Zara

Overview

Zara’s vision on growth and global strategy

• Building up fixed assets
• Vertical integration
• No advertising, creating premium stores
• Fashion follower – QR to fashion trends
• Strongly customer oriented
• Stable growth
• Markdowns half the average (15% as supposed to 30% )
• Pricing market based

Business model

• Vertical operations and downstream activities
• Multi-chain concept
• Creative design team
• Competitive advantage – Sustainable growth

Problem Statement

Growth challenge – 20% per annum expected, 76% of equity value implicit on Inditex’s stock price was based on expectations on future growth. Failure to deliver expected growth results might cause a serious offset in company’s market capitalization. Room for non-local growth – in average a retailer was present in 10 countries while e. g. a pharmaceutical company averaged operations in 125 countries.

Problem statement is: In what geographical area(s) should further Zara expansion follow? Should there be another logistics-distribution centre created as increase of operations might cause dis-economies of scale? Should it acquire additional chains given the complexity of managing those and the risk of own-product-replacements? Preserve the margins.

Evaluation of the alternative solutions

Growth challenge

• Notes: not much potential on the local market;
• different markets require different positioning
• though costs grow as distance grows, prices also change (margins are kept)
• 50% of all export is to developing countries
• Zara shopper visits the store 17 times a year, average is 2-4 times
• Creating a climate of scarcity and opportunity in stores

Change in marketing strategy

Current: Three types of entering a market: company owned stores, joint ventures, franchising

• Strategy is standard across the countries
• No adv
• One big shop central city (capital)
• Followed by smaller ones (spreading around the country)
• Shop windows used excessively
• Products do not differ much from country to country
• Model is downstream
• No knowledge is shared
• From design to stores within 4-5 weeks, industry average 9 months
• Due to product testing, failure rate only 1% compared to industry average of 10%

Change in pricing strategy

Current: Prices vary on the different markets, due to transport costs (all supplied from the base in Galicia) – this changes positioning Lower mark-down than industry average

Data collection: The survey questionnaire has been distributed to 50 managers to collect the data Data analysis: By using a statistical package the results were analysed Report and interpret findings: The study purposes to interpret the analysis as findings in the coming section to validate the factors influencing the global sourcing in apparel industry. Zara is a famous apparel branded company from Inditex group operating from its headquarters in Spain. This group includes other brands like Massimo Dutti, Pull & Bear, Stradivarius, Oysho and Bershka

Zara’s outstanding success was achieved by making a shift from the conventional sourcing to the customized sourcing strategy. Zara unlike other garment producers, instead of outsourcing its production from the low cost bidding countries, Zara makes its profits by building up its brand image through marketing and advertisement. Zara retains its control on design, production and distribution and beats the high labor costs. Zara integrated its supply chain in line with the demand driven market in a vertical integrated pattern.

Through this vertical integration, the design to delivery lead time has came down from 4-6 months to a few days. Twice the week every shop under the brand receives new stock and 80% of the collection is a new one over a period. Zara’s success point of Speed to market can be attributed to its quick supply lines. The whole operations of the company are lined up to offer the designer-look fashions to the stores with minimum delivery risks. Zara maintains complete control in most of the stages of operations like selection, cutting, fabric treatment and pattern making through its own mills as and maintains wholly owned supply chain.

Only half part of its components are sewn outside. Zara owns 400 workshops and co-operatives around the Galicia area and in Portugal. Zara is a famous apparel branded company from the group of Inditex operating from its headquarters in Spain. This group includes other brands like Massimo Dutti, Pull & Bear, Stradivarius, Oysho and Bershka Zara sources 80% of its products from Europe. Zara is less likely to outsource its production to the low cost countries. This makes a quick delivery of the products to the point of sale. Read also about Zara corporate social responsibility issues

The sales feed back to the production sites keeps its inventory at optimum levels. The control over fabric, pattern and garment quality avoids freight cost, long lead times and delay in deliveries. The sales feed back through the integrated technology allows the designers to respond to cope with the smallest demand fluctuations and trend in the fashion market. Zara’s market research cut downs the non productive trends and lines and keeps the stores up to date for the customer choice. Read about Zara sourcing strategy

Zara’ when confronted by stockouts, the sourcing model adopts the store execution policies and customer behavioral perception activities. Also Zara’s sourcing model involves careful selection of inventory size particular to the store, readily available to the customers, making the shopping an enjoyable experience to the recurring customer. Maintaining the right size of inventory lot is the key area here. This makes the entire supply chain alert to the economic order quantity with a vision of quick delivery.

