Company overview
Discuss about the Acquisition Is Important To Effective Supply Chain Management.
Zara is a Spanish fashion retailing company founded in 1975. The company was initially involved in manufacturing similar clothing as the high- end fashion garments but later on, they made improvements in the processes of their designing, manufacturing and distributing apparels. It helped them in reacting towards the contemporary trend in the market to adapt to the new and modern style. They termed this new trend as instant fashions, which used information technologies and groups of designers rather than individual designers (Dutta 2002, pp. 35-38). This report will focus on the case study of Zara to find out about the issue and the logistics management strategies implemented by them for achieving success. The reasons for success will be found out in comparison to another successful and unsuccessful company. The case study is based on the ways in which Zara has achieved the top position in the fashion retail industry in terms of pace and flexibility by effectively supervising every detailing of their business.
It has 2200 outlets, which are located all over the world. Its headquartered are situated in Galicia in Spain and earns annual revenue of US$9 billion. Inditex is the parent group of Zara and the founders are Amancio Ortega and Rosalia Mera. According to the report of 2017, Zara has managed up to 20 clothing collections per year. At present, Zara is one of the most innovative as well as devastating retailer in the world. It was responsible for earning a total sale of 64.8% in the year 2011. At the end of the financial year, this company was successful in reaching 82 countries all over the world by reaching out to 1830 stores. The company is consistently expanding each year and it is directly affecting revenue by increasing from 2477 million Euros in 2001 to 8938 million Euros in 2011 (edition.cnn.com). The company has able to attain success due to the implementation of suitable strategies and models on their business process. Following section will highlight the secret strategies behind Zara’s success.
Zara has termed their success as instant fashion or fast fashion. This particular business model of the company is placed within the highly responsive buyer- driven supply chain. In this specific business model, the customers play a significant role. This is because the process of manufacturing and designing the products of Zara are dependent on the demand of customers in the market. This company uses the strategic technique of collecting feedback from the customers and sending those to the headquarters. It has enabled the company to work on the design of the apparels as per the needs and desires of the customers. They can make any kind of changes or amendments in the designing as per the feedback received from the customers instantly.
Business model and strategy
They have made use of real- time business by controlling the location of their production instead of utilizing the benefits of scale economies and outsourcing the works to other developing countries. The management of the company believed in time over the cost of production, which was effective in mitigating risks as well as wastage of time. It helped in direct distribution of the products to the stores by keeping the inventories low and the stores free and fresh. Ferdows, Lewis and Machuca (2004, pp. 104- 117) found out that the business system of Zara was capable of turning around within two weeks.
According to Ferdows, Lewis and Machuca (2005, pp. 98- 111), instant fashion a.k.a rapid- fire fast fashion strategy of Zara required an efficient communication plan. Therefore, they have started focusing on strong communication channels to meet business demands instead of the recent market trends and the estimated sales. They have started using different forms of media such as TV, internet, industry publications and others to collect information about the sale of products. By implementing the latest IT tools, they have managed to maintain a constant communication between the designers and customers to help in creating products as per the customers’ demands. While focusing on a rigid communication, their focus shifted from organizational structure, which fell flat. Approximately 300 designers of the company were ever ready to create new designs and work on the old ones as per the desire of the customers. It helped them in avoiding minor disturbance in retail orders, which could lead to a disrupted supply chain.
Again, the company follows the strategy of counter- intuitive sourcing and distribution without the support of third- party partners. Their processes of designing, warehousing, distributing and logistics functions are conducted internally. In this way, they could gain total control over its value chain and takes much less time in the completing the total procedure before putting the products on display. In comparison to months invested in conducting the whole process, Zara does it exceptionally well within a fortnight. According to one of the founders, this flawless pace has become possible, as they have kept five fingers of their hands touching the factory and the other five in the customers (Ghemawat, Nueno and Dailey 2003).
Zara has played a major role in achieving success by keeping the production stores nearby and introducing an extremely fast supply chain. As most of the designing and production process of Zara is conducted internally, therefore the retailers do not get the scope to be involved with a wide range of suppliers. The production process of Europe is conducted in Spain and Portugal due to cheaper labor force. This goes in contrary with the higher labor costs of the rival companies where the cost is reduced in advertising and inventory with smaller lead-time.
Issue with the company
Zara has constantly maintained a rigid time schedule in terms of placing orders and getting back the stock products. The headquarters place orders in the right time by aligning with the timing of the other offices spread throughout the world. This is the strategy behind incorporating their instant fashion to gain competitive advantage against the rival companies. The logistics used by the company was also designed in- house. Creating small batches of products is the key to combine business model of basic design and quick delivery for Zara. In comparison to average industry standards, Zara has less than 10% stock of the unsold products. As per the research carried out by Rohwedder and Johnson (2008), it was found out that inventory- to- sales ratio for Zara was 7 in contrast 12 for H&M and 14 for GAP. It has led to their increase in profit margin by marking down the sale.
