Replenishment Strategy With Respect To ZARA

Supply Chain and Value Chain and Operations Research

Department : Fashion Management Studies

Semester : 02

Submitted To: Dr. Dibyendu Bikas Dutta

Submitted By: Aastha Gupta (MFM/18/196)

Aayushi Agrawal (MFM/18/N531)
Monica Raj (MFM/18/698)
Oindrila Pal (MFM/18/141)
Ramkrishna Mondal (MFM/18/929)

BATCH : 2018 – 20

NIFT KOLKATA
 DECLARATION

We the undersigned solemnly declare that the report entitled “Replenishment

Strategy with respect to Brand ZARA” is based on our own work carried out
during the course of our study towards partial fulfilment of the subject Supply
Chain and Value Chain and Operations Research under the supervision of Dr.
Dibyendu Bikas Dutta.
We assert that the statements made and conclusions drawn are an outcome of the
project work. We further declare that the work reported in this report will not be
submitted, either in part or in full, for the award of any other
degree/diploma/certificate in this institute or any other institute or University.

_____________________ _____________________
Aastha Gupta Monica Raj
MFM/18/196 MFM/18/698

_____________________ _____________________
Aayushi Agrawal Oindrila Pal
MFM/18/N531 MFM/18/141

_____________________
Ramkrishna Mondal
MFM/18/929

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 CERTIFICATE

This to certify that report entitled “Replenishment Strategy with respect to

Brand ZARA” was carried out by Ms. Aastha Gupta, Ms. Monica Raj, Ms.
Aayushi Agrawal, Ms. Oindrila Pal and Mr. Ramkrishna Mondal, 1st Year
students of Semester-II, Masters of Fashion Management (MFM), National
Institute of Fashion Technology, Kolkata under the guidance and supervision of
Dr. Dibyendu Bikas Dutta for the fulfilment of the requirements for the subject
of Supply Chain and Value Chain and Operations Research

_______________________
Dr. Dibyendu Bikas Dutta
Assistant Professor
Department of Fashion Management Studies (FMS)
National Institute of Fashion Technology (NIFT), Kolkata

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 ACKNOWLEDGEMENT

Supply Chain and Value Chain and Operations Research helped us in developing
a better understanding about the process flow of Supply Chain & Operations
Research with respect to every aspect in details. We have hugely benefitted from
the subject, wherein we have understood the practicality and the benefits that one
would have after studying the subject.
We would like to express our special thanks and gratitude to our teacher
Dr.Dibyendu Bikas Dutta for his able guidance and constant supervision as well
as for providing necessary information and support in completing our project.
We would also like to extend our gratitude to our Director, Col. Subroto Biswas
for all the opportunities we have been receiving on the campus, which in turn
facilitates the smooth functioning of our assignments and tasks.
Our thanks and appreciations also go to the people who are directly and indirectly
helped us out in developing the assignment.

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 TABLE OFCONTENTS

SR. NO. TOPIC PAGE NO.

Declaration ii
Certificate iii
Acknowledgement iv
1 Supply Chain Management 1
1.1 Advantages of Supply Chain Management 2
1.2 Supply Chain 2
1.3 Supply Chain management: Decision Phases 5
1.4 Performance Measure 7
2 Inventory Replenishment 11
2.1 Factors used to calculate Inventory Replenishment 12
2.2 Replenishment Policies 13
3 Zara’s Replenishment Strategy 17
3.1 About Zara 17
3.2 ZARA Business model 19
3.3 ZARA Business Strategy 20
3.4 Production & Supply Chain 20
3.5 ZARA Business Strategy on Positioning 21
3.6 ZARA Business Strategy of Fast Fashion 21
3.7 ZARA Business Strategy of Supply Chain 21
3.8 ZARA Business Strategy of Store Fronts 21
3.9 Factors of ZARA’s Supply Hain management Success 21
3.10 ZARA’s Logistics & Supply Chain 23
3.11 Three Principles of ZARA’S Supply Chain 27
3.12 Zara : Vertically Integrated supply Chain 28
4 Conclusion 30
5 References 31

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 Replenishment Strategy: ZARA

1. Supply Chain Management

Supply Chain Management can be defined as the management of flow of products and
services, which begins from the origin of products and ends at the product’s consumption.
It also comprises movement and storage of raw materials that are involved in work in
progress, inventory and fully furnished goods. The main objective of supply chain
management is to monitor and relate production, distribution, and shipment of products and
services. This can be done by companies with a very good and tight hold over internal
inventories, production, distribution, internal productions and sales.

In the above figure, we can see the flow of goods, services and information from the
producer to the consumer. The picture depicts the movement of a product from the producer
to the manufacturer, who forwards it to the distributor for shipment. The distributor in turn
ships it to the wholesaler or retailer, who further distributes the products to various shops
from where the customers can easily get the product.

Supply chain management basically merges the supply and demand management. It uses
different strategies and approaches to view the entire chain and work efficiently at each and
every step involved in the chain. Every unit that participates in the process must aim to
minimize the costs and help the companies to improve their long-term performance, while

1
also creating value for its stakeholders and customers. This process can also minimize the
rates by eradicating the unnecessary expenses, movements and handling.

