Spanish clothier Zara t urn s the rules o f supply chain management on thei r head. The result? A superresponsive network and p rofi t margins t ha t are the envy o fth e industry.
by K asr a
Michael A. Lewis, and
Jose A.D. Machuca
hen a German w holesale r suddenly canceled L1 big lingerie order in 1975, Amancio Or-
tet;;a t hough t his fledgling clothing company
might go b ankrupt . 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 t h e far northwest corner of Spain, and sold t h e goods himself. He called t h e shop Zara.
Today,over 650 Zara stores in some 50 countries attract wellheeled c ustomers in luxury shoppin g districts a roun d t h e 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 € 7 million to € 6 billion, and net 36
4profits ballooned i4-ft)ld from € 1 million to € 7 million. In 3
May 2001, a particularly tough period for initial public offerings, Tnditex sold 25% of its shares t o t h e public for € 3 billion. 2.
While m anyo f its competitors have exhibited poor financial results over t h e last t hree years, Zara's sales and net income have continued to grow at an annual rate of over 2O'H..
The 2 1st-centur y 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 t h e 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 t h e fashion business, where designers typically spend months planning for t h e next season. Because Zara can
offer a large variety o fth e latest designs
quickly and in limited quantities, it collects 85% o fth e full ticket price on its retail clothing, while t h e 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 conventiona l wisdom a bou t how supply chains should be run. In fact, some of
Zara's practices may seem questionable,
if n o t 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 tha n at each store. It leaves large areas empty in its expensive retail shops. And
it tolerates, even encourages, occasional stock-outs.
During the last t hree years, we've tried to discover iust
how / ar a 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 o the r sources. We were particularly...