ZARA SCM STRATEGIES : KEY ISSUES AND THEIR EXPLANATION

ISSUE 1. Vertical integration has gone out of fashion in the consumer economy. Zara is a spectacular exception to the rule. How Zara used its vertically integrated supply chain to its advantage. Answer
1. The global apparel market presently is a consumer-driven industry. Also, globalization and new technologies have allowed consumers to have more access to fashion and different varieties. As a result, consumers are changing, competition is fierce, and companies are evolving to meet these demands. 2. Zara is a flagship brand of the Spanish retail group Inditex which plays the role of retailer, who has taken a new approach in the industry. With their unique strategy, Zara has the competitive advantage to be sustainable. In order to maintain that advantage and growth they confront certain challenges that face traditional retailers in the apparel industry. In the present day setup of companies shying from using the vertically integrated supply chain due to cost constraints, Zara has on the other hand been able to sustain more growth and profit by retaining this system.

Issue 2 The idea of vertical integration is anathema to an increasing number of companies. Most of yesterdays highly integrated giants are working overtime at splitting into more manageable, more energetic units i.e., de-integrating. Then they are turning around and re-integrating not by acquisitions but via alliances with all sorts of partners of all shapes and sizes.

1.Vertical Integration can be termed as a firms ownership of vertically related activities. The greater the firms ownership and control over successive stages of the value chain for its product, the greater its degree of vertical integration. The extent of vertical integration is indicated by the ratio of a firms value added to its sales revenue. So in such a situation Zara should have been making losses compared to other companies but the situation was on the contrary. 2.Zaras success is based on its vertically integrated supply chain system that achieves a speed of response to market demand that is without precedent in the fast moving fashion clothing sector. Zaras cycles of design, production, and distribution are substantially faster than any of its main competitors. For most fashion retailers there is a six-month lag between completing a new design and deliveries arriving at retail stores. Zara can take a new design from drawing board to retail store in as little as three weeks. Products are designed at the Inditex headquarters in La Coruna on the northwest tip of Spain. Over 40,000 garments are designed annually with about one-quarter entering production. 3. The strength of Zara lies in having the new design product on the retail counter within 2 weeks time. This is due to its very closely integrated supply network. Nearly half of Zaras

products are manufactured within Zaras local network, which comprises Zaras own factories and subcontractors who undertake all sewing operations whereas the rest is outsourced to third-party manufacturers. For its own production, 40% of fabric requirements are supplied by Comidex a wholly owned subsidiary of Inditex. Most fabric is supplied undyed. Postponing dying until later in the production process allows colours to be changed at short notice. Finished products are ironed, labelled (including tags with prices in local currencies), bagged in boxes or on hangers ready for retail display, then transferred by monorail to the La Coruna distribution centre. The concept of pull is utilised by following the need raised by the customers which is identified by the salesmen who in turn have been specially trained for this. Each retail store submits its orders twice a week and receives shipments twice a week. Orders are dispatched within eight hours of receipt and are delivered within 24 hours in Europe, 48 hours in the US, and 72 hours in Japan. 4. Another important aspect in its supply chain is that Zara owns and manages almost all its retail stores. This allows standardised layout and window displays and close communication and collaboration between store managers and headquarters. Zaras tightly coordinated system allows quick response to market demand. At the beginning of each season only small numbers of each new item are produced and are placed in a few lead stores. According to market response, Zara then adjusts production. Typically, Zaras products spend no more than two weeks in a retail store. Product market specialists provide critical feedback that is used both to adjust production levels and to make design or colour modifications to existing items. The close, informal information networks within Zara are critical to product design. Although designers begin working on new designs some nine months before each new season, continuous adjustments to designs are made in response to new information on fashion trends and customer preferences. Designers and market specialists are encouraged to be alert to the new ranges released by the fashion houses of Milan, Paris, London, and New York; to the styles worn by trendsetters on TV, in popular music and in the leading-edge clubs and also to feedback received from store managers and other employees. 5. Zaras compressed product cycles have induced changes in customers retail buying behaviour. Zara customers make more frequent visits to their local stores than is typical for other fashion retailers. They also make faster purchase decisions in the knowledge that garments move quickly and are unlikely to be restocked. Zaras vertical integration works for Zara because it fits with other aspects of its strategy: mid-market pricing, high-fashion orientation, and constantly changing product range. 6. Another aspect that makes Zaras business model more profitable then any other retailer is because in the complete supply chain cycle it is playing both the role of the manufacturer and the role of the retailer and hence is capable of making more profits than any of its close competitors even though associated costs of maintaining the full process is higher. 7. Effective supply chain and its advantage can be seen from the following example. It takes less than two weeks for a skirt to get from Zara's design team in Spain to a Zara store in Qatar or Paris or Tokyo, 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 don't sell as well, avoiding inventory backlogs. Competitors, meanwhile, are dealing with a complex global network just to make a simple shirt, in a process that could take up to eight months from the design stage to the store. The company spends 15 percent more to produce its garments in Spain and Portugal than rivals spend in China mainly due to labor costs, it more than compensates by not advertising, cutting inventory costs and adjusting to fashion trends quickly.

