British University Vietnam

HAN16080027

INTERNATIONAL SUPPLY CHAIN MANAGEMENT

ZARA FASHION - INDIVIDUAL ASSIGNMENT

Question 1
In order to successfully embrace the “fast fashion” philosophy and become the leader in the
apparel industry worldwide, Zara’s supply chain process refuses to obey conventional wisdom of
forecasting trends and then promoting and distributing products to customers.
Zara’s unique yet effective supply chain practices are reflected in the customer control, real-time
order, speedy transportation and vertical coordination. First, Zara brings customers to the store
and listen to their opinions and observe their purchasing behaviors. Having noted in certain
period, store managers order new clothes twice per week, then receive orders twice per week.
Since the manufacture chain based mainly in Europe, Zara utilizes air shipping to ensure the
speed-to-market strategy. Zara’s supply chain lies in the vertical integration, which is considered
as a factor contributing to the organization’s success (Emerald Insight, 2005). In other words,
“Zara has flourished on the principle of being responsible for its products all the way from initial
conception to the customer” (ibid).
Despite the proven success, Zara has still faced certain challenges. The first major issue is the
high cost of air shipping – Zara’s principal transportation mode due to the unstable oil prices.
Moreover, that only small batches are transported each time results in the higher transportation
cost. Another factor that hurts the air express is the unexpected events such as natural disasters,
which leads to delivery delays and larger replenishment time.
Parietti (2015) once stated that firm-specific strategies are crucial when developing business
scale and seeking global expansion. With the admirable global reach in 86 countries, it is
undeniable that Zara’s has successfully employed its staunchly competitive strategies towards
global growth, which makes it difficult for rivals to follow. Once noticeable point is the limited
production run, which brings certain benefits such as the exclusivity of offering for target young
customers. This strategy can be applied in the US to overtake the competitors located in the
region. Furthermore, Zara should investigate the local tastes of US young people besides
producing fast and exclusive fashion. Performing the organizational advantages together with
localization strategy will help Zara to dominate the US market and achieve the organizational
aim generally. Below is suggestion for Zara’s supply chain design, emphasizing on structuring
logistical and cross-functional drivers to achieve strategic fit.

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Figure 1. Supply chain decision-making framework (Chopra & Meindl, 2016, p.58)
Zara’s aforementioned strategy implies that the ideal supply chain structure will focus on
responsiveness while maintaining a certain level of efficiency. With the facilities driver, Zara
should increase the number of facilities in emerging market to reduce transportation costs and
avoid the chance of delay. The facility should be dedicated and product-focused, which means
that Zara focuses on producing certain types of complicated garments and can control the quality
of those products from the beginning to completion (Chopra and Meindl, 2016, p. 60). Facility
locations should be decentralized to shorten lead time and facility sites should be limited and
carefully selected to minimize the total distances or costs for supplying demands (Melo, et al,
2008). Regarding inventory, Zara should consider higher level of inventory of “best-sellers" in
stores so that it does not lose ready-to-buy customers. With respect to transportation, Zara should
remain air shipping, however, since more local facilities and inventory have been advised,
frequency of transportation should be reduced. The information flow system is the ideal balance
of push and pull phase since Zara’s designs are based on both customer’ purchasing behaviors
and the prediction for upcoming trends. Thus, Zara should continue to optimize information
driver to boost information accuracy across supply stages and maximize responsiveness and total
supply chain profitability (ibid, p. 67). Sourcing should be flexible to balance the responsiveness
and efficiency. Basic products can be outsourced in low cost countries and exclusive items need
to be performed in-house for guaranteed quality (Ferdows et al., 2004). Finally, with pricing
driver, Zara should optimize the economies of scale by tracking and filling spare transportation
so that pricing pressure on products can be reduced. Though committed to inexpensive clothes,
no EDLP or high-low pricing is necessary since for each design Zara only offers very limited

