c
l
o
t
h
e
s
L
o
w
e
r
q
u
a
n
t
i
t
i
e
s
=
S
c
a
r
c
e
s
u
p

p
l
y

months. Thus, most retailers try to

forecast what and how much its
customers might buy many months

in the future, while Zara moves in

More styles =
More choice,step with its customers. Trend
and
moreidentification
comes
through
chances
of
constant
research
not
just
hitting it
traditional
consumer
market
Firstly, by focussing
on

shorter

times,

response

the

company

ensures that its stores

research, but a daily stream of

emails and phone calls from the
stores to head office. Unlike other
retailers, Zara's machinery can react

to the report immediately and

carry
produce a response in terms of a
clothes
that
the
new style or a modification within
consumers want at that
2-4 weeks. Many other retailers
time. Zara can move
have such long supply chain lead
from identifying a
times that for them it would seem a
trend to having clothes
lost cause for them to even try and
in its stores within 30
respond to a sales report.
days, this means that
are

able

Zara

to

can

quickly

identify and catch aSecondly, by reducing the quantity

winning fashion trend,manufactured in each style, Zara
while its competitorsnot only reduces its exposure to any
are struggling to catchsingle product but also creates an
up. Catching fashion
while it is hot is a clear
recipe

for

better

margins

with

more

artificial scarcity. As with all things

fashionable, the less its availability,

the more desirable the object
becomes.

sales happening at fullThe added benefit of lower

quantities is that if a style does not
prices
and
fewer
work well, there is not much to be
discounts.
disposed during the season-end
In comparison, mostsale. The result of this is that Zara
retailers of comparablediscounts only about 18 percent of
size or even smaller,its production, roughly half the
work on timelines thatlevels of competitors.
stretch

into

4-12

even if a style sells out very

Thirdly,
more

instead

quantities

ofquickly,

there

are

new

styles

peralready waiting to take up the

style, Zara producesspace.

more styles, roughly
12,000 a year. Thus,

10

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

on these parameters as well as some

Zara can offer moreunique aspects of the retailer's
choices
in
morebusiness model.
current fashions than
many

of

its

competitors. It delivers
merchandise

to

its

stores twice a week,

and since re-orders are
rare the stores look
fresh every 3-4 days.
Fresh produce, moving
in step with the fashion
trend

and

updated

frequently

the

ingredients
right

to

are

just

create

the

sweet smell of success.

Now, the question is

how does Zara achieve
its three key success

factors which would

be a nightmare for
most other retailers to
achieve in such short
time spans? So, let us
look

at

mechanisms

the
that

enable Zara to deliver

11

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

mostly to low cost Asian countries.

In contrast, it is estimated that 80
ZARAS
LOGISTICS AND percent of Zara's production is
SUPPLY CHAIN carried out in Europe which is
within the small radius of its
If you thought that it isheadquarters in Spain. In fact,
not possible to producealmost half of its production is in
or
all this success in theowned
same kind of set-up asfacilities.

closely-controlled

other retailers, and that

it also has to cost
something, you would
be absolutely correct
on both counts. Zara
follows a structure that
is

more

closely

controlled than most

other

retailers,

and

pays further by having

the various businessWhile this gives Zara a
elements in closetremendous amount of flexibility
proximity to eachand control, it does have to
itscontend with higher people costs,
averaging 17-20 times the costs in
headquarters in Spain. Asia.
other,

around

1) Ownership and Counter-intuitively Inditex has also

Control of
gone the route of owning capitalProduction
intensive manufacturing facilities in

Retailers

like

the

Spain. In fact, it is a vertically

American chain Gap
integrated group, with up-to-date
and
the
Swedish
equipment for fabric dyeing and
retailer Hennes &
processing, cutting and garment
Mauritz completely
finishing. Greige (undyed fabric) is
outsource
their
more of a commodity and is sourced
production to factories
from Spain, the Far East, India, and
around the world and
Morocco. By retaining control over

the

dyeing

processing
Inditex
processing

andto provide the correct fabrics for new

areas,styles. It also does not own the

has

fabriccapacity

available on demand

12

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

design and product development

labour-intensive
costs. But obviously, this higher
process of garment cost of product development is
stitching, but controls
than
adequately
it through a network more
of
compensated by higher realised
subcontracted
workshops in Spain
and Portugal.

