zara - supply chain & value creation

ZARASupply Chain & Value-Creation

Zubin Poonawalla

PURPOSE

• To analyze ZARA's success due to its supply chain

• How it correlates with value-creation for the company.

AGENDA• ZARA: Company Profile

• ZARA: The Supply Chain

• Vertically Integrated

COMPANY PROFILE

• ZARA is the flagship chain store of Inditex Group owned by Spanish tycoon Amancio Ortega

• HQ in Coruna, Spain, where the first ZARA store opened in FY75.

Inditex : FY15 Global Sales Breakdown

•

Statistics on ZARA's Supply Chain

• 15 days from designs to products V/s. industry average of 6-9 months

• 12 inventory turnovers/year V/s industry average 3-4 times

• 12,000 designs/year

• 30,000 SKU’s/year

• Unsold items account for 10% of stock V/s industry average 17%~20%

• Commits 50%~60% of production in advance of the season V/s 80%~90% for other

Supply Chain

• ZARA buys fabric in only 4 different

colors;• Designs & cuts its

fabric in-house

Suppliers are all close to their factories so ZARA can order on a

need-basisClothes are ironed in advance & packed on hangers, with security

& price tags affixed

Overnight trucks are used to deliver to European

stores & airfreight is used to ship to other countries

The Key to ZARA's Success

• Vertically integrated supply chain where design, production, distribution, & retailing were integrated.

• “The vertical integration of our production system allows us to place a garment in any store around the world in a period between two to three weeks.”

ZARA: Vertically Integrated Supply Chain

•

THE AWKWARD FACTOR IN THE PROFITABILITY FORMULA

• Buy low, sell high; Buy on credit, sell on cash.

• Zara, which contributes around 65% of group sales , concentrates on three winning formulae to bake its fresh fashion:

Short Lead Time = More fashionable Lower quantities = Scarce supplyMore styles = More choice, & more chances of

hitting it right?

ZARA: Vertically Integrated Supply Chain

In Spain, 200 fashion designers are in charge of new designs for the clothing

line. They select the most cost effective fabric for the new designs.

Designs will be made into models when sent to the factory. The

computer then decide how to shear fabrics in order to waste as little as

possible.

Fabric will be sent to the factories.

ZARA: Vertically Integrated Supply Chain

After the sewing process,

products will be sent back to the factory for button nailing,

ironing & inspection.

Up to tens of kilometers of underground transmission channel connects all the

processors.

Label trademarks for different countries.

Why Vertical?• Cost & Speed

• Local sourcing of raw material – Cutting cost because they do not outsource any channel • Fast time-to-customer – Cutting

time, faster, effective, and efficient • Mass customization• Low process costs• Avoid conflicts emerge from

different channels

ZARA’s Rate for the Global Distribution –

from Spain

China – 48 hours

Europe – 24 hours

U.S. – 48 hours

Japan – 72 hours

Why Vertical? (Contd..)

Information Technology (IT)- Collecting vital information

• POS (Point of Sale Terminals)

• “H” structure – information from each store is independent & parallel to the headquarter in Spain

• PDA – order from the headquarter in Spain by the manager of each store

Values Generated by Logistics

Flexibility to matchoperational scale

Networkcoverage

Project managementof solution

Innovationof solution

Strategicstocklocations

Supplychainvisibility

Reducedlogisticslead times

e.g.Postponementservices

Managingsmallerlot sizes

Reducedlogisticslead times

Improveddeliveryreliability

e.g.In-storelogisticsservices Reduced

logisticslead times

Improveddelivery reliability

Reduced logisticslead times

Tighter controlof inventory

More competitiveglobal supplier base

Improved purchasingof low value items

Flexibility oflocation andlabour rates

Higher labourutilisation

Optimised assetutilisation

Optimisedunit cost

Fewererrors, losses and claims

Tighter controlof inventory

Flexibility oflocation andoverheads

Proven systemsat lower costs

Simplermanagementtasks

Leveragedoverheads

Strategicstocklocations

Reducedlogisticslead times

Special purposevehicles

Third partycapital providers

Shared useactivities

Speed of gettingchange intothe market

Higher salesvolumes frombetter off-the-shelf availability

Higher salesfor meetingcustomer needs

Lower quantityof inventor to sellat reduced prices

Greatercertainty ofexecution

Increasedflexibility

Lowerbought-in costs

Reducedlabourcosts

Reducedtransportcosts Reduced

cost ofwrite-offs/errors

Reducedinventoryhold costs

Reducedsystemscosts

Reduced supply chain mgtcosts

Reduced transport processing costs

Lowerinventories

Off-balance sheetfinancing

Enhancedutilisation

Revenue growth

Cost reduction

Increase RevenueReduced product discounting

Books 85% of the full ticket price for its merchandise, while the industry average is 60%

Flexibility to respond to change in consumer demands

Unsold items account for <10% of stock, as opposed to the industry average of 17-20%

Faster time to the market/extending product life

4-5 weeks from conception to distribution

Tailored productsProduces 11,000 designs annuallyCompetitors only have 2,000 to 4,000 items

Improved product availabilityStores Twice-weekly shipments

Decrease Costs• COGS

Outside the distribution center in La Coruña, ZARA has twenty-three highly automated factories.

• Cost of logisticsSince nearly 60% of ZARA's merchandise is produced in-house, decreased

transportation costs• Management & administration

Plants use JIT systems developed in cooperation with logistics experts from Toyota Motor (TM)

• Cost of capital/assetsZARA owns 40% of their production facilities in Europe

THANK -YOU