Zara: Breaching the Laws of Supply Chain.

Zara breaches most of the current conventional knowledge and practices about how supply

chains in clothing industry should be run. Interestingly, some of Zara's supply-chain practices

may seem questionable when taken individually. Zara’s global success can be explained by

going through their following practices.

Zara has developed a super responsive supply chain by adhering strictly to the

philosophy which states that, to be successful, one should control what happens to one’s

product until the customer buys it (End-to-End Supply Chain).

Where other designers spend months planning for the next season, Zara can design,

produce, deliver a new garment and put it for display in mere 15 days. It offers large

varieties of designs and in limited quantities, this allows them to rake in a higher full

price ticket over its peers in retail clothing.

Almost half of the production is done in-house by Zara, unlike many of its peers in retail

clothing that rush to outsource. It produces complicated products in-house and outsources

the simple ones. When Zara produces a garment in-house, it uses local subcontractors for

simple and labor-intensive steps of the production process. These are small workshops,

each with only a few dozen employees, and Zara is their primary customer. (Controlling,

what’s happening to the product in front of eyes)

Zara intentionally leaves extra capacity, rather than pushing its factories to maximize

their output. Zara follows a fundamental rule of queuing models, which holds that

waiting time shoots up exponentially when capacity is tight and demand is variable. By

tolerating lower capacity utilization in its factories and distribution centers, Zara can react

to peak or unexpected demands faster than its rivals.

Zara manufactures and distributes products in small batches. Instead of relying on outside

partners, it manages all design, warehousing, distribution, and logistics functions itself.

(Controlling, what’s happening to the product, yourself).

Zara’s retail stores have to follow a rigid timetable for placing orders and receiving stock.

It leaves large areas empty in its expensive retail shops and it tolerates and encourages,

occasional stock-outs, which is quite amusing yet effective.

Zara doesn’t have any ground-breaking supply-chain innovations but a self-reinforcing

system which is built on 3 principles: Each one of these principles alone could improve

the responsiveness of any company's supply chain. But together, they create a powerful

force because they reinforce one another. This is the key to Zara’s Success.

o Close the Communication Loop: Quickly and directly close the information

loop between the end users and the upstream operations of design, procurement,

production, & distribution by tracking products and materials in real-time in every

step & transferring information from buyers to designers and production staff.

o Stick to rhythm across Supply Chain: Zara invests money on anything that

helps to increase and enforce the speed and responsiveness of the supply chain.

o Increase Supply Chain flexibility by leveraging Capital Assets: Zara has made

major capital investments in production and distribution facilities and uses them

to increase the supply chain's responsiveness to new and fluctuating demands.

Unlike its peers, which excise redundant labor to cut costs, Zara runs three parallel, but

operationally distinct, product families with separate design, sales, and procurement and

production-planning staffs. Though it's more expensive to operate three channels, the

information flow for each channel is fast, direct, and unencumbered by problems in other

channels making the overall supply chain more responsive.

The physical and organizational proximity of the designers, market specialists and

procurement & production planners increases both the speed and the quality of the design

process. Zara's organization, operational procedures, performance measures, and even its

office layouts are all designed to make information transfer easy, unlike other companies

where layers of bureaucracy brings information transfer to a halt, hence the fast-fashion

system is easily handled by Zara.

While companies use PDAs to communicate, Zara's flat organization ensures that

important conversations, like trends don't fall through the bureaucratic cracks. The

constant flow of updated data from stores to production-house takes care of the so called

bullwhip effect, i.e. the tendency of supply chains (and all open-loop information

systems) to amplify small disturbances.

Clothing industry allows retailers to change a maximum of 20% of their orders once the

season has started, but Zara lets them adjust 40% to 50%, hence, it avoids costly

overproduction and the subsequent sales and discounting prevalent in the industry.

Zara introduces new products in small batches, though larger batches would reduce costs.

(exclusivity), which reduces the costs associated with running out of any particular item.

Zara encourages stock-outs, being out of stock in one item helps them to sell another.

Zara carries out an expensive practice of moving unsold items after two or three weeks

but since Zara stores receive small shipments and carry little inventory, the risks are

small; unsold items account for less than 10% of stock, compared with the industry

average of 17% to 20%.

The level of control that Zara has on its products allows it to set the pace at which

products and information flow. The entire chain moves to a fast but predictable rhythm.

This relentless and transparent rhythm aligns all the players in Zara's supply chain. By

carefully timing the whole chain, Zara avoids the usual problem of rushing through one

step and waiting to take the next.

Zara validates the company policy of delivering two shipments every week, though less

frequent shipment would reduce distribution costs. It justifies transporting products by air

and truck, though ships and trains would lower transportation fees and it provides a

rationale for shipping some garments on hangers, though folding them into boxes would

reduce the air and truck freight charges. All these counterintuitive practices helps its

supply-chain to stick to a rhythm.

Zara has made major capital investments in production and distribution facilities since its

managers believe that investment in capital assets can actually increase the organization's

overall flexibility. Owning production assets gives Zara a level of control over schedules

and capacities that would be impossible to achieve if the company were entirely

dependent on outside suppliers, especially ones located on the other side of the world.

Production process of specific garments can be ramped up or down quickly and

conveniently because Zara normally operates many of its factories for only a single shift.

These highly automated factories can operate extra hours if need be to meet seasonal or

unforeseen demands. Zara's factories are specialized by garment type, it uses

sophisticated just-in-time systems, developed in cooperation with Toyota, that allow the

company to customize its processes and exploit innovations.

Operating hours of Zara’s facility follow the weekly rhythm of the orders: In a normal

week, it functions around the clock for four days but runs for only one or two shifts on

the remaining three days. Ordinarily, 800 people fill the orders, each within eight hours.

But during peak seasons, the company adds as many as 400 temporary staffers to

maintain lead times.

In a nutshell, it can be concluded that the deepest secret of Zara's success is its ability to

sustain an environment that optimizes the entire supply chain rather than each step and

whatever they do, they don't take their eyes off the product until it's sold.

Sources:

Ferdows, K., A. Lewis, M. and A.D. Machuca, J. (2004). Rapid-Fire Fulfillment. [online]

Harvard Business Review. Available at: https://hbr.org/2004/11/rapid-fire-fulfillment

[Accessed 2 Dec. 2015].