Operations & Supply Chain Management

CASE STUDY CONCEPT:

The Zara supply chain drives its successful business model.

Zara changes its clothing designs every two weeks on average, while competitors

change their designs every two or three months. It carries about 11,000 distinct items

per year in thousands of stores worldwide compared to competitors that carry 2,000 to

4,000 items per year in their stores. Zara’s highly responsive supply chain is central to

its business success. The heart of the Zara supply chain is a huge, highly automated

distribution center (DC) called “The Cube”.

The company was founded in Spain in 1974 by Amancio Ortega and his wife Rosalía

Mera. It is the flagship business unit of a holding company called Inditex Corporation

with headquarters in Arteixo, Galicia, a city in northwestern Spain near where Mr.

Ortega was born. In 2019 Zara was ranked as the 46th most valuable brand in the world

by Forbes.

Company Business Model

Agents for the company are always scouting out new fashion trends at clubs and social

gatherings. When they see inspiring examples, they quickly send design sketches to the

garment designers at the Cube. New items can be designed and out to the stores in 4 –

6 weeks, and existing items can be modified in 2 weeks.

The company’s core market is women 24 – 35 years old. They reach this market by

locating their stores in town centers and places with high concentrations of women in

this age range. Short production runs create scarcity of given designs and that

generates a sense of urgency and reason to buy while supplies last. As a consequence,

Zara does not have lots of excess inventory, nor does it need to do big mark-downs on

its clothing items.

Zara has 12 inventory turns per year compared to 3 – 4 per year for competitors. Stores

place orders twice a week and this drives factory scheduling. Such short-term focused

order cycles make forecasts very accurate, much more accurate than competitors who

may order every two weeks or every month.

Clothing items are priced based on market demand, not on cost of manufacture. The

short lead times for delivery of unique fashion items combined with short production

runs enable Zara to offer customers more styles and choices, and yet still create a

sense of urgency to buy because items often sell out quickly. And that particular item or

style may not be available again after it sells out. Zara sells 85 percent of its items at full

price compared to the industry average of selling only 60 percent of items at full price.

Annually there is 10 percent of inventory unsold compared to industry averages of 17 –

20 percent.

In Spain customers visit Zara stores 17 times per year on average compared to 3 times

per year for competitors. Because their clothing designs change often, it is harder for

people to see them clearly on the Internet and thus they are encouraged to come into

the stores instead and try on the unique fashions that Zara offers.

Manufacturing and Supply Chain Operations Make Zara Unique

Zara buys large quantities of only a few types of fabric (just four or five types, but they

can change from year to year), and does the garment design and related cutting and

dyeing in-house. This way fabric manufacturers can make quick deliveries of bulk

quantities of fabric directly to the Zara DC – the Cube. The company purchases raw

fabric from suppliers in Italy, Spain, Portugal and Greece. And those suppliers deliver

within 5 days of orders being placed. Inbound logistics from suppliers are mostly by

truck.

The Cube is 464,500 square meters (5 million square feet), and highly automated with

underground monorail links to 11 Zara-owned clothing factories within a 16 km (10 mile

) radius of the Cube. All raw materials pass through the Cube on their way to the

clothing factories, and all finished goods also pass through on their way out to the

stores. The diagram below illustrates Zara’s supply chain model.

Zara’s factories can quickly increase and decrease production rates, so there is less

inventory in the supply chain and less need to finance that inventory with working

capital. They do only 50 – 60 percent of their manufacturing in advance versus the 80 –

90 percent done by competitors. Zara does not need to place big bets on yearly fashion

trends. They can make many smaller bets on short term trends that are easier to call

correctly.

The Zara factories are connected to the Cube by underground tunnels with high-speed

monorails (about 200 kilometers or 124 miles of rails) to move cut fabric to these

factories for dyeing and assembly into clothing items. The monorail system then returns

finished products to the Cube for shipment to stores. Here are some facts about the

company’s manufacturing operations:

• Zara competes on flexibility and agility instead of low cost and cheap labor. They

employ about 3,000 workers in manufacturing operations in Spain at an average

cost of 8.00 euros per hour compared to average labor cost in Asia of about 0.40

euros per hour.

• Zara factories in Spain use flexible manufacturing systems for quick change over

operations.

• 50% of all items are manufactured in Spain

• 26% in the rest of Europe

• 24% in Asia and Africa

Direction:

In 4-6 pages in MS Word, conduct research and case analysis, and respond to the

following questions: Using the information from the business cases.

1. What is flexible manufacturing? And how it can help Zara improve quality?

2. Describe some of the methods that Zara might use to control inventory

3. What strategies that Zara might implement in Its CHM to avoid the Bullwhip

effect?

4. What operational techniques Zara must use to become effectively Lean? Explain

based on effective distribution system.

You are required to cite at least three internal or external sources in your postings,

formatted to APA standards. Avoid citing sources from Wikis, Wikipedia,

Dictionary.com, private company websites, and other non-academic references.

Review APA standards: https://owl.english.purdue.edu/owl/ (Links to an external

site.)Links to an external site. (Links to an external site.)