margins.
In addition, the entire product
development cycle begins from the
market research. This

2) Supercharged
Product
Development
Design

and

development
highly

combines information

product
is

people-

intensive process. The

heavy

creative

workload of 1,000 new

styles every month is
managed by a design
and development team
of over 200 people.
This means that every
person on an average
is producing around 60

from visiting university

campuses, discos and other
venues to observe what
young fashion leaders are
wearing
f
r
o
m
d
a
i
l
y

styles in a year or 1-2

styles every week.
With new styles being
developed

and

introduced frequently,
each

style

would

provide only around

200,000-300,000

of

retail sales, a far lower

figure

than

other

retailers or brands, and

certainly not costefficient in terms of

f
e
e
d
b
a
c
k
f
r
o
m

t
h
e

information

technology

and

communications infrastructure to
keep streaming up-to-date trend
information to the people making

s
t
o
r
e
s

the product and business decisions.

At the leading edge of research are
the sales associates and store
managers in Zara stores, who zap
orders on customised hand held
computers over the Internet to Zara

f
r
o
m

headquarters based on what they

see selling. And not just orders, but
ideas for cuts, fabrics or even a
whole new line. They draw upon

t
h
e

customer comments, or even a new

style that a customer might be
wearing that could be copied for
Zara's stores. Traditional daily sales

s
a
l
e
s

reports can hardly provide such a

dynamically updated picture of the
market.

3) React Rather than Predict

r
e
p
o
r
t
s
This

has

What sets Zara apart from many of

its competitors is what it has done to
its business information and business
process. Rather than concentrating
on forecasting accurately, it

has developed its business around

reacting swiftly.
meant

significant
investment

in

13

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

more countries around the world.

What a typical retailerTypically vendors may take a few
or brand might do?weeks to two months to procure
Designers
looking

startfabrics, have them approved by the

fashionretailer, and then produce a number

may
at

startof samples, and only once all

designing a look forapprovals are finished, put the style
into production.
summer
2010.
Information
andFrom beginning to end, the process
trends,

and

inspiration comes fromof defining a concept to receiving

forecasting
agencies,goods in the retail store might take
trade

shows,

various

other

andanywhere from 9 to 12 months for a

places.typical retailer. This one-year

Over a period of 3-5advance decision making on what

months they developmerchandise and how much to
the ideas into physicalstock is a bit like driving a car at
samples. Sales budgetsspeed by just looking in the rear
and stock plans areview mirror! Amazingly, it seems to
developed based onwork 60-65 per cent of the time.
what is going on in theZara, on the other hand, largely
business right thenconcentrates its forecasting effort
on the kind and amount of fabric it
(roughly
one-year
will buy. It is a smart hedging by
ahead of the targeted
Zara because of two reasons style). At various times
fabric (raw
during this seasonal
material)
process,
there
are
mistakes
decision-making
are
cheaper
meetings, where styles
than
are accepted, rejected or
finished
changed, pricing and
goods
margin decisions taken
errors the
and orders finalised.
same
fabric
Based on a host of
could be
factors, the orders
turned into
might then be placed
different
with vendors in one or

g
a
r
m
e
n
t
s

commercial
managers
designers
sit
down
conceptualise
w
h
a
t
t

In fact, for an extra

degree of flexibility

Zara

buys

semiun-

coloured fabric that it

processed

or

colours up close to the

selling season based
on the immediate need.
With that edge, and a
super-fast

garment

r
m
e
n
t

design and production

process, it takes to the

market

its

customers are looking

what

for.
l

4) Quick-Bake
Recipe: Well
Mixed Ingredients
Garment styling for
Zara

actually

from

the

phone

starts

email

call

o
o
k
l
i

or

received

from the stores. Thus,

from

the

beginning

Zara is responding to

an actual need, rather

than forecasting for a

distant future.
Based on the store
demand,
Zara's

f
a

and
and

b
r

d
e

i
t

o
u

i
l

b
e
14

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009
Finally,
Zara's
high-tech

