Zara Case Study

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Zara case study
Business model
Amancio Ortega Gaona, a Galicia native, opened the first Zara stores in La Coruna in 1975 and has begun international expansion ever since. Zara is a part of Inditex, which is one of the world’s largest fashion distributors. Zara is known for its fast respond to ever- changing fashion trends to satisfy customers’ needs. The purpose of this paper is to discuss issues and alternatives of Zara’s operating system. The three key success factors in Zara’s business are: • Short lead time to reach the market

• Low quantities to create scarce supply
• More styles
By focusing on shorter lead time, the company guarantees that the stores will carry fashionable clothes that consumers want at that time. Assuming the company has the fabric in stock, in-house design, pattern making, and cutting capabilities, Zara can go from start to finish on a style production within as little as 10 days. Zara can quickly identify fashion trend by studying consumer market research and updating information from store managers. By reducing quantity manufactured in each style, Zara reduces fashion risk as well as creating scarcity (more demand). The customers might not be able to find their favorite clothes if they do not make immediate purchases. Clothes will not stay in one location so that they will be on sale. Instead, they are moved between locations in order to drive demands. Most competitors increase quantities per style while Zara produces more styles, about 12,000 a year. Each style sells out quickly so new styles can take up the space.

Problems
The company is facing several issues:
• Inability to enter U.S. market. The management announces that significant expansion in the U.S. market is not a near- term goal. The differences in the tastes and preferences of American consumers, the lack of strong supply chain, distribution and production centers, and the cost of advertisements are main reasons why the company decides to focus on other markets. • Inability to acquire economies of scale. The company manages small batch production to meet the fast changing tastes of consumers. Zara only commits to 50-60% of production in advance of the season. The remainder percentage is based on rolling basis of demands which creates scarce supply. It encourages customers to buy at a full price right away, because the stores receive new items every two weeks. Also it encourages customers to visit Zara’s stores often. The average Zara’s customer’s number of visits is 17 times a year, compared to 3-4 times that of other competitors. • Limited advertisements due to heavily reliance on customers’ word-of-mouth. Advertisement is an important part of business and it affects sales. Zara’s choice of advertisement might not work in the future. • Direct competition due to expanding into new geographic territory. • High labor costs. About 80% of Zara’s production is built in Europe. Almost half of its production self-owned or closely-controlled facilities which provides flexibility to control. Based on Table 9-3 Relative wage levels, the cost of hiring people is Spain is about 13 times the costs in Asia on which most other competitors’ production lines are based. • Main problem with Zara: most of the manufactured garments distribution is in Spain. If natural disaster occurs in Spain, the company’s production will be delayed. Case analysis

• Vertically integrated. Zara’s business model is vertically integrated which covers all aspects of fashion process including manufacture, design, logistics, and distribution. By practicing vertically integrated model, Zara enables to shorten turnaround times, reduce fashion risk, and gain flexibility. Based on Table 9-4 Production movement, in 2000, the company makes 44% of its own fabric and the external production rate is 56%. The key to this business model is the ability to respond to customers’ demand in the shortest time. The value chain is highly...
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