ZARA- SUPPLY CHAIN

OPERATIONALIZATIO
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Table of Contents
1. Introduction...............................................................................................................2
2. Theoretical Framework..............................................................................................3
3. Research Methodology...............................................................................................6
4. Findings......................................................................................................................7
1. What are pros and cons of centralized and decentralized supply chains?............................7
2. What are GRI standards concerning supply chain operations?.............................................8
3. What is China’s current demand for fast-fashion clothing?..................................................9
5. Conclusions and Recommendations..........................................................................10
Recommendations.....................................................................................................................11

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 1. Introduction

Founded in 1975, ZARA is the first brand launched in the INDITEX group and has become the
pioneer of fast fashion, reaching the status of the biggest retailer of clothes worldwide in
2016 [ CITATION Kav17 \l 1033 ].
The first ZARA store, owned by Amancio Ortega opened in A Coruna, Spain. This was the
start of Zara’s fast and large expansion. By the mid 80’s, ZARA started expanding in Spain
and by 1990 reached US and Paris. From a family owned small business, the brand
developed into a global trend. In 2009, ZARA reached China.
Zara’s designs are inspired by the latest catwalks and trends, making high fashion available
to the everyday consumer. This is also how the term fast fashion was created, symbolizing
the quick availability of fashion trends from high brands to the mass consumers, while also
having competitive prices [ CITATION Ken19 \l 1033 ].

The secret behind ZARA’s success lies in the company’s way of operating and their
centralized supply chain that together with their scarcity of products created the need in the
eyes of the customers. A centralized supply chain concentrates the decision-making
authority in one place, in order to ensure control and organization throughout the
operational chain [ CITATION Gia18 \l 1033 ].
Moreover, the company relies on a very fast lead time between production and in-store
display of only 3 weeks. In addition to the fast lead time, ZARA manufactures only a fixed
number of products with a certain design, making the items more desirable in the minds of
consumers, as it is a “buy now or miss out” opportunity and thus creates an urgency of
purchase [ CITATION Kav17 \l 1033 ].

Problem definition
The unique supply chain approach was the strategy that propelled ZARA to the top. As they
grew to become a worldwide success, their supply chain remained vertically integrated. The
vertical integration helps organizations control the operations throughout the supply chain
and manage activities more closely [ CITATION UKE17 \l 1033 ].
Instead of using a “push” approach, ZARA relied on the opposite “pull” technique, extracting
the trends from the runway and immediately introducing them on the shelves of the stores.
All the garments were manufactured in Spain or in countries near Spain like Turkey,
Morocco and Portugal[CITATION ZAR20 \l 1033 ].
However, as the company grew and reached farther locations, 40% of ZARA’s manufacturing
was outsourced to low wage factories in India, Bangladesh, China etc. creating so called
sourcing clusters, strategically dispatched for precise locations. A problem that arose with
such sourcing clusters was the subcontracting[ CITATION Kav17 \l 1033 ].

After the manufacturing was ready, the batches were sent back to Spain, checked and only
after that did the products make their debut on the shelves. This strategy rose high costs for
ZARA, as the batches were sent via air freight. Yet, the strategy was still favorable since it
allowed the company to replace the inventories every 3 weeks.

Management issue
Due to the rise in global demand for clothes and fast-fashion items, ZARA is facing a difficult
challenge: although the centralized supply chain bought the company its success, the costs

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are getting too expensive for ZARA to continue keeping up with the demand, as mentioned
in the case[ CITATION AKa17 \l 1033 ]. Moreover, deciding to opt out of the centralized
supply chain strategy that they have been relying on until now, will split Zara into having
“two brains” [ CITATION AKa17 \l 1033 ], changing the company’s structure completely.
Therefore, some changes need to be made to Zara’s supply chain in order to improve the
effectiveness in Asia.

Main research objective and research question

The research objective of this report is to analyze different supply chain models in order to
determine how ZARA can effectively improve the centralized supply chain in the Chinese
market.

The main research question, as derived from the research objective is:
How can ZARA improve its centralized and vertically integrated supply chain to better
target Chinese market?

For a more targeted research analysis, sub-questions have been developed:

1. What are pros and cons of centralized and decentralized supply chains?
2. What are GRI standards concerning supply chain operations?
3. What is China’s current demand for fast-fashion clothing?

In the next chapter, the framework used for analysis will be presented, along with the
reason why it has been chosen.

2. Theoretical Framework

In this chapter, the two frameworks used for the research analysis will be described and
analyzed, in order to understand the current situation of Zara and to help investigate a
possible solution to the main research question.

Sub Question 1: “What are pros and cons of centralized and decentralized supply chains?”

A supply chain is a network of collaborators (suppliers, distributors and intermediaries) that

have as ultimate goal the creation of the perfect order for the customer. In a centralized
supply chain, the decisions are taken by a superior authority which delegates the next steps.
The decentralized approach refers to a division of the decision-making authority throughout
different locations/individuals [ CITATION Bea98 \l 1033 ].

The centralized and decentralized supply chain has been investigated by Benita
Beamon[CITATION Bea98 \n \t \l 1033 ] in the International Journal of Production
Economics.

The definitions are relevant for understanding the supply chain of Zara and analyzing which
factors have an impact on the company’s distribution. Therefore, it will be used to answer
the first sub-question and will give information about the advantages and disadvantages of
both supply chain approaches.

