Purpose – The purpose of this paper is to understand how to develop a competitive supply chain in order to response to the speed of the customer changes in clothing industry. Literatures review – The key success factors of the clothing industry are explained. Also the supply chain concepts related to the industry are developed (Agility, Quick Response and Lean) Analysis of Zara’s supply chain – The supply chain network of the company is analysed and each stage of the network is developed in details to see how the supply concepts are applied or not by the leader of the clothing industry (Zara) Future developments – The company needs to focus on e-commerce development by taking advantage of its agile supply chain. Furthermore, Zara could set up a reverse logistics to develop a sustainable business. Conclusion – Three key points are relevant in this industry: the location of production facilities has to be the closest as possible to consumers (1). The use of concurrent engineering ease to develop products quickly (2). Finally, the ownership of the stores is a competitive advantage to understand the needs of customers. Limits – The use of Zara’s supply chain model is not applicable for international development.
Table of contents
1 – Introduction
“One day it’s in and the next day it’s out” (H. Klum). Customer demand changes in fashion clothing industry are quick and unpredictable. The summer/winter collections’ times is ended, to give way to a perpetual series renewing of collections. Each time a customer come in a store, he wants to discover new products. The strategy sounds good and simple at a marketing point of view but that is a tricky challenge for supply chain managers. They need to reduce lead time, be innovative and responsive with a high variety of products to manage. How do companies have to organize its supply chain in order to be responsive to changes rapidly while remaining competitive in price? The aim of this essay is to explain how to develop a competitive supply chain in order to response to the speed of the customer changes in clothing industry. The first part deals with supply chain theoretical concepts used in the clothing supply chain. Afterward, I will explain you and analyse how Zara does to overcome competitors thanks to its supply chain and after I develop some future improvement ideas to stay competitive in the following decades.
2 – Literature review part: Clothing Industry Supply Chain
A – Key success factors in the fashion apparel industry
The fashion market is today highly competitive with several well-known brands such as Zara, H&M, River Island, Gap, Mango. According to Christopher et al. (2004), clothing market encompasses the following four features: short life cycles, high volatility, low predictability and high impulse purchasing. Every day, the customer wants a new fashion product at an affordable price. The characteristics of fast fashion are instability of forms and constant changes to create unique products. As it becomes impossible to forecast new trends, companies have to focus on timing and to get responsive to market changes. Each forecasting error or delay results in loss: markdown or lost sales (figure 1). The implications of these effects for supply chain management are numerous and important.
B – Clothing Industry Supply Chain concepts
Agile Supply Chain is a “network’s ability to consistently identify and capture business opportunities more quickly than its rival do” according to Cai-Feng (2009). As in the clothing industry, the competition is based on time-to-market, agility is an adaptation faculty to the unpredictable changes of customer behaviour. Agility is required in fast changing environment in order to increase profit and outperform the competition. (Figure 1). Companies could become agile by improving the flow of information all along the supply chain, from final consumers to raw material suppliers. Concurrent engineering is related to agility and is a concept that refers to the simultaneous participation of all the functional areas of the firm in the product design activity. It ensures that the final design meets all the needs and that the product can be quickly brought to the marketplace while maximizing quality and minimizing costs (Cox et al, 2013). (Figures 2 and 3). According to Yusuf et al. (2003) there are four pivotal objectives of agile manufacturing: customer enrichment ahead of competitors, achieving mass customization at the cost of mass production, mastering change and uncertainty and leveraging the impact of people across enterprises through information technology. Moreover, the Fisher’s Model (1997) points out that a company has to choose between either agility or efficiency regarding the kind of products sold. As clothes are innovative ones, companies have to be agile. (Figure 4).
2) Quick Response
Quick Response is a “state of responsiveness and flexibility in which an organisation seeks to provide a highly diverse range of products/services to a customer in the exact quantity, variety and quality, and at the right time, place and price as dictated by consumer demand” (Christopher et al, 2004). The aim of QR is the reduction of the lead time between the design of a new product and the time it is sold to the final customer. As the whole supply chain is dependent to the expectations of the customer, the communication through all the stages is very important. The uses of information technology such as EDI, bar code, electronic point of sales; allow the spread of information. Moreover, partnerships or vertical integration in the supply chain ease the communication and enable companies to be more responsive to customer changes. Retailers and its suppliers need to be more closely connected through shared information than was the case in the past. Finally, QR ensures a reduction of stocks, avoid forecasting mistakes and a better provision of service. That is a practice required in high competitive, volatile and dynamic marketplace. 3) Lean thinking
The principle of lean operations is moving towards the elimination of all waste for faster, more dependable, higher quality, and at lower cost. One of the seven wastes is inventory (Shingo, 1988). Lean companies use Vendor-Managed Inventory to manage this waste. That is “a means of optimizing supply chain performance in which the supplier has access to the customer’s inventory data and is responsible for maintaining the inventory level required by the customer.” (Cox et al, 2013). By implementing VMI, the companies shortens the replenishment time and consequently the lead-time as well which is a competitive advantage in clothing industry. Pull system eliminates forecasting and the principle is the produce only what the customer needs (Womack & Jones, 2003) by using the takt time and only small batch production. In order to match supply with demand in the clothing industry, companies use postponement in the aid of reduce stock. Postponement is the fact of delaying customization of a product until the last possible moment (Zinn and Bowersox, 1988).