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quantity which help the company to collect larger percentages of the full price and thus achieve
higher net margins on sales (Tokatli, 2007).
Question 2
Since the current channels to Spanish consumers were insufficient and a recession had left many
wholesalers bankrupt, Zara supply edge was forced to lie in vertical coordination and integration,
meaning the business greatly controls from design, sourcing, fabrication, production, distribution
to sales (International Herald Tribune, 2005, cited in Tokatli, 2007). More specifically, Zara
decided to own its upstream and downstream players and manage almost steps involved in
manufacturing and supplying, especially of stylish and exclusive items to ensure the quality
stability. Though the vertical integration derives some benefits such as technological innovation,
strict control of quality and minimum supply disruption, it poses certain challenges that Zara
needs to overcome to maximize the supply chain surplus.
The first major hurdle for Zara’s vertical coordination could be the “inability to foster a
collaborative culture” (Chopra and Meindl, 2016, p.277). Different teams and partners have
different working cultures and goals; thus, it is understandable that they are likely to focus on
maximizing local objectives. Furthermore, the unwillingness to communicate properly of teams
and the risk of information miscommunicated throughout various layers also facilitates that
separation among stages. The solution for that would be devoting greater managerial and
technological resources to coordination (ibid). For instance, functional managers must be aware
of common goals, inspire trust and facilitate their teams to act towards mutual benefits by greater
interaction and connectivity among firms through appropriate channels. More
technologies/machines invested to improve “the sharing of forecasts, historical information,
evaluating exception condition, and enabling vision and planning” among both internal and
external parties would be highly recommended (ibid).
Another challenge associated with Zara’s coordination is the high operational cost as unlike
other firms who prefer to produce and order in large lots to exploit economies of scale thus lower
cost, Zara committed to fashion exclusivity, meaning either items produced in-house or
outsourced are in limited run (ibid). Moreover, Zara store’s managers order twice a week and
expect to receive orders, in small batches, twice a week via air express, which leads to
significantly high cost for transportation. The suggestion is that Zara should expand the time
between orders and order in larger lots each time. To facilitate this, technological advancement
for shared information as stated above must be utilized for better collaborative forecasts and
planning to speculate as accurately as possible the purchasing volume thus to minimize inventory
costs.

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Question 3
Given the developments in manufacturing technology, the diverse needs of the market, and the
widespread use of information technology, competition in business is no longer between
companies, but between supply chains, and no longer within domestic boundaries, but across the
globe (Friedman 2005, cited in Skiver, 2015). In other words, realizing the opportunities for new
promising markets, significant revenue enhancement and costs reduction in today’s economy are
among reasons companies, including Zara, decided to go global.
Despite the tremendous benefits, globalization poses numerous challenges on finance
performance that Zara with vertical control of international supply chain, must be seriously
considered. One of the most noticeable obstacles is the total cost for Zara’s offshoring decision –
placing retail stores overseas. Freight cost is the very first element affecting Zara’s finance
performance when opening over 6,100 stores in 86 countries, since the major shipping mode is
air express with great frequency of twice a week, not to mention local transportation. Though
this strategy works in European locations thanks to the density of stores, it is not feasible in other
less condensed continents. This leads to the significantly high shipping costs and other relevant
contingent expenses namely packaging, customs, taxes and tariffs when crossing international
borders. Another cost very much affecting on Zara’s finance performance are infrastructure (IT
and facilities), local labor, and hidden costs such as technology for order communication (for
example the electronic handheld order machine), invoicing errors, as well as the exchange rate
trends and their impact on cost (Chopra & Meindl, 2016, p. 157).

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Figure 3.1. Dimensions to consider when evaluating total cost from offshoring (ibid, p.157)
Globalization of supply chain not only incurs enormous costs for operation and administration
but also entailing risks that could hurt a business’s performance. Similar to the point, Rodrigue
(2017) once stated that the complexity of global supply chain requires an assessment of possible
risks to mitigate supply vulnerability, including financial performance. The specific risks
associated with financial achievement of Zara's global supply chain will be analyzed based on
the table below from Chopra and Meindl (2016).

