ZARA’S OPERATIONS STATEGY, A CRITIQUE OF A

BUSINESS CASE.
1.Excecutive summary.

Operations management is in regard to all operations within the organization responsible for
creating goods and services that organizations pass to their customers. This function is at the heart of
all organizations, giving the means of achieving their aims and reason for their existence. These
activities include: managing purchases, inventory control, quality control, storage and logistics. A
great deal of focus in operations is on efficiency and effectiveness of such a process.

An example of successful operations strategy in the retail industry is the strategy employed by Zara
which is discussed in this critique. Zara started as a single shop in La Coruna and then rapidly spread
its wings to 68 countries; opening a store each day - one of the fastest global expansions the world
has ever seen. Throughout the entire system of Zara’s business; designing, sourcing, manufacturing,
distribution process and retailing come out a number of success factors: short cycle time, small
batches per product, extensive variety of product every season and heavy investment in information
and technology. This elements feature in every aspect of the business.

2. Introduction.

Zara is the flagship brand of the Spanish fashion retail giant, Inditex, (Industrias de Deseno Texti S.
A.) Founded in 1975 ; this super- heated performers in soft retail fashion market in recent years; is
engaged in textile design, manufacturing and distribution .The group operates approximately 1500
stores .The company primarily operates in Europe, where about 80% of its sales are made with La
Coruna , the city that saw its earlier operations, home of its central offices. Zara contributes about
2/3 of the company’s sales making it undoubtedly the firm’s growth engine. As other retailers like
Marks and Spenser and Gap join retailers in reporting falling profitability it is interesting to note
that Zara’s profitability is still soaring; among the highest in the industry. What makes Zara such
successful when other competitors are falling? Which business model does Zara use? What are the
challenges that Zara faces? The questions can be best answered through a SWOT analysis of the
firm.

3.0 S.W.O.T Analysis.

3.1 Strengths.

 Zara’s strong supply Chain Management.

An efficient supply chain is becoming more and more key success factor for companies.
According to McMillan and Mullen (Operations Management Vol-2, 2002), “the purpose
of SCM is to integrate all tasks associated with the bi-directional flow of materials,
information and finance into organized, coherent, managed processes in order to
provide end-to-end management and control.”

 To analyze Zara supply chain, it is interesting to look closely at the product

design, inventory management, evaluation of suppliers and vendors,
 logistics management, material management, time scheduling, information
systems which are the main contributors in allowing Zara to offer cutting
edge fashion at affordable prices.
Zara as part of the Inditex group has a very strong distribution network. Hence their
superior supply chain management enables the retailer to deliver goods within 24 hours
of the receipt of order at its European stores and 40 hours at its American and Asian
outlets. Inditex’s logistics is carried out from distribution centers located in Spain.
Currently the company’s logistic department employs more than 5,000 people and
distributed 697 million garments, in the financial year of 2008
This competitive distribution network enables Zara to enhance its operational efficiencies
and thus increase its customer satisfaction
It is also interesting to consider other key performance indicators of Zara
comparing to other peers in the retail market
 Design and Production- Just in Time Production

Zara delivers fashionable and trendy cloth addressing all tastes through a controlled
design and integrated process – Just in Time . Just In Time concept is a concept
from Japanese philosophy focusing on the elimination of waste in management or
production system. Zara designs all its products itself. Concurrent method design
could be an adjective to the of product design process which involve the whole
commercial team , designers, market specialist, procurement team as well as
continuous feedback from store managers to ensure that the products reach the
customer just in time.

Young Designers (26 average) draw the design sketches then discuss it with market
specials and planning & procurement staff. Designs inspiration is copied from
different sources (trade fairs, catwalks, magazines) from all around the world. It is
worth to mention that out of 40,000 designs only 10,000 are approved. This
illustrates the flexibility of ideas generation and on the other hand the huge
number of designs reflects the ability to meet almost all the fashion requirements
by customers of all ages (up to 55).