3 Analysis – Reflexion of Zara’s Supply Chain
A – Zara company
Zara is an affiliate of Inditex Group and the headquarters are in La Corunã (Spain). In 2013, the company has 1872 stores around the world (figure 5), all of them are located in the most up-market, high traffic, and prestigious streets. The strategy is to offer throughout the year a great deal of product variety. Below some Supply Chain KPIs to understand why Zara is currently the world leader in the clothing industry since 2011. The aim of the following sections is to understand and explain how Zara operates to obtain such good indicators.
B – Analysis of the current supply chain
1) Supply chain network
The Zara’s supply chain network is very untypical. Despite of classic theory of A.Smith which promotes the specialization of each company on its own core business, Zara decided to own almost its entire supply chain network. The goal of this strategy is to be agile and vertical integrated in order to ease the communication along the chain and be responsive to any demand changes. Zara produces 50% of items in-house, owns its ironing machine, its distribution center and almost all the stores (only 12 were opened by joint-ventures). Moreover, Zara outsources sewing and distribution activities but strive to keep control on them. In fact, all sewing operations are subcontracted to external companies (around 500), all located near to La Corunã. These subcontractors are numerous and most work exclusively for Zara. This configuration gives to the company a huge balance of power. The company selects its supplier on three points: speed, flexibility, quality. Furthermore, Zara outsourced to truck companies the transportation activities between its distribution center and its stores.
The contractors use trucks bearing Zara’s name, hence there are strongly associated to the strategy of Zara. Therefore, Zara controls very well all its supply chain from manufacturing to the final customer. If we compare this network to competitor ones, it is quite different. For instance, Nike, Adidas or Gap own only design activities and outsource all physical ones. In their make or buy decisions, they consider others activities as non-strategic and prefer to focus on brand image. They have only 2 seasons per year (Vs 16 for Zara) which entails a lot of consumer rejections, because products are not aligned with customer expectations. Owning stores is very important because this is the only point of contact with the final customer. This vertical integration is a competitive advantage of Zara. For reminder, it is a key principle of quick response.
Production organization (figure 6) reflects the key points of the corporate strategy: offering to customers fashionable and affordable products. Despite of Fisher’s Model, Zara opted to be both agile and efficient by separating these production facilities. In fact, the production of “timeless” products (40%) (for instance regular t-shirt or regular blue jeans) is outsourced in low labour cost countries. They have historical sales data on this kind of products and hence they can forecast future sales and take commitments on quantities to order long time before the sales in store. That is a push system on basic products. With this strategy Zara is efficient and obtain products at a low price. 20% of the production is located in Asia and other 20% in Poland. Initial forecasting is done for Asia facilities (around 5 months in advance) and after Zara adjusts the quantities with its polish suppliers for which the lead time is lower than in Asia. All these products are outsourced to around 300 suppliers to improve responsiveness and efficiency, and also not to be dependent on a single source.
On another hand, 50% of the factories are owned by Zara itself and located in Spain near to the headquarters in La Corunã (around 22 factories). This location is strategic in order to produce fast-fashion items. Despite the high level of wages, that is the only way to be able to place clothes in store’s shelf only two weeks after it design That is a pull system (elements of lean). Zara produces these items only when the demand for them already exists. These production facilities allow Zara ensuring a quick response. Zara’s production organization is a competitive advantage, because it allows producing both fashionable products in only two weeks but also affordable products due to the efficiency of the outsourced production.
Zara’s designers copy the models of famous luxury brands to be sure the customers will like it. They also take feedbacks from the sales advisors to understand more the trends. The staff (300 employees) designs all the products in the headquarters. Whereas competitors take long time to develop and manufacture products, Zara lead time is very short. Zara is able to design and produce an item in only two weeks because of the vertical integration and the use of concurrent engineering. In fact, every department (marketing, R&D, manufacturing, purchasing) works closely hence they are able to take joint-decisions jointly very quickly. The fact that executives speak the same language and are located in the same place near to the factories is a key point. This method avoid uncertainty by creating a desirable and manufacturable product and bring it very quickly to the customers.
