Zara Supply Chain Case Study

A. Introduction

The retailing industry is constantly expending and presently encompasses massive amounts of money. In 2003, the clothing market in the major countries was estimated at about 580 billion, with the US accounting for about 180 billion and Western Europe representing 225 billion. Given the vast scope of the industry, it is logical that many competitors enter the lucrative commerce every year. In 1975, Amancio Ortega Gaona opened the first Zara store in La Coruna, Spain. A decade later, there were 82 Zara stores in Spain and the company undertook its worldwide expansion. By year 2000, Zara's affordable designer-clothes had spread across the globe and half of the company's sales were outside of Spain. In 2001, Inditex (Zara's parent company) made an initial public offering of stocks and was by then the world's third largest clothing retailer. Zara produces about 11 thousand styles each year - perhaps 5 times as many as a comparable retailer would typically produce, and all in relatively small batches. This encourages the company to experiment, but always within a commercial orientation. Gaona describes his strategy as follows; "Today it is more important to respond to quickly changing fashion trends than to have low costs." 2 In 2002, 450 Zara stores were operating in 33 different countries with about 10 new boutiques opening every month. Although nowadays Zara has become a large multinational firm operating well over half a million stores globally, its success is rooted in developing a remarkable strategy for defending its position in the national market. The company's staggering growth has led Zara to being described as "possibly the most innovative and devastating retailer in the world".

On the other hand, Benetton was founded in 1963. Throughout the years, this Italian-based company opened 5000 stores in 120 different countries around the world. The corporation's 1.8 billion dollar total turnover has enabled Benetton to assert their position on the market and become one of Zara's main competitors.3 The two companies rely on very different supply chain systems, although both are efficient and emphasize response to short-term changes in demand. The following paper aims at describing and analyzing those systems as well as providing some feedback regarding their operating methods.

B. Business Strategy

For the past three decades, Zara's built-in strategy has proven to be quite effective. In the recent years, the company has grown by an astounding 23% annually while European rivals have grown by a mere 3% over the same period. 2 Both Zara and Benetton are one step ahead of competition in that they copy what customers are buying rather than attempting to impose a certain fashion trend. For instance, Zara creates 85% of all items after the beginning of the season in response to customer interest and demand. 1 Benetton and Zara both have successful supply chain models that enable them to differentiate their product and brand from giant global competitors. Zara's centralized manufacturing center, its lower information flow along with its significantly shorter lead-time allowed the company to become highly profitable over the years. On the other hand, Benetton's unique dyeing system and its use of the push-pull strategy has permitted it to remain one of Zara's biggest competition. Ultimately, Benetton's use of RFID technology could give them the opportunity to lower labor costs and hence increase profitability. Nonetheless, the advantages that stem from Zara's thriving supply chain model take the form of a focused and tailored strategy and are backed by a coherent marketing campaign. The campaign reflects Zara'a sound business models, illustrates the core standards of the firm and offer value to target customers, all the while making the best use of the principle of creativity, flexibility and home-field advantage.

C. The Supply Chain Model

"Zara's business model, which involves changing stock every two to four weeks, rather than every season, and focusing on supply chain flexibility rather than simply finding the lowest labor cost, is becoming an industry standard." Zara's supply chain model is the primary success factor of the company, in which many in the industry are trying to follow today. Including a growing 650 stores that are located in over 50 countries, Zara maintains all its operations such as design, production and marketing in its main headquarters in La Corunna, Spain, which also includes local tailoring shops. 60% of Zara's products are manufactured at headquarters and are distributed internationally, while the rest which includes repetitive or longer shelf-life fashion is mainly outsourced in Asian and Turkey. The supply chain model that Zara utilizes is a constant Just-in-Time (JIT) system which directly and constantly manufacturers the needed amount of new and repetitive merchandise, and distributes them to its international stores.

D. The Manufacturing Process

Known as "design-on-demand retailing," the manufacturing process takes around two weeks to complete. The process begins with the 200 designers that are in constant contact with store managers about repeat orders of high demand merchandise and with trend-spotters about new designs. Designers sketch out their designs based on the latest trends from television, catwalk shows and trend-spotters and send them to the main fabric manufacturing factory. Fabric is originally obtained from Spain, Far East, India and Morocco and is then cut and colored based on designs at the main factory through three parallel facilities; each for men's, women's and children's clothing. At the same time, being "grass-root market researchers," store managers provide real-time information of sold and high demand items to production managers. Production managers determine the number of garments to produce and which stores will receive them. Finally, the manufactured fabric is sent to the local tailoring shops to be assembled and is then sent to the distribution center, where they are shipped.

E. Advantages of the Supply Chain Model

Zara's constant JIT supply chain model encompasses a number of industry demanded advantages that gives it the competitive advantage. The single manufacturing center of Zara removes the need for information to travel through a number of dispersed channels. This results in shortening delay time, minimizing restriction, provides immediate feedback, allows for faster decision making and lowers the risk of loss. The parallel manufacturing facilities creates