AY2015-16 Term 2

GROUP PROJECT (G2)

January 2016

OPIM 321 – Supply Chain Management

1. About 4
1.1. Company History 4
1.2. Business Aim 4
1.3. Competitive Strategy 4
1.4. Key Financials 5
1.4.1. Cash Conversion Cycle 6
2. Zara’s Supply Chain Overview 7
2.1. Push/Pull Cycle of Zara’s Supply Chain 9
2.2. Cycle View of Zara’s Supply Chain 10
2.2.1. Product Design 10
2.2.2. Procurement cycle 11
2.2.3. Sourcing and Manufacturing cycle 11
2.2.4. Distribution 12
2.2.5. Retailing 12
3. Zara’s Supply Chain Decision Making Framework 12
3.1. Inventory 13
3.2. Facilities 13
3.2.1. Factories 13
3.2.2. Distribution Centers 14
3.3. Transportation 15
3.4. Information 15
3.4.1. RFID Technology 15
3.4.2. PDAs 16
3.5. Sourcing and production 16
3.5.1. Sustainability of supply 16
3.6. Pricing 17
4. Future challenges for Zara’s Supply Chain 17
4.1. Increasing Transportation costs 17
4.2. Increasing demand in Asia and the Pacific region 18
4.3. Increase in e-commerce 18
4.4. Outdated POS System 19
4.5. Child labour 19
5. Recommendations 20
5.1. Adaptability: Sensible SENSE 20
5.2. Adaptability and Agility: Opening a DC in Asia 20
5.3. Alignment: Child Labour 21
Annex 23
References 24
1. About Zara

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1.1. Company History
Zara was founded in 1975 in the Spanish city La Coruna by Amancio Ortega Gaona, the owner of
Inditex. Zara’s approach to “fast fashion” led to a great success with the public and to the opening of nine
new stores in main cities of Spain. Zara’s first garment factories Samlor and Goa are located in Arteixo.
In 1984, the first logistic center of 10,000 square meters was established in Arteixo. In 1985, Inditex was
incorporated as the holding company of Zara, where the management began to set in place a strategy for
Zara to be able to react quickly to changes in fashion trends. The Inditex group continued to expand and
in the following years, there was a continuous growth with shops opening in more countries, enhancing
the world coverage of the organization. Currently, there are over 2000 Zara stores in 88 countries. ok

1.2. Business Aim

Zara strives to provide the latest fashion to the mass market at an affordable price. The general
business model can be split into three main points: 1) keeping low production quantities, 2) having a wide
range of products, and 3) fast distribution with short lead times. This allows Zara to have reasonable
prices and the possibility of selling latest fashion items earlier than its competitors. Zara sells different
kinds of clothing divided in four main categories: Women, Trafaluc (TRF), Men and Kids. Products have
to obey safety and health standards from the design to packaging phase. Many controls are conducted
each year to guarantee these standards.

1.3. Competitive Strategy

As mentioned, Zara is a clothing retail company that focuses on “fast fashion”. Fashion trends
tend to evolve quickly and while it is possible to create the next latest fashion trend, fashion misses are far
more common than hits due to the inherent unpredictability of consumer preferences. The demand for
variety is high and demand can be unpredictable. Zara does not necessarily want to focus on accurately
forecasting and predicting fashion trends but rather it wants to be very responsive to the latest trends and
rapidly produce what the market demands. Therefore, Zara’s supply chain needs to be very flexible, agile
and responsive in order to effectively carry out such a strategy. We will further examine how each one of
the supply chain metrics helps Zara to achieve this competitive edge.

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 Figure 1: Context where Agile supply chains work best. Good chart. Very similar concept to the high/low
implied uncertainty with the responsiveness/cost efficiency.

1.4. Key Financials

2010 2011 2012 2013 2014

Zara EBIT (Million 1,534 1,725 2,233 2,089 2,123

Euros)

Inditex Gross Margin(%) 59.3% 59.3% 59.8% 59.3% 58.3%

Retail Apparel Industry 20.5% 19.8% 20.3% 18.3% 17.9%

Inditex ROE 30% 28% 30% 27% 25%

Inditex ROA 20.8% 19.7% 21.5% 18.4% 18.2%

Table 1: Key financials for Zara and Inditex, 2010 - 2014.