Zara business is organized around processes not functions, to close the information
loop. All team is involved in all processes. This method minimizes the time as
decision is conducted in one room, and in direct proximity to the information. As a
result, Zara reduces the inherent uncertainty associated with new designs in this
industry that is characterized by long lead times and very high variability of
demand e.g M&S could need a whole season to get a new item to stock

 Procurement
Zara manufactures 60% of its products. By owning its in-house production Zara is
able to be flexible in the amount, frequency, and variety of new styled products.
Zara has outsourced less manufacturing than its peers. It has 22 factories and
runs many of them often only in one shift leaving extra capacity to respond
quickly to seasonality and unforeseen demand. Comparing to peers which rely
heavily on overseas suppliers/manufactures which don’t provide same flexibility
as these suppliers could request orders to be placed few months in advance.
 Zara is outsourcing all the labour intensive tasks mainly the sewing, while the
cutting is done in-house. This produces of saving labour cost, flexibility of
meeting deadlines, keeping the designs/fashions strictly controlled.

Labeled and priced goods are immediately hanged upon arrival-Zara Burjuman,
Dubai, July 2005

 Information Systems

Operations in the firm are technology enabled making Information systems one
of the drivers of the quick response communication strategy at Zara.Zara applies
technology in areas that speed up complex tasks, lower cycle time and reduce
error. It is technology that helps Zara identify and manufucture the clothes that
customers want, get those products to the market quickly

Zara stores managers carry handheld Casio computers to send online information
to headquarters like selling trends, customers comments, or placing orders.

Designers send their design suggestions to factory and to distribution

department by scanning a design into a computer and electronically transmit to
factory computers including computers controlled cutting equipment.

Designers input the designs patterns into CAD systems which automatically feed
into the cutting machines in the factories ensuring the required quality of
outputs and having a minimum fabrics waste.

 Inventory Management

Zara’s parent company, Inditex, had the lowest inventory, as a percentage of

annual sales, compared with its nearest global competitors, such as Gap,
Benetton, and H&M.Zara seems fully aware of the adage: “ invetory= death.”
The firm therefore avoids building inventories in any part of its supply chain from
raw materials to end user. Inventory optimization models are in place to help the
the firm determine how many of which items in which sizes should be delivered
to stores during the twice aweek shipment ensuring sores stock just what they
want.

Zara designs around 10,000 new models every year and replenishes ranges
within every one of its 650 retail stores twice per week, but in strictly limited
quantities of stock. This ensures Zara’s brand promise to customers of
exclusivity, and also of design freshness. But it also avoids build-up of large
quantities of unpopular stock.
 Centralized Logistics and Distribution

Zara controls and optimizes across different steps of the supply chain, not within
them, even though it may increase costs at some steps, “Zara sticks to a deep,
predictable and fast rhythm, based around order fulfillment to stores.” says
Professor Ferdows.

There are two orders per week from each store on specific days and hours, with
shipments in La Coruna usually prepared overnight. Trucks leave at specific
times and shipments arrive in stores at specific times. Garments , are pre-hung,
already labeled and priced.

“As a result of this clearly defined rhythm, not only every stage of the supply
chain – from design to procurement, production, distribution, and retail – know
their activities, but even the regular customers know to visit stores more often
on shipment days for the fresh designs.
This large and high-tech facility also has extra capacity on hand to enable Zara
to react to weekly and monthly demand fluctuations. For example, it operates
typically 4.5 days per week, around the clock on full capacity, and extra shifts
and temporary personnel are added when needed.

It is interesting to know that Zara can get the product from the idea to the store
in15 days time, where the industry standard is 6 months, the design and
production process is very efficient and harmonized due to the use of the
different methods that suites their line of business and set new model to look
for.

 Human resource management

The human resource at Zara are one of the components behind the unique
efficient and quick response system. People are highly motivated which reflects
Zara HR policy. Zara hires young people, provides training and fair incentive
schemes which result in high and effective communication
People at Zara also sell and market the name and represent the fashion. The
store manager we met at Zara was dressed in a fashionable way. “We sell
fashion”, he says.
People plays a vital role in Zara business model whether designers, buyers,
logistics and sales staff. For example the store manager is a key player of the
decision to make a specific model.

