What is trade-off faced by Zara between carrying costs and stockout costs?

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Zara's secret to retail success - its supply chain!

Zara is a multinational fashion brand that is famous for its commitment to fast fashion. Zara stores operate globally as subsidiaries of the parent company Inditex. Inditex owns and operates many aspects of the supply chain for clothes sold in Zara stores. Since Zara is the most popular brand within the Inditex umbrella of companies and brands, this article uses the term Zara interchangeably with Inditex. Nonetheless, it is important to note that Inditex has vertically integrated the Zara supply chain and, accordingly, Inditex owns some of the suppliers or uses licence agreements to control the production of most clothes sold at Zara stores.

Synergy between business and operations strategy

For Zara, speed and responsiveness within the companys supply chain are incredibly important success factors. In comparison to other brands that churn out fast fashion, Zara aims for the supersonic production of fashion goods that respond to current consumer preferences.

The Zara brand is renowned for its ability to deliver new clothes to stores quickly and in small batches. Twice a week, at precise times, store managers submit orders for clothes to be delivered to their stores, and twice a week, on schedule, new garments arrive. The company produces about 450 million items a year for its 1,770 stores in 86 countries.

For Zara, its supply chain provides its primary competitive advantage over other fashion retailers. Inditex utilizes vertical integration within the Zara supply chain to adapt haute couture designs so that clothes can be manufactured, distributed and be on the retailers shelves within 2 weeks of the original design first appearing on catwalks. Zara competes favourably with other brands because of its speed to market. To further the brands appeal to consumers, Zara aims to achieve growth through diversification of product designs and clothes.

Zara literally embodies the idea of fast fashion. Store managers communicate customer feedback and advise the Inditex executive team as to the styles that shoppers like or dislike, and what fashions the customers are looking for. That data is instantly funneled back to Zaras designers and buyers. Products that sell fast are promptly ordered while products that are slow to sell are likely to be redesigned or improved in season. This strategy allows Zara to sell more items at full price because the company exudes responsiveness and exclusivity. Zara gets 85 percent of the full price on its clothes, while the industry average for fashion retailers is 60% to 70%. Zaras unsold clothing inventory account for less than 10% of Zara stock compared with an industry average of 17 to 20 percent.

According to Professor Kasra Ferdows, Zara understands that if they dont have to discount as much, they can spend money on other things. They can see the benefit of this certainty and rhythm in the supply chain. By not engaging in price discounts like other brands, Zara can afford the extra labor and shipping costs needed to accommodate and satisfy changes in seasonality and customer demand.

The wages paid by Inditex/Zara to its European workers are higher than those of their developing-world counterparts (such as Bangladesh), but the companys incredibly quick production more than offsets the higher manufacturing and design costs. Inditexs strong supply and distribution network in Europe enables the company to deliver goods to Zara stores in European stores within 24 hours, and to Zara store in North America in about 40 hours.

Just in time production and Inventory management

Zara is a retail giant that delivers fashionable and trendy numbers catered for different tastes through a controlled and integrated process this process is referred to as just-in-time production. Professor Nelson Fraiman states that Inditex/Zara will typically develop a product from concept and deliver to store in just 15 days, while the industry standard is 6 months.

Instead of outsourcing, Zara keeps a significant amount of its production in-house. Zaras own factories utilize a Master Production Schedule that expressly reserves about 85% of the companys capacity for in-season adjustments. In-house production allows the organization to be flexible in the amount, frequency, and variety of new products that may be launched by Zara from time to time. The company often relies heavily on sophisticated fabric sourcing, cutting, and sewing facilities near to its design headquarters in Spain.

Zara retains extra capacity within its production facilities to respond to demand as it develops and changes. For example, a Zara factory would operate typically 4.5 days per week around the clock at full capacity and production would have built-in flexibility with extra shifts and temporary labor added when and if needed. This type of production strategy translates to more frequent shipments to stores, but it also has an impact on inventory.

Inditex follows several distinct inventory optimization models to ensure Zara stores have sufficient inventory in place to help the company complete sales. For example, the company uses data to determine the quantity of clothing products to be delivered to its retail stores via shipments that go out twice every week. Clothing shipments are usually delivered in limited batches to ensure that each Zara store receives only the items they require.

Some Zara executives are known for stating that inventory = death so the company takes steps to avoid maintaining significant inventory in any part of its supply chain from raw materials to finished products. Refusal to overstock an item enhances the brand image of Zara being exclusive while avoiding the costs associated with stockpiling inventory, however, some claim that Zaras inventory management techniques are too risky for todays competitive fashion marketplace.

Zara commits to 50 to 60 percent of its total clothing production at the start of the season with the remaining 40%-50% of its clothes being designed and manufactured smack in the middle of the season. If a certain style or design suddenly become the rage, Inditex reacts quickly by designing or adapting new styles and arranging for delivery of the fashion goods into Zara stores while the trend is still peaking.

Sometimes the companys quick in-season turnaround, from production facilities located close to Zaras distribution headquarters in Spain, allows Zara to successfully chase the latest trend. Zara avoids big losses because its orders for new products are usually delivered in small batches; there is generally not very much unsold inventory even if product sales are not as successful as forecasted. So a failed product or style experiment is over in a jiffy, and there may be time for Zara to order different products and styles to replace any unpopular products.

Centralized logistics and a Solid distribution network

Zara sticks to a deep, predictable and fast rhythm, based around order fulfillment to stores. Each Zara outlet sends in two orders per week on specific days and timing. Trucks leave at specific times and shipments arrive in stores at specific times. Garments are labeled and priced upon destination. As a result of this clearly defined rhythm, every staff involved (from design to procurement, production, distribution, and retail) knows the timeline and how their activities pan out with respect to other functions. Zara customers by extension know when to visit their local store to shop for fresh new garments.

The secret to their success has been centralization, says Felipe Caro, an associate professor at the University of California at Los Angeless Anderson School of Management and a business adviser to the company. They can make decisions in a very coordinated manner.

Zaras cross-functional operations strategy coupled with its vertically integrated supply chain enables mass production under a push control logistics process. The end result is well-managed inventories, reduced instances of markdowns, higher profitability and value creation for shareholders in the short and long term.