Zara's operating income reflects a steady increasing trend, with a spike of 30% in 2012. The rise
was due to growth in Eastern Europe and in online sales in Canada and China. In 2012, Zara added 360
new stores in 54 different markets, making for a total worldwide of 6,009, rapidly diversifying its sales
worldwide. The decline in 2013 was due to poor global outlook, resulting in a struggle to maintain Zara’s
stellar growth rates.

Although Zara has a slight overall decrease in gross margin due to changes in prices of materials,
Zara’s gross margin has been relatively stable compared to its competitor H&M, suggesting an efficient
supply chain and Zara’s ability to control costs. ok

As a result of Zara’s global expansion plans, the ROE and ROA have fallen over the 5 year
period as large amount of capital is required to open new stores worldwide, and to move into the e-
commerce market to put itself in a stronger position to tackle new digital competition. Having said that,
the group is performing above industry average despite the decline (table 1).

1.4.1. Cash Conversion Cycle

Zara’s cash conversion cycle experienced an increase from 2012 to 2014, largely due to the
increase in the number of days sales receivable. The level of days inventory held and days payable
outstanding have remained relatively stable since 2009. However, its cash conversion cycle is still healthy
and remains negative. This means that Zara on average does not pay its suppliers until it receives the
payments for these sales from customers. Zara is using its working capital effectively and will have cash
for other expenses should the need arise. ok

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Figure 2: Inditex cash conversion cycle.

2. Zara’s Supply Chain Overview

The diagram in Figure 1 3 shows the key players in Zara’s Supply Chain. High fashion items,
which account for approximately 60 percent of Zara’s total production, are manufactured in 22 factories
in Spain, mostly located close to the headquarters. In this production process, only the most labor
intensive step, the sewing, is outsourced. It is carried out by external workshops located in Spain,
Portugal and Morocco. As Zara’s main goal is not only minimizing costs but also achieving high
responsiveness for more expensive and fashionable items, the high-fashion garments are produced in
Spain to cut lead times.
yes
About 40 percent of the production is performed by external manufacturers, which can be divided
into two categories. The semi-fashionable items are produced in Europe and Northern Africa, mainly in
Turkey and Morocco, to take advantage of low labor costs and relatively short lead times at the same
time. Cheap standard items with highly predictable demand, like unicolor t-shirts, are produced in Asia to
minimize labor costs. good

All final products (ironed, folded, and labelled) are transported to Zara’s distribution centers
(DCs) in Spain, which are located in Arteixo or Zaragoza. From there third-party logistics operators carry
the items to logistics operator hubs and warehouses in each local market. Depending whether the
destination is located in Europe or overseas, the transport is done by truck or air freight. From the local

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hubs the products are delivered to the individual shops, most of which are self-owned by Zara. In regions
with barriers to direct access, for example due to laws, Zara uses joint ventures to enter the market. A
franchise approach is used in small and high-risk markets.

Figure 3: Key players in Zara’s supply chain. The blue color indicates that the step is owned by Zara,
grey boxes represent external players.

The distribution network design of Zara is a variation of manufacturer storage with customer
pick-up. Notable is the absence of retailers as well as that Zara owns almost all of its shops and its DCs. A
positive effect of this approach is that most information, like sales, can be transmitted directly inside the
company to all key players. The main goals, short lead times and high responsiveness, are benefitting
from this.

