Supply Chain Management of the Spanish Retailer

Zara

Submitted to : Dr. Shahzad Ahmed Khan

Submitted by: Bilal Karim

CMS( 17884)
Introduction
Zara is a Spanish clothing and accessories retailer based in Arteixo, Galicia, and founded
in 1975 by Amancio Ortega and Rosala Mera. It is the flagship chain store of the Inditex group,
The world's largest apparel retailer, the fashion group also owns brands such as Massimo
Dutti, Pull and Bear, Uterqe, Stradivarius and Bershka.
It is claimed that Zara needs just two weeks to develop a new product and get it to stores, compared
to the six-month industry average, and launches around 10,000 new designs each year. Zara has
resisted the industry-wide trend towards transferring fast fashion production to low-cost countries.
Perhaps its most unusual strategy was its policy of zero advertising; the company preferred to
invest a percentage of revenues in opening new stores instead. This has increased the idea of Zara
as a "fashion imitator" company and low cost products.
History of Zara

In 1963, Amancio Ortega Gaona started Confecciones GOA in La Corua, to manufacture

womens pajamas and lingerie products for garment wholesalers. In 1975 however, after a German
customer cancelled a sizable order, the firm opened its first Zara retail shop in La Corua. The
original intent was simply to have an outlet for cancelled orders but the experience taught the firm
the importance of a marriage between manufacturing and retailing - a lesson that has guided the
evolution of the company ever since. As a senior marketing executive reiterated in 2001, it is
critical for us to have five fingers touching the factory and five touching the customer.

From a starting point of 6 stores in 1979, the company established retail operations in all the major
Spanish cities during the 1980s. In 1988 the first overseas Zara store opened in Porto, Portugal,
followed shortly by New York City in 1989 and Paris in 1990. But the real step-up in foreign
expansion took place during the 1990s when Inditex entered 29 countries in Europe, the Americas
and Asia (particularly during 1998 to 2001 when it entered 21 of these 29 countries). By 2002
Inditex had opened 1284 stores in 39 countries, an aggressive expansion program based entirely
on internal financing. Even the IPO in May of 2001 brought no additional cash into the company.
Zaras growth is based on a business model that allows it to operate with essentially negative
working capital in other words, it collects cash faster than it pays it out! As an illustration of
the success of the model, Inditex sales grew from 367 million in 1991 to 3.25 billion and net
profit from 31 million in 1991 to 345 million in 2001. In 2001 alone, while many companies
in the industry were facing downturns, Inditex sales grew by 27% over 2000 and profit increased
by 32%. In 2001, Inditexs EBITDA and EBIT as percentage of revenues were the highest among
its peers.
Competitors of ZARA

1.Chanel

2.Christian Dior

3.Burberry

4.Ralph Lauren

5.Prada

6.Gucci

7.Louis Vuitton

8.Hugo Boss

9.Hermes International

10.Versace

11.Valentino S.P.A
Supply Chain Strategy

Factories can increase and decrease production quickly, thus there is less inventory in the supply
chain and less need to finance that inventory with working capital. They do only 50 60 percent
of their manufacturing in advance versus the 80 90 percent done by competitors. So Zara does
not need to place big bets on yearly fashion trends. They can make many smaller bets on short
term trends that are easier to call correctly.

Zara buys large quantities of only a few types of fabric (just four or five types, but they can change
from year to year), and does the garment design and related cutting and dyeing in-house. This way
fabric manufacturers can make quick deliveries of bulk quantities of fabric directly to the Zara
DC the Cube. The company purchases raw fabric from suppliers in Italy, Spain, Portugal and
Greece. And those suppliers deliver within 5 days of orders being placed. Inbound logistics from
suppliers are mostly by truck.

The Cube is 464,500 square meters (5 million square feet), and highly automated with underground
monorail links to 11 factories within a 16 km (10 mile ) radius of the Cube. All raw materials pass
through the cube and all finished goods also pass through on their way to stores. The diagram
below illustrates Zaras supply chain model.

kilometers or 124 miles of rails) to move cut fabric to these factories for dyeing and assembly into
clothing items. The factories also use the monorail system to return finished products to the Cube
for shipment to stores. Here are some facts about the companys manufacturing operations:

Zara competes on flexibility and agility instead of low cost and cheap labor. They employ
about 3,000 workers in manufacturing operations in Spain at an average cost of 8.00 euros
per hour compared to average labor cost in Asia of about 0.40 euros per hour.
 Zara factories in Spain use flexible manufacturing systems for quick change over operations.
50% of all items are manufactured in Spain
26% in the rest of Europe
24% in Asia and Africa
The screenshot below illustrates how the Zara supply chain is organized. Manufacturing is
centered in northwestern Spain where company headquarters and the Cube are located. But for
their main distribution and logistics hub they chose a more centrally located facility. That facility
is located in Zaragoza in a large logistics hub developed by the Spanish government. Raw material
is sent by suppliers to Zaras manufacturing center. Then finished garments leave the Cube and
are transported to the Zara logistics hub in Zaragoza. And from there they are delivered to stores
around the world by truck and by plane.