1.1. Advantages of Supply Chain Management

The key benefits of supply chain management are as follows:

 Develops better customer relationship and service.

 Creates better delivery mechanisms for products and services in demand with
minimum delay.

 Improvises productivity and business functions.

 Minimizes warehouse and transportation costs.

 Minimizes direct and indirect costs.

 Assists in achieving shipping of right products to the right place at the right time.

 Enhances inventory management, supporting the successful execution of just-in

time stock models.

 Assists companies in adapting to the challenges of globalization, economic

upheaval, expanding consumer expectations, and related differences.

 Assists companies in minimizing waste, driving out costs, and achieving

efficiencies throughout the supply chain process.

1.2. Supply Chain

Supply chain management is a process used by companies to ensure that their supply
chain is efficient and cost-effective. A supply chain is the collection of steps that a
company takes to transform raw materials into a final product. The five basic
components of supply chain management are discussed below:

a) Plan
The initial stage of the supply chain process is the planning stage. We need to
develop a plan or strategy in order to address how the products and services will
satisfy the demands and necessities of the customers. In this stage, the planning
should mainly focus on designing a strategy that yields maximum profit. For
managing all the resources required for designing products and providing services,

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 a strategy has to be designed by the companies. Supply chain management mainly
focuses on planning and developing a set of metrics.

b) Develop
After planning, the next step involves developing or sourcing. In this stage, we
mainly concentrate on building a strong relationship with suppliers of the raw
materials required for production. This involves not only identifying dependable
suppliers but also determining different planning methods for shipping, delivery,
and payment of the product.

Companies need to select suppliers to deliver the items and services they require to
develop their product. So in this stage, the supply chain managers need to construct
a set of pricing, delivery and payment processes with suppliers and also create the
metrics for controlling and improving the relationships.

Finally, the supply chain managers can combine all these processes for handling
their goods and services inventory. This handling comprises receiving and
examining shipments, transferring them to the manufacturing facilities and
authorizing supplier payments

c) Make
The third step in the supply chain management process is the manufacturing or
making of products that were demanded by the customer. In this stage, the products
are designed, produced, tested, packaged, and synchronized for delivery.
Here, the task of the supply chain manager is to schedule all the activities required
for manufacturing, testing, packaging and preparation for delivery. This stage is
considered as the most metric-intensive unit of the supply chain, where firms can
gauge the quality levels, production output and worker productivity.

d) Deliver

The fourth stage is the delivery stage. Here the products are delivered to the
customer at the destined location by the supplier. This stage is basically the
logistics phase, where customer orders are accepted and delivery of the goods is
planned. The delivery stage is often referred as logistics, where firms collaborate
for the receipt of orders from customers, establish a network of warehouses, pick
carriers to deliver products to customers and set up an invoicing system to receive
payments.

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e) Return

The last and final stage of supply chain management is referred as the return. In the
stage, defective or damaged goods are returned to the supplier by the customer.
Here, the companies need to deal with customer queries and respond to their
complaints etc. This stage often tends to be a problematic section of the supply
chain for many companies. The planners of supply chain need to discover a
responsive and flexible network for accepting damaged, defective and extra
products back from their customers and facilitating the return process for customers
who have issues with delivered products.

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1.3. Supply Chain Management- Decision Phases

Decision phases can be defined as the different stages involved in supply chain
management for taking an action or decision related to some product or services.
Successful supply chain management requires decisions on the flow of information,
product, and funds that fall into three decision phases. Here we will be discussing the
three main decision phases involved in the entire process of supply chain. The three
phases are described below:

a) Supply Chain Strategy

In this phase, decision is taken by the management mostly. The decision to be made
considers the sections like long term prediction and involves price of goods that
are very expensive if it goes wrong. It is very important to study the market
conditions at this stage. These decisions consider the prevailing and future
conditions of the market. They comprise the structural lawet of supply chain. After
the lawet is prepared, the tasks and duties of each is laid out. All the strategic
decisions are taken by the higher authority or the senior management. These
decisions include deciding manufacturing the material, factory location, which
should be easy for transporters to load material and to dispatch at their mentioned
location, location of warehouses for storage of completed product or goods and
many more.

b) Supply Chain Planning

Supply chain planning should be done according to the demand and supply view.
In order to understand customers’ demands, a market research should be done. The
second thing to consider is awareness and updated information about the
competitors and strategies used by them to satisfy their customer demands and
requirements. As we know, different markets have different demands and should
be dealt with a different approach. This phase includes it all, starting from
predicting the market demand to which market will be provided the finished goods
to which plant is planned in this stage. All the participants or employees involved
with the company should make efforts to make the entire process as flexible as they
can. A supply chain design phase is considered successful if it performs well in
short-term planning.