2.1. Push/Pull Cycle of Zara’s Supply Chain

Figure 4: Push/pull cycle of a supply chain. You should illustrate the Push/Pull for Zara.
The Zara basic label of apparel with a steady demand (e.g. underwear, basic t-shirts, socks) are
mainly produced in Asia, which provides cheaper production and longer lead times. This reflects the push
nature of the supply chain cycle as these merchandise are made to stock. Good

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 On the other hand, the high-end trendy Zara labels like Zara RTF, consisting of more fashionable
outfits, are produced in factories in Europe. This results in shorter lead times and time to market, helping
Zara react faster to demand, although the downside is higher production cost. In Zara’s stores, customers
can always find new products although they are limited in supply. This creates a sense of scarcity and
exclusivity as only a few items are on display in stores despite the large amount of space available (the
size of an average Zara store is around 1,000 square meters). This is also enhanced further when Zara
removes a design in a store when it has run out of popular sizes, even though it may still have other sizes
in stock. All of these serve to create the pull factor of Zara’s supply chain. yes

The high level of information integration in Zara’s supply chain, from the POS system in stores to
the IT system in its warehouses, increases the accuracy and validity of data sources about customer’s
consumption behavior, preferences and the most updated fashion trends. This allows faster reaction to
changes in consumer demand, as well as better decision-making based on market analysis to enhance
customer satisfaction.

The priority of Zara’s designers is not innovation, but to recognize trendy fashion elements as
they arise, and incorporate them in new kinds of products. As such, they can interpret the fashion instead
of creating it. Furthermore, Zara keeps its production lot as small as possible by leaving the extra capacity
for generally manufacturing products, which allows them to concentrate on coming up with more new
designs. Good

2.2. Cycle View of Zara’s Supply Chain

The figure below shows Zara’s theoretical flow/cycle time of production. It takes 24 days for a
unit to be processed if there are no delays at any stage. This is achieved by Zara conducting all their
processes from design to production in-house as opposed to outsourcing them.

Figure 5: Zara’s supply chain from start to finish for one unit. Good

The whole process of Zara’s supply chain can be divided into five parts: product design,
procurement, sourcing and manufacturing, distribution, and retail and sales.

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2.2.1. Product Design
Zara’s designs are produced in small quantities but wide varieties. This allows them to keep their
shops’ outlook fresh every week and cut down on promotions and price reductions. Zara manufactures
10,000 designs annually. As compared to the 2,000 to 4,000 designs for most clothing retailers, Zara
pushes out new products in a speed that is at least two times faster than competitors in the industry.
Product design plays a crucial part in the lead time and Zara reported only an average of 3 days to come
up with a new design.

Most of Zara’s products have a lead time of four weeks from designing to having the products
ready to be sold in Zara stores, even though all of Zara’s products have to go through the DCs in Arteixo
and Zaragoza before being sent out to the stores. On the other hand, 70% of H&M’s products have a lead
time of three months as they are manufactured in Asia, though some of the products might take as long as
six months. Only 30% of H&M’s products have a shorter lead time ranging from two to six weeks. This
reflects how Zara leads in the fast fashion industry from their speed of bringing most of their new
products to stores in just four weeks. yes

In terms of design, Zara sells some of the trendiest apparels with designs which are inspired by
some of the famous designers’ work, but they do not engage these designers to design their products.
Similarly H&M also sells fashionable apparels, but H&M has original collections through collaborations
with famous designers.

2.2.2. Procurement cycle

Zara sources fabric, other inputs, and finished products from external suppliers with the help of
purchasing offices in Barcelona and Hong Kong, as well as the sourcing personnel at headquarters. While
Europe was historically Zara’s main source for fabric, the recent establishment of three companies in
Hong Kong for purposes of purchasing as well as trend-spotting suggested that sourcing from the Far
East, particularly China, might expand substantially.

2.2.3. Sourcing and Manufacturing cycle

Sourcing and manufacturing differ greatly for Zara and H&M in terms of their choice of location
in manufacturing their products. Zara manufactures 60% of their apparels in factories around Arteixo
where they produce the trendiest and high risk items, 40% in Africa and Asia, where semi fashionable and
basic design products are manufactured. Production in Europe is about 35% more costly than in Asia, but
Zara chooses to manufacture most of its products in Europe for the shorter lead times. In addition, Zara
works with only 20 key suppliers for 75% of the finished products, reflecting their strict choice of
selection in clothing. ok

Even for the garments that are manufactured in-house, cut garments are sent out to about 450
workshops, located primarily in Galicia and across the border in northern Portugal, that perform the labor-
intensive sewing. These are generally small workshops, averaging about 20–30 employees (although a
few employed more than 100 people), which specialized by product type. The sewn garments are then
sent back to Zara’s manufacturing complex, where they are inspected, ironed, folded, bagged, and
ticketed before being sent on to the adjoining distribution centers.

