Zara’s Competitive Advantage through Effective Supply Chain Management
Supply chain management (SCM) is referred to the management of the flow of goods and services in a company. It involves processes relating to movement and storage of raw materials for manufacturing, work-in-progress inventory, and finished goods till they are ready to be consumed by the customers (Christopher, 2016). Due to effective supply chain management, Zara has generated a competitive advantage over its competitors in the clothing retail industry. Effective supply chain management allows Zara to introduce new designs for its customers every week and change more than 75 percent of their merchandise display in every 3 to 4 weeks. Responsive supply chain is referred to a network of firms that are capable of generating wealth for business while operating in a competitive environment by reacting quickly and cost-effectively to the rapidly changing market requirements (Kim and Lee, 2010). Responsive supply chain is important for Zara because it enables them to offer latest products and sell more products at full price.
The five forces model was given by Michael Porter which assist in analysing the competitive environment in which a firm or product works (Huggins and Izushi, 2011).
The uniqueness and high profitability attract a large number of investors to the retailing industry; however, there are high barriers to entry. It requires high fix costs and investments from the corporations because it involves high selling, administrative and general costs. Customers also value brand equity, therefore, the threat of new entry for Zara is low (Gremme, 2014).
The supplier power is high when companies face high costs while switching to a new supplier. For Zara, the supplier power is moderate because the firm has entered into legal contracts with its suppliers which make it difficult for them to raise prices or manipulate the designs. Furthermore, Zara maintains a positive relationship with its customers which avoid any disputes between them.
The customers of Zara are ranged between middle to upper-class individuals who possess a high purchasing power because they have more income at their disposal. Zara has a positive brand image because it focuses on satisfying customers’ demands. Buyers have moderate power because most of them are loyal towards Zara because the company offer diverse and newly designed products every week (Trehan and Mehta, 2014).
Zara operates in the fashion industry which is very unpredictable with a large number of competitors operating in the sector. Through Zara has differentiated itself from its main competitors, which include GAP, H&M and Marks & Spencer, due to constant innovations, creative designs and effective supply chain due to which only 10 percent of its stock remain unsold.
Michael Porter’s Five Forces Analysis for Zara
Zara faces very fierce competition in local, European and international markets from its competitors such as GAP, H&M and MANGO. However, Zara has gained a competitive advantage over its competitors due to effective supply chain management. GAP offers less affordable products, H&M offer less quality and MANGO is based on franchising system, whereas, Zara is able to deliver high-quality designer clothes at affordable prices to its customers (Mann and Byun, 2011).
The core advantage of Zara is its rapid supply chain model which provides its three advantages which include customer satisfaction, effective control in operations, and economic profits. In the industry, customer demand is unpredictable, and Zara’s responsive supply chain enables it to deliver 5 to 6 weeks cycle time and change around 75 percent of its merchandise display in every three to four weeks. Effective control enables Zara to correctly forecast updates regarding its supply chain which ensure little quantity and frequent delivery (Lopez and Fan, 2009). Furthermore, responsive supply chain enables Zara to reduce its inventories and wastage of raw material and it also reduces forecast errors which increase economic profits of the firm.
Inditex is a Spanish multinational clothing corporation which was founded in 1963. It is the world’s largest fashion retailer with more than 7,475 stores situated in 96 markets worldwide; the head office of the firm is situated in Arteixo, Galicia. The corporation has hired more than 171,839 employees across the globe. Zara uses both in-house and outsourced manufacturing (Inditex, 2018b).
In this model, manufacturing operations are conducted by a company using internal “technical” resources by using own employees and time for the production process. This model’s advantages include effective control from beginning to end, improved quality, tracking of manufacturing costs, faster information exchange, and protection of confidential information (Tao et al., 2011). The key disadvantage of the in-house process is high costs to keep up with changing government regulations, technological advancements and market trends.
In outsourced manufacturing, companies transfer portions of their manufacturing work to different outside companies rather than completing them internally. The advantages of outsourced manufacturing include the requirement of fewer staff members, less investment in capital needed, no pressure at operations, increased company’s productivity, lower costs, skilled workforce, more focus on core competencies. The key disadvantage is a higher risk of miscommunication which might result in lowering products quality, longer time to process, and missed sales which reduce company’s profits (Dong et al., 2016).