Zara case Zara uses a vertically integrated system (VMS): In this system, wholesalers, retailers and distributors work as a unified system. One channel owns the others. They have a corporate VMS system, because Zara has managed to build a system that is controlled from the headquarters and it allows a quick response to decide and solve problems. Inditex, Zara’s parent company owns most of the resources to design, produce and distribute.

Recommendations: Instead of doing everything themselves, Zara could train their managers in the local stores to already make quick decisions than to just send many ideas to the main headquarters in Spain and let them decide what is best. So spread the decision making process among their local stores. Zara’s vertical integration has many advantages, but there is a drawback for Zara as they focus distributing small batch quantities and do not receive any discounts on manufacturing large quantities. Pandora

Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. The activities of a business could be grouped under two headings: Primary Activities – those that are directly concerned with creating and delivering a product. -Inbound logistics: All the raw materials are collected from their distributors and in Pandora’s case these are the songs from musicians. – Operations: is transforming the raw materials into a finished product and service.

Pandora’s software gets smarter through the listener’s inputs of likes and dislikes and marks them as unique playlist for that same user. – Outbound logistics: All those activities associated with getting finished goods and services to buyers. Pandora has pushed the music service into a variety of channels, including apps for smart phones and tablets as well as through home entertainment systems such as video game players, DVD players and Internet radios. – Marketing & Sales: Essentially an information activity – informing buyers and consumers about products and services (benefits, use, price etc. Pandora informs their listeners firstly through web page, and then music has become more mobile. Pandora has formed strategic partnerships to push their music service into different channels, such as apps for smartphones and tablets, as well as through video game players, DVD players and Internet. Since listening to music goes through the radio, Pandora has also collaborated with new car brands. – Service: All those activities associated with maintaining product performance after the product has been sold. The service plays musical selections of a certain genre based on the user’s artist selection.

The user then provides positive or negative feedback for songs chosen by the service, which are taken into account when Pandora selects future songs. Recommendation: The client should have more possibilities to have an opinion on the music instead of likes and dislikes. So after each opinion they have, they get a small questionnaire. Global market The activity of buying or selling goods and services in all the countries of the world, or the value of the goods and services sold. Global marketing is sometimes used to refer to overseas expansion efforts through licensing, franchises, and joint ventures. Zara got stores all over the world.

If the designers design new clothes, it will come in all the stores. Zara does most of the things by themselves, like making their own fabric, produce their own clothes and having their own designers. Recommendation Zara could create a joint venture with distributors in the markets such as Asia or the US, to produce the products for them. Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency. Procurement: When the raw material is purchased together with other inputs to create value to the product and support the value chain activities.

In the case of Pandora the raw materials purchased are the songs from musicians. – Technology development: Includes research and development, process automation, and other technology development to support the value chain activity. For Pandora they have an automated software-driven machine that discerns the types of music and places them in genres. – Human Resource Management Using people as a resource to support the value chain. Young analysist analyze of the music by a professional musician to analyze and decode them in different genres.

Young analysts sit together with senior analysts to encode the music and add features to differentiate its service. – Firm Infrastructure Includes activities such as finance, strategic planning and control, general management, etc. Pandora is mostly focused on strategic planning ; control, because they have to critically analyze their songs they get delivered from musicians. This takes a lot of time and need be planned strategically. Strategic planning is then linked to general management. Recommendation: Pandora can hire more junior analyst which can be trained to become senior analyst so that the work is divided.

Case Study and Exercises Exercise #1 We were given the formula of distance , where D – Distance from location L (distribution center) to location I (consumption point); – X coordinate of the warehouse l (distribution); – X coordinate of the store i (consumption); – Y coordinate of the warehouse l (distribution); – Y coordinate of the store i (consumption). Consequently, applying these formula in the Excel we receive the following result: Then, multiplying the distance by the amount of demand and summing up for each relevant location, we get: Thus, the answer is LOCAY, because it has the minimal score. Exercise #2