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c) Supply Chain Operation

The third and last decision phase consists of the various functional decisions that
are to be made instantly within minutes, hours or days. The objective behind this
decisional phase is minimizing uncertainty and performance optimization. Starting
from handling the customer order to supplying the customer with that product,
everything is included in this phase. For example, imagine a customer demanding
an item manufactured by were company. Initially, the marketing department is
responsible for taking the order and forwarding it to production department and
inventory department. The production department then responds to the customer
demand by sending the demanded item to the warehouse through a proper medium
and the distributor sends it to the customer within a time frame. All the departments
engaged in this process need to work with an aim of improving the performance
and minimizing uncertainty.

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1.4. Supply Chain Management- Performance Measure

Supply chain performance measure can be defined as an approach to judge the

performance of supply chain system. Supply chain performance measures can
broadly be classified into two categories:

 Qualitative measures: For example, customer satisfaction and product quality.

 Quantitative measures: For example, order-to-delivery lead time, supply chain
response time, flexibility, resource utilization, delivery performance.

Here, we will be considering the quantitative performance measures only. The

performance of a supply chain can be improvised by using a multi-dimensional
strategy, which addresses how the company needs to provide services to diverse
customer demands.

1.4.1. Quantitative Measures

Mostly the measures taken for measuring the performance may be somewhat
similar to each other, but the objective behind each segment is very different
from the other. Quantitative measures are the assessments used to measure the
performance, and compare or track the performance or products. We can further
divide the quantitative measures of supply chain performance into two types.
They are:

a) Non-financial measures

The metrics of non-financial measures comprise cycle time, customer

service level, inventory levels, resource utilization ability to perform,
flexibility, and quality. In this section, we will discuss the first four
dimensions of the metrics:

Cycle Time- Cycle time is often called the lead time. It can be simply
defined as the end-to-end delay in a business process. For supply chains,
cycle time can be defined as the business processes of interest, supply chain
process and the order-to-delivery process. In the cycle time, we should learn
about two types of lead times. They are as follows:

 Supply chain lead time

 Order-to-delivery lead time

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The order-to-delivery lead time can be defined as the time of delay in the
middle of the placement of order by a customer and the delivery of products
to the customer. In case the item is in stock, it would be similar to the
distribution lead time and order management time. If the ordered item needs
to be produced, it would be the summation of supplier lead time,
manufacturing lead time, distribution lead time and order management time.
The supply chain process lead time can be defined as the time taken by the
supply chain to transform the raw materials into final products along with
the time required to reach the products to the customer’s destination address.
Hence it comprises supplier lead time, manufacturing lead time, distribution
lead time and the logistics lead time for transport of raw materials from
suppliers to plants and for shipment of semi-finished/finished products in
and out of intermediate storage points. Lead time in supply chains is
governed by the halts in the interface because of the interfaces between
suppliers and manufacturing plants, between plants and warehouses,
between distributors and retailers and many more. Lead time compression
is a crucial topic to discuss due to the time based competition and the
collaboration of lead time with inventory levels, costs, and customer service
levels.

Customer Service Level - The customer service level in a supply chain is

marked as an operation of multiple unique performance indices. Here we
have three measures to gauge performance. They are as follows:

 Order fill rate: The order fill rate is the portion of customer demands that
can be easily satisfied from the stock available. For this portion of
customer demands, there is no need to consider the supplier lead time
and the manufacturing lead time. The order fill rate could be with respect
to a central warehouse or a field warehouse or stock at any level in the
system.

 Stockout rate: It is the reverse of order fill rate and marks the portion of
orders lost because of a stockout.

 Backorder level: This is yet another measure, which is the gauge of total
number of orders waiting to be filled.

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 Probability of on-time delivery: It is the portion of customer orders that
are completed on-time, i.e., within the agreed-upon due date. In order to
maximize the customer service level, it is important to maximize order
fill rate, minimize stockout rate, and minimize backorder levels.

Inventory Levels- As the inventory-carrying costs increase the total costs

significantly, it is essential to carry sufficient inventory to meet the customer
demands. In a supply chain system, inventories can be further divided into
four categories.

 Raw materials
 Work-in-process, i.e., unfinished and semi-finished sections
 Finished goods inventory
 Spare parts

Every inventory is held for a different reason. It’s a must to maintain optimal
levels of each type of inventory. Hence gauging the actual inventory levels
will supply a better scenario of system efficiency.

Resource Utilization- In a supply chain network, huge variety of resources

is used. These different types of resources available for different
applications are mentioned below.

 Manufacturing resources: Include the machines, material handlers,

tools, etc.
 Storage resources: Comprise warehouses, automated storage and
retrieval systems.
 Logistics resources: Engage trucks, rail transport, air-cargo carriers, etc.
 Human resources: Consist of labor, scientific and technical personnel
 Financial resources: Include working capital, stocks, etc.

In the resource utilization paradigm, the main motto is to utilize all the assets
or resources efficiently in order to maximize customer service levels, reduce
lead times and optimize inventory levels.

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b) Financial Measures

The measures taken for gauging different fixed and operational costs related
to a supply chain are considered the financial measures. Finally, the key
objective to be achieved is to maximize the revenue by maintaining low
supply chain costs.