Assessment of Zara’s Supplier Power and Customer Power
Zara uses both in-house manufacturing and outsourced manufacturing model for producing its products and quickly deliver them to the market. Around 50 percent of Zara’s products are manufactured in in-house facilities. 26 percent of the products are manufactured in other countries in Europe and 24 percent in Asian countries. Zara manufactures most of the trendy, high-quality clothes in firm-owned factories situated in Spain whereas it outsourced basic clothes to factories in Asian countries (Crofton and Dopico, 2012). In order to response and change as per fashion industry, Inditex has opted for both manufacturing model. It uses outsourced manufacturing for the productions of products which have predictable demand and basic quality. On the other hand, in-house manufacturing facilities are used by the company for the production of products which have uncertain demand and require high quality. Furthermore, putting production facility near headquarters improves communication
For Zara, responsiveness and speed are more crucial than costs. Based on the disadvantages of outsourced production, it may lead to missed sales, decrease in quality, slow processes, and customer dissatisfaction. According to Fisher matrix approach, a firm should align its supply chain with product characteristics in order to become successful. Zara offers innovative products (fashion wear) that require responsive and efficient supply chain and it also offers functional products (casual wear) which require a stable supply chain (Hausman and Thorbeck, 2010). Therefore, manufacturing innovative products through the in-house process and functional products through outsourcing process is suitable for Zara, and it provides the company a competitive advantage.
Uncertain demand means companies are facing difficulty in accurately projecting customers demand in the future. It has a negatively impact on the supply chain of corporations because it makes it hard for companies to control and manage inventory. Demand uncertainty makes it difficult for companies to maintain a minimum stock which results in increased expenses because of holding excess inventory. In order to meet uncertain demand, Zara requires to response as per rapidly changing market, or it will miss business opportunities (Nenni, Giustiniano and Pirolo, 2013).
In order to address this issue, Zara has a formed a team of specialised fashion hunters who visit a variety of fashion shows to collect information regarding new fashion trends and provide continual feedback to the headquarters so that they are able to speed up the clothes designing process. The corporation keeps all type of materials in the warehouse which ensures that they spent a short time on pattern making and it assists designers in taking decisions quickly. On the other hand, most of GAP’s factories are situated in China, and it is difficult for them to send materials to China. It takes around 2 to 3 months for GAP’s designers to analyse and design product plans which are twice more than Zara (Hansen, 2012). Furthermore, Zara use local suppliers for logistic distribution and material supplying which makes the process substantially faster. Although the cost of managing an in-house manufacturing facility is relatively higher, the comprehensive profits are must higher than compared to outsourced manufacturing.
Zara’s Position in the Fashion Industry and Competition
Predictable demand means the ability of a corporation to forecast and accurately project customers demand for the future. The companies are able to reduce their supply chain costs by effective predicting the demand of customers (Jin et al., 2012). For Zara, predictable demand means casual wears which did not need high responsiveness to the market.
Zara can easily predict the demand for casual wears, and they did not have high responsiveness from the customers in the markets. Most of the customers prefer to shop at Zara because they offer trendy products quickly than compared to their customers. Only a small segment of people choose Zara to purchase casual clothes. Therefore, the company has outsourced its casual wears manufacturing in Asian countries which assist them in reducing their production costs and focus on quickly supply trendy clothes to its customers (Caro, 2012). Conclusively, Zara uses both in-house manufacturing and outsourced manufacturing facility for production. The main competitive advantage of the company is its responsive supply chain which enables it to offer new designer clothes even with uncertain demand to its customers, four times faster than its competitors. On the other hand, Zara uses outsourced manufacturing for products with predictable demand and use Asian manufactures because outsourcing is much cheaper and it requires lower costs.
Supply chain strategy is defined as the combination and connection of functions and practices throughout a value chain which focus on fulfilling customers’ demand in a marketplace (Van Weele, 2010). Flexible supply chain is defined as the ability of a business process to manage and react to new changes without hindering cost, quality, time or performance of the firm (Gattorna, 2015). Flexible supply chain provides a competitive advantage to companies, for example, H&M’s supply chain strategy focuses on cost efficiency in the production of goods, reduction of lead time and continuous search for promising markets. The company use a team of 100 designers who work on creating new product plans which allow them to offer chic, trendy styles cloths with rapid turnarounds which provide them a competitive advantage (Lu, 2014).
