Zara Supply Chain Case Study Ppt Template

It's not unusual to pass a Zara store and do a double-take - didn't you just see that on the catwalk? As a brand, they value their speed and responsiveness to the latest fashion trends. Owned by the distribution group Inditex, we had a look at what makes Zara so fast that the New York Times called it "mind-spinningly supersonic".

Want to manage your supply chain as efficiently as Zara? Try TradeGecko's inventory

management system today!

Click here to START A FREE TRIAL > 

Amancio Ortega founded Zara in 1975 as an attempt to better understand world markets for his fashion merchandise. From that first store in Spain, Zara has since expanded to 1,770 stores in 86 countries around the world. 

In 2012, Inditex, Ortega’s parent company made up of Zara and other retail concepts and suppliers, reported total sales of US$20.7 billion, with Zara representing a powerful 66 percent, or US$13.6 billion, of that total.

What’s the secret to Zara’s competitive advantage? Its supply chain.

Zara produces around 450 million items a year. How can it stay so efficient with the sheer volume that passes through its supply chain? Regular, small batch deliveries happen with clock-work precision twice a week to all of their stores around the world. 

Ensuring all this runs smoothly is what Zara does best - controlling more of its manufacturing and supply chain than most of its competitive counterparts. 

Synergy between business and operations strategy

Zara’s overarching strategy is achieving growth through diversification with vertical integrations. It adapts couture designs, manufactures, distributes, and retails clothes within 2 weeks of the original design first appearing on catwalks.

The company owns its supply chain and competes on its speed to market, literally embodying the idea of “fast fashion”.

Just in time production

The retail giant delivers fashionable and trendy numbers catered for different tastes through a controlled and integrated process – just in time.

Zara keeps a significant amount of its production in-house and makes sure that its own factories reserve 85 percent of their capacity for in-season adjustments. In-house production allows the organization to be flexible in the amount, frequency, and variety of new products to be launched.

The company often relies heavily on sophisticated fabric sourcing, cutting, and sewing facilities nearer to its design headquarters in Spain.

The wages of these European workers are higher than those of their developing-world counterparts, but the turnaround time is miraculous.

Zara also commits six months in advance to only 15 to 25 percent of a season’s line. And it only locks in 50 to 60 percent of its line by the start of the season, meaning that up to 50 percent of its clothes are designed and manufactured smack in the middle of the season.

If a certain style or design becomes the new must-have on the street, Zara gets to work. Designers churn out the new styles and they're fast-tracked to stores while the trend is still going strong. 

Store managers communicate customer feedback on what shoppers like, what they dislike, and what they’re looking for. That data is instantly funneled back to Zara’s designers who begin sketching on the spot.

Zara also has extra capacity on hand to respond to demand as it develops and changes. For example, it operates typically 4.5 days per week around the clock on full capacity, leaving some flexibility for extra shifts and temporary labor to be added when needed.

This then translates to frequent shipments and higher numbers of customer visits to the stores, creating an environment of shortage and opportunity.

This strategy allows Zara to sell more items at full price because of the sense of scarcity and exclusiveness the company exudes. Zara’s total cost is minimized because merchandise that is marked down is reduced dramatically as compared to competitors.

Zara gets 85 percent of the full price on its clothes, while the industry average is 60 to 70 percent. Unsold items account for less than 10 percent of its stock, compared with an industry average of 17 to 20 percent.

“Most companies are riddled with penny-wise, pound-foolish decisions to reduce cost,” noted Kasra Ferdows, a professor at Georgetown University’s McDonough School of Business in this article on Bloomberg. “Zara understands that if they don’t have to discount as much, they can spend money on other things. They can see the benefit of this certainty and rhythm in the supply chain.”

This is also the reason why Zara can afford the extra labor and shipping costs needed to accommodate and satisfy changes in seasonality and customer demand.

Inventory management

You'll be hard pressed to find any excess inventory or deadstock in a Zara warehouse.  Throughout the supply chain, lean is word, all the way from raw materials to the finished garments on the shelves. 

