ZARAS OPERATING MODEL Michael Lewis ( its a case study)

La Corua in northern Spain was once renowned mainly for its food, beaches and surfing. But it then became famous for another reason. It was there that Amancio Ortega Gaona, now the worlds third-richest man, founded the wildly successful fashion company, Inditex, which became more commonly known by its oldest and biggest brand, Zara. Back in 1963 Amancio Ortega started his company to manufacture womens pyjamas and lingerie products for garment wholesalers. In 1975, after one customer cancelled a large order, the firm opened a retail outlet in La Corua. This Zara store was popular and during the next 10 years others opened in all major Spanish cities. The Inditex corporate structure was created in 1985 and in December 1988, the first overseas Zara store opened in Porto, Portugal, followed shortly by New York in 1989 and Paris in 1990. By September 2013, Inditex had eight different business formats (including brands such as Massimo Dutti, Bershka, Stradivarius, Oysho, Pull & Bear and Uterqe), 6104 stores in 86 countries (including 1751 Zara stores) and employed 128,000 people. Each of these brands was responsible for its own stores, ordering system, designers, factories, subcontractors, suppliers, distribution centres and systems; sharing only core corporate services, like legal and finance. But they all followed a similar operating model that focused on speed to market. There was even some degree of competition between them. Zara, the largest Inditex division, accounted for around two thirds of total Inditex sales. In 2012 the group had a consolidated turnover of 2.3 billion. Although their first Zara store was simply intended to be an outlet for cancelled orders, a more fundamental lesson was also learnt; there were benefits of having, in the words of one Inditex executive, five fingers touching the factory and five touching the customer. This virtual vertical integration, gave significant control of the production/supply process, all the way from loom to shop floor without owning all of the production assets. Today, Zara is able to offer cutting-edge fashion at affordable prices because their operating model exerts control over almost the entire garment supply chain (retailing, design, purchasing and logistics).

At the heart of the Zara operating model, the stores (almost all of which were owned and operated by Zara) were located in expensive prime retail locations, selected after extensive market research. Inside, much of the selling space was left empty in order to create a pleasant, spacious and uncluttered shopping environment. The layout of the stores, the furniture, and even the window displays were all designed at La Corua and a flying team from headquarters was usually dispatched to a new site to set up the store. Location, traffic and layout were crucial for Zara because it spent relatively little on advertising. A typical Zara store had women, mens and childrens sections, with a manager in charge of each. Womens wear accounted for more than half of sales, with ZARAS OPERATING MODEL Michael Lewis CASE STUDY ca se study 18 Zaras op erating mod el 477 the rest equally divided between mens wear and childrens wear. The store manager was usually also the head of the womens section. Zara placed a great deal of emphasis on training its sales force and strongly emphasised internal promotion. Store-employee remuneration was based on a combination of salary and a bonus derived from overall store sales. Although store managers were responsible for the profit and loss of their respective stores, La Corua controlled prices, transfer costs, and even a certain amount of merchandising and product ordering. In practice, the critical performance measures for the store managers related to the precision of their sales forecasts (communicated through the ordering process) and sales growth. A simple yet key measure followed by senior managers was the rate of improvement of daily sales from year-to-year for example, sales on the third Wednesday of June 2016 compared to the third Wednesday of June 2015. To its customers, Zara offered fashionably exclusive (yet low-cost) products. Individual stores held very low levels of inventory typically only a few pieces of each item and this could mean that a stores entire stock was on display. Indeed, it was not unusual to find empty racks by the end of a days trading. This created an additional incentive for customers to buy on the spot (because if a customer chose to wait, the item might be sold out and may never be made again). This allowed Zara to both carry less overall inventory and have fewer unsold items that had to be discounted in end-of season sales. Items that remained on the shelves for more than two or three weeks were normally taken out of the store and shipped either to other stores in the same country or (rarely) back to Spain. In an industry where discounting meant that the average product fetched only around 60 per cent of its full price, Zara often managed to collect almost 90 per cent. However, this approach meant that stores were completely reliant on regular and rapid replenishment of new designs. Stores were required to place their orders at pre-designated times and received shipments twice per week. If a store missed its ordering deadline, it had to wait for the next scheduled delivery. Zara also minimised the risk of oversupply by keeping production volumes low at the beginning of the season, reacting quickly to the orders and new trends that emerged during the season. The industry average pre-season inventory commitment the level of production and procurement in the supply chain in, say, late July for the fall/winter season ranged from 45 per cent to 60 per cent of anticipated sales. At Zara it was only 15 per cent to 20 per cent. The in-season commitments at Zara were 40 per cent to 50 per cent, whereas the industry average ranged from almost nothing to a maximum of 20 per cent.

1. (6 Marks Total) Operational Performance Objectives
   1. What are the primary operational performance objectives at the Retail, Production/Supply and Distribution levels? Why? (2 Marks)
   2. Why might the primary operational objectives conflict at the different levels in the supply chain? (2 Marks)
   3. What impact does any variation have on Zaras ability to perform on its Efficiency Frontier? (2 Marks)