- Replenishing the stores ensure that the inventory is up-to-date with new designs and latest trends; it keeps the products fresh. The speed of producing new products faster than its competitors provide a competitive advantage to Zara.
- The frequent delivery ensures that products can be put on shelves when they are in trend. It also encourages customers to purchase more clothes since they feel that if they did not buy the clothes now, they would not be able to repurchase them (Caro et al., 2010).
- It meets customers’ personal and diversified demands because it is hard for clothing retailers to predict customers demand because it changes rapidly in the fashion industry.
- It raises the stock turnover and reduces the inventory for Zara. Zara’s Cargo distribution centre operates efficiently and rapidly to ensure that the firm is able to deliver new designs quickly to customers. Instead of keeping the clothes in warehouses, the company is able to display them in stores for customers directly.
The frequency of replenishment affects the logistics systems of Zara; the company use different technologies for increasing the responsiveness of its supply chain management. The main function of Zara’s automated distribution centre (DC) called ‘The Cube’ which is situated in Spain is to increase the turnover of products rather than storing them. The Information technology department uses technology such as Point of sale (POS) or Electronic ordering system (EOS) in order to achieve accuracy and efficiency in transactions for orders (Kroenke, 2010). In its stores, the firm uses POS terminals which run on a DOS operating system which ensure that each transaction is registered and clearly rapidly. The top-level management of the firm also felt that shelf commercial IT applications are not suitable for its operations, therefore, the company write its own applications for functions such as ordering, manufacturing, accounting and fulfilment (Yip and Huang, 2016). Supply chain management system is referred to an application for planning, optimising and controlling factors such as due dates, capacities and volumes along with the entire supply chain. It ensures that operations of an enterprise are working effectively and efficiently which provide it a competitive advantage. Zara also uses effective warehouse management systems such as warehouse procedures, warehouse layout, stock account system, and input and output operations.
In-house and Outsourced Manufacturing Models for Zara
Inditex has centralised the operations of Zara and implemented simplified IT infrastructure which assists in establishing a demand-driven and driving fast-to-market supply chain infrastructure. The fashion hunters of Zara create product plans based on latest fashion trends which reduce the time of production. Effective IT infrastructure shortened the time taken in design conception, production and offering of products in the store. By using computer-aided design (CAD) system, Zara is able to maintain a minimum stock of raw material (Turker and Altuntas, 2014). Use of barcode identification system makes the process of controlling and managing inventory and sales easier. Zara’s information system focuses on normalisation of cloth information for supporting new product design and production. Generally, clothing companies take several weeks to collect and send all the necessary information to production. However, Zara keeps all materials in the warehouse which reduce the time of designing and speed up the production process. The company has developed its own EOS system for controlling and managing the production process. IT infrastructure plays a large part in smooth running of Zara’s operations (Ross, 2015).
In retailing industries, corporations are using online mediums for selling their products due to its numerous advantages which include lower costs, wider reach, increase in market share, easy feedback collection, increase in customer base, and others. Zara sells its products online in different countries which enable the company to increase its market share and customer base. The responsive SCM of Zara is not suitable for online selling because customers have different preferences than compared to stores. In online sales, customers demand diverse product options and quicker delivery times (Zhenxiang and Lijie, 2011). Zara has to change its supply chain operations and implement new policies for selecting only online selling of products. Organisations such as Amazon are able to effectively use online sales because they establish distribution centres all across the globe which allows them to manage their order and offer services such as same day delivery. Zara can easily offer same day delivery in Spain; however, it will require investing heavily in other markets to increase its online share by establishing new distribution centres. Therefore, responsive SCM is more suitable for Zara in retail sales because it allows them to offer trendy products to their customers at their stores which are situated worldwide. Customers visit Zara store around 17 times a year whereas they visit its competitors’ stores only 3 to 4 times which shows that retailing model is more suitable for Zara than compared to online sales (Roy, 2010).
Advantages and Disadvantages of In-house and Outsourced Manufacturing
Conclusion
In conclusion, Zara’s responsive SCM allow it to change and adapt as per market trends and provide the latest trendy clothes to its customers. The firm has generated a competitive advantage over its competitors by using effective SCM model. Zara uses IT infrastructure to manage and control each part of its supply chain, and it allows for replenishing of stores multiple times a week. The responsive SCM of Zara is more suited for retail sales rather than online sales.
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