However, this is different for H&M, which does not own any factories, but instead works with a
huge number of 900 independent suppliers, where 80% are from Asia and the rest from Europe. H&M has

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most of their products manufactured in Asia to take advantage of the low cost production. Correct The
stark difference in Zara and H&M sourcing and manufacturing choices reflects their different emphasis
on lead time and cost respectively.

2.2.4. Distribution

Figure 6: Typical distribution timeline of a Zara article.

As mentioned earlier, all Zara’s products, wherever they are manufactured, are sent back to the
DCs in Spain, and then to be sent out to Zara stores all over the world. Zara’s garments do not stay in the
DC for more than three days, and products will be transported from the DC to warehouses in some of the
local markets, and then sent to the Zara stores by the third party logistics companies. For markets with no
local warehouses, products will be sent directly to the Zara stores. 75% of Zara's products are shipped by
trucks, and 25% are shipped by air. good

In contrast, H&M’s distribution system is different as products produced at the suppliers’

factories will be sent directly to the logistic centers in the market. The products are then replenished from
the distribution centers. 90% percent of H&M’s goods are shipped via sea or rail as the company tries to
reduce road and air transports as part of their conservation efforts.

2.2.5. Retailing

In terms of retailing, H&M and Zara stores are similar in determining their store locations, mainly
in prime locations. Both H&M and Zara stores have trendy products that move in and out of the store
quickly. The only difference is that Zara keeps little inventory, but H&M keeps a large inventory of basic
items. ok

3. Zara’s Supply Chain Decision Making Framework

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Figure 7: Zara’s supply chain decision making framework.
Very good summary of Zara overall SC framework.
3.1. Inventory
Zara has an inventory turn of 29.58 while the industry average was only a 5.29. With that, the
inventory cycle time is 12.34 days (365/29.58). This suggests that Zara takes 12.34 days to sell its average
inventory. As opposed to the industry average of 69 days (365/5.29), Zara is moving its inventory very
efficiently, and has a lower chance of becoming stuck with excess and obsolete inventory. Very good On
the average, Zara sells off 85% of its products at original price, while the industry only sells of 50%. This
is mainly because Zara produces limited amount for each product, hence decreasing the risk of having too
much excess and obsolete inventory which Zara would sell at discounted prices or finally write off as
obsolete when the season is over. yes

3.2. Facilities

3.2.1. Factories
Zara’s factories are mainly located in these few regions - 50% in spain, 26% in rest of Europe and
24% in Asia and Africa. Having a majority of the factories located in Europe allows Zara to be flexible
and agile despite having to pay a higher wage for labour. The average wage in Europe is about
8euros/hour while the average wage in Asia is only 0.40euros/hour. Internal manufacturing is the primary
responsibility of 22 fully owned factories, 18 of them located in and around its headquarters in Arteixo.
Speed is critical to Zara’s success and it reserves about 85% of its in house factories’ production capacity
for last-min orders during the season. yes

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 Zara’s factories are heavily automated, specialized by garment type, and focused on the capital-
intensive parts of the production process—pattern design and cutting—as well as on final finishing and
inspection. Vertical integration into manufacturing had begun in 1980, and starting in 1990, significant
investments had been made in installing a just-in-time system in these factories in cooperation with
Toyota—one of the first experiments of its kind in Europe. As a result, employees had had to learn how to
use new machines and work in multifunctional teams.