Zara can deliver garments to stores worldwide in just a few days: China 48 hrs; Europe 24 hrs;
Japan 72 hrs; United States 48 hrs. It uses trucks to deliver to stores in Europe and uses air
freight to ship clothes to other markets. Zara can afford this increased shipping cost because it does
not need to do much discounting of clothes and it also does not spend much money on advertising.
A Lean and Agile Supply Chain
Stores take deliveries twice per week, and they can get ordered inventory often within two days
after placing their orders. Items are shipped and arrive at stores already on hangers and with tags
and prices on them. So items come off delivery trucks and go directly onto the sales floor. This
makes it possible for store managers to order and receive the products customers want when they
want them, week by week.

Zara stores respond practically in real-time as customer preferences evolve. It is a great business
model for success in the high-change and hard to predict fashion industry. It means about half of
the clothing the company sells, most of its high margin fashion items (but not its lower margin
basic items), is manufactured based on highly accurate, short-term (2 6 week) demand forecasts.
Because this business model tracks so closely to real customer demand from one month to the
next, it frees the company to a large degree from getting caught in cyclical market ups and downs
that ensnare its competitors (those cycles are driven by boom-to-bust gyrations generated
by the bullwhip effect). Turbulence in the global economy since 2008 has hurt sales at many
competing fashion retailers, but Zara has seen steady, profitable growth during this time.
However, a fast-moving and finely tuned supply chain like Zaras requires constant attention to
keep it running smoothly. Supply chain planners and managers are always watching customer
demand and making adjustments to manufacturing and supply chain operations. The screenshot
below shows the result of one simulation using the supply chain model outlined above.
Adjustments need to be made to production rates, vehicles, and delivery routes and schedules to
get this supply chain to work well.
Transportation and Distribution
ZARA is following vertical integrated distribution strategy which allows ZARA to enjoy benefits like
strong control, cost control, competitive advantage and differentiation. These advantages lead ZARA to
be the market leader in clothing industry. ZARA is able to cut its cost and time or having cost and time
control as it do not outsource its distribution, this also allows them to avoid the conflicts that usually
arises because of adopting different distribution channels. Vertical integration is also serving as a point
of differentiation between ZARA and its competitors, as usually retailing stores outsource its distribution
and that can be the reason of delayed distribution or supply of products at retail outlets which do not
happens in case of ZARA.

All products pass through Zaras major distribution center in La Corua. This 5-storey, 50,000 m2
distribution centre employs some of the most sophisticated and up-to-date automated systems:
many developed by Zara/Inditex staff with the support of a Danish supplier. With a workforce of
1200, the distribution center normally operates four days per week with the precise number of
shifts depending on the volume of products that have to be distributed. Orders for each store are
packed into separate boxes and racks (for hanging items) and are typically ready for shipment 8
hours after they have been received.
In addition to the central distribution center, Zara has three other smaller warehouses in Brazil,
Argentina, and Mexico in order to cope with distance and different seasons in the Southern
Hemisphere.

In 2001, the distribution center shipped 130 million pieces - i.e. about 400,000 pieces in a typical
day. 75% of these shipments were to stores in Europe. Around 300,000 new items (SKUs or stock
keeping units) are introduced every year (the 10,000 new product designs in typically five to six
colors and five to seven sizes).

Fashion garments represent around 80% of Zaras products and the rest are more basic items.
Contractors, using trucks bearing Zaras name pick up the merchandize at La Corua and deliver
it directly to Zaras stores in Europe.

The trucks run to published schedules. It is also easy to schedule a pick up at a specific destination
for transport back to La Corua (for example a shipment from China to be picked up at the port of
Rotterdam). Products shipped by air are flown from either the airport in La Corua or the larger
airport in Santiago. Typically, stores in Europe receive their orders in 24 hours, the United States
in 48 hours and Japan in 48 to 72 hours. Compared to shipments of similar companies, Zara has
an almost flawless 98.9% accurate with less than 0.5% shrinkage.