In the fast fashion retail business strategy, supply chain management processes serve to introduce fashionable merchandise rapidly, such that stores can respond immediately to customer demand for merchandise. This was pioneered by Zara, a global specialty apparel chain located in La Coruna, Spain. It has also been adopted by other retailers, including American Apparel, H&M (headquartered in Sweden) and TopShop (United Kingdom). The approach is particularly effective for specialty apparel retailers that target fashion-conscious consumers who simply must have the latest looksbut they want to do so on a very limited budget. These shoppers load up on new fast fashions every few weeks, instead of purchasing a few higher-priced basics every few months. To fit with such short cycles and meet customers demands, the fast fashion process starts with the receipt of timely information from store managers. At Zara, store managers always have their reporting devices literally in hand. These handheld devices, which are linked directly to the companys corporate office in Spain, enable daily reports on what customers are buying (or not) and what they are asking for but not finding. For example, customers might want a purple version of a pink shirt that they see on the shop floor. Managers immediately pass the information on to the designers in Spain. Those designers then communicate electronically with the factory that produces fabric for shirts. This factory starts up its automated equipment, which is run by assemblers who live in close proximity to the factory. (The undyed fabric comes from Asia, where Zara finds inexpensive sources, and then bulk ships fabric to Spain and Portugal to be manufactured into apparel.) The robots in the companys 14 highly automated factories start cutting out shirts and mixing purple dye. For final construction, a network of small assemblers, located near the factories in Galicia, Spain, and northern Portugal, takes responsibility for making the final product. Finally, to ensure timely 23 delivery, the shirts get shipped by truck to stores in Europe and by air express to stores in the rest of the world. Zara production is so efficient, it can get a new product from design to the sales floor in only 10 days. Since Zara now operates in 96 markets, its parent company Inditex works with over 7,200 factories worldwide to deliver products to stores; however, most of its clothing is still made in Spain and nearby countries. The Benefits of Fast Fashion for Zara Zaras main advantage over its competitors, such as The Gap and H&M, has resulted from its highly responsive and tightly organized supply chain. Unlike these competitors, Zara selects factory locations that are in close geographic proximity to the companys headquarters in Spain. Although this approach increases labour costs, compared with outsourced production in lower-cost countries in Asia, it also improves communication, reduces shipping costs and time, and reduces the time before new fashions appear in stores. It also gives Zara the flexibility to modify its operations in one supply chain function to expedite processes in another, such as pricing or tagging. It might hang merchandise on racks in the warehouse so that store employees can move apparel directly from delivery to the sales floor. And it can do all this because it 24 Zaras competitive advantage in specialty apparel retailing is based on its efficient supply chain that delivers fashionable merchandise to its stores frequently. Shutterstock/Sorbis maintains complete control over the entire process. A big key to Zaras success is the fact that it does much of its production inhouse and ensures that its factories reserve 85 percent of their capacity to make adjustments during the season. That allows ultimate flexibility in the variety of products they can launch, as well as how much and how often it can be produced. Additionally, it only locks in about half of a new line for the start of the season to allow popular items to be produced during the season and quickly shipped to stores. Furthermore, instead of shipping new products a few times a season, as many of its competitors do, Zara makes deliveries to every one of its stores every few days. The purple shirts would be in stores in two weekscompared with the several months it would take most department stores and other specialty apparel stores to accomplish the same feat. Because its fast fashion system also ensures shorter lead times, its less likely that any Zara store will be out of stock before the next sweater shipment arrives. Limiting the stock in stores can even create a sense of scarcity among its customers. If they dont buy now, the item might not be available next time they visit the store. By producing and shipping in these small quantities, Zara can quickly recover from its (rare) fashion faux pas. Finally, the efficiency of its supply chain means Zara rarely has to discount merchandise that is not selling. At Zara, the number of items that end up marked down is about half the industry average. Even with these results, Zara still manages to introduce around 10,000 new designs and 40,000 new SKUs each year. Page 392 Moving Too Fast? The Negative Effects of Fast Fashion Despite some strong signals of successincluding a 10-percent increase in samestore sales, and a 12-percent increase in net sales Zara started to outgrow its own strategy. By their very nature, fashion trends change rapidly and constantly, and so must the merchandise on Zaras shop floors. Faced with disappointed customers, some sales managers ordered extra quantities of hot items to avoid stockouts. Even with this attempt to circumvent the replenishment system, some 25 26 stores still suffered from stockouts, because they received fewer units than they had ordered when overall demand exceeded inventory levels. For some items, Zara confronted perhaps the most frustrating scenario in a supply chain: inventory sat unused, eating up storage costs at one location, even as another store desperately pleaded for the same inventory to meet its customers demands. One way Zara is trying to meet more customer needs is by investing in its instore pickup for online orders. Zaras fast fashion model is the perfect fit for online shoppers because it can always offer something new. Because Zara designed its ordering platforms for small store orders, it is able to process online orders in much the same way. Home delivery can create a hurdle, and by emphasizing in-store pickup, Zara can avoid delivery challenges. One way it is improving in-store pickup is with self-service pickup kiosks that can hold up to 4,000 packages. As noted earlier, the company launches as many as 10,000 new styles annually, with a range of colours and sizes, resulting in hundreds of thousands of SKUs in the system. Counting replenishment orders, which are received twice weekly, Zaras average shipping total reached nearly 2.5 million items per week, all coming from the companys distribution centre. Its legendary supply chain efficiency thus was in danger of a clogged artery. In response, Zara has adopted some new mathematical processes that turn human experience and mountains of data into actionable information. These models factor in store managers unique requests for merchandise replenishments, together with historical trends in the sales of the same item. Merchandise display practices have been altered, such as removing all sizes of a garment from the sales floor if a popular size is not available. This practice helps reduce customer frustration, in that they never see an item that might not be available in their size. It also diminishes shipping; if the medium size is unavailable, the small and large sizes do not get shipped either. Instead, these remaining sizes head toward the stores that still have all sizes in stock, so they can be available to customers there. Zara is also making more effective uses of RFID technology. Because Zara manufacturers its own clothing, it can insert RFID tags into the security tags 27 that already appear on each piece of clothing. Thus the very act of inserting the tags becomes viable as a parallel step to the attachment of the security tags. In contrast, retailers that previously tried to insert RFID tags struggled to find efficient methods and had trouble deciding exactly when in the supply chain they should be inserted. Walmart, for example, demanded that suppliers add them, but suppliers balked at the added expense associated with the additional step. By including the RFID elements within the security tags, Zara has found a way to reuse the still relatively expensive RFID technology. In previous experiments, the tags left the store with customers who purchased the related item. At Zara, employees remove the security tag as they check out customers, so the RFID chips also stay in the store, available for reuse. These methods give Zara a distinct advantage. The task of taking inventory has become so much faster and easier that Zara can perform it every six weeks instead of twice a year, as is common in the industry. Rather than actively scanning each items bar code, inventory takers simply walk through the store with an RFID device that passively gathers information from each rack. In turn, its inventory tracking is significantly more accurate, and it knows exactly what styles and items are selling best (or worst). Growth, costs, market demand, and technology advances all can push retail executives to rethink their business processes. But truly savvy managers search for ways to optimize operations, even when business is running smoothly. As Zara learned, current approaches will not necessarily work tomorrow.

Questions 1. How does an individual firm like Zara manage a supply chain? How does it get new products from design to store so quickly? 2. What are some of the ways that Zaras supply chain management system has helped create value for its customers? Provide specific examples. 3. What challenges did Zaras focus on supply chain efficiency create? Are all such systems destined to suffer such growing pains?