what it will cost

distribution system ensures that no

and at what price itstyle sits around very long at head

will sell
office. The garments are quickly
cleared

through

the

distribution

As soon as approvals centre, and shipped to the stores,

are received,
instructions are issued arriving within 48 hours. Each store
to cut the appropriate receives deliveries twice a week, so
fabric.
after being produced the merchandise
The cutting is done indoes not spend more than a week at

Zara's own high-techmost in transit.

automated
cutting
facilities.

The

cut5) Information Technology Keeps

pieces are distributedIt Boiling Keeping Costs Down
for assembly to aInformation and communications
network of smalltechnology is at the heart of Zara's
workshops mostly inbusiness. Four critical informationGalicia and in northernrelated areas that give Zara its
speed include:
Portugal. None of
these workshops are Collecting information on
owned by Zara. The

consumer needs: trend into

workshops

are

information flows daily, and is

provided with a set of

fed into a database at head

easy

to

follow

office. Designers check the

instructions,

which

database for these dispatches as

enable them to quickly

well as daily sales numbers,

sew up the pieces and

using the information to create

provide

constant

new lines and modify existing

stream

to

Zara's

ones thus, designers have access

garment finishing and

to real-time information when

packing

deciding with the commercial

Thus,
months

facilities.
what

takes

team on the fabric, cut, and

for

other

price points of a new garment.

companies, takes no

Standardisation

more than a few days

information

for Zara.

incomplete specifications and

varying

of

product

different

product

or

information

availability

Product

typically

information

and

add

inventory management being

several weeks to a

able to manage thousands of

typical

retailer's

fabric and trim specifications,

product design and

design specifications as well as

approval

process,

their physical inventory, gives

Zara

Zara's team the capability to

the

design a garment with available

but
warehouses
product
information

stocks, rather than having to

with

common

order and wait for the material

to come in.

definitions,

Distribution management: its

allowing
it
toState-of-the-art distribution facility
functions with minimal
quickly
and
human intervention.
accurately prepare Approximately 200 kilometres
designs, with clear of underground tracks move
cut manufacturing
instructions.

15

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

merchandise from
Zara's
manufacturing
plants to the 400+
chutes that ensure
each order reachesKeeping Costs Down
its

rightEven

while

manufacturing

in

destination. OpticalEurope, Zara manages to keep its

reading
devicescosts down. None of its assembly
sort

out

andworkshops

are

owned

by the

distribute

morecompany. Most of the informal

than 60,000 itemseconomy workers the workshops
of clothing an hour.employ are mothers, grandmothers
Zara's merchandiseand teenage girls looking to add to
does

not

wastetheir household incomes in the

time waiting forsmall towns and villages where
human sorting.
they live.
Further, in terms of marketing
costs, Zara relies more on having
prime

retail

locations

than

on

advertising for attracting customers

to its stores. It spends a meagre 0.3
per cent of sales on advertising
compared to an average of 3.5 per
cent of competitors according to the

company, choosing highly visible

locations for its stores renders
advertising
unnecessary.

16

[SUPPLY CHAIN PRACTICES OF ZARA] August 31, 2009

Apart from designing to the fashion-of-the-day, Zara's strategy of producing low volumes
per style and changing products quickly in its stores enables it to cut down on the
discounts as well. Only about 18 percent of Zara clothing doesn't work with its customers
and must be discounted. That's half the industry average of 35 percent. Zara also has two
clearly time-limited sales a year rather than constant markdowns.
Lastly, since it spends effort on producing what are current fashion trends, it spends its design
effort on interpreting rather than creating afresh. In fact, Zara has been constantly

alleged to have knocked-off top designers' ranges, thus spending less on product
development and design.

Do Zara follow JIT?