Figure 3.2. Supply chain risks to be considered during network design (ibid, p.160)
Delays and disruptions are among the major risks to be investigated since Zara’s inflexible air
shipping services have been facing unexpected events of natural disasters. These are big
headaches for the company as they diminish replenishment process thus losing customers who
might be ready to purchase at certain points of time. Second, the breakdown of information
infrastructure which results in order miscommunication between stores and distributors or
manufactures; long lead time; and poor collaborative forecast and planning could be signs of
system and forecast risks. Another point worth mentioning is that locating retail stores in
different countries would suffer from price, exchange rate and probably sale fluctuation since
political and socio-economic situations of places markedly differ. For instance, Zara could be
assumed as budget fashion in Europe or Americas however in Asian countries like Vietnam,
Zara is somewhere less than luxury brand but more than inexpensive fashion according to
Vietnamese’ average disposable income and purchasing behaviors, which affect revenue and
sales target (Vietnam Investment Review, 2018). Moreover, Zara should be aware of intellectual
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property risk when seeking outsourcers overseas or developing foreign markets since products,
including exclusive items can be easily copied due to poor local intellectual protection law.
Finally, though Zara’s strategy does not penetrate to inventory and warehousing, the business
might still struggle with inventory risks since demand and supply uncertainty is sometimes
inevitable which leads to high rate of product obsolescence, decreased product values, forced
markdown and other inventory holding costs. The aforementioned risks, if not controlled
properly, will produce painful outcomes and add in the total costs of the internationalized supply
chain.
Question 4
Buyer-supplier relationship is believed to be central to the success or failure of supply chain
management. Endorsing the importance of inter-organizational affair, Chen, et al 2004 (cited in
Ambrose, el al, 2010) claimed that “strategic relationships with critical suppliers must be
understood in order to maximize the value creation in the supply chain”. Zara is among the fast
fashion businesses in the industry that both have manufacturing facilities and network with
suppliers mostly locating in partially industrialized countries (Tokatli, 2007). Zara’s suppliers
vary from raw material suppliers to subsidiaries (such as subcontract manufacturers). It is
reported that “today Zara stores are full of garments made in India, Pakistan, Bangladesh, Sri
Lanka and Indonesia”, and “the supply chains of Zara also include Morocco, Bulgaria, Lithuania
and Turkey” where intricately high-quality garments can be manufactured with the required
flexibility and at high speeds (ibid). For Zara to become such a powerful leader in the fast
fashion industry, maintaining and developing harmonious relationship with its partners must be
among the toughest and complicated tasks. Several suggestions about how to develop
appropriate partnership approach which could help Zara to “achieve a seamless stream of
products to satisfy customers and provide a good profit for chain members”, will be elaborated
hereafter (Ellis, 2011, p.66).
First, the business must concern about the six key elements when it attempts to manage
successful relationship with suppliers (ibid, p.69-74). Zara is advised to adopt long-term
perspective and inspire trust with its suppliers especially those who are profitable over time, by
successful cooperation, professionalism, reliable and beneficial contracts, and sometimes social
interactions of individuals between firms. The company then must define the commitment plan
to parties based on the expected level of collaboration. For example, Zara can claim some
suppliers who share affinity and loyalty to the company, as members or partners and develop
loyalty incentives plan; while consider those who have positive work experiences with the
company for few times but not too active, as lower levels so that Zara can be flexible with
alternative options for next times.

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Figure 4.1. Key issues in B2B relationship marketing (Ellis, 2011, p.69)

Figure 4.2. A relationship ladder of loyalty (ibid, p.71)

Second, Zara is suggested to understand five stages in the implementation of customer
relationship management (CRM) when dealing with its suppliers: customer portfolio analysis –
drawing the potential partners; customer intimacy – exploring potential partners’ profiles;
network development – manage interrelated relationships that contribute to value co-creation;
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value proposition development – identifying sources of values to meet and exceed mutual
expectation; and manage the customer life cycle – processing partners’ acquisition (ibid, p.77-
78). These stages not only help Zara to understand deeply about those who is potentially joining
its global supply chain but also develop a logistical and consistent strategy for the business to
deal with a large pool of suppliers and minimize chain members’ vulnerability.

Figure 4.3. The CRM value chain (ibid, p.78)

Prosperous partnership is considerably tough to achieve and requires complicated process of
identifying potential partners and classifying them into different categories for different
cooperation strategy. As a result, Zara should develop a proper relationship management plan of
its suppliers by understanding thoroughly the key elements of relationship marketing that the
business goes forwards as well as critical CRM stages to evaluate the partnership possibilities.
Word count: 2194

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