ISSUE 3. Drawbacks of having a highly integrated supply chain for a fashion retailing company.
Zara though is making profits due to its operating methodology of vertical integration however some inherent limitations that are there are as enumerated below : (a) Economies of scale. Vertical integration has made Zara successfully develop a strong merchandising strategy. This strategy has led it to create a climate of scarcity and opportunity as well as a fast-fashion system. However, Zaras strategy creates some weaknesses. Their vertical integration has some drawbacks or limitations. Vertical integration often leads to the inability to acquire economies of scale, which means Zara cannot gain the advantages of producing large quantities of goods for a discounted rate. These higher costs are then incurred for the Inditex Corporation. (b) Increased costs. Zaras speedy and recurrent introductions of new products incur increased costs as well. They have higher research and development costs. They also have elevated costs due to the constant changeover of production techniques to create their different apparel lines. That also means that employees must be trained in order to use the new manufacturing techniques, which again leads to increased costs. Traditional retailers do not experience higher costs in all of these areas. (c) Diseconomies of scale. Zara has not invested in distribution facilities to support their global expansion. As a result, although it is aware of how to quickly supply 1,000 stores, they may not be able to supply more retail locations due to their centralized logistic model. Even though Zara has been successful at scaling up its distribution system, the centralized logistics system might eventually be subject to diseconomies of scale as Zara continues to open stores all around the world and ships product from its single Distribution Center in Europe. This system may work well with the current number of stores because majority of the stores are centralized in Europe. However, Zara wont be benefiting from short lead times and low operational cost with a single central Distribution Center model as they are branching out into other countries. (d) Fast and recurring introduction of new products in different countries increase costs in R&D: In the manufacturing environment, Zaras product development teams are responsible for attending high-fashion fairs and exhibitions to translate the latest trends of the season into their designs. Also throughout the season, Zaras product development teams are constantly researching the market by traveling to universities and clubs around the world to track customer preferences. Additionally, the young, fashionable, and international staff helps to interpret the desire of the moment (Zara). (e) Developing vertically integrated supply chain system in different countries with high labour cost will result in high production cost Zara Management is considering investing in distribution and production in new regions they are expanding into. North America and Asia seemed to be the obvious regional opportunities. The U.S market was subject to retailing overcapacity, demanded larger sizes on average and as Zara did not have any distribution or manufacturing facility within United States, all the apparel were shipped from Europe to the States which incurred a significant transportation cost.

ISSUE 4. In the light of Zaras global expansion in far-off locations like Asia and America, what modifications the company has to bring in its supply chain Answer
1.Zara today has more than 1600 outlets in 82 countries around the world with more stress and coverage in the European markets. Additionally it is foraying into the American and Asian markets in a big way. Economics of the various countries also point that the next major spending markets would be the East Asian as well South East Asian countries. The American markets are presently reeling under the economic recession and would take a long time to recover and be profitable but for Zara this would still remain a huge market to tap as presently Zara has very less outlets compared to the market size. 2.Some of the threats that Zara today faces in its expansion drive are: (a)Zara's vertically integrated model is a threat to its success in the long run. The model will not work once Zara scales its operation. Currently, Zara's designing, production, distribution and retails stores are tightly coupled together and operate very closely. Expanding operations in different regions (America, Asia, Europe etc.), requires addressing different fashion trends at a time. Also, given different sizes/ trends in different regions, it would not be easy to pull a new fashion cloth or apparel from one region and put it in other region. (b)Also, scaling its operation may require joint-ventures and acquiring some smaller chains also. In a 50:50 joint venture, it is very difficult for Zara to impose its business model to the other partner. In this aspect it has been noticed that many of Zara's joint ventures dissolving on a couple of occasions. (c)While Zara may find it difficult to manage the vertically integrated model for its large scales of operation, local retailers may follow Zara's formula to success and can emerge as big threat to its success, thereby reducing the market sustainability of Zara at these new markets. (d)It is not easy to beat the local retailers in their home market. For example, the Local apparel market in Italy is still owned 61% by the independent stores, 45% in Spain (Note that this is Zara's local market too) and 15-30% in other three major European markets. Specially, in countries with very cheap labour (mostly in Asia), it will be very difficult for Zara to keep up its production in Spain and subsequent distribution and sale in these countries. (e)Zara's business model is based on ever changing fashion. For countries like US and the other emerging markets of Asia, where people are less fashion forward and stepped up deep in their culture, it may be a challenge for Zara to mark its presence and sustain in these markets. (f)With changing time, Advertisement is becoming an important part of the business and it reflects directly to the sales. Zara's in-store advertisement model may not work going forward in the densely populated region of Asia as the people are to a greater extent influenced by the advertising done and carried.

