Zaras Unique Business Model is Driven by Its Supply Chain Capabilities.

Zara changes its clothing designs every two weeks on average, while competitors change their designs every two or three months. It carries about 11,000 distinct items per year in thousands of stores worldwide compared to competitors that carry 2,000 to 4,000 items per year in their stores. Zaras highly responsive supply chain is central to its business success. The heart of the company and its supply chain is a huge, highly automated distribution center (DC) called The Cube. The company was founded in Spain in 1974 by Amancio Ortega and his wife Rosala Mera. It is the flagship business unit of a holding company called Inditex Corporation with headquarters in Arteixo, Galicia, a city in northwestern Spain near where Mr. Ortega was born.

In 2019 Zara was ranked as the 46th most valuable brand in the world by Forbes. Company Business Model Agents for the company are always scouting out new fashion trends at clubs and social gatherings. When they see inspiring examples they quickly send design sketches to the garment designers at the Cube. New items can be designed and out to the stores in 4 6 weeks, and existing items can be modified in 2 weeks. The companys core market is women 24 35 years old. They reach this market by locating their stores in town centers and places with high concentrations of women in this age range. Short production runs create scarcity of given designs and that generates a sense of urgency and reason to buy while supplies last. As a consequence, Zara does not have lots of excess inventory, nor does it need to do big mark-downs on its clothing items.

Zara has 12 inventory turns per year compared to 3 4 per year for competitors. Stores place orders twice a week and this drives factory scheduling. Such short-term focused order cycles make forecasts very accurate, much more accurate than competitors who may order every two weeks or every month. Clothing items are priced based on market demand, not on the cost of manufacture. The short lead times for delivery of unique fashion items combined with short production runs enable to offer customers more styles and choices, and yet still create a sense of urgency to buy because items often sell out quickly. And that particular item or style may not be available again after it sells out. Zara sells 85 percent of its items at full price compared to the industry average of selling only 60 percent of items at full price.

Annually there is 10 percent of inventory unsold compared to industry averages of 17 20 percent. In Spain, customers visit Zara stores 17 times per year on average compared to 3 times per year for competitors. Because their clothing designs change often, it is harder for people to see them clearly on the Internet and thus they are encouraged to come into the stores instead and try on the unique fashions that Zara offers. Manufacturing and Supply Chain Operations Make Zara Unique Zara buys large quantities of only a few types of fabric (just four or five types, but they can change from year to year), and does the garment design and related cutting and dyeing in-house. This way fabric manufacturers can make quick deliveries of bulk quantities of fabric directly to the Zara DC the Cube. The company purchases raw fabric from suppliers in Italy, Spain, Portugal, and Greece. And those suppliers deliver within 5 days of orders being placed. Inbound logistics from suppliers are mostly by truck.

Zaras factories can quickly increase and decrease production rates, so there is less inventory in the supply chain and less need to finance that inventory with working capital. They do only 50 60 percent of their manufacturing in advance versus the 80 90 percent done by competitors. Zara does not need to place big bets on yearly fashion trends. They can make many smaller bets on short term trends that are easier to call correctly. A Lean and Agile Supply Chain Stores take deliveries twice per week, and they can get ordered inventory often within two days after placing their orders. Items are shipped and arrive at stores already on hangers and with tags and prices on them. So items come off delivery trucks and go directly onto the sales floor. This makes it possible for store managers to order and receive the products customers want when they want them, week by week.

Zara stores respond practically in real-time as styles and customer preferences evolve. It is a great business model for success in the high-change and hard to predict fashion industry. It means about half of the clothing the company sells, which includes most of its high margin and unique fashion items (but not its lower margin basic items), is manufactured based on highly accurate, short-term (2 6 week) demand forecasts. Zara spends its money on opening new stores instead of spending a lot on ad campaigns. Estimates vary on the number of Zara stores worldwide. An article in the New York Times Magazine (November 2012, How Zara Grew into the Worlds Largest Fashion Retailer, placed the store count at around 5,900. An article in Forbes simply states there are more nearly 3,000 stores (June 2019, The Worlds Most Valuable Brands #46 Zara, see bibliography below). Annual sales for 2018 were estimated by Forbes to be $21.3 billion. The holding company, Inditex SA, is a public company and Inditex provides annual statements, but it does not break out Zara sales from sales of the other brands owned by Inditex (Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqe). Zara also uses a flexible business model where its stores can be owned, franchised or co-owned with partners. So it is not always possible to find exact numbers for Zaras business operations and finances.

Q.1.1. In light of the above case study and with the aid of your prescribed textbook, provide your own definition of a supply chain. (4)

Q.1.2. Explain any three elements of the Zara supply chain. Note, you are required to paraphrase the element before you apply it to Zara. (12)

Q.1.3 Supply chains are constantly impacted by global trends. Supply chain practitioners need to be constantly scanning the environment to be aware of trends so that the company can adapt.

Discuss any two trends in the supply chain and indicate whether you believe Zara is aware of the trend or not. Note, you are required to paraphrase these trends before you apply them to Zara. (8)

Q.1.4. A central question for supply chains is the make or buy decision.

Q.1.4.1 In your own words, differentiate between the make or buy decision. (4) Q.1.4.2 Explain which option Zara uses with supporting points from the case study. (4)

Q.1.5 As organisations compete and grow in size, they tend to expand their operations to span across the globe as with Zara. Discuss any two entry strategies for the global market you believe Zara utilises. Note: you are required to paraphrase the strategies before you apply them to Zara.