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The 21st-century Supply Chain

Spanish clothier Zara turns the rules of supply chain management on their head. The result? A superresponsive network and profit margins that are the envy ofthe industry.

Fiilflllment
by Kasra Michael A. Lewis, and Jose A.D. Machuca

ire

W

hen a German wholesaler suddenly canceled L1 big lingerie order in 1975, Amancio Or-

tet;;a thought his fledgling clothing company might go bankrupt. All his capittil was tied up in the order. There were no other buyers. In desperation, he opened a shop near his factory in La Coruna, in the far northwest corner of Spain, and sold the goods himself. He called the shop Zara. Today,over 650 Zara stores in some 50 countries attract wellheeled customers in luxury shopping districts around the world, and Senor Ortega is arguably the richest man in Spain. The clothing company he founded, called Inditex, has been growingever since he opened that first Zara shop. From 1991 to 200^, Inditex's sales - 70"-:. of which spring from Zara - grew more than 12-fold from €367 million to €4-6 billion, and net profits ballooned i4-ft)ld from €31 million to €447 million. In May 2001, a particularly tough period for initial public offerings, Tnditex sold 25% of its shares to the public for €2.3 billion. While manyof its competitors have exhibited poor financial results over the last three years, Zara's sales and net income have continued to grow at an annual rate of over 2O'H.. IIAIWARD

!04

The 21st-century Supply Chain

The lesson Ortega learned from his early scare was this: To be successful, "you need to have five fingers touching the factory and Hve touching the customer." Translation: Control what happens to your product until the customer buys it. hi adhering to this philosophy, Zara has developed a superresponsive supply chain. T'he company can design, produce, and deliver a new garment and put it on display in its stores worldwide in a mere 15 days. Such a pace is unheardof in the fashion business, where designers typically spend months planning for the next season. Because Zara can offer a large variety ofthe latest designs quickly and in limited quantities, it collects 85% ofthe full ticket price on its retail clothing, while the industry average is 60% to 70%. As a result, it achieves a higher net margin on sales than its competitors; in 2001, for example, when Inditex's net margin was io.5"i., Benetton's was only 7%, H&M's was 9.5%, and Gap's \N^s near zero. Zara defies most of the current conventional wisdom about how supply chains should be run. In fact, some of Zara's practices may seem questionable, if not downright crazy, when taken individually. Unlike so many of its peers in retail clothing that rush to outsource, Zara keeps almost half of its production in-house. Far from pushing its factories to maximize their output, the company intentionally leaves extra capacity. Rather than chase economies of scale, Zara manufactures and distributes products in small batches. Instead of relying on outside partners, the company manages all design, warehousing, distribution, and logistics functions itself. Even many ofits day-to-day operational procedures differ from the norm. It holds its retail stores to a rigid timetable for placing orders and receiving stock. It puts price tags on

items before they're shipped, rather than at each store. It leaves large areas empty in its expensive retail shops. And it tolerates, even encourages, occasional stock-outs. During the last three years, we've tried to discover iust how /ara designs and manages its rapid-fire supply chain. We conducted a series of interviews with senior managKasra Ferdows (fcrdow!>k(a\^eori;etiwn.edit) is the Heisky ers at Inditex and examined company documents and a Family Professor of Global Manufacturing at Ceorgetowii wide range of other sources. We were particularly curiUniversity's McDonough School of Business in Washington ous to see if Zara had discovered any groundbreaking...
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