Excerpt
1. What are the key elements of Zara’s business operating model?
As the largest division of Inditex, Zara accounts for 76% of its total retail sales. All of Inditex brands, including Zara, share a focus on providing fashion at affordable prices, excellent quality, and similar models for control of supply, production and distribution. Starting from its production stage, distribution stage and to retailing stage, Zara maintains a quality standard. The following points look at key elements employed by Zara’s business operating model in order to meet its high quality and operation standards.
In meeting its goal to provide customer with the latest fashion, Zara ensures to always fill its retail stores with a wide variety of clothing and most of these clothes only stay in the stores for two weeks period. Replenishment of inventory must constantly be done every day to cope with customers’ demand. Two weeks constant rotations of new products encourage customers to buy what they want the first time they see it, knowing that what they like may not still be in stores the next time they visit Zara.
Zara’s headquarter in La Coruna houses 260 experts in their commercial team. This team consists of expert designers, market specialists and procurement and production planners who are also known as buyers. Each team of experts work very closely with its subordinates, for example, designers would work closely with subcontractor sewers to monitor quality and redesigning any improvement required. Market specialist would establish personal relationship with store managers to discuss what each store’s inventory needs are and when to order the quantity. Each store managers are equipped with specially designed hand-held digital device to facilitate the rapid and accurate exchange of market data. The role of a store manager is to maximize speed to market, therefore it is very important for store managers to work hand in hand with both market specialists and buyers team to ensure precise ordering schedule and quantity.
Zara owns its own manufacturing factories in Spain. In a typical fashion industry like one Zara is in, being able to produce its own goods is a major economical advantage. Zara produces 50% of its products in its own network of 22 Spanish factories (Case Study, 2003) and uses subcontractor sewers who work exclusively for Zara and located in close proximity to its warehouses. Many of Zara’s suppliers are located in Spain and Portugal, which are relatively close to Zara’s factories. With its large and stable orders, Zara is often the preferred client of its suppliers. All these together enable Zara to produce what and how much they want as well as when they need it without incurring excessive costs. Buyers study and decide on what Zara is able to produce based on its current level of speed and expertise, factories capacity and cost implications. Anything that Zara cannot produce within its acceptable standard, they would seek to outsource the job. In outsourcing the jobs, Zara is always careful to monitor outsourcing quality and minimize any risk associated with it. Outsourcing labor intensive jobs enables Zara to focus more on its production processes and provides more flexibility to respond to volume changes in production. To further support the operational of the ten factories, ten aerial monorails were built to connect the ten factories together, making integration work between them possible and convenient at the same time.
Zara’s central distribution warehouse which is located in La Coruna handles most of the logistic work. All finished products ready to be shipped must pass through this central warehouse for quality testing and distribution planning purposes. However, apart from the main warehouse, Zara built three other smaller warehouses located in Brazil, Argentina and Mexico. The purpose of these additional warehouses is to cope with the distance and different seasons in Southern Hemisphere regions. Having built these extra warehouses enables Zara to further improve distribution speed and flexibility in handling demand changes in southern hemisphere retail stores regions. One more additional logistic centre in Zaragoza was also being planned to be built in Spain to support its current supply chain system.
The major distribution centre in La Coruna houses approximately 1200 workforce which works based on shifts system. Typically, the centre is operated four days per week (may be more or less), with the number of workers and shifts varying according to the job demand for the particular period.
Zara owns about 507 stores everywhere worldwide. All its products need to be distributed to each of these stores, based on each store’s own inventory needs, in a timely fashion. For Zara, distance is not measured in kilometers, but in time; Time reflects cost, that is, both logistic related costs and opportunity costs. To cope with its complicated logistic needs and fast response inventory system, Zara needs to create a complex scheduling program. In Europe region, contractors operated trucks labeled with Zara brand, run on a carefully planned timetable schedules to handle deliveries from La Coruna warehouse to numerous Zara retail stores. Every retail stores must be prompt to put in their order because the trucks only deliver to their stores on a regular time basis, usually twice a week. Any additional deliveries or inventory requests can also be fit within the already specified time schedules for each store.
As to worldwide delivery, the distribution centre in La Coruna ships more than 100,000 pieces on a typical day. Even for its worldwide shipment, Zara maintains consistency in punctuality of order placement and deliveries. Compared to similar companies in the industry, shipments at Zara were almost flawless-98.9% accurate with less than 0.5% shrinkage (Case Study, 2003). All shipment products have already been ironed, labeled and priced so that they are ready to be displayed immediately as soon as they arrive in any retail store.
Another major key elements in which Zara successfully implement into its operation management is “just in time inventory” system in each one of their retail stores. Keeping inventories just enough to feed customer demand for a period of time is indeed a very risky decision. This demands every store managers to carefully plan, calculate, and discuss their store’s inventory needs together with main commercial team in La Coruna, on daily basis. To help with this, Zara’s retail store manager is equipped with hand held device to send order instantaneously to warehouses. Precise forecasting is the key to their success in implementing this highly risky method.
[...]