There is a hike in prices because of the inventories, transportation, facilities,

operations, technology, materials, and labor. Generally, the financial
performance of a supply chain is assessed by considering the following
items:

 Cost of raw materials.

 Revenue from goods sold.
 Activity-based costs like the material handling, manufacturing,
assembling rates etc.
 Inventory holding costs
 Transportation costs
 Cost of expired perishable goods
 Penalties for incorrectly filled or late orders delivered to customers
 Credits for incorrectly filled or late deliveries from suppliers
 Cost of goods returned by customers
 Credits for goods returned to suppliers

In short, we can say that the financial performance indices can be merged as
one by using key modules such as activity-based costing, inventory costing,
transportation costing, and inter-company financial transactions.

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2. Inventory Replenishment
Inventory Replenishment captures purchase order lead time information from the
Purchasing module and past usage information from the Inventory, Order Management,
and Work Order modules. It enables we to adjust past usage information based on the needs
of the business, and to manually enter additional information that works with its
calculations to provide the most complete picture of the current inventory situation.

Inventory Replenishment plans replenishment orders for the current period and then sends
this information to Purchasing and Order Management. Purchasing and Order Management
use this information to create purchase orders, kit assembly orders, and warehouse transfer
orders.

Inventory Replenishment helps we to manage wer inventory requirements on an ongoing

basis. It provides tools to help we:

 Identify current replenishment needs at the inventory site level

 Analyse inventory performance
 Monitor new item performance
 Measure customer service
 Identify irregularities
 Identify purchase orders with excess lead times
 Identify purchase orders that need to be expedited
 Identify unusual usage patterns
 Calculate inventory site replenishment values
 Identify inventory items that need target orders placed

Inventory Replenishment enables we to measure how well we are serving the customers on
an overall level and on an inventory item level. It also helps we measure each inventory
item’s performance and profitability in terms of its turnover rate, gross margin, adjusted
gross margin, and return on investment.

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2.1. Factors Used to Calculate Inventory Replenishment
a) Lead Times
Lead time is one of the factors used in calculating replenishment quantities and
replenishment points. All lead times are based on two standard inventory concepts:
 Lead time — The number of days between the date we place an order until the
date we receive the order. To ensure that Inventory Replenishment calculations are
accurate, lead times should be maintained for each inventory item at each site. Lead
times are specific to individual orders for inventory items and are not used to
predict future needs.
 Projected lead time — A factor used to predict needs in the current fiscal period,
projected lead time is the average number of days estimated to replenish inventory
from the normal source of supply. Inventory Replenishment calculates the
replenishment quantity for an inventory site using purchase order lead time,
transfer order lead time, or assembly order lead time

b) Demand

Demand is one of the factors that Inventory Replenishment uses to calculate

replenishment quantities. Recall that replenishment quantities can be calculated
using demand determined by calculated parameter values or determined by
parameter values that we entered manually

c) Safety Stock

Safety stock is the quantity of an inventory item needed in inventory to prevent

stock outs. It provides protection against greater than normal demand or delays in
delivery during the time that it takes to order and receive a replenishment shipment.
Safety stock quantities can be set manually. They can also be calculated using the
days’ supply, percentage of lead time demand, or service level formula. This
section explains how safety stock quantities can be determined and identifies
factors that should be considered when calculating additional safety stock and
calculating safety stock for critical items.

d) Manual Entry

A manual entry can be used to define safety stock when we need to rely on wer
buyer to set safety stock quantities. For example, have the buyer set the safety stock

12
 quantity when we have promised a specific customer to keep a certain quantity of
an inventory item in stock at all times and that customer is the only customer who
buys that inventory item. Safety stock can be set to any value, including zero. For
example, many distributors keep no safety stock for costly, very slow-moving
inventory items. When an inventory item is sold, they reorder another.

e) Days Supply

The days supply formula can be used to calculate safety stock when we need to
keep enough stock on hand to last a specified number of days in case of
emergencies. This formula relies on a buyer’s estimate of how many days’ supply
we need to keep in inventory. When using the days supply formula, Inventory
Replenishment calculates safety stock by multiplying the average daily demand by
the number of days’ supply we want to keep on hand in case of an emergency.

2.2. Replenishment Policies

A replenishment policy determines how Inventory Replenishment calculates the
replenishment quantity and reorder point for an inventory site. If we do not select a
replenishment policy for an inventory site or for the site, inventory item, or material
type associated with that inventory site, then Inventory Replenishment does not
calculate a replenishment quantity for that inventory site nor does it generate a planned
order for that inventory site.