This design strategy enables Zara to commercialize products before its own competitor and at an affordable price. In fact, concurrent engineering allows saving money by reducing the number of changes during the development process. Even if Zara misses out a new fashion product created by a competitor, the company is able to develop a like product within the two following weeks. Thereby, Zara owns always the most fashion products in its stores and that’s why customers come back very often to the stores. “In London, consumers visit in average four times a year clothing stores but Zara’s customers visit its shops an average 17 times annually”. (Ferdows et al, 2004). This competitive advantage is related to supply chain and due to the vertical integration which enables developing products quickly.
Zara owns a huge distribution center in Spain (Figure 7). Because of this location very close to the main market (Europe), the transportation lead times are very short and the transportation costs are low. These two elements ensure quick response and efficiency of the company. Furthermore, Zara uses sophisticated automated picking system1 which allows Zara to get a low number of picking mistakes, a few labour costs and a quick picking able
to ship within 8 hours after the order arrived. In average, the orders arrive in the stores in Europe normally within 24 hours, in the USA within 48 hours and Japan within 48 to 72 hours (air shipments). Sophisticated IT is an element of lean management. Transportation is outsourced because the profit margin is very low and it is not a strategic element. Another key element of the distribution is the underutilization of the capacity. In June 2001, the warehouse worked at 50% of the capacity but Zara decided to invest in a new warehouse, again in Zaragoza. This underutilization is at odds with casual thinking of productivity but increases to flexibility and responsiveness of Zara. Once again, the competitive advantage of Zara is its geographic position and the fact, Zara owns the facilities and could invest in specific material as sophisticated system.
Zara has its own stores and it is again a relevant point because that is the only point of contact with the customers. The better way to understand their needs is to talk with them. Zara uses “empowerment” (elements of Lean) which means the fact to give responsibilities to people are not used to have in order to motivate workers but also to take advantage of their skills (Cox et al, 2013). Zara bets on the sales advisor to do that job: identify customer needs (for instance, a customer who asks if a cloth is available in another colour) and give feedbacks to headquarters. The ideas are brought up to the marketing teams to release or not new products. By that way, flow of information along the supply chain is highlighted and Zara’s products match the expectations of customers. Moreover they control stock in each store by using phone calls with headquarters to give their feelings regarding the trend of sales on each product.
That is the opposite of the theory of VMI and the use of IT. From my point of view, the system Zara is operating is better, because clothing industry is so much variable that even the most sophisticated replenishment system is not able to determine the real needs. Moreover we have to give the decisions to the person who knows what is happening. In that case, store managers have a better knwoledge of the situation than executives in headquarters. Once again, if a company doesn’t own its stores therefore they plan master production schedule regarding forecasting methods which are not relevant in clothing industry.
6) Inventory management
Regarding competitors, inventory level of Zara are the lowest (figure 8). Firstly, Zara launches only small batch productions (lean concept) in order to reduce the risks of producing something the customer doesn’t want. By doing that, they reduced the number of unsold clothes and practice less markdowns than the others which increase the profit margin (Figure 9). According to Ghemawat and Nueno (2003), Zara generated only 15%-20% of its sales at markdown as compared to 30%-40% for its Europan peers. Zara reduces waste and capture value. Moreover, Zara employs postponement for instance half of the products are undyed until the last moment to select the colour. That method decreases the components stock and avoid forecasting mistakes. Furthermore, it occurs sometimes that a product is sold well in a country but not in another one, Zara uses reverse logistics by moving stocks from a store to another one in order to place this product in a country where the sales will be higher. Stores place order twice a week and they don’t keep stock in the stores which decrease the stock level as well. They can do that because of the speed of replenishment (24 hours European countries).
C– Improvement areas
1) Improving its market share on online sales During the last decade, the clothing online sales have increased a lot (figure 10) and that’s becoming a huge market in which some companies, such as Amazon or Asos, lead innovation. Zara decided to launch itself in this market only in 2011 and has accumulated delay against competitors. For sure, online sales will account for a large parts of revenues tomorrow and Zara has to increase its online market share. Moreover, that could be a competitive advantage by testing new products on internet before launching bigger production batchs. At a supply chain point of view, that entails differences and investment. In fact, the type of transportation is different: full-truck versus personal delivery service much costly. Moreover, the inventory management system of Zara is too old to support online sales. They could invest in a POS (point-of-sale) system in order to know exactly the quantity of products they have in each store without changing the replenishment system which is good for me. With these informations, they could deliver the online customer directly through the
2) Developing a reverse logistics to become sustainable
Zara has to consider more the sustainable aspect of its business. We have to underline Zara has already done some improvements regarding this point2 but could go further by focusing on the reverse logistics of the clothes after their end of life. In fact, as the clothes are fast-fashion items, basically they become quickly “has-been”. Zara could buy to its customers the old clothes for a small price (£1 for instance) in order to reuse the material. Zara could create a closed loop by bringing back the products from the point of consumption to the point of origin. Both Zara and customers would be winner. Firstly Zara, because the company will develop a green brand image and also by maximising the capture of value, reusing raw material. Secondly the customers, because they can empty their shelves in exchange of a few money. For sure, this solution is hard to implement, because Zara has to design the reverse logistics and also develop industry to recycling products but recycling could become a core competitive advantage for the future by reducing the use of resources, decreasing the pollution and developing a brand image of the company.