 Low marketing / advertising cost

Fashion retailers spend on average 3.5% of revenue on advertising their products,

while Zara's parent company Inditex spends just 0-0.3%. Zara depends on word of
mouth shuning advertisements.
Zara relies on its stores to project its image. Zara has coordinators whose main
task is to change the layout of the shop every week. An item that you see today
 at the right side of the shop next week (if not sold yet) will be displayed at some
other side in some other way.

 Synergy between Business and operations strategy

Zara’s strategy is growth through diversification with both horizontal and vertical
integration. Zara copies fashion by adapting couture designs. It manufactures,
distributes, and retails clothes within 2 weeks of the original design appearing on
catwalks. It owns the entire value added chain and competes on the basis of
speed to market, having invented the concept “fast fashion”. Finally it is
important to highlight the smooth integration between Zara business strategy
and it is operation strategy.

Zara operations are in line with the business strategy.Zara manufacturing and
distributions systems enable delivery from concept to store within 14 days.
Ownership and control of manufacturing facilities in Spain allows for quick
response.
Ownership of high tech distribution systems that allow for very fast delivery from
factory to stores all over Europe. Zara’s use of sales staff for market research
purposes allows quick response to customer preferences and local differences.

 Customer survey

The Zara survey is an attempt to reflect the specific segment of Zara customers
and their level of satisfaction, accessibility and usage as a comparative tool to
what the company’s claim on the statements such as “we are selling fashion and
not clothes”. By that, a questionnaire designed and tested on 20 subjects of
which 14 were female and 6 male. The average age was 27. All the interviewed
subjects were selected among those who were familiar with the brand and
purchased at least one item from Zara during the last six months as inclusion
criteria. The main objective of such data collection was to get the brand
feedback and reputation. Also the subjects were always allowed to select more
than one box in the questionnaire. For example one might be interested to
purchase all Shirts, T-Shirts and Trousers from Zara and so on.

3.2 Key Success Factors behind Zara

 Fashion and Variety

Zara main competency is selling Fashion and Trendy cloth with high range of
variety. Zara designers are on a constant lookout for new ideas to keep the
product line fresh. Zara introduces 11000 new garments in a typical year. Many
lines will only be available for a matter of weeks before being replaced.
As per Adel Hassan (Store Manager at Zara- UAE, Burjuman center), “We do sell
fashion. We ask our customers what they want, and then we give it to them.”
Affordability

“I can get a fashionable outfit at Zara at a price which is half the price of a
 similar design and fabrics at any branded shop in Dubai”, Daad Jumblat says.
Zara prices are affordable for people of different income class.

 Speed and quick responsiveness to Market

Zara is geared around speed and responsiveness providing fresh baked products.
Store managers communicate customer feedback on what shoppers like, what
they don’t like and what they’re looking for. That data is instantly funneled back
to Zara’s designers who begin sketching on the spot. The responsiveness effects
the customer behavior as it plays role in pushing the customer to buy quickly and
have higher visits frequency as new models arrive very frequent. This creates an
environment of shortage and opportunity in Zara’s retail stores. The environment also
increases the regularity and quickness, in which consumers visit the stores and buy the
products. The usual customers know that new products are introduced every two weeks
and most likely would not be available the next day. Therefore, Zara’s scarcity background
allows the company to sell more items at full price. This strategy minimizes Zara’s total
cost because it reduces the percentage of markdown merchandise compared to its
competitor.

3.3 Weaknesses

• Zara’s over- dependence on the European market

Most of Zara’s stores as well as production sights are located in European countries making the
firm vulnerable to anything that may cause disruptions in the region –weather,terrorism, political
unrest,labour strife or natural disaster. According to the groups annual report (Inditex Group
2008), Inditex operates 1,747 stores (all brands) only in Spain and another 1,362 stores in the
other European regions. Spain accounted for 33.9% of the group's revenues during 2008 and the
other European regions made up another 43.4% of Inditex’s total revenues.
Hence it can be found that the group is heavily dependent on Spain and the European markets
for its revenues. Therefore the company and its flagship brand is extremely vulnerable to
economic, political or social change occurring in these markets.
• Vertical integration
Although vertical integration is an advantage to the firm, it also has limitations. The integration
for instance, often leads to the inability to acquire economies of scale, which means they cannot
gain the advantages of producing large quantities of goods for a discounted rate. This leads to
high costs a incurred by the Inditex Corporation. Inditex also has to support their own high
capital investments for their chains and be able to financially back their “technology and skills
beyond those currently available within the organization” (David145).