Inventory optimization models are put in place to help the company to determine the quantity that should be delivered to every single one of its retail stores via shipments that go out twice every week. The stock delivered is strictly limited, ensuring that each store only receives just want they need. This goes towards the brand image of being exclusive while avoiding the build up of unpopular stock.

This quick in-season turnaround, from production facilities located close to Zara’s distribution headquarters in Spain, allows Zara to ship more often and in smaller batches. If the design Zara hastily creates in an attempt to chase the latest trend does not in fact sell well, little harm is done.

The batch is small, so there’s not a ton of unsold inventory to get rid of. And because the failed experiment is over in a jiffy, there’s still time to try a different style, and then a different one after that.

Centralized logistics

“The secret to their success has been centralization,” says Felipe Caro, an associate professor at the University of California at Los Angeles’s Anderson School of Management and a business adviser to the company. “They can make decisions in a very coordinated manner.”

Zara sticks to a deep, predictable and fast rhythm, based around order fulfillment to stores.

Each Zara outlet sends in two orders per week on specific days and timing. Trucks leave at specific times and shipments arrive in stores at specific times. Garments are already labeled and priced upon destination.

As a result of this clearly defined rhythm, every staff involved (from design to procurement, production, distribution, and retail) knows the timeline and how their activities pan out with respect to other functions. That certainly also extends to Zara customers, who know when to visit stores for fresh new garments.

Solid distribution network

Zara’s strong distribution network enables the company to deliver goods to its European stores within 24 hours, and to its American and Asian outlets in less than 40 hours.

According to Nelson Fraiman, a Columbia Business School professor who wrote a 2010 case study about Zara, the retail giant can get a product out from concept to store in just 15 days, while the industry standard is 6 months.

Fast fashion success

This brand’s success story shows the strength of its operations. Its cross-functional operations strategy, coupled with its vertically integrated supply chain, enables mass production under push control, leading to well-managed inventories, lower markdowns, higher profitability, and value creation for shareholders in the short and long term.

Zara is all about staying on top of the hottest trends, and exuding an exclusive feel, but its supply chain is the real star of the show. These rockstar-level logistics take it from being just another fashion retailer to an industry example of fast fashion done right. 

References: 1 | 2 | 3 | 4

Images: 1 | 2 | 3 | 4

See also:

3 lessons startups can learn from Alibaba

Tesla created a custom-built supply chain that competes with the best, and so can you

Out of stock problems? Walmart, Nike and Best Buy had them too, but here's how you can do better

Want to manage your inventory as effortlessly as Zara but for a fraction of the cost?

Save time and money by signing up for a free trial of TradeGecko today!

Start my free trial now

Zara changes its clothing designs every two weeks on average, while competitors change their designs every two or three months. It carries about 11,000 distinct items per year in thousands of stores worldwide compared to competitors that carry 2,000 to 4,000 items per year in their stores. Zara’s supply chain is absolutely critical to its business success (Zara website – http://www.zara.com).

 (click on screenshot for larger image)

The company was founded in Spain in 1975. It is the flagship business unit of a holding company called Inditex Corporation with headquarters in Arteixo, Galicia, Spain. The heart of the company and its supply chain is a huge, highly automated distribution center (DC) called “The Cube”. The screenshot above shows a closeup satellite view of this facility.

CASE STUDY CONCEPT: Zara’s Business Model is Driven by Its Supply Chain Capabilities

Agents for the company are always scouting out new fashion trends at clubs and social gatherings. When they see inspiring examples they quickly send design sketches to the garment designers at the Cube. New items can be designed and out to the stores in 4 – 6 weeks, and existing items can be modified in 2 weeks.

The company’s core market is women 24 – 35 years old. They reach this market by locating their stores in town centers and places with high concentrations of women in this age range. Short production runs create scarcity of given designs and that generates a sense of urgency and reason to buy while supplies last. As a consequence, Zara does not have lots of excess inventory, nor does it need to do big mark-downs on its clothing items.

In Spain customers visit Zara stores 17 times per year compared to 3 times per year for competitors. Since their clothes are unique and not standard, it is harder for people to see them clearly on the Internet and thus they are encouraged to come into the stores instead and try on the unique fashions that Zara offers.