a) Reorder Point Replenishment Policy

The Reorder Point replenishment policy can be used for inventory items that have
no target order requirements and for which we do not want to calculate an
economic order quantity or manually set maximum and/or minimum replenishment
points. When we use the Reorder Point replenishment policy, we order a
replenishment quantity when the replenishment position drops below a
replenishment point called a reorder point. Inventory Replenishment calculates the
replenishment point by adding lead time demand to the safety stock quantity. In
formula form, the reorder point can be expressed as:
(Lead time demand + Safety stock)

b) Line Point Replenishment Policy

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 The Line Point is a replenishment policy that should be used for inventory items
with target order requirements specified by the vendor. Because the vendor has
specified a target order requirement, we may not want to order when the
replenishment position reaches the replenishment point. We may need to wait so
that we can place an order that meets the target order requirement. Because of this,
we need to order additional units to meet the needs during the time it takes to build
the target order. Using the Line Point replenishment policy ensures that we keep
enough inventory on hand to meet wer needs between the time the replenishment
position reaches the replenishment point and the time it takes to build a target order.
In formula form, the line point can be expressed as:
(Safety stock + Lead time demand + Review cycle demand)

c) Economic Order Quantity Replenishment Policy

Using the economic order quantity (EOQ) replenishment policy results in the
lowest total cost of inventory rather than the lowest per-unit cost. EOQ considers
material costs (including freight), reordering costs, and inventory carrying costs.
The EOQ replenishment policy can be used for most moderate to fast-moving
inventory items. Because the EOQ formula assumes constant demand, it can be
used for:
 Inventory items with total demand that exceeds the number of units most
commonly sold to a single customer during most inventory periods.
 Non-seasonal inventory items that have been in stock for at least five months.
 Seasonal inventory items that have been in stock for at least 12 months.

We order an economic order quantity when the replenishment position falls below
the replenishment point. The replenishment point equals safety stock plus the lead
time demand quantity. In formula form, this replenishment point can be expressed
as:
(Safety stock + Lead time demand)

Inventory Replenishment calculates replenishment quantity as an EOQ using an

up-to-date version of an industry-standard formula, with the results adjusted to
reflect realities of the marketplace.

In formula form, the EOQ can be expressed as:

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 √ [((2 × Number of Fiscal Periods Per Year x Default number of days in fiscal
period specified in IR Setup) × (Reorder Cost specified in IR Setup × Projected
Daily Demand)) / (Annual Carrying Cost percentage specified in IR Setup) *
Replacement Unit Cost)]
where:

 The symbol √ is the square root of the quantity in square brackets.

 Reorder cost is the cost of processing, placing, receiving, and paying for an
inventory item.

d) MAX/MIN Replenishment Policy

The MAX/MIN is a replenishment policy that can be used to determine reorder

quantities when forecast demand based on past usage does not accurately predict
future needs. Inventory Replenishment automatically includes safety stock levels
when it calculates replenishment quantities using the MAX/MIN replenishment
policy. We can tell Inventory Replenishment not to include safety stock levels if
we want to exclude them from calculations by selecting None as the Safety Stock
policy at the inventory site, inventory item, site, or material type level of control.

The MAX/MIN replenishment policy can be used for:

 Slow-moving inventory items, that is, those items for which the normal sales
quantity is greater than the average monthly usage. Slow-moving items are sold
infrequently.
 Inventory items with highly variable usage patterns.
 New inventory items with no usage histories.

The MAX/MIN is also known formally as the minimum/maximum replenishment

policy.

e) Order to Replenish Policy

The Order to Replenish policy is used to determine replenishment quantities when

forecast demand based on past usage does not accurately predict future needs. In
particular, it can be used for inventory items for which the MAX/MIN
replenishment policy does not provide enough inventory to meet actual needs

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during the lead time period. As an alternative to the MAX/MIN replenishment
policy, this policy can be used for:

 Slow-moving inventory items, that is, those items for which the normal sales
quantity is greater than the average monthly usage. Slow-moving items are sold
infrequently.
 Inventory items with highly variable usage patterns.
 New inventory items with no usage histories.
When we use the Order to Replenish policy, we order when the replenishment
position drops below a manually set maximum quantity. After this value is entered
manually, it is not recalculated by Inventory Replenishment.

When the replenishment position drops below the maximum quantity, Inventory
Replenishment calculates the replenishment quantity by subtracting the
replenishment position from the maximum quantity. In formula form,
replenishment quantity can be expressed as:
(Maximum quantity – Replenishment position)

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3. ZARA’s Replenishment Strategy

3.1. About ZARA

Zara is a Spanish fast fashion (clothing and accessories) retailer based in Galicia. The
company was founded in 1975 by Amancio Ortega and Rosalía Mera. It is the main
brand of the Inditex group, the world's largest apparel retailer. Zara as of 2017 manages
up to 20 clothing collections a year.

During the last two decades Zara tripled its profit and stores and nowadays is ranked
the third biggest retailer world-wide. It has 3000 in-house designers located in it
headquarter in the region of A Coruña, Spain, which design over 40 000 items per year
among which only 10 000 are selected for production. Opposite to its competitors, more
than 50% of its production is in Europe and not in Asia or South America. Average
markdown ratio is at approximately 50 per cent, for comparison Zara sold only 15 per
cent on sale. All these facts allow Zara to expand its sales and profits over 20 per cent
per year.