3.2.2. Distribution Centers

The Inditex Group runs a centralized logistics system based on 14 logistics centers spread
throughout Spain. The two main distribution centers for Zara are located in Zaragoza and in Arteixo, near
the company’s headquarter. Zara’s DC in in Arteixo is a five-storied building with a total surface of
500,000 square meters. The other DC in Zaragoza was built in 2003 with a total surface of 125,000 square
meters and was enlarged to 200,000 square meters in 2011. It is even more technologically-advanced, for
example double-entry carousels, also called cross-docking sorters, are part of the DCs equipment.

All produced Zara items are first sent to one of these two DCs, no matter where they are
produced. I wonder why they do that. May be at that time, the volumes in Asia was really insignificant
compared with Europe From the DCs the products are directly shipped to individual country markets. For
example even when a t-shirt is made in China or Southeast Asia and is destined for the Japanese market,
it is not directly shipped to Japan. The t-shirt is first transported to Spain and from there to Japan. With
this cross-docking strategy, Zara avoids running DCs in each part of the world and thereby reduces its
costs. In combination with the fast transportation modes Zara uses, the centralized logistics cuts the
delivery times and enables Zara to keep very small inventory at the same time. Additionally, this system
provides a high level of responsiveness to market demand changes and leads to a high level of control
over the supply chain operations.

The total amount of items shipped by the DCs is approximately 2.5 million items per week. The
time between receiving an order at either of the two DCs to the delivery of the items to the stores is on
average 48 hours for Non-European shops and 24 hours for European stores. Garments do not spend more
than three days in the DCs. The capacity of the DCs for handling and shipping is 45,000 folded garments
per hour. But at most times the capacity of both DCs is just utilized to about 50 percent. Only during peak
season or as a reaction to unexpected high demands the capacity of the facilities is utilized to higher
percentages. This is done by increasing the number of shifts and hiring temporary workers (roughly one
temporary worker for every three permanent workers). The strategy of low overall utilization rates
follows a basic rule of queuing models, which states that tight capacity in combination with variable
demand leads to highly increasing waiting times. Therefore, Zara tolerates comparatively low capacity
utilization in order to be more responsive to peak or unexpected demands. As stated previously, this
responsiveness is a key competitive advantage and thus a main factor of Zara’s success. good

3.3. Transportation
As one of the main goals in Zara’s business model is to respond and react quickly to changes in
customer demand, time is one main criteria for transport decisions. As mentioned before, Zara has two
distribution centers in Spain through which every product, manufactured in Europe or any other place in
the world, will pass. Depending on the origin and the urgency of the finished products or raw materials,

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they arrive in the distribution centers by truck, air or sea freight. Trucks are mainly used inside Europe,
while air freight is used to transport garments from Asia, achieving short lead times. yes

From the distribution centers, stores located in Spain are being supplied on two specific days
every week, while international shops are supplied on two other specific days. Shipments are usually
made in small quantities, resulting in a low inventory level in stores. Stores in central and Southern
Europe are supplied by trucks, which are operated by third party distributors like Azkar, Cayco or DHL.
This allows the stores to receive their orders on average 24 hours after placing them. In 2014 Zara used
15,485 trucks to carry products in Spain and Portugal. About 75 percent of all products are shipped by
truck and inside Europe.

Stores in Asia and America are supplied via air freight from the airport in La Coruna or Santiago
de Compostela. The cargo is mainly carried by Emirates, KLM or DHL and stores are typically supplied
within 48 hours after placing their order. Using air freight is an uncommon transportation method in the
fashion industry, as it is more expensive than truck or water transportation. For most companies in this
industry, the main goal is to minimize their cost. As Zara designs and produces between 35 and 85
percent of their garments during the season, their main criteria is a short lead time. In order to achieve
this, Zara’s logistic costs are about 3 percent higher for shipments made to the Middle East and about 6
percent to America when compared to its competitors that ship by water freight. Transport by water takes
about 58 days from Spain to the warehouse in Los Angeles, while air freight arrives within 2 days. good