4 – Conclusion
Given the need of constantly renewing collections in order to delight consumers, companies developed agile and lean supply chain to be able to give a quick response to customer changes. The supply chain of Zara is an example for competitors, because succeeded to develop a “leagile” organization by splitting production facilities. These competitive advantages are (1) the location of fast-fashion items production, very close to consumers; (2) the use of concurrent engineering to develop products quickly and finally (3) the ownership of the stores to understand the needs of customers. In order to still lead the industry, Zara has to develop its sustainable supply chain and take advantage of the e-commerce development. Nevertheless this structure is a good fit for regional activity but what about the international development of the brand? If Zara continues its expansion all around the world, its model is going to fail because the key point is geographical proximity. One of the solution is maybe to develop regional headquarters, but Zara will have to create relationship with regional suppliers which have a different culture than Spanish one. The essay lacks comments on supplier relationships. I only developed some points on Spanish suppliers. Regarding Asians ones, documents are scarce, probably suppliers work without respecting human rights (children work, etc.). Zara doesn’t communicate a lot on that point. For sure that is an area of improvement.
Table of references
Christopher,M., Lowson, R. & Peck, 2004. Creating agile supply chains in the fashion industry. International Journal of productivity and performance management. Cox, J. F., Blackstone, J. H., Spencer, M.S.,(2013). Apics Dictionary, twelve edition. Apics Association, Chicago. Ferdows, K., Lewis, M. A., Machuca, J. A.D, 2004. Rapid-Fire Fulfillment. Harvard Business Review. November Ferdows, K., Lewis, M., Machuca, J., 2003. Case Study: Zara, Supply Chain Forum, An International Journal. Fisher, M., 1997. What is the right supply chain for your product? Harvard Business Review. March April. Ghemawat and Nueno, 2003. Zara: Fast Fashion, Harvard Business School. April. LI Cai-feng, 2009. Agile Supply Chain: competing in volatile markets. International journal on Management science and engineering.
Ray, R., (2009). Supply Chain Management for Retailing. Tata McGraw-Hill Education, New Delhi. Ren, J., Yusuf Y.Y., Burns N.D., 2003. The effects of agile attributes on competitive priorities: a neural network approach. International Journal of Agile Management Systems. Reynolds, A., 2012. Zara commits to toxic-free supply chain by 2020. Supply Chain Management Daily, December. Vitzthum, C., 2001. Zara’s Success Lies in Low-Cost Lines and a Rapid Turnover of Collections. The Wall Street Journal, May.
Womack, J. P. and Jones, D. (1996). Lean thinking. Simon and Schuster, New York.
Zinn, W., Bowersox, D.J., 1988. Planning physical distribution with the principle of postponement, Journal of Business Logistics. January. www.zara.com
Table of figures
Figure 1: Shorter life-cycles making timing crucial.
The companies which are not agile bring products to the market late and consequently loss the first sales and at the end, they practice markdown to sell stocks but some of it become obsolescent which means loss of money. Figure 2: Importance of concurrent enginering: time and money savings.
Without coordination between departments of the same company, it entails a loss of time and money because of the iterative loops. For instance, R&D create a new design but marketing is not satisfied by the product so they ask to R&D to redesign it which finally meets expectation of marketing but this latest will not be manufacturable, again new design and etc. When company use concurrent engineering, there is a lot of changes at the beginning of the process, because each department explain its own constraint but finally the product is ready earlier. Figure 3: Concurrent enginnering leads to a unified product concept.
By working together, departments agree on a single unified product concept.
Figure 4: Fisher’s Model (1997) : Matches the supply chain with the product.
Figure 5: Zara stores all around the world.
Figure 6 : Zara production facilities in the world.
Figure 7: Central Distribution Center
Figure 8: Zara stock level versus competitors
Figure 9 : Increase of profit margin by doing less markdowns
Zara has only 10% of unsold goods versus 20% for the whole industry.
Figure 10: Evolution of e-commerce clothing market in USA