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Zara has resisted the industry-wide trend towards transferring fast fashion production
to low-cost countries. While it spent little on ads, it spent heavily on stores. Zara is a
vertically integrated retailer. Unlike similar apparel retailers, Zara controls most of the
steps on the supply-chain: It designs, produces, and distributes itself. The business
system that had resulted was particularly distinctive in that Zara manufactured its most
fashion-sensitive products internally. Zara did not produce "classics", clothes that
would always be in style. In fact, the company intended its clothes to have fairly short
life spans, both within stores and in customers' closets.

ZARA’s Customer Segment

Low cost fashion for the 16 to 24 years old
 Get it approximately right
 Eliminate creative design
 Fast-response supply chain including design
 Finalise design knowing material supply constraint
 Optimise the supply process for speed and cost
 Manage follow-up (next batch) and customer flows
 Respond to what customers want – create a demand chain
 Copy trendy fashion fast
 Create a store experience
 Create a network/brand

Zara’s Customer Offer

Fresh/fast
 Fast copying of leading styles
 Fast delivery in own stores
 Limited editions

Quality
 Raw material: medium
 Knit: poor
 Look: grand!
 Customer satisfaction

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 Cost
 Low monetary cost
 Low time cost: the Zara experience

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

3.2. ZARA Business Model

Zara’s business model is one of finest the fashion retail industry has ever seen. When
majority of the large retailer like Gap and all are struggling in many operational;
countries, business model of Zara is giving them handsome return in the form of a 20%
yoy growth of the segments (store vs store, QoQ etc).

Before knowing the exact business model of Zara, we must know one thing from the
fashion industry i.e. FAST FASHION (similar to FMCG- fast moving consumer
goods). Fast fashion: similar to FMCG- this fashion come and goes. Primarily targeted
towards YA crowd to MA crowd ( YA- Young adult and MA- Middle aged) this
fashion never goes out of style- it simply goes out of stock.

Basic assumption here is that the girl/ lady buying the stock will never wear it more
than 6-8 times on an outing. So quality is in such a way that it withers out within 2-3
months and ourgirl/ lady friend is back in the store again- till that time the entire range
has undergone a change and thus she buys new stock and the cycle continuous. Fast
fashion also means that impulsive nature of the buy transaction is highly impulsive,
because girls know that whatever I am seeing today- may not even be in stock in the
next 15 days , so if I like it to the extent of buying it later, I might as well buy it now-
BRILLIANT. H&M, Forever 21, Topshop and Primar are also pioneers of fast fashion
but there is something about Zara business model that has catapulted it from zero to
top and the rest of the fast fashion companies have remained where they are or are
dwindling. It all comes down to Zara’s excellent business strategy and very agile
business model.

Lot of advantages with Zara business model. They quickly spot new fashion trends,
they always under predict the forecast of stock requirements which reduces discount
wars on leftover stock and artificially drivers demand to the sky, quick churning of the

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 stock which keeps ladies coming back for new every time. They are also extremely
responsive to factor like the weather and competitor trends and design.

Zara business model is a factory set up which means their factories push out the newest
products to the store with zero customization option to everyone and no products are
ever made to order. Zara business model is a very supply chain intensive business
model. From the first design up to the final production and ultimately distribution to
the store happens all within 7 days flat. Since the lead time is less than a week from
design to doors, they do not have to stock stuff and then sell, they can adapt to the
weather and other conditions and changes their entire collections within a week. This
means Zara business model can respond to immediate fashion changes, reduce or
increase production as necessary, introduce new lines and so forth.

3.3. ZARA Business Strategy

Zara business strategy is pretty clear and straight forward. Roll over the inventory at
such a fast pace that consumers are actually scared that if they like anything, will it
stay till the next visit so that they but it off immediately on seeing. They do this in a
continues loop-
a. Fashion spotting newest trends based on fashion, weather etc.
b. Design
c. Produce in factories
d. Ship to store
e. Sell to consumers and REPEAT

3.4. ZARA Business Strategy on Production and Supply Chain

Zara’s team of designer has about 200 professionals, 12000 different models for sale
in its stores (that’s a huge SKU number). Some of the factories are owned by the
company and equally wide range of external vendors help Zara to fabricate a model
and to have it ready for sale in its store worldwide within the average term of
approximately one week (door to door time is about 15 days).

Garments in- house manufactures ones & these purchased from vendors, arrive at the
ZARA’s warehouse in Spain, from there material is dispatched to the worldwide store.

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3.5. ZARA Business Strategy on Positioning
Zara business model spends near zero on digital advertising. They regularly do
promote posts of one of their design for a small duration till gathering viral mass and
it then spreads on its own.

3.6. ZARA Business Strategy of Fast Fashion

Zara’s fast fashion is not the run of the mill Chinese copy- cat production. Zara has an
awesome global trend spotter feedback system from the lowest level of employees to
quickly alter and improve upon its existing clothing lines. The fresh design is then sent
to manufactures in Asia and Europe who will get this feedback into a new line of
clothes ready to sell within a week.

3.7. ZARA Business Strategy of Supply Chain

Zara does not outsource anything to Chinese manufacturer. The availability of cheaper
Spanish labor, Asian and Middle Eastern labor, Zara can put its new merchandise in
stores within a week. Zara focuses on fast fashion items being produced in and around
Spain and outsourcing more shelf products to cheaper labor markets.