While discussing about the success of Zara it is worth comparing its success with another company, which has made effective use of its supply chain and logistics. Unilever is one such British- Dutch consumer goods company and it is the third largest in the industry. It excels in offering food, beverages and personal care products to the customers. The company had started a five- year growth strategy with the intention of modifying their supply chain management. While improving their supply chain management they focused on their organizational structure, international purchasing process, supplier involvement, supply chain executives and technology. This amendment process has helped them in making $14.24 billion savings in the year 2003 (www.inditex.com). In this way, they became established as a leader in the in the consumer packaged sector by adopting technological initiatives.
On the other hand, mismanagement of logistics and supply chain was also responsible for the failure of some companies. For instance, The Great Hershey’s Chocolate Meltdown of ’99 is a remarkable example of disruptive supply chain. As the company was unable to provide $100 million of Hershey’s Kisses and Jolly Ranchers to the specific stores during Halloween, they have lost 8% stock in a single day. Further research found out that the reason behind this failure was their timing and distribution of their new order. It was the right decision to launch the products during Halloween but they could not keep up to their promise.
The innovative technique of in- house processing of the apparels and frequent delivery has been effective attracting the customers all over the world. As per Tokatli (2008), the customers in central London pay visit to the general stores four times a year on an average in contrast to the 17 times average visit to the Zara stores. Therefore, the company has been able to gain competitive advantage with constant modification in their designing to offer something new to the customers every time. They have adopted the strategy of tantalizing exclusivity by designing 40,000 new products every year and selecting only 10,000 for production. In this respect, they have planned to maintain sustainability for the long- term future. The brand has planned to meet the needs of the customers without hampering the environmental cycle that might lead to depletion of natural resources.
Sourcing and distribution
Zara has been successful in gaining competitive advantage by designing similar products from the high- end fashion with cheaper fabric and sold them at much less prices than the rival companies. This is an excellent cost- cutting strategy used by this brand along with fast- paced supply to the customers to meet the demands of the competitive market. Their unique approach was extended to the use of no advertising and marketing strategy. Zara has been very clever in spending only 0.3% of their revenue in comparison to 3.5% investment by other retail companies (www.wipo.int). The company spends their revenue in beautifying their stores and visual merchandizing to give a cutting- edge technology to the brand. The reasonable pricing of Zara has not compromised with the customer standards. They have maintained their upscale standard by building up stores in posh locations and renovating their stores quite often as compared to the rival companies. They keep on changing the products on display at weekly intervals to attract customers with eye- catchy stores.
This report has mentioned in detail the strategies and concepts used by Zara to be successful and gain competitive advantage in their business. From the analysis of their business process, it can be stated that if other rival companies such as H&M or GAP incorporate such strategies then they will be benefitted. This is because the strategies taken by Zara have proved to be successful and effective in leading them the top position in the fashion industry. However, it might not be suitable for other companies if they are unable to understand their competitive advantages as did by Zara. They could do so by controlling the three intangibles- organizational information system, process model and the brand identity.
Other companies can attain success by making effective IT infrastructure as Zara and maintaining an efficient communication plan. It was considered as a key success factor of the company. Other companies can make use of their process capital in the form of modifying their programs, policies and techniques to boost up product and service delivery. Rapid- fire supply chain of Zara was an outstanding example of investing on the internal and external value chain network. Brand image or brand identity is another intangible, which can be considered in distinguishing the products and services in a competitive market. Zara has created a strong brand image among the customers by recognizing as a high- end affordable retail fashion. The two diagrams given below are in support of the Zara’s analysis.
Fundamental reasons for success
Fig: Value chain Zara and its rival company
Source: www.inditex.com
Fig: Supply chain framework of Zara
Source: www.inditex.com
The supply chain of Zara can pose challenges in terms addressing various trends and customer preferences across the globe. The supply chain becomes more complex with the increase in its global reach. They might face challenge from the rival companies in the form of duplicity or imitation of their products. For instance, Benetton Group, Forever 21 and Fast Retailing Co. are coming forward to imitate the strategies of Zara by refurbishing their stores quite often and changing the products on display quite frequently. It is major challenge for Zara and they need to come up with new innovative techniques for maintain their leading position in the industry.
Conclusion
It can be concluded from this report on the logistics and supply chain management of Zara that an integrated supply chain has provided the company with system benefits, which demands coordination among various business processes. This is because every part of business is interrelated with another. Therefore, it is required to keep a strong bonding on each sector of the business as a key to success. With the attainment of ultimate success in business, it is not possible to be restricted by the rival companies. As Zara could identify its intangible assets, therefore it became easy for them to react fast to the changing business environment.
It can be recommended for maintain effective supply chain management that there should not be any hurry in implementing the process. As Zara is facing tough competition from the rival companies, they should not take any wrong step in rush. It will be good for them to function with a clear visibility in every step that they take. They will have to be at their toe in case of any discrepancy in the supply chain. They have always conducted their process with in- house system and should continue doing the same. They should avoid the support of several suppliers while launching any new product. They can modify their supply chain by bridging the gap between planning and delivering of the products and services. Moreover, they should always begin with a fresh perspective in terms of new designing and distribution of the apparels.
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