Supply Chain Management of Zara

Zara follows an interesting method of supply chain management. They use something called
vertically integrated supply chain where design, production, distribution, and retailing are
integrated. It means supply chain of the company is own by the company. It allows them to place
garments through any store in the world within the minimum time frame typically between two
to three weeks. The follows an interesting method for selling as well that is buy low, sell high,
buy on credit and sell on cash. This is proven very successful for them so far. They concentrate
on three wining formula shorter lead time, lower quantity and more style.

Example of vertical integration:

Designe
They designe products in house. To cut costs.
Step1 Designe will be made into models

Manufacture
They sent their designe to the factory.
Step 2 Computer decides how to cut to reduce waste.

Quality Check
After creation they check the finished product
Step 3 If every thing is fine then level the product.

Disrtibution.
Then sent to stores around the world..
Step 4

Systems they follow to be ahead of their supplier. They follow lot of trait from TPS other wise
known as Lean production system.

Just in time production: Zara follows just in time production system. All the suppliers are
situated close to their factory. So, when a new design is on the floor raw materials comes with it.
They keep very few raw materials in inventory. Zara keeps a significant amount of its production
in-house. They make sure that their factories must reserve 85% of their capacity for in-season
adjustment. These help them to be more flexible in the amount, frequently, and variety of new
products t launched. They also commits six months in advance to only 15 to 25 percent of a
season’s line. And it only locks in 50 to 60 percent of its line by the start of the season, meaning
that up to 50 percent of its clothes are designed and manufactured smack in the middle of the
season. When any new model comes into the market Zara take quick step to launch it into the
market. They want to design the model as fast as possible. Zara also has extra capacity on hand
to respond to demand as it develops and changes. For example, it operates typically 4.5 days per
week around the clock on full capacity, leaving some flexibility for extra shifts and temporary
labor to be added when needed.

Low waste: Designer sends design to the factory their assessments are done. After that they cut
raw materials using computerized process so that waste is minimized.

Lean Inventory management: It is hard to find any excess inventory in the warehouse of Zara.
They do not have deadstock in their warehouses. Lean is the word which is followed in
throughout the supply chain of Zara. Inventory optimization models are put in place to help the
company to determine the quantity that should be delivered to every single one of its retail stores
via shipments that go out twice every week. Stock delivered is strictly limited at Zara. They
always ensure that their warehouse would contain those products which they actually need.
Production facilities are located near to Zara’s distribution headquarters, as a result they are able
to order at a lower batches. The batch is small, so there’s not a ton of unsold inventory to get rid
of.

Centralized Order fulfillment: Zara uses centralized order fulfillment system. Each Zara outlet
sends in two orders per week on specific days. Trucks leave at specific times and shipments
arrive in stores at specific times. Garments are already labeled and priced upon arriving at their
destination, meaning they’re immediately ready to be sold.

Raw
Suppliers Manufacturing Distribution Customer
Materials
Zara’s Supply Chain Approach: if we analyze Zara’s supply chain, we will find some unique
approach that Zara follow to establish an agile supply chain. These approaches help them to
avoid Bullwhip effect.

 Production Methodology: Zara’s procurement team does not work on the number of
finished goods. They work on the quantity of raw materials needed to manufacture the
clothes. These process help to reduce waste. Besides they can re-use fabric but do not
resell a piece of clothing that didn’t meet the expectation.
 Demand Forecasting: Efficient inventory models helps Zara to determine exactly the
quantity that they will need for every store. They ordered very small batches twice a
week. So they can track their inventory by calculating how much inventory do they have,
how many items they sold. They can determine the exact scarcity of market. So they can
order the exact quantity of the products.
 Proximity of Supply: Relationship with suppliers is very good. Suppliers are always
very close to them. So Zara can order on an everyday-need basis. It helps them to
maintain just-in-time process.
 Local Manufacturing: Instead of outsourcing the production in Asia or Eastern Europe,
it manufactures its production in Galicia. This process differentiate them from their
competitors. They do not get the lower cost production which they could find in the other
region. But they get the faster time to market, low transportation costs and low
disturbance to changing tariffs and politics overweight. Zara also keeps up to 85% of its
plants idle, in order to optimize the response to demand changes all around the world. So
they are able to catch the changing market very early.
 Production Feedback: The whole process maintain a proper feedback system. Everyday
customers give feedback to the store manager. Store managers give feedback to the
market specialists. Market specialists then give feedback to production and design teams.
These feedback systems help to response quickly to market needs.
Advantages of Their Vertical Integration System:

 The company doesn’t have to rely on their suppliers. They face little disruption like labor
strike or labor dispute from company.
 When its suppliers have a lot of market power and can dictate terms, the company
benefited. It can lower internal costs and have better delivery of needed items. It's less
likely to be short of critical elements.
 It can achieve economies of scale through vertical integration. It can lower the per unit
cost by buying a bulk of product at a time. It also help to make the manufacturing process
more efficient.
 They have good knowledge about market. They earn these knowledge by the feedback
they get from their customers. With this market knowledge they can change their product
according to market demand.
 They are able to lower their cost by using vertical integration. As a result they can set a
lower market price of their product. This will attract customers and expand their business.

Disadvantages of Their Vertical Integration System:

  They must invest a great deal of capital to set up or buy factories. It is a matter of cost
for them.
 Vertical integration Supply chain system gives them less flexibility. They are not able to
change their factories with lower exchange rate or any other benefits.
 It's also not likely that any company will have a culture that supports both retail stores
and factories.