3.4. Information

3.4.1. RFID Technology

Zara being such a large entity requires a strong information system to carry out its strategy of
“fast fashion”. This means that information must be collected and transmitted in a very responsive
manner and as close to real time as possible. RFID Technology being used since 2014, which allows for
identification of garments from logistical platforms through to their sales. This enables Zara to carry out a
more precise in store product management as well as inventory and demand planning. Once an order
arrives at the store, the system provides information on which products need to be restocked and where,
improving stock taking time by 80%. ok

3.4.2. PDAs
Shop Managers can also use PDAs to check the latest designs and place their orders in
accordance to the demand that they observe in their store, contributing valuable information on fashion
trends to the headquarter. Store managers make orders twice a week and receive orders twice a week as
well. The designers collect the order information, determine what style is popular and produce designs
that cater to the latest trend. When the design is approved and finalized, it is then sent to a factory. The
result is that Zara designed up to 10,000 new designs every year. Typically, the retailer will enjoy four or
five waves of new products after the initial seasonal launch, this is possible because of the information
that is provided. As a result, Zara locks in about 30%-40% of its designs at the start of its season, while
the rest are designed and manufactured throughout the remaining season with the demand information
submitted by store managers. good

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3.5. Sourcing and production
As a fast fashion retailer with a strong focus on customer service, Zara prioritizes timely delivery
of products to customers to meet demand ahead of its competitors. Zara aims to achieve an efficient
supply chain by balancing its in-house and outsourcing activities. As mentioned before, labour intensive
tasks such as sewing are outsourced to manufacturers within close proximities.

To determine the effectiveness of its strategy, Zara uses production lead time to evaluate its
suppliers and monitor their performance. Compared to its competitors, Zara is almost 12 times faster in
designing a new collection and delivering it to customers, taking approximately 4 weeks while others
need as long as 6 months.

An alternative metric Zara could use is Days Payable Outstanding (DPO), which indicates the
duration Zara takes to pay its invoices from its suppliers. Since Zara is highly dependent on its suppliers
to meet customer demand in time, it is crucial to form good and long-term relationships with them.
Hence, a stable DPO is recommended to maintain strong ties with the 20 key suppliers of Zara. ok

3.5.1. Sustainability of supply

In an effort to engage in corporate social responsibility, Zara drawn up policies of sustainable
supply. All suppliers and manufacturers are bound by the social and environmental responsibility values,
which encompass issues of labour rights, health and safety of products and environmental aspects. These
standards are also constantly under review to incorporate best practices and reinforce its validity. yes

3.6. Pricing

The concept of Zara is to sell clothes at a reasonable price without much sales discounts. Thus, it
is important to provide prices levels, that customers are willing and able to pay. Customers outside Spain
have to bear the extra costs of shipping, therefore items are priced on average about 23% higher in
France, Germany and Italy, 50% higher in England and Mexico, 70% in USA and 100% in Japan. Part of
Zara’s pricing strategy is to avoid discounting. Hence, Zara creates create artificial scarcity, by turning
over its inventory so quickly that customers may not be able to find the apparel they want after a week or
two. Furthermore, with rarely any sales discount, Zara can reduce the variation in demand patterns and
keeping demand profiles constant. Figure 8
shows Zara’s positioning in relation to price
and fashion level. The level of fashion is
higher than H&M or Pull & Bear, but the
price is lower compared to Benetton or
Massimo Dutti. ok

Figure 8: Average price positioning of Zara

related to fashion level, compared to other
brands.

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You should provide a summary table for all the operational KPIs, definitions and suggested targets

4. Future challenges for Zara’s Supply Chain

4.1. Increasing Transportation costs
As mentioned in the previous sections, an important part of Zara’s business model is offering
high quality products to affordable prices. Since transportation accounts for significant parts of Zara’s
costs, an increase of transportation costs is a substantial challenge for the company. Most of the currently
used transportation modes in Zara’s supply chain, especially air freight, use fossil fuels. In the mid- and
long-term future, this energy supply will experience a shortage, which will inevitably increase the prices
for transportation, even if the current short-term trend shows a contrary development. Thus, Zara should
start looking into alternative solutions for their transportation network, in order to be ready to react to this
challenge. ok

