Zara Fast Fashion Case

Submitted by – Aakanksha Mishra 199278055

T Chaitanya Kiran 199278056
Sohini De 199278062
Hrashavardhan Pinniti 199278033

Question 1. Compare Inditex's financial results with its international competitors. What
does that reveal about Inditex's relative operating economics?
Using the exhibit 6 of the case, an economic comparison of the 4 companies can be made to
analyze and compare their business models. Inditex, a vertically integrated firm, gains a
competitive edge by incorporating a quick response to market demands and operates on Just-in-
Time philosophy by delivering and replenishing stock at shops within 4 weeks as opposed to 6
months by its competitors. A sense of urgency is maintained in the customers, having a 17 times
revisit as opposed to 3 times in a year. Thus inventory carrying cost is very low. Inditex also does
not spend much on marketing and advertisement of its product line. It has a strong IT support.
Inditex has a higher market penetration in the European market as compared to competitors.

 Return on equity (ROE) for Inditex = 0.2282 (340/1486), GAP = 0.00265, H&M = 0.24845,
Benetton = 0.0568. This indicates the net income for Zara model is better than its
competitors.
 Profitability  For Inditex = 0.104615 (340/ 3250), GAP = 0.00058, H&M = 0.96041,
Benetton =0.07053. This indicates Zara has better profitability that all of its competitors
due to its brand mystification and promise of delivery of fast fashion in the smallest lead
time and 4-week cycle time.
 Inditex has the least current asset due to its lower inventory carrying business model,
making it more efficient and agile with respect to meeting fluctuating customer’s
demands. Also, 40% production for Inditex is in-house, this it has a higher fixed asset and
better ROE.

Question 2. How do the distinctive features of Zara's business model affect its operating
economics?
Zara business model primarily focused on Fast Fashion which promoted fashion-sensitive styles
available for a short span of time. However, in order to sustain this model, Zara brought forth two
distinctive features that made this concept a success – less lead time and less production of
quantity.
 Continual Tracking of Customer Preferences, as performed by Zara, helped to understand
the latest styles and trends of fashion. The company was able to manufacture a wide range of
products (11000 in a year) because of a large number of SKUs they had.
 Short Cycle Time of production helped to bring in a wide range of products
 Elimination of Warehouses and Low inventories further helped to reduce the lead time.
There was a central distribution center which stored the products, and products were shipped
directly.
 No premium was charged for the wide variety of fashion that was made available at Zara.
However, it was not the most affordable product in the market. The merging of cost leadership
with differentiation strategies was a win-win for Zara.
  Vertical Integration was implemented. This helped to reduce any demand-supply
mismatch resulting in Bullwhip effect, which could be a major threat for fast fashion.
 Inditex, the parent company of Zara, fully owned the production. Hence, it was possible to
gain profits even by producing less in quantity, as the large economies of scale was not a
major concern.

Question 3. Explain the linkages among Zara's choices about how to compete,
particularly ones connected to quick-response capability.
Zara has three major competitors – Gap, H&M and Benetton. For each of these global players, Zara
incorporated a strategy that helped Zara outshine them.
Problems with the competitors
 For Gap, most of their productions were outsources and there was a significant lack of
positioning in the market.
 For H&M, outsourced all of its products and the lead time was thereby high. Moreover,
the format followed by all H&M stores remained almost similar. So, there was a lack of
fashion change
 For Benetton, the lead time was several months. Also, narrowed its production lines.
Zara identified the gap which was present in its primary competitors and helped to resolve it. The
areas in which Zara chose to compete were –
Reduction of lead time by not outsourcing the manufacturing process. Changing the fashion
trends by understanding the latest customer demands. Also, having no cost premium, would
further incentivize the customer to consumer more.
 In the Fast Fashion model, new products would be available in the stores within 5-6 weeks
while for the competitors it took close to 6 months for new designs.
 Zara did not outsource any of its product to keep a low lead time.
 Inditex owned twenty manufacturing factories, and it incorporated vertical integration.
This helped to create a Just-in-Time production system, where the manufacturing of
products could be done within a short period and also make it available to consumers.
 Production was done in small batches to avoid any surplus.

Question 4. What other strategic recommendations would you make to Castella?

Zara’s follows a vertically integrated supply chain with very low inventory levels and fast paced,
innovation driven business model. The demand is met in 4 weeks’ period with stocks being
replenished and a sense of urgency is created in the customer’s mind with respect to on-shelf
availability of the products. With such business model, centralization of entities like warehousing,
manufacturing, delivery and IT has to be integrated for efficient Just-in-time results and cot
savings.

Also, with 1,284 store locations, centralized distribution centre set ups becomes imperative in
order to resolve bottlenecks. With high operations efficiency it is advisable to focus on the current
chain and attain economies of scale, rather than planning for expansion and acquisition of more
manufacturing units in Asian regions.

Clusterization of demands using demographical, geographical and psychological analysis of

customers can help Inditex to maintain high customer satisfaction, decrease complexity in the
operations and cater to different needs at once.