Using provided formulas , where – X coordinate of the optimal location for warehouse; – Y coordinate of the optimal location; – X coordinate of store i; – Y coordinate of store i; – Load (or Demand) of the store i, we get And finally The answer is (8;11). Zara’s Case Study Company Profile Zara is one of the largest international fashion companies with 1671 stores around the globe. It is a part of Inditex holding. Inditex is one of the world’s largest fashion retailers, welcoming shoppers at its eight store formats -Zara, Pull & Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterque – boasting 5. 93 stores in 85 markets [www. inditex. com], [www. zara. com]. In 1975 the first Zara shop was founded in Spain. In 1976-1984 In-Spain expansion takes place. In 1988 it enters Portuguese market. Followed by US and France, it quickly becomes world-brand and until 2006 it had 52 countries which held retail operations of the company. Zara concentrates on the three principles to satisfy the customer [http://ru. scribd. com/doc/27372254/Supply-Chain-Practices-of-Zara#]: Short lead Time which results in “more” fashionable clothes Lower quantities – scarce supply More styles, which create a greater possibility of attracting needed customers. )

Zara’s designing process organized in a way such that the stores, which actually interact with the customers, communicate to the head office in Spain the needs of the customers and the trends in fashion clothes. Thus, making it possible for the company to react to market changes within 30 days [http://thirdeyesight. in/articles/ImagesFashion_Zara_Part_I. pdf], which makes Zara unreachable for the same-size competitors. 2) Reducing the number of clothes manufactured in each style creates the “scarcity” which is applicable to fashion clothes. The less it is available, the more desirable it becomes. As a result, Zara discounts only approx. 0% of its products. 3) The stores are supplied with new merchandise twice a week, thus making them seem “new” every 3-4 days. On average, Zara creates around 11,500 styles per year [http://thirdeyesight. in/articles/ImagesFashion_Zara_Part_I. pdf; http://www. slideshare. net/koffman/zara-case-study-2780928#btnNext]. Moreover, most of the production facilities are located in Spain, near the headquarters, so that the company has more control over the operations, producing and distributing. Zara’s characteristics of vertical supply chain Zara is a vertically integrated retailer. Unlike similar apparel retailers,

Zara controls most of the steps on the supply-chain: It designs, produces, and distributes itself. The business system that had resulted was particularly distinctive in that Zara manufactured its most fashion-sensitive products internally. Zara did not produce “classics”, clothes that would always be in-style. In fact, the company intended its clothes to have fairly short life ps, both within-stores and in customers’ closets. Retailers like the American chain ‘Gap’ and the Swedish retailer ‘Hennes ; Mauritz’  completely outsource their production to factories around the world and mostly to low cost Asian countries.

In contrast, it is estimated that 76 percent of Zara’s production is carried out in Europe which is within the small radius of its headquarters in Spain. In fact, almost half of its production is in owned or closely-controlled facilities. Another 24% are produced in Asian region [http://www. slideshare. net/anusaj/zara-ppt#btnNext] While this gives a tremendous amount of flexibility, it does contend with higher people costs – that of up to 19 times as much as Asian ones. The group also owns capital intensive facilities in Spain, which can do dyeing and processing of the fabric as well as cutting and garment finishing.

Provided that, Inditex has an ability to adjust to the new trend or demand in a very short time. Overall Supply Chain is can be described as follows: Collect the information from retailing points. At least two times per week the sailing points should somehow conduct the information to the headquarters in Spain, providing information for the groups in charge to develop and decide on the range of clothes which will be demanded by the customers in the observed future. This work is done by approx. 200 people, which develop up to 1,000 styles per month [http://ru. scribd. om/doc/27372254/Supply-Chain-Practices-of-Zara#] The information is also received via sales reports from retail points. Thus it can be claimed, that Zara has invested a lot into IT, to make the up-to-date information flow possible. Decide on the needed clothes, distinguish trends. After depicting and sketching appropriate merchandise for the stores, they send the order to facilities, which are located near the head office. Moreover, it should be said that Zara somehow lowers its risks by purchasing uncolored fabric or even raw materials, thus making enhancing flexibility.