• Zara’s quick and frequent introduction of new products

Incurs increased costs, meaning higher R&D costs. They also have high costs due to the constant
changeover of production techniques to create their different apparel lines. Which also means
 that employees must be trained in order to use the new manufacturing techniques, which again
leads to increased costs. Most competitors don’t experience higher cost in this area.

 Inditex over dependence on Zara

Zara constitutes around 80% of Inditex business ( 8 companies) which means a
failure in Zara can put the whole group at a risk.
 American Consumer Taste
American consumer view of Zara differs from the European one who view Zara as
fashionable house. If Zara needs to grow in American market it needs to address
specifically the American needs and perception of fashion

 American Supply Chain

Zara supply chain in Europe proved to be extremely efficient. However , Zara has
not built a distribution strategy in America which is a constraint to the selling
ability in US.

 Increase in Euro Rate

An increase in Euro rate will increase the consumer selling price in US dollar based
economies, consequently Zara will loose price advantage against relative
competitors outsourcing in US dollar based economies.

3.4 Opportunities

• Plans for future expansions

The group has invested nearly to € 2,800 million primarily put into the opening of 573 new stores in
2008 (Inditex Group 2008), both in those countries in which it had a commercial presence already
and completely new markets. During 2009, it expects the opening of between 560 and 640 new
stores (Datamonitor 2008). As a result Zara could hope to sustain its stable revenue of previous years
despite the financial downturn (Journal of Fashion Management and Marketing 2009).
• Offer more specialized products for different geographic location within the same city
In the United States, the company is possibly experiencing cannibalization because there are too
many Zara stores that carry the same product within one city. Zara could differentiate its product
from location to location to increase shopper traffic.

• Asia Logistics center

Zara has set Asia as a top priority for its expansion, with plans to open stores in countries throughout
the region. This certainly makes sense, since Chinese apparel retail market alone grew by 8.6% in
2007 to reach a value of $67,700 million. In 2012, the market is expected to gain a value of $96,000
million, which would be an increase of 41.7% since 2007. China accounts for approximately 32% of
the Asian market's value .
• Growing online sales in the UK
Zara has an extensive market to exploit in the U.K Last year Great Britain already overtook Germany
as the largest European clothing market

3.5 Threats- porter’s Five forces

• Rising Level of competition

Competitors are reducing their lead-time.Consumer’s decision to purchase a certain article depends
on personal taste (and peer group approval), trend as well as price.Zara’s rivals have studied the
firm’s sauce and while non has attained the efficiency of Amancio Ortega’s firm, many are trying to
learn from the master.Example, H@M has increased the frequency of new items in stores. Others are
Forever21 and Uniqlo who now get new looks within 6 weeks.Benetton reprenishes stores as fast as
once a week.
• Zara’s worldwide retail sales reported a consistently strong performance between 2006 and 2008,
most recently outperforming its closest competitors. In addition the company operates an extremely
efficient supply chain and distribution network within Europe as well as its American and Asian
markets (Economist 2006)
• In more general terms the fashion industry is very fast and the product’s life cycle very short.
Furthermore it depends largely on recent trends, prices and the customer’s satisfaction; hence the
market is extremely competitive.

 Threat of Substitutes
• Consumer’s decision to purchase a certain article depends on personal taste (and peer
group approval), trend as well as price.
• Generally speaking a substitute for fast fashion, at least for some wealthy costumers, could
always be designer clothes (as they are the creators of trends for “tomorrow”) or even
second hand clothes (for those who purchase with a certain price in mind).
• However, in conclusion it can be argued that there are no real substitutes for clothing
products in general, since it is one of the essential consumer goods.

