Chapter Six: E-Supply Chains, Collaborative Commerce, and Corporate Portals

6-9

REFERENCES FOR ONLINE FILE W6.8

PTC.com. Fila Selects PTC Retail, Footware and
Apparel Solution as Company-Wide PLM Standard.
January 9, 2006. internetretailer.com/internet/market
ing-conference/42467-fila-selects-ptc-retailfootwear- apparel-solution-as-company-wide-plmstandar.html (accessed February 2009).

Time-Compression. Fila Selects PTC Retail. November/

December 2005. time-compression.com/x/guide Archive
Article.html?id=8320 (accessed February 2009).

ONLINE FILE W6.9

Application Case

ZARA: FAST FASHION SUPPLY CHAIN INNOVATOR

The fashion industry is notoriously challenging: Fashions and
peoples tastes are fickle, fast to change, and difficult to predict accurately. Achieving sustainability in this competitive
industry is hard; market leadership almost impossible.
Zara (zara.com) traces its origins to La Coruna, Spain, in
1925; since then, it has grown into the flagship brand of its
parent company, Inditex. Until 1987, Zaras operations were
confined to Spain. In 1988, it opened in neighboring
Portugal and then went international, opening in New York
and Paris. By the end of the twentieth century, Zara was
operating across Europe and Scandinavia, the United States,
Japan, and South America. It now has expanded into a number of Southeast Asian countries, Russia, the Middle East,
China, and Northern Africa. At the beginning of 2009, Zara
operated 1,500 stores in 65 countries; 24 of these stores are
located in the United States. In this highly competitive market, Zara is now the third-largest apparel retailer in the world
in terms of revenues and has approached 20 percent annual
growth rates in sales and net income. It launches 10,000 to
12,000 new designs each year.
To understand some of Zaras success, it is important to
remember a key mantra for Zara: Success relies on having
five fingers touching the factory and five touching the customer (Ortega, cited by Ferdows et al. 2004). In other
words, the decisions taken by Zaras executives are driven by
a belief in being responsive to consumer demand and changing preferences and in meeting those needs by maintaining
control of nearly all aspects of the supply chain. Zara has
become famous for being able to go from the design phase to
delivering the finished good to its warehouses in a 2- to 3week time frame, compared with its competitors who might
take 9 to 12 months. Zaras stores around the world receive
these new designs 1 to 2 days after they reach the distribution center. Zara rolls out some 12,000 new items per year,
compared to its competitors who average 2,000 to 4,000.
Zaras customers visit their stores about 17 times per year,
compared with about 4 visits per year to its competitors. It
discounts only 18 percent of its clothes, compared to the
industry average of about 35 to 40 percent. Zara spends a

miserly 0.3 percent of sales on advertising, compared to an

industry average of 3.5 percent. And, of interest here, it
spends 5 to 10 times less on IT than its major rivals do. So
why is the company so successful?
It is generally acknowledged that Zara has a superresponsive supply chain. Rather than relying on sophisticated demand forecasting, Zaras strength lies in its ability to
respond rapidly to changing trends (see Exhibit W6.9.1 illustrating Zaras core business activities). Zara has identified a
few critical processes (ordering, design and manufacturing,
fulfillment) and gears those processes to meeting three discrete customer groups (men, women, children). Customer
needs, preferences, and behaviors are the starting point of
the Zara supply chain. Customer demand patterns and qualitative feedback from its stores drive much of the design and
manufacturing activity. So, too, does market research into
key fashion trends.
At a time when many other competitors are outsourcing
much of the manufacturing, Zara outsources comparatively
little, other than the actual machining of garments. And
unlike competitors who rely on low-cost producers in China
and India, Zara elects to have garments sewn locally in Spain
and northern Portugal. Zara also controls its distribution network, at times engaging in relatively high-cost practices that
actually drive efficiencies elsewhere. Zara makes deliveries to
its retail outlets twice weekly and in relatively small quantities, thus encouraging customers to buy now or miss out
later. It also means that Zara carries much less in inventory.
All clothes are tagged and priced in Spain, and many clothes
are delivered on hangers and can be placed directly in the
store without ironing. However, this practice costs more
because it increases the volume of goods to be transported.
Trucks and planes are used for deliverya higher-cost option
than trains and shipsallowing for rapid fulfillment.
Zaras supply chain is geared more toward maximizing
revenues than toward reducing costs, and the organization
appears to have uncanny insights into some of the more hidden costs associated with some very low-cost supply chain
practices and activities.
(continued)

6-10

Part 3: Business-to-Business E-Commerce

ONLINE FILE W6.9 (continued)