The process organized in such way, that final product may be even painted on demand. However, only cutting of material is done within the company. Actual sewing is done by workshops, which are mostly located in Spain or Portugal. None of the workshops belongs to Zara. The company provides them with instructions how to do the work for its own needs. Zara being vertically integrated has its own distribution network, which allows the company to further control physical flow. Since the time has a great value for Zara, the newly produced merchandise arrives to the stores within 48 hours. [http://ru. cribd. com/doc/27372254/Supply-Chain-Practices-of-Zara#] An esteem of time, needed to pass from development of the product to actual shipping is around 7-10 days. [http://thirdeyesight. in/articles/ImagesFashion_Zara_Part_I. pdf] Zara’s development in China First Zara’s store was opened in Shanghai, in February 2006, and during the first day store has managed to generate 800,000 RMB of revenue. Within a year Zara opened 12 new stores across China, and accorfding to the latest data (31st of July) its chain had 114 stores within China (out of 355 operating in Asian region) [http://en. wikipedia. rg/wiki/Zara_%28retailer%29#Stores] in over 40 cities, including Beijing, Guangzhou, Shenyang and other. [http://www. chinadaily. com. cn/business/2012-09/06/content_15737684. htm] During 2011 Beijing Consumer Association was checking the quality of Zara’s product. The result was that they accused company of selling lower quality products on chineese market. [http://www. chinadaily. com. cn/business/2011-04/26/content_12396211. htm]. However, the company doesn’t seem to be damaged: no apologizes nor compensations followed. .On 5th of September, 2012 Zara opened its on-line shop in China.

What are the Key success factors of Zara? “The ability to respond to customer requirements on a timely basis has always been a fundamental element of the marketing concept. ” Martin Christopher et. al. Hence, it is important being proactive in a market such as the fast-fashion industry which Zara is operating in, time is always a crucial factor. The fast-fashion market, amongst other things, is characterized by short lifecycles, high volatility, low predictability, and high-impulse purchases. Therefore, it is very important for Zara to constantly have their products available for a potential customer in order to sell and earn more profit.

Since the fast-fashion market is also constantly shifting and trends can be replaced over a night, there is a low predictability. This makes it a lot more difficult to compose accurate forecasts. In order to stay competitive in the market, it is important to take be aware of these types of factors mentioned above, and make sure you are not left behind. One of Zara? s distinctive key success factors is their valuable and planned integrated logistics and supply chain management. This allows them to further develop and deliver a competitive marketing mix.

In a marketplace where customers expect to find the latest designs that are still in fashion, Zara is an outstanding example of how to make that possible. It usually takes at least six months in the textile industry for an idea to be transformed into a product and reach the store shelves. By reducing the lead-time through efficient channel management, Zara has developed a vertical integrated business model, which allows them to change some parts of their inventory in only a couple of weeks. This strategy is nowadays known as the “Quick Response” (QR).

The definition of QR can be described as; “A state of responsiveness and flexibility in which an organization seeks to provide a highly diverse range of products and services to a customer/consumer in the exact quantity, variety, quality, time, place and price, as dictated by real-time customer/consumer demand. ”Neil Towers et. al The QR strategy allows Zara to create products that are inspired by the latest fashion trends from around the world through diverse media sources displayed to a broad public, leading fashion scenes, movies, bloggers, etc.

By having products for a reasonable price with relatively high quality, Zara is one of the leading fast-fashion companies in the world. But, how does their company function to have this much success? One of the main reasons why Zara is so competitive is because they have suppliers that are strategically designed to fulfill their conceptual idea. Their conceptual idea is to supply trendy clothes, to a broad market, for a reasonable price. Almost 30 percent of the company`s suppliers are situated in either Spain or parts of Europe.

The local presence of the manufacturing facilities within a short distance to many of their stores and headquarters, has allowed the company to be very flexible in a changing market. With high integration to the company? s suppliers, the products that are highly sensitive to availability and proactive response are mainly produced in Europe. They minimize costs and lead-time because of the local presence, which makes it possible to introduce new and fresh merchandise multiple times a year.

Since, major parts of the production are situated locally, the products can reach the stores at the right time, meet the actual demand, and reach a higher sell-through. The other part of their product line that is not susceptible for seasonal change is outsourced to low-cost-labor countries in Asia. The combination of suppliers works as a competitive advantage. It promotes high-impulse purchasing from their new lines while still profiting for their basic product lines. Another key success factor is their pricing strategy.

The company uses a market-based pricing strategy, which means that they design products at a fixed price according to what the costumers are willing to pay. All the costs to produce and deliver the product combined with the planned gross margin for profit are then calculated in accordance to the final retail price. Besides the pricing strategy, Zara also uses a market-oriented approach, which refers to being aware and predicting costumers hidden needs. As studies has revealed, the company only spends one percent of their annual turnover on advertising.