3.8. ZARA Business Strategy of Store Fronts

Smart people at burger king knew that McDonalds has invested millions into
researching the best locations with high foot falls to open McDonalds fast food joints.
Thus, instead of putting in money into that Burger king decided to open up new stores,
right next to McDonalds.

Similarly, ZARA will pay a higher rent and brokerage for store adjacent to the luxury
apparel brands.

3.9. Factors of ZARA’s Supply Chain Management Success

ZARA has focused on producing the formula that works best for them. It is based on
the following factors;

 Short lead time which allow for more fashion forward clothing
 Lower quantities which produce scarce supply
 More styles allow customers to have more choice and chances of receiving what
they prefer

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Since the company has focused on a shorter response time, Zara is able to ensure that
all its retail stores are carrying products that are in demand by consumers at that specific
time. For example, Zara is able to identify a specific trend and having that trendy
garment within its store in 30 day. Through analysing customer preferences and current
fashion trends Zara is able to move in step with its customers. This is achieved through
constant research and has equipped tis factories with machinery that is able to react the
trend changes which have been reported immediately and produce response to new
styles of modification of them in 2-4 weeks.

The company is able to reduce the quantity of items manufactured in each style which
also reduces the exposure of a single product and creates artificial scarcity. Common in
almost all industries is the philosophy that the less a product is available the more
desirable it becomes for the customer. There is also the added benefit of shielding the
company from risk which may come about if the style does not work well with
customers. Since there is a less quantity of it less is lost at the time of its disposal in a
season end sale. This allows Zara to discount products up to 18 per cent of its production
which is half the amount that competitors are able to do.

Lastly, Zara runs by the policy of more styles per quantity instead of more quantities
per style. Zara alone produces more styles about 12,000 a year. Even if a specific style
ends up being sold out quickly there is always a new style that is waiting to take its

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 place. For example, Inditex’s Zara is able to offer more choices to its customers based
on current fashions than its competitors.

3.10.ZARA’S Logistics `and Supply Chain

Zara follows a structure that is more closely controlled than most other retailers, and
pays further by having the various business elements in close proximity to each other,
around its headquarters in Spain.
a. Ownership and Control of Production

Retailers like the American chain ‘Gap’ and the Swedish retailer ‘Hennes &
Mauritz’ completely outsource their production to factories around the world and
mostly to low cost Asian countries. In contrast, it is estimated that 80 percent of
Zara's production is carried out in Europe which is within the small radius of its
headquarters in Spain. In fact, almost half of its production is in owned or closely-
controlled facilities.

While this gives Zara a tremendous amount of flexibility and control .it does have
to contend with higher people costs, averaging 17-20 times the costs in Asia.
Counter-intuitively Inditex has also gone the route of owning capital-intensive
manufacturing facilities in Spain. In fact, it is a vertically integrated group, with
up-to-date equipment for fabric dyeing and processing, cutting and garment
finishing. Greige (undyed fabric) is more of a commodity and is sourced from
Spain, the Far East, India, and Morocco. By retaining control over the dyeing and
processing areas, Inditex has fabric- processing capacity available “on demand”

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 to provide the correct fabrics for new styles. It also does not own the labour-
intensive process of garment stitching, but controls it through a network of
subcontracted workshops in Spain and Portugal.

b. Supercharged Product Development

Design and product development is a highly 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 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 “cost-efficient” in terms of design and product
development costs. But obviously, this higher cost of product development is
more than adequately compensated by higher realized margins.

In addition, the entire product development cycle begins from the market
research.
This combines information –
 from visiting university campuses, discos and other venues to observe what
young fashion leaders are wearing
 from daily feedback from the stores
 from the sales reports

This has meant a significant investment in information technology and

communications infrastructure to keep streaming up-to-date trend information to
the people making 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 customized hand-held computers over the Internet to Zara 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 customer comments, or even a new style that a
customer might be wearing that could be copied for Zara's stores. Traditional daily
sales reports can hardly provide such a dynamically updated picture of the market.

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c. React Rather than Predict
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.

Zara, on the other hand, largely concentrates its forecasting effort on the kind and
amount of fabric it will buy. It is a smart hedging by Zara because of two reasons:

 Fabric (raw material) mistakes are cheaper than finished goods errors
 The same fabric could be turned into different garments

In fact, for an extra degree of flexibility Zara buys semi-processed or un-coloured

fabric that it colours up close to the selling season based on the immediate need.
With that edge, and a super-fast garment design and production process, it takes to
the market what its customers are looking for.