EXHIBIT W6.9.1 Zaras Core Business Activities
Zara

In-Store Sales
Customer demands,
behaviors, feedback

In-Store Sales
Design

Cutting

Distribution
In-Store Sales

Market research,
key trends
In-Store Sales

Sewing

Although Zara may spend less on IT than others in the

fashion industry, it would be a mistake to think that IT is
not regarded as being critical to business success. Rather,
Zara appears to adopt a philosophy that says (1) invest in
mission-critical IT as a priority; (2) do not try to automate
all functions, but allow IT to support information and knowledge sharing and collaboration, and inform the decision
making; (3) simpler IT solutions that meet business needs
are generally preferable to the more complex ones; and
(4) ensure that all investments in IT (many are in-house
custom-built systems) are a very close match to required
business functionality. Zara has made little investment in the
Internet for B2C EC for two good reasons: (1) its distribution
centers are not configured to support the picking and shipping of direct to consumer orders and (2) its research suggests that most mail-order businesses needed to deal with
substantial returns, further complicating the management of
their merchandise. The key to Zaras success is appropriate,
business-driven IT investments, geared at supporting and
automating parts of the critical core business processes.

Zara would appear to be a testimony to the successful

design and implementation of a market-responsive supply
chain strategy.

Questions
1. Why is the fashion industry so competitive?
2. Why do you think excellence in supply chain management
may be an important ingredient in success in the fashion
industry?
3. What were the underlying reasons for Zaras success?
4. What is the meaning of the expression five fingers
touching the factory and five fingers touching the customer? Would this be an appropriate mantra for a
supermarket chain to adopt?
5. Discuss some of the risks you feel are evident in Zaras
approach to supply chain management.

Chapter Six: E-Supply Chains, Collaborative Commerce, and Corporate Portals

6-11

REFERENCES FOR ONLINE FILE W6.9

Ferdows, K., M. A. Lewis, and J. A. D. Machuca. Rapid-Fire
Fulfillment. Harvard Business Review (November 2004).
Indu, P., and V. Gupta. Zaras Supply Chain Management
Practices. ICFAI Center for Management Research,
Hyderabad, India, OPER/055, 2006.

Wikipedia. en.Wikipedia.org/wiki/Zara_(Clothing)
(accessed February 2009).
Zara. zara.com (accessed January 2009).

Online File W6.10 The CPFR Process

As part of a pilot project, Wagner-Lambert (WL), now a Pfizer company, shared strategic plans, performance data, and market insight with Wal-Mart. The company realized that it could benefit from Wal-Marts market knowledge, just as Wal-Mart
could benefit from WLs product knowledge. In CPFR, trading partners collaborate on making demand forecasts. Using CPFR,
WL increased its products shelf-fill rate (the extent to which a stores shelves are fully stocked) from 87 percent to 98 percent, earning the company about $8 million a year in additional sales.
When implementing a CPFR process, the collaborators agree on a standard process, shown in Exhibit W6.10.1. The
process ends with an order forecast. CPFR provides a standard framework for collaborative planning. Retailers and vendors
determine the rules of engagement, such as how often and at what level information will be provided. Typically, they
share greater amounts of more detailed information, such as promotion schedules and item point-of-sale history, and use
store-level expectations as the basis for all forecasts.
The idea is to improve demand forecasting for all of the partners in the supply chain and then communicate forecasts
using information-sharing applications (already developed by technology companies such as Oracle and JDA systems). For the
retailer, collaborative forecasting means fewer out-of-stocks and resultant lost sales and less stored inventory. For the manufacturer, collaborative forecasting means fewer expedited shipments, optimal inventory level, and optimally sized production runs.
Besides working together to develop production plans and forecasts for stock replenishment, suppliers and retailers
also coordinate the related logistics activities (such as shipment or warehousing) using a common language standard and
new information methodologies.
The CPFR strategy has been driven by Wal-Mart and various benchmarking partners. After a successful pilot between WalMart and Warner-Lambert involving Listerine products, a VICS (Voluntary Interindustry Commerce Standards) subcommittee
was established to develop the proposed CPFR standard for the participating retailing industries (Wal-Marts suppliers).

EXHIBIT W6.10.1 The CPFR Process

Company decides
on participating
suppliers

Agreement on
scope of
collaboration

Selection of
supporting software
(e.g., from
JDA Software)

Develop jointly the

forecasts, resolve
forecasts exceptions

Determine
specific project (e.g.,
demand forecast,
logistics forecast)

Examine the
value chain

Use result to
make inventory and
scheduling decision