4.2. Increasing demand in Asia and the Pacific region

The trend in sales shows a remarkable increase of the demand in Asia and the Pacific region for
the Inditex group and thereby also for Zara (see Figures 9 and 10). Regarding the amount of potential
customers and the trend to higher income per person in Asia, it is most likely that the growth of these
markets will persist. This is a positive aspect from the sales point of view, but at the same time it is going
to be a big challenge for Zara’s supply chain strategy. It is highly questionable, if the centralized logistics
approach with all products flowing through the two main DCs in Spain is still the most effective solution,
when the sales development mentioned above is taken into account. An alternative solution might be the
integration of another DC serving the Asian and Pacific markets. However, this would cause new
challenges regarding the choice of location and the information and transport system. Good

Figure 9: Annual sales of the Inditex Group in Asia and the Pacific region.

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Figure 10: Percentage of sales in Asia and the Pacific region on the Inditex Group’s total sales.
Good and meaningful chart
4.3. Increase in e-commerce
In the last decade, e-commerce has experienced significant growth in fashion retailing. Many
companies have noticed this development early and have installed online shops as retailing channels,
which now account for substantial parts of their sales. Although Zara has online shops in some countries,
compared to its competitors the effort put into e-commerce is low. Zara covers 88 country markets with
shops, but only in 27 countries can customers order Zara garments online. In addition, the online shops
are mainly available in Europe and North America. So there is a big potential for developing online
markets for Zara, especially in Asia. As it is very likely that the online fashion market will grow larger,
this will be a significant challenge for Zara’s supply chain model.

The main problems in e-commerce are the availability of garments and the request of customers
for short delivery times. In order to be competitive in online sales, delivery times of 24 hours have to be
achieved for most markets. Zara’s current supply chain optimizes availability and lead times mainly for
their stores. Thus, the key challenges in e-commerce for Zara is to keep local inventories for online
customers as well as finding cheap and reliable last-mile delivery modes, without negatively influencing
the shops’ supply and while keeping costs low. Should they have a separate focused SC network for
online business?

4.4. Outdated POS System

Zara’s point-of-sale (POS) system is currently outdated as it still uses the DOS format, which
Microsoft is no longer supporting. While the current POS system is perfectly operational and sufficient to
support Zara’s day to day operations, there are some issues with using this older POS system. The DOS
system functions like a closed network within the store and store managers do not have the ability to look
up inventory balances of other stores to check the availability of a particular piece of apparel in another
store. The only method is to call up other stores manually to check the availability of the apparel. There
is also a risk that their hardware vendors may update their machines so that DOS is no longer compatible,
causing ZARA to not be able to open any new stores.

Another issue is that the sales and inventory data are not transmitted to ZARA headquarters in
real-time. Instead, at the end of each working day, employees copy the daily sales totals from each
terminal onto a floppy disk and transmit this data to HQ via a dial-up modem. The PDAs that are used to
find out the new designs available also had to be linked via the modem to the information systems at La

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Coruna and some store managers actually complained that this took a long time and the screens on the
PDA were small to navigate. Good

4.5. Child labour

Although Zara manufactures 60% of their apparels in house and in close proximity, the remaining
40% that is outsourced still represents a large number of suppliers globally. Some suppliers are located in
far away locations such as Asia and South America, Zara may be unable to keep a close eye on these
suppliers. As a result, some suppliers may employ unethical manufacturing practices to increases their
own profit margin. For example, in 2013 Zara was accused of using child labour and sweatshops to
produce its apparels in Argentina. The existence of such geographical divide in the supply chain makes
dilutes Zara’s control over its suppliers. Hence, Zara may find it difficult to to achieve alignment with
these suppliers despite putting in place tough requirements and social audits. These scandals have a
serious impact on Zara’s brand image and prove that the existing social audit programs and assessment
program may not be sufficient to align the interest of their suppliers. ok