As soon as approvals are received, instructions are issued to cut the appropriate
fabric. The cutting is done in Zara's own high-tech automated cutting facilities. The
cut pieces are distributed for assembly to a network of small workshops mostly in
Galicia and in northern Portugal. None of these workshops are owned by Zara. The
workshops are provided with a set of easy to follow instructions, which enable them
to quickly sew up the pieces and provide a constant stream to Zara's garment
finishing and packing facilities. Thus, what takes months for other companies,
takes no more than a few days for Zara. Finally, Zara's high-tech distribution
system ensures that no style sits around very long at head office. The garments are
quickly cleared through the distribution centre, and shipped to the stores, arriving
within 48 hours. Each store receives deliveries twice a week, so after being
produced the merchandise does not spend more than a week at most in transit.

d. Information Technology: Keeping Costs Down

Information and communications technology is at the heart of Zara's business. Four

critical information-related areas that give Zara its speed include:

e. Collecting information on consumer needs:

Trend into information flows daily, and is fed into a database at head office.
Designers check the database for these dispatches as well as daily sales numbers,
using the information to create new lines and modify existing ones thus, designers

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 have access to real-time information when deciding with the commercial team on
the fabric, cut, and price points of a new garment.

f. Standardization of product information different or incomplete specifications

And varying product information availability typically add several weeks to a

typical retailer's product design and approval process, but Zara “warehouses” the
product information with common definitions, allowing it to quickly and accurately
prepare designs, with clear cut manufacturing instructions.

g. Product information and inventory management being able to manage

thousands of fabric and trim specifications, design specifications as well as their
physical inventory, gives Zara's team the capability to design a garment with
available stocks, rather than having to order and wait for the material to come in.
h. Distribution management:

Its State-of-the-art distribution facility functions with minimal human intervention.

Approximately 200 kilometres of underground tracks move merchandise from
Zara's manufacturing plants to the 400+ chutes that ensure each order reaches its
right destination. Optical reading devices sort out and distribute more than60,000
items of clothing an hour. Zara's merchandise does not waste time waiting for
human sorting.

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 i. Keeping Costs Down

Even while manufacturing in Europe, Zara manages to keep its costs down. None
of its assembly workshops are owned by the company. Most of the informal
economy workers the workshops employ are mothers, grandmothers and teenage
girls looking to add to their household incomes in the small towns and villages
where 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.

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. 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.

3.11.Three Principles of ZARA’s Supply Chain

1. Transfer both hard data and anecdotal information from shoppers to designers and
production staff quickly.

 Track materials and products in real time every step of the way, including
inventory on display in the stores.

2. Stick to a rhythm across the entire chain: timing and synchronicity are paramount.

3. Leverage the Assets: Zara produces roughly half of its products in its own
factories. It buys fabric and dyestuff Inditex firms. So much Vertical Integration
is out of fashion in the industry; rivals like Gap and H&M, own no production
facilities.

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3.12.ZARA: Vertically Integrated Supply Chain

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3.12.1. Why Vertical Integrated Supply Chain?
Cost & Speed
 Local sourcing of raw material – Cutting cost because they do not
outsource any channel
 Fast time-to-customer – Cutting time, faster, effective, and efficient
 Mass customization
 Low process costs
 Avoid conflicts emerge from different channels
 Information Technology (IT) - Collecting vital information
 POS (Point of Sale Terminals)
 “H” structure – information from each store is independent and parallel to
the headquarter in Spain
 order from the headquarter in Spain by the manager of each store

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4. Conclusion
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 only achieved high
margins –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 than appreciation.

Over the last decades Zara introduced agile supply chain (ASC) in the fast fashion industry
and positioned itself third in the world retailers ranking. This came as a result of close
communication between customers and its designers and the ability to ship the desired
items in a week catching the sales moment. All these prove that ASC is an aspect enhancing
competition among organizations. Another lesson is that efficient production organization
with a good balance between in house and outsourcing task leads to minimum lead times
and increase in market share for Zara. The supply chain is not on an isolated agile process
of Zara, but indeed the whole organization is agile and working very efficient.

By using quick response Zara aims to reduce both excess stock holding in the supply chain
and risk associated with forecasting as product specifications are not finalized until closer
to delivery. What could be concluded from Zara's success from the perspective of speed is
that several benefits such as improved customer satisfaction, increased market opportunity,
decreased overall risks, and reduced total costs can be simultaneously achieved through
being fast.

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5. References

 http://help.inventory-planner.com/using-inventory-planner/forecasting-and-
replenishment-overview/replenishment-report-video

 https://pubsonline.informs.org/doi/10.1287/msom.3.3.230.9889

 https://www.researchgate.net/publication/228452645_Inventory_replenishment_in_ret
ail_the_Efficient_Full_Service_strategy

 https://www.huyett.com/getmedia/833d49fc-40ff-45a6-9606-d09461f15e78/principles-
of-replenishment-white-paper.aspx

 http://synergybusiness.com/wp-
content/uploads/2017/03//InventoryReplenishment_SL_2015.pdf

 https://6river.com/what-is-inventory-replenishment/

 https://www.tutorialspoint.com/supply_chain_management/supply_chain_managemen
t_tutorial.pdf

 https://www.retailitinsights.com/doc/inventory-replenishment-what-is-it-exactly-an-
0001

 https://searcherp.techtarget.com/definition/replenishment

 https://searcherp.techtarget.com/definition/supply-chain-management-SCM

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