3.The modifications that Zara should bring in its supply chain so as to maintain and grow as a firm during its expansion to the far off regions of America and Asia are as follows: (a)It can have multiple vertically integrated productions for each region. For America which is slightly lesser fashion forward like Western Europe the requirements of the markets could be assessed by the shop managers as is being done and then sold in the market. Zara should most likely develop a second central distribution center in the Americas to decrease logistics in order to deliver fashionable goods in a faster manner. Their second central distribution facility should be an expansion of one of their smaller distribution centres located in Argentina, Brazil or Mexico. The close proximity of the distribution centre to the American market will allow them to effectively interpret the particular American fashion. This also allows Zara to protect itself from any regional development / disruption which is the case today as a majority of the production is done in Spain only. (b)Today a major concern at any part of the world or in any business is the rising transportation costs due to the rise in the fuel and oil prices. This would be affecting the model of twice-weekly deliveries that has been key to defining the Zara experience becomes more expensive to maintain. Inorder to tide over this aspect Zara needs to maintain its monopoly in the supply chain and can go for increasing the costs as the majority of its clientele are those that purchase items off the shelf at the moment the product is manufactured. So in order to strengthen its supply chain it should go for agreements with the various air cargo carriers for speedy delivery. (c)Zara should also go for the containerised handling facilities which provide warehousing facilities in storage and transportation. As the turnaround time for receipt at a store to display on the shelf is critical in its supply chain it should go ahead for the utilisation of special containerised packing wherein garments can be kept on the hangers itself. (d)Zaras winning formula can only exist through managements savvy understanding of how information systems can enable winning strategies. It is technology that helps Zara identify and manufacture the clothes customers want, get those products to market quickly, and eliminate costs related to advertising, inventory missteps, and markdowns. Zara needs to always have the cutting edge in Information Technology and should always upgrade itself with the latest in the offering. (e)Today Zara is entering into hitherto untested waters like the Asian and the South American countries. These are generally countries which have a very potential of risk associated due to the varied tastes and likes. Herein Zara can use the help of various franchises initially to gain a foothold before going on its own in these countries till the time they have been accepted and organised. The advantages of using franchises could be exploited as the losses if any being incurred would not be on Zara and at the same time they incur huge savings on establishment and infrastructural cost. (f)Zara has to change its outlook from being a sole manufacturer to retailer to start outsourcing some product items to other firms at the same time keep its core competency intact that is of having the latest fashion in stores. Extensive outsourcing has become a key feature of all fast-cycle product development throughout the various sectors. As Zara has been looking forward for expansion to the various sectors and going for a global reach, these aspects should be kept in mind so as to reduce time as well as to reduce costs.

4.Zara has been having a successful supply chain model even though it is going for a vertically integrated chain which is not advisable for the garment industry. This has primarily been due to the underlining fact that speed can substitute for inventory Faster reaction with the very little finished goods produced results in lesser inventory and savings due to nil or very little overstocks and further no spiralling variety production. The second factor has been that information can also substitute inventory as has been done by Zara by pre-empting the needs of its customers and so sustaining a comprehensive edge.

ISSUE 5 Most of the supply chain management efforts by organisations now-a-days are aimed at minimising costs rather than on maximising revenues. However Zaras supply chain management practises are an exception. Zara should continue with these practices or should aim at reducing costs so as to maximise profits?

Answer 1. Zaras success is based on a business system that achieves a speed of response to market demand that is without precedent in the fast moving fashion clothing sector. Zaras cycles of design, production, and distribution are substantially faster than any of its main competitors. For most fashion retailers there is a six-month lag between completing a new design and deliveries arriving at retail stores. Zara can take a new design from drawing board to retail store in as little as three weeks. 2. Today Zara is moving ahead and is progressing to attaining a larger global market by expanding to both the American continent as well as the Asian region. In this aspect and looking at the future of the growth of Zara it is suggested that Zara should continue with its vertically integrated supply chain management but at the same time should resort to outsourcing and utilisation of the multiple vertical integrated supply chain. 3.The advantages that Zara could most possibly gain from these are : (a)The fewer the number of firms, the greater are the transaction costs and bigger the advantages of Vertical Integration, also transaction-specific investments increase the advantages of Vertical Integration. (b)The greater are information asymmetries, the more likely is opportunistic behaviour and the greater the advantages of Vertical Integration. This will be able to be effective in the European Markets. (c)Taxes and regulations are a cost of market contracts that can be avoided by Vertical Integration, similarly when there is greater uncertainties concerning costs, technologies, and demand, the greater the difficulty of writing contracts, and the greater the advantages. (d)In the American and the Asian Markets since the dissimilarity are more so greater the advantages of outsourcing and transportation costs as compared with the Vertical Integration. As Zara shall be positioning themselves to gain a foothold in these markets so greater the need to invest in capability development and so the greater the advantages of outsourcing over Vertical Integration.

(e) With the need for expansion to new markets the greater will be the need for entrepreneurship and flexibility and also subsequently will be greater the advantages of highpowered incentives provided by market contracts, and the greater the administrative disadvantages of Vertical Integration. In these aspects the greater will be the flexibility advantages of outsourcing. Also for areas where more heavier the investment requirements and higher the independent risks at each stage, the more risky is Vertical Integration and better advantageous will be outsourcing. 4. Zara cannot address different requirements and challenges working from its home location only and so it would be but optimal for it to have multiple vertically integrated production for each region apart from going into outsourcing to achieve better targets and profit margins.