CASE STUDY CONCEPT:Zara's Unique Business Model is Driven by Its Supply Chain Capabilities.

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 highly responsive supply chain is central to its business success. The heart of the company and its supply chain is a huge, highly automated distribution center (DC) called "The Cube". The screenshot below shows a closeup satellite view of this facility.

The company wasfounded in Spain in 1974. It is the flagship business unitof a holding company called Inditex Corporation with headquarters in Arteixo, Galicia; a city in northwestern Spain near where the company founder, Amancio Ortega was born. In 2018 Zara was ranked as the46th most valuable brandin the world byForbes(see bibliography below).

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 - 6weeks, and existing items can be modified in 2 weeks.

The company's coremarket 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 on average compared to 3 times per year for competitors. Because their clothing designs change often, 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 theNew York Times Magazine(November2012, "How Zara Grew into the World's Largest Fashion Retailer" see reference in bibliography below), places the store count at around5,900. Anarticle inForbessimply states there are more than 2,200 stores (May 2018, "The World's Most Valuable Brands - #46 Zara", see bibliographybelow). Annual sales at the end of 2017 were estimated byForbesto be $18.98 billion. Because Zara is a privately owned company, it is not required to disclose information routinely released by public companies. Zara usesa flexible business model where its stores can be owned, franchised or co-owned with partners.

Manufacturingand Supply ChainOperations 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 onlya fewtypes of fabric (justfour 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 purchasesraw fabric from suppliers in Italy, Spain, Portugal and Greece. And thosesuppliers 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.

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 manufacturingoperations:

Zaracompetes 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 garmentsleave the Cube and are transported to the Zara logistics hubin Zaragoza. And from there theyare delivered to stores around the world by truck and by plane.

Zara can deliver garmentsto 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 receivethe products customers want when they want them, week by week.

Zara stores respond practically in real-time as styles and customer preferencesevolve. It is a great business model for successin the high-change and hard to predict fashion industry.It means about half of the clothing the company sells, most ofits high margin and unique 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 marketups and downs that ensnare its competitors. Turbulence in the global economy since 2008 has hurtsales 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. Continuous adjustments need to be made to production rates, vehicles, and delivery routes and schedules to keep this supply chain working well.

Zarais a clothing and fashion retailerthat uses its supply chain to significantly change the way it operatesin a very traditional industry. Noother 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 thatenable people to applytheir training and their technology to best effect.

Buyingtechnology 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. Goodmentalmodels enable peopleto understand the potentials and see the opportunities that a real-time supply chain offers. Effective operating procedures enable people to act on what they seeand capitalize onthe 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 todo what Zara does so well.

Discussion Topics (Questions)

How do you think Zara utilizes the six rights (right source, price, quantity, time, place, and quality) model to its logistics perspective?

What makes Zara different than any other multinational corporation?

(Each question of 700 words)