Zara has 12 inventory turns per year compared to 3 – 4 per year for competitors. Stores place orders twice a week and this drives factory scheduling. Such short term focused order cycles make forecasts very accurate, much more accurate than competitors who may order every two weeks or every month.

Clothing items are priced based on market demand, not on cost of manufacture. The short lead times for delivery of unique fashion items combined with short production runs enable Zara to offer customers more styles and choices, and yet still create a sense of urgency to buy because items often sell out quickly. And that particular item or style may not be available again after it sells out. Zara sells 85 percent of its items at full price compared to the industry average of selling only 60 percent of items at full price. Annually there is 10 percent of inventory unsold compared to industry averages of 17 – 20 percent.

Zara spends its money on opening new stores instead of spending a lot on ad campaigns. Estimates vary on the number of Zara stores worldwide. An article in the New York Times Magazine (November 2012, “How Zara Grew into the World’s Largest Fashion Retailer” see reference in bibliography below), places the store count at around 5,900. An article in Forbes simply states there are more than 2,100 stores (May 2016, “The World’s Most Valuable Brands – #53 Zara”, see bibliography below). Annual sales at the end of 2015 were estimated by Forbes to be $15.9 billion. Because Zara is a privately owned company, it is not required to disclose information routinely released by public companies. Zara uses a flexible business model where its stores can be owned, franchised or co-owned with partners.

Manufacturing and Supply Chain Operations Make Zara Unique in Its Industry

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 Zara’s supply chain model.

  (click on diagram for larger image)

The 11 Zara owned factories are connected to the Cube by underground tunnels with high speed monorails (about 200 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 company’s 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 Zara’s 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.
 (click on screenshot for larger image)

[ We are glad to provide a free evaluation account to instructors and supply chain professionals interested in exploring SCM Globe simulations — click here to request an account — Get Your Free 30-Day Trial Demo ]

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 Zara’s 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.

 (click on screenshot for larger image)

Zara is a clothing and fashion retailer that uses its supply chain to significantly change the way it operates in a very traditional industry. No other competitor can copy its business model until it first copies its supply chain. And since supply chains are composed of people, process, and technology, even the latest and greatest technology is not a competitive advantage all by itself. People must be well trained, and processes must be put in place that enable people to apply their training and their technology to best effect.

Buying technology similar to that used by Zara is easy. But for the technology to be used profitably, competitors must learn about the mental models and the operating procedures used by Zara. Good mental models enable people to understand the potentials and see the opportunities that a real-time supply chain offers. Effective operating procedures enable people to act on what they see and capitalize on the competitive advantages their technology gives them.

Zara has spent more than 30 years building its unique real-time supply chain and training its people. So competitors have a lot of learning to do to create the mental models, and roll out the operating procedures needed to do what Zara does so well.

[ See our blog article “Five New Supply Chain Technologies and How to Use Them” for more about new technologies and how they can be used to improve supply chain operations and create competitive advantages for companies.]

YOUR CHALLENGE – Imagine you are in charge of Zara’s supply chain operations. This case study and supply chain simulation will give you an understanding of what that job is like. In this exercise your mental model of Zara’s supply chain will expand and your understanding of how this supply chain works will deepen. You will appreciate the continuous adjustments that need to be made to keep the supply working and keep operating expenses and inventory levels under control.

First, get this supply chain to run for 15 days.Start by doing whatever seems necessary to keep the supply chain running without stock-outs or over-stocks for 15 days. When you load the Zara supply chain model from the library and run the simulation you will see a problem occurs on day 5. There will be other problems after you address this one. Work first on just getting the supply chain model to run for 15 days, then refine your solutions to get the supply chain to run at lower costs in transportation, facility operations and on-hand inventory across the supply chain.

Because of its agile supply chain, Zara works on a short sales and operations planning cycle (let’s assume Zara works on a 15 day cycle where its competitors work on 30-day or even 60-day planning cycles). That 15-day operations planning cycle is what we are simulating in this case study. You will need to adjust store delivery frequencies and amounts, and adjust manufacturing rates and supplier deliveries also. As you work on getting the supply chain to run for 15 days, you will form a picture in your mind of how this supply chain operates – a mental model that shows you how the products, facilities, vehicles and routes in this supply chain interact.

