Case # 4 – Zara
Zara is the flagship company of Inditex, an international clothing retailer. Zara began its business as a small retail store in Spain founded by Amancio Ortega Gaona in 1975. In the following decades Zara has grown to nearly 450 store location in 29 countries by the year 2000. Zara consistently accounts for more than 80% of Inditex’s net sales as indicated by Figure 1; linking the success of Inditex to the success of the strategies of Zara. Figure 1 Inditex Net Sales by Concept
The success of Zara is linked to its vertical integration strategy with local sourcing that differentiates it from other international clothing retailers. Sourcing Strategy
Zara uses a combination strategy when sourcing their production. It uses most of outsourcing to produce basic items and initial fashion collection. It outsources about half of its production to third party; about 60% come from Europe, 30% come from Asia and rest come from other parts of world. Outsourcing decision depends on number of considerations such as raw materials quality, expertise, relative cost, time sensitivity, transportation costs, political and foreign exchange risk and social responsibility concerns. By using outsourced suppliers for its initial annual inventory Zara is able to produce at lower costs, therefore increasing its margins. At the beginning of each season Zara commits almost 50-60% of season inventory; about one fourth of season’s production is made available at start of season. The percentage outsourced, however, is much lower than their competitors. This strategy gives Zara more flexibility to use in-house production in manufacturing apparels that follows current fashion trend. In-season production offers Zara a competitive advantage of responding to current fashion trend; this creates a risk profile for Zara which differentiates it from other apparel retailers. Zara is doing this on purpose as a way to better meet consumer demand once numbers are actually known; this way it is able to produce more of the popular products and less of the slow movers. Zara’s competitors, however, do not follow this strategy and often times face situations like, selling out of their popular inventory and holding onto large quantities of unpopular products. Zara also benefits from this strategy by not having to heavily discount a large amount of product at the end of the season. Given its in-house ability to meet demand, Zara can produce more of the products that are selling and cut back on slow movers, ultimately leaving very few unsold slow moving products at the end of the year. Zara’s competitors, however, have to plan their production months in advance making it near impossible to determine what products will actually sell and which ones won’t. This ultimately makes it difficult to maximize sales and will result in a large quantity of unsold goods on hand at the end of the season. Inventory Management
Given this unique sourcing model Zara maintains extremely low inventory of finished products to create a consumer perception of having to purchase now, to avoid missing out later. This customer environment is evidenced in the fact that customers come to Zara stores 17 times a year as compared 3 to 4 times for its competitors. With this sourcing strategy and customer culture, Zara has several specific challenges with its inventory management strategy. One challenge directly related to Zara’s rapid inventory turnover is the need to have fast moving communication up the supply chain. If Zara’s retailer stores are unable to give the manufacturer the information they need, then the entire sourcing strategy will fall apart. Zara meets this challenge by having direct communication between retail stores and store specials that can give direct feed back to the designers. Despite apparent success at moving information up the supply chain, Zara still is presented with an ongoing set of difficulties. Another challenge is...
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