5. Recommendations
5.1. Adaptability: Sensible SENSE
ZARA relies heavily on customer preference data to produce their designs. Introducing a new
POS system can help to translate these data in real time and allow Zara to observe the formation of
fashion trends more accurately. It also allows store managers to check inventory levels at other retail
outlets and help customers locate the items that they want. In addition, being connected to the internet
allows the POS system to integrate with the rest of the systems in the supply chain and improve the flow
of information in the supply chain. Technology advances at such a rapid pace that Zara’s POS may
become outdated in the near future and lack support from vendors. The rise of big data, having a newer
POS system may allow Zara to perform additional analytic functions which can help it to improve
responsiveness to demand. yes

5.2. Adaptability and Agility: Opening a DC in Asia

Zara should take advantage of the booming e-commerce industry by introducing online platforms
in the Southeast Asian countries like Indonesia, Singapore, Malaysia, Thailand, and the Philippines.
Despite Zara’s notable brand presence in the Asian market, with about 128 stores, there is still a lack of
online platforms in Asia. The growth of the Southeast Asian markets is not only limited to e-commerce,
but it can also be observed in traditional shop sales (refer to section 4.2.). Hence, there is a large overall
market potential.

In order to serve the growing demand of the Southeast Asian market, we recommend Zara to
build a new major distribution center in this region which partly serves to replace the current DCs in
Spain. With the largest number of stores of 46 and the largest population size, Indonesia is the key
Southeast Asian market. With cheap labour and land, as well as its central location, Indonesia is the
optimal spot for a DC. This DC would help Zara and its supply chain to adapt to the growing overall
market illustrated in the previous paragraph. Even though building a new DC and integrating it into the
supply chain requires a very large investment, we believe that the advantages of an additional DC outside
Spain will outweigh the cost, due to the huge potential of the Southeast Asian market. Very good and

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fully agree. However, as this is a rather obvious problem, we need to fully understand why this was not
done in the first place.

Additionally, the advantages are not limited to meeting the potential demand. The introduction of
a new DC will increase the efficiency of the supply chain network. Products produced and sold in Asia
and the Pacific region do not have to be shipped back and forth to Spain anymore which cuts
transportation costs and lead time. Shorter routes also allows Zara to test and implement alternative
energy sources into their transportation network. This will help Zara in overcoming the transportation
challenges, which are mainly caused by the future shortage of fossil fuels (refer to section 4.1.).

On top of that, having an additional distribution center in Asia helps to improve the agility of
Zara’s supply chain. This reduces the overall lead time mainly in the Asian market, which increases
responsiveness to demand changes due changes fashion trends for instance. Should the introduction of a
distribution center in Asia be successful, it could serve as a model for future expansion in other regions of
the world such as the Americas. Yes. Again, why didn’t they do this for the big market in North America
in the first place. Kind of silly to ship from Asia to Europe, then to North America. In the long run, by
tapping on its acquired knowledge and experience of integrating new major DCs, similar future projects
could be completed at faster rate. This results in greater agility in Zara’s supply chain network.

5.3. Alignment: Child Labour

Based on the latest figures released in 2014, the total number of suppliers that obtained a social
audit rating of A or B stands at 85%. Zara is still a long way from its target of having A or B ratings for
100% of its manufacturers and suppliers.

Firstly, Zara does not impose penalty on its suppliers for breaking the code of conduct, instead it
may simply chooses to drop the supplier. This may not be a strong enough deterrence for preventing
misconduct. Zara can impose penalty to suppliers that do not comply with the standards. This will send a
strong signal to Zara’s suppliers to be extra mindful of their practices. Fully agree In addition to the
penalty, Zara can also adopt positive enforcement by selecting role models, suppliers which have
followed the code of conduct closely, from its suppliers and reward these suppliers with cash incentives.
This further highlights Zara commitment towards aligning its interest with the suppliers, as good
performance is rewarded while bad performance is punished, achieving an effect sharing of risk and
reward in its supply chain. yes

Figure 11: Zara’s compliance

programme for its suppliers.

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Annex

18
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