 Bargaining Power of Buyers

• Due to the economic downturn bargaining power of buyers is higher than ever. Retailers
have to make sure that they offer whatever their customers are looking for, immediately and
to an acceptable quality, in order to remain competitive (Foreign Policy 2008).
• Nevertheless it is proven that consumers are willing to pay more for a certain brand name.
Fashion articles strife for uniqueness and exclusiveness, thus customers are obliged to pay a
certain price in order to acquire the exact piece of fashion clothing they were looking for.
• Concluding it must be argued that bargaining power, during the economic crisis may be
much higher than normally, however in general the bargaining power of buyers is moderate.

 Bargaining Power of Suppliers

• The bargaining power of suppliers depends on their products. However especially in the
textile industry, competition is numerous and suppliers’ power thus marginal.
 • Raw materials are bought in so called “low-cost-countries”
• Overall the bargaining power of Zara’s suppliers is very low.

 Counterfeit goods
The abundance of counterfeit goods and accessories is adversely affecting the sales of
branded products (Datamonitor 2008).
• Its inability to penetrate the US apparel market
This may be due to American tastes that differ from European preferences.

 Rising Labour Costs

As mentioned before the company is highly dependence on the European market. Since labour
costs in the EU are continuously rising, this is very likely to have a negative effect on Inditex’s
revenues.
3.6 Financial performance Indicators

It is very important to highlight the result of the efficient operation strategy has
resulted in an excellent financial status. Inditex, ZARA parents’ company has
outperformed most of its peers; this edge on financial performance has given ZARA
prospects for future sustainable growth.
Turnover Growth: Average 25% for the last five years.

Operating Profit: Average 15% - higher then H&M, Benetton,

Working Capital: Is one of the lowest (20 m Euro compared to H&M 1035 m Euro – the
net operating revenue are comparable) since Inditex is capable of turning capital
quicker and have higher assets.

Cost: Inditex cost is low. Operating cost, cost of goods, inventory, marketing cost,
employee/ store are examples of an effective and controlled cost management.

Recommendation:

1.Distribution center for America

To seek and develop new opportunities in the Americas Zara most likely should develop a
second central distribution center as an expansion of their smaller distribution center in
Latin America

2. Ecommerce
Internet retailing is growing, in the states consumers like to have the comfort of shopping
from their own homes at any time. If Zara wants to expand and compete in the US market
it is inevitable for them to develop their internet selling strategy noting that e-selling
would increase the sale time to 24/24 , 7/7. Since Zara product cycle is of the most
dynamic the ability of the consumer to be able to see the new line of Zara products online
is definitely an added value for Zara.

3 Differentiation between local stores

To motivate customer visit more stores and as a strategy to create traffic Zara should
differentiate its stores by offering different product lines in different shops.

In a nutcell , Zara has the potential for sustainable growth due to its competitive
advantage and its ability to face the challenges of the apparel industry. The company
keeps its operating income elevated, has a strong and unique business model, and has
various opportunities or expansion in the retail industry. To many Europeans, Zara is a
familiar face with consistently
trendy, well-priced new apparel every week. To Americans, it is a company that is just
getting its feet wet in the American market. Though, the Inditex branch is researching and
developing new methods for expansion, the company must continue to re-invent and
innovate themselves in order
to stay fr

References

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3. Capell, K. (2008) `Zara thrieves by breaking all the rules`, Business Week, 20 October, p. 66

4. DATAMONITOR (2008) ‘Inditex S.A.: Company Profile’, Datamonitor, 27 October 2008

5. DATAMONITOR (2007) ‘Womenswear in Europe: Industry Profile’, Datamonitor, July 2007

6. Economist (2006) ‘Shining Example’, Economist, 379: 8482, p. 4-6

7. Economist (2005) `The Future of Fast Fashion`, Economist, 375:8431, p. 57-58

8. Foreign Policy (2008) `Fashion Forward`, Foreign Policy, 11:169, p. 28

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behaviour of 'tweenage' girls and the key societal communicating factors influencing the buying
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10. Inditex Group (2009) ‘Zara’, http://www.inditex.com/en/who_we_are/concepts/zara (Accessed

11/10/09)