They put most of their resources into using modern technologies, such as point-of-sales data collected from their stores as an effective communication tool. By regularly collecting POS-data, and translating the information into real demand and different consumption patterns, the company can deliver the exact quantity of merchandise, at the right time, to their stores. This activity minimizes the costs and results in higher profit, which can be used for other business activities such as expansion, product development and so on.

Not to mention, it also makes it possible for the company to evaluate and predict which products that will have a shorter or longer product life cycle. Hence, will result in higher sell-through, quick elimination of products that are out of fashion, and replenishment of new merchandise. Another reason to why their internationalization has been so successful is the fact that their merchandize can be sold in many different parts of the world. Even regardless of cultural differences. One of the reasons is that their consumer’s love garments from the high-end market and Zara copies those garments at lower prices for their consumers.

In some cultures the company is using adaptation tools. For example, each store manager is allowed to make slight modifications to the assortment to achieve a better match between supply and demand in certain countries. In addition, the location of the stores is another successful factor. Zara has chosen to position their stores in attractive and high-trafficked locations. Also, Zara’s stores are designed by professional store decorators in accordance to Zara’s business image. The interior of the Zara in Central for instance is very similar to other high-end fashion stores, which gives customers the same feeling as shopping in a luxury store.

References

1. Used the two articles posted by Dawn on FB Lectures Tutorials And: Retrieved on 2012-03-11http://www. google. com. hk/books? hl=sv&lr=&id=-9Ja0ZQ6gSMC&oi=fnd&pg=PA62&dq=market+orientation+and+supply+chain+management+in+the+fashion+industry&ots=0FiX4Yvyf5&sig=BoBe-KOlSiOaY6igTvN7NvyPVYM&redir_esc=y#v=onepage&q=market%20orientation%20and%20supply%20chain%20management%20in%20the%20fashion%20industry&f=false Retrieved on 2012-03-11 http://martin-christopher. info/wp-content/uploads/2009/12/CREATING-AGILE-SUPPLY-CHAINS-IN-THE-FASHION-INDUSTRY. pdf

Topshop was setup in 1964 in the basement of a department store. It became part of Arcadia Group Ltd alongside shops like Miss Selfridge, Wallis, Dorothy Perkins and Outfit. Now, they have over 300 stores in the UK and ship to more than 100 countries worldwide. Oxford Circus in London is Topshop’s flagship store; they’ve also recently opened flagships in Chicago and New York.

Topshop specialise in on-trend and high-fashion clothing. They sell Women’s, Baby, and Maternity. Topshop have collaborated with many designers and celebrities like Christopher Kane and Kate Moss to create fresh and unique looks. They are also the first ever high street brand in history to attend London Fashion Week.

Communication is a way of passing on a message or transferring information. A business needs accurate and relevant information so they can make important decisions in order to remain competitive. There are two different types of communication; internal and external. Internal communication means communication within the company, for example a manager to all shop-floor staff. External communication is the company communicating with others outside of it, its customers.

Topshop communicate internally and externally public in a variety of ways. One example of external communication would be Twitter. Twitter is a social networking site that has millions of users. Topshop use Twitter to interact with their customers; this may be to reveal new items, keep them up to date on events, or even handle customer complaints. By using Twitter, Topshop are keeping their customers up to date with important information as they know that most of their target market (16-34 years) use the website. Other social media Topshop use are Facebook, Instagram, Tumblr and Pinterest. Many departments that would use this way of communication would be Marketing, PR and IT.

Email is a way of communicating both internally and externally. Internally, Topshop would use email to communicate between staff, for example Head Office emailing all staff to inform them of an upcoming event, a new range etc. Topshop can email externally through newsletters. Newsletters (handled by IT or Marketing and PR) inform their customers of new clothing ranges, upcoming events, trend alerts, and sales. People can subscribe to these by putting their email address into the website. This way, Topshop can keep their customers up to date with important information.

Another type of external communication that Topshop use is YouTube. YouTube has over 1 billion different users each month (in the UK), and Topshop use this to their advantage. They have their own channel which has over 35,000 subscribers. They upload videos daily of things such as ‘EDITED’ where a Topshop stylist will create outfits with the new collection. Or ‘5 Ways to Wear’, which showcases Topshop’s clothing. YouTube is a great way for Topshop to promote their products and also communicate with their customers. The commenting system on YouTube allows Topshop’s customers to comment on what they like and dislike, or even recommend what they’d like to see next. The IT, Marketing and PR departments would have a strong presence in this type of communication. Styling and Personal Shopping (aka customer service) would have an input too.