Next do some research on store rental costs, labor rates, transportation costs and product demand in different markets.Go to websites of commercial real estate brokers in cities of interest and see what you can find out about rents. Research salaries and median income in different cities to find out about labor rates. Go to 3PL and logistics services company websites to find out about transportation costs. Search for fashion industry clothing demand forecasts around the world. Consider subdividing the two high level products (Zara Basics Pack and Zara Fashion Pack) into lower level product categories to get more insight and accuracy. What are some lower level product categories that make up the Fashion Pack, or the Basics Pack?

NOTE: Do the best you can with the time you have available for this research. Do internet searches on relevant key words and phrases. See what comes up and select sources that seem the most trustworthy and accurate (that’s what we did when we created this case study; our assumptions and sources are shown below). If you can’t find the exact numbers you are looking for, then estimate numbers you need based on other numbers you do find in your research. Do not spend more than your allocated time doing research. As the saying goes, “Good is good enough.” Document your sources, make your best estimates, and move on.

Then update and expand the Zara supply chain model using your research data.Update product prices and demand at the stores based on your research. Experiment with adding new stores in other cities in Europe and overseas in North America, South America, Africa or Asia (represent all stores in a single city with just one or two stores and keep total number of facilities in your model about 25 or less). For added realism see how stores in New York and Shanghai are located in the existing supply chain model in the SCM Globe library. Stores can be on actual Zara store locations or can be placed in the middle of a cluster of actual Zara stores; enter collective demand, costs and on-hand inventory for all actual stores represented by a single store in your model. Note in the existing model how flights from the logistics hub in Spain land at nearby airports for stores in New York and Shanghai, then delivery trucks move garments from those airports to the stores. Use that same approach as you expand into other countries outside of Europe.

Add new vehicles and create delivery routes for them to deliver products to the new stores. Now adjust your supply chain model to support these new stores and still run for 15 days. Then make adjustments to lower transportation and operating costs and on-hand inventory.

TIP:Save backup copies of your supply chain model from time to time as you make changes. Then if a change doesn’t work out, you can restore from a saved copy.

NOTE: Find useful ideas for reducing inventory and for calculating optimum product delivery amounts and schedules by reading “Cutting Inventory and Operating Costs” in the online guide. For ideas on how to expand this supply chain see “Tips for Building Supply Chain Models” for useful techniques.

Create a presentation describing the supply chain challenges you encountered and why successful solutions to those challenges provides such a competitive advantage for Zara. Explain the supply chain principles and best practices you used to solve the challenges you encountered while expanding the supply chain and finding a way to keep it running efficiently for 15 days. Show how this supply chain makes it possible for Zara to use its fast fashion business model, and why it provides a competitive advantage over other fashion retailers. If Zara competitors were to emulate Zara’s business model, what supply chain capabilities would they need? Use screenshots and data from your simulations to illustrate your report.

Assumptions and Simplifications Used in this Model

Because Zara is a private company, specific details of the Zara business model and supply chain can be difficult to verify. Yet the supply chain model presented here is still a useful picture of the Zara supply chain and illustrates its operations and its capabilities (see more about this in “Supply Chain Modeling and Simulation Logic“). This case study and supply chain model is based on data from articles listed in the bibliography below. The assumptions and specifications listed here are built into the model, and you can easily change them as better data becomes available. New products, facilities, vehicles and routes can also be added to this model to further explore how Zara’s supply chain operates.

  • Zara finished goods garments are combined into two categories of products, Zara Fashion Pack represents in-house manufactured high fashion items, Zara Basics Pack represents basic items contract manufactured by others
  • Zara Fashion Pack = 100 garments; price of 5,000 euros; weight of 40 Kg; volume of 1 cubic meter;
  • Zara Basics Pack = 200 garments; price of 3,000 euros; weight of 60 Kg; volume of 0.5 cubic meters
  • The Cube employs 3,000 people at average rate of 8 euros per hour = 64 euros per day
  • Automated warehouse in Zaragoza employs 800 people at avg of 64 euros per day and other facility operating costs for utilities, insurance, etc. cost additional 15,000 euros daily
  • Raw fabric costs per case: Fabric 1 = 1 cubic meter; price of 1,000 euros; Fabric 2 = 0.5 cubic meter; price of 800 euros; Fabric 3 = 0.6 cubic meter, price of 1,200 euros
  • Zara factories need mix of raw fabrics to create their finished goods; see the definition of these facilities to see individual requirements and production
  • The Cube has 1.6 million cubic meters of product storage space
  • 150 million items pass through Cube annually or 411,000 per day
  • 11 actual Zara factories are represented by 5 factories in the model
  • Monorail shipping containers are 50 cubic meters in volume, can carry 10,000 kilograms of weight, and travel at average speed including loading and unloading of 60 kilometers per hour
  • Zara stores in a single city are represented by a single store that combines the demand of all stores in that city – not all cities are included and more cities can be added to this model
  • All specifications for Products, Facilities, Vehicles and Routes in this supply chain model can be edited and changed
  • New products, facilities, vehicles and routes can be added to this model
  • Vehicle operating costs per km are set to be just half the normal cost for trucks and airplanes. This more accurately models the process where Zara pays for one-way shipping containers to move products from one facility to another without paying the full round-trip cost (carbon per km was also adjusted to half of normal for the same reason). This compensates for the model logic which calculates vehicle costs based on the round trip distance instead of the one-way distance. However, full operating cost per km is used for the monorail vehicles that move products between the Cube DC and the Zara garment factories because Zara owns those vehicles and pays for full round-trip costs.

 

REMEMBER — There is a spreadsheet reporting template you can use to analyze downloaded simulation data. Import your simulation data into the template and create monthly profit & loss reports as well as generate key performance indicators. See more about this in the online guide section “Analyzing Simulation Data” – scroll down to the heading titled “Download Simulation Data to Spreadsheet Reporting Templates”. The sample template is set up for the Cincinnati Seasonings company, but look at how the reports read the simulation data and you will see how to change the spreadsheet as needed to accommodate this case study.

To share your changes and improvements to this model with other SCM Globe users see “Download and Share Supply Chain Models

Register onSCM Globeto gain access to this and all other case studies. Click the blue “Register” button on the home page (www.scmglobe.com) and buy a subscription (if you haven’t already) with a credit card or PayPal account. Then go to the SCM Globe library and click the “Import” button next to this case study. Scan the “Getting Started” section (if you haven’t already), and you are ready to go.

Bibliography: 

A web search on Zara supply chain operations done in October 2016 yielded many results; this case study is based on information found in the articles listed below:

Agile Supply Chain
Analysis of Zara’s supply chain practices – By Galin Zhelyazkov – Design, Manufacture & Engineering Management; Strathclyde University Glasgow, 2011

How Zara Grew Into the World’s Largest Fashion Retailer
History and business model of Zara – By Suzy Hansen, The New York Times Magazine, 9 Nov 2012

Logistics Clustering for Competitive Advantage
Zara’s global logistics hub outside Spanish city of Zaragoza  –  By Yossi Sheffi, Dir MIT Center for Transportation & Logistics, CSCMPs Supply Chain Quarterly, Quarter 3 2012

Polka Dots Are In? Polka Dots It Is!
How Zara gets fresh styles to stores insanely fast—within weeks. – By Seth Stevenson – Slate.com, 21 Jun 2012

The World’s Most Valuable Brands – #53 Zara  
A ranking and brief profile of the 100 most valuable and recognized brand name companies – Forbes, May 2016 –

Zara’s Fast Fashion Edge
Speed and responsiveness to customer demand drives Zara’s business model
– By Susan Berfield and Manuel Baigorri – Bloomberg Business, 14 Nov 2013

Zara Uses Supply Chain to Win Again
In face of flat or declining retail industry sales, Zara stands out – By Kevin O’Marah – Forbes, 9 Mar 2016

We found the following slide presentations were also informative:

Zara Supply Chain from Dimple Ramani

 

Supply Chain Management of ZARA from Sai Praveen Chettupalli

Copyright © 2016 by SCM Globe Corp.

0 thoughts on “Zara Supply Chain Case Study Ppt Template

Leave a Reply

Your email address will not be published. Required fields are marked *