Most JIT system (even Toyotas) focus on manufacturing but Zara has a true just-in-time
system From customer to design, production and fabric manufacturing
Customers pull not designers push drives the system

This helps Zara to have an edge over most of its competitors strategy by having very low
Inventory to Sales Ratio. A comparison (of Zara and its Competitors) is given in the
following graph -

17

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

Zaras Production
Commitment and
Markdown

Fresh items

Markdown is
phenomenon of selling
the product in sale at
the season end or sale
during offseason.

6-month
Pre-season
Traditional
Industry

45 - 60 %

Model

Zara

15 25 %
18

[SUPPLY CHAIN PRACTICES OF ZARA] August 31, 2009

IS ZARAs COMPETITIVE ADVANTAGE SUSTAINABLE?

Zaras core competencies mainly revolves around

1. The high turnover of its products

2. Low level of inventory due to Fast supply chain - 1 week final production cycle, two
day outbound logistics, fast adaptation of leading trends
3. Efficient distribution system
4. Commitment of its employees
5. Scanning the fashion trends, market trends and meeting the consumer demands
relating to fashionable clothes
6. Flexible production system

CORE COMPETENCE

Valuable

The high turnover

of its products

Low level of inventory

due to Fast supply
chain

Commitment of its
employees

Efficient

Flexible production
system
Not easily imitable

distribution

Idiosyncratic

system
Scanning the

fashion

trends, market

trends

and

meeting

the

consumer demands
relating to fashionable
clothes
SUSTAINABLE COMPETITIVE ADVANTAGE

Not easily substitutable

19

[SUPPLY CHAIN PRACTICES OF ZARA] August 31, 2009

Zara achieved its competitive advantage through Mass Customization

Elements of Mass Customization
Information elicitation
Communication network
Flexible technology
Tracking system
Make-to-order

Elicitation
Communication

Tracking

Inventory

Processing

Market

Zara has actually developed its structure in such a way that it supportrs the
methodlogy of Mass Custmization (an inbetween situation of Mass Production
and Customization). This Mass Customization is a combination of Job Shop and
Continous Flow of Production System with high efficieny and low volume, a
scenario rare to find in real world.But Zara has developed it and this has added to
its Compititve Advantage.

20

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

A shift in the
traditional productprocess frontier

Low Variety
Low efficiency
Low volume

High variety

J
o
b
S
h
o
p
New Frontier
Batch
Process
Mass Customization
Product
Production Line
Old
Frontier
Continuous Flow

21

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

LEARNING
Reducti
on
in
markdown
can
more
than
make up
for the
increase
in
labour
cost
Planned
shortage
s
can
induce
more
future
demand
Good store
location,
layout and
product
display can
be
a
substitute
for
advertising
Faster
response
eliminates
inventory
risks
Excess
capacity
pays for itself by
faster response

ZARA IN SUM
By taking a new and aggressive
approach

to

fashion

risk

management through current, small

job

shop

production

in

continuous flow of fashion items,

Zara

not

margins

only

achieved

high

NOTWITHSTANDING

higher local labour costs but

turned the production design into a
compelling marketing story with
the help of its Supply Chain
Management, an effort worth more
then appreciation.

22

[SUPPLY CHAIN PRACTICES OF ZARA] August 31,

2009

BIBLIOGRAPHY

HBS: 9-604-081,
2004.

17

th

Dec

[3] Dutta, Devangshu. Retail @

The following
the speed of fashion, 2002,
websites were referred
to while preparing the
report:<www.3isite.com/articles/ImagesF
ashion_Zara_Part_I.pdf>
[1] Website
of
Wikipedia
- [4] PDF file http://en.wikipedia. <http://www.gallaugher.com/Zara
org/wiki/Zara_(clot %20Case.pdf>
hing)

[2] Website of Zara www.zara.com/

The following articles
were referred to while
preparing the report:-

[1] Ghemawat, Pankaj

and Nueno, Jose
Luis. Zara: Fast
fashion, HBS: 9st

703-497, 1
2003.

Apr

[2] Mcafee
Andrew,
Dessain
Vincent
and
Sjoman,
Anders. Zara: IT
for fast fashion,

23