ZARA Clothing Performance Analysis

ZARA Clothing Performance Analysis Zara is the largest division and flagship brand of the Spanish retail group Inditex. It sells up-to-the-minute fashionability at low prices, in stores that are clearly focused on one particular market (Slack, 2006). The first store opened by accident in 1975 due to a large pyjamas order cancellation. This typically can be said to be an emergent strategy as the Zara store today was not an intended strategy. Vertically integrated, Zara controls most of the processes in the supply chain whereby 50% of the products are manufactured in Spain, 26% in the rest of Europe and 24% in Asian countries. Zara outsources products of high labour intensive processes but maintains in-house capital intensive processes, protecting knowledge and know-how. It takes less than two weeks for a skirt to get from Zaras design team in Spain to a Zara stores in any part of the globe, as much as 12 times faster than the competition. And with shorter lead times, Zara can ship fewer pieces, in a greater variety of styles, more often and they can more easily cancel lines that dont sell as well, avoiding inventory backlogs. (Thinking Made Easy, 2009) This quick response capacity of Zara is made possible by the 3 main stages that define the competitive edge of the company: design, manufacturing and distribution. This strategy is embraced to focus on the operations which can enhance cost efficiency and hence Zaras internalization. Other production activities are completed via a network of about 500 subcontractors in close proximity to Zaras operations at La Coruna. Mr. Ortega the CEO of the Inditex, the parent company of Zara, once said that the secret to retail success is to have five fingers touching the factory and five touching the customer. (Nigel Slack, 2008) This paper uses the models and frameworks of the Operations Strategy module to describe analyze how Zaras operations strategy led to a sustainable competitive advantage in the global apparel industry. What is Operations Strategy? Just as there is no overall agreement about what strategy means, there is no universal agreement on how operations strategy should be described. Four distinct perspectives have emerged on the description as illustrated in Fig. 1 below (Nigel Slack, 2008): Top down vs. Bottom up: Zara boosted its innovation in a fast changing market by adapting the bottom up perspective of strategy in its operations. This is a key driver of competitive advantage through constant innovation to develop new-products that provide customers with new perceived benefits. Zara benefits from an organizational culture that allows information exchange, risk taking, experimentation and learning from failures. Market Requirements vs. Operations Resource: Whatever the operations strategy of an organization, it must in some way reflect the requirements of the organizations market. The fashion market is a fast changing one characterized by quick shifts in consumer demands. As described by Inditex CEO, Jose Maria Castellano, the fashion world is in constant flux and is driven not by supply but by customer demand. We need to give consumers what they want, and if I go to South America or Asia to make clothes, I simply cant move fast enough. How do Zaras operations resources help it to compete in its market? Zara has remained focused on its core philosophy that creativity and quality design together with a rapid response to market demands will yield profitable results. Its business model incorporates the following operational goals: To develop a system the requires short lead times To decrease production quantities and inventory To increase variety of styles/choice. We can deduce that operations strategy is concerned with the reconciliation of market requirements and operations resources. Key drivers of this reconciliation are the importance of setting appropriate performance objectives and understanding the decision areas that determine resource deployment. Factors affecting Zaras Strategic Decisions: Capacity Zara employs a chase demand capacity management in its operations. Spare manufacturing capacity is mirrored in the companys storage function, where up to 400 extra staff can be drafted in during busty periods. As new stock delivery schedules are regimented, customers know when new stock is due and traffic in stores is heavier at such times. As a result, the company is able to adjust its resources to match the demands as appropriate. Procurement and production planners make preliminary, but crucial, estimates of manufacturing costs and available capacity. The cross-functional teams can examine prototypes in the hall, choose a design, and commit resources for its production and introduction in a few hours, if necessary. (Ferdows Kasra, 2005) A small change in retail orders, for example, can result in wide fluctuations in factory orders after its transmitted through wholesalers and distributors. In an industry that traditionally allows retailers to change a maximum of 20 percent of their orders once the season has started, Zara lets them adjust 40 percent to 50 percent. In this way, Zara avoids costly overproduction and the subsequent sales and discounting prevalent in the industry. Supply Networks The vertical Integration advantage can be seen in Zaras centralized logistics and distribution. Zara designs around 10,000 new models every year and replenishes ranges within every one of its 650 retail stores twice per week, but in strictly limited quantities of stock. This ensures Zaras brand promise to customers of exclusivity, and also of design freshness. But it also avoids build-up of large quantities of unpopular stock. Zaras system has to deal with something in the realm of 300,000 new stock-keeping units (SKUs), on average, every year. (Ferdows Kasra, 2005). It outsources less manufacturing (only labour intensive tasks mainly the sewing) than its competitors hence can react quickly to seasonality and unforeseen demand. Zara avoids building inventories in any part of its supply chain from raw materials to end user. Process Technology Zaras communication and coordination through high technology information systems is one of Zaras success factors relative to its competitors. Its customized handheld computers support the connection between the retail stores and headquarters. These PDAs transmit all kinds of information (hard data as orders and sales trends and such soft data as customer reactions and the buzz around a new style). The constant flow of updated data mitigates the so-called bullwhip effect-the tendency of supply chains (and all open-loop information systems) to amplify small disturbances. Development and Organization This fast fashion system depends on a constant exchange of information throughout every part of Zaras supply chain-from customers to store managers, from store managers to market specialists and designers, from designers to production staff, from buyers to subcontractors, from warehouse managers to distributors, and so on Zaras organization, operational procedures, performance measures, and even its office layouts are all designed to make information transfer easy. By having operations in close- proximity to its headquarters allowed for better and faster communication between functional areas for faster decision making. Key success objectives for Zaras Performance: Speed: Speed and responsiveness to Market, Zara has changed the way clothing industry works where deigning, production and delivery to the retailers requires period of six months. The design and distribution cycle of the company takes just 10-15days in the whole process. Zaras speed to market in product development exceeds the capabilities of its competitors. This in itself provides additional value to stakeholders, customers, and stores in producing quality clothing at affordable prices. The proximity of their manufacturing and operational processes allows Zara to maintain the flexibility necessary to design and produce over 12000 new items annually. This capability allows Zara to achieve their strategy of expedited response to consumer demand. The process of obtaining market information and relaying it to design and production teams expedites product development by shortening the throughput time of their products from design to store. Dependability: Due to Zaras ownership and control of production, they ensure timely delivery and service. Although most of their stores run out of stock, signifying that they have low dependability in terms of product availability, another perspective of dependability in terms of keeping to date with fashion is achieved. Quality: Zara brand is synonymous with the cutting edge of fashion at affordable prices. Another Quality advantage is the added sense of quality to the product as the tags would be labelled with made in Europe rather than made in China due to Zaras trade-off between Low labour costs in Asia and operational efficiency. Flexibility: Designers (of average age 26) draw the design sketches then discuss it with market specials and planning procurement staff illustrating a flexibility of ideas generation and on the other hand the huge number of designs reflects the ability to meet almost all the fashion requirements by customers of all ages (up to 55). This adaptive model rather than traditional merchandising is very different from its competitors. Many competitors rely on a small elite design team that plans both design and production needs well in advance. Stores have little autonomy in deciding which products to display or put on sale because Headquarters plans accordingly and ships quantities as forecasted. Zara owned many of the fabric dying, processing and cutting equipment that provided Zara added control and flexibility to adopt new trends on demand. The added flexibility helped Zara on two fronts: shorter lead times and fewer inventories. (OPPapers.com, 2010) Cost: Zara produces most of its products in Europe. Compared to their competitors, they outsource very little to Asia. Though the cost of production in Spain is 17-20% more expensive than Asia, Zara does have a competitive advantage over its competitors in regards to operations. Though there is a cost advantage in their approach in regards to labour, the lack of flexibility in changing orders based on current trends hinders their operational efficiencies. Inventory costs are higher for competitors because orders are placed for a whole season well in advance and then held in distribution facilities until periodic shipment to stores. Lower inventory cost is a key sustainable advantage as it enables Zara to manufacture and sell its products at cheaper prices. Conclusion The smooth integration between Zara business strategy and it is operation strategy as illustrated in the strategic matrix below brought about a promotion of innovativeness through a blending of its performance objectives and decision areas. This aligned Zara operations with its business strategy, ensuring comprehensiveness, correspondence and coherence to achieve its mark in the garment industry as a world leader today. Zara has demonstrated that market flexibility and lean inventories may be even more important than cheap labour, an insight that just might reverse the and its success is based on controlling all the steps of manufacturing clothes: from design to fabric to manufacturing, distribution and sales in order to cut costs and make huge gains in speed and flexibility. In the fashion industry, where trends change daily, Getting a good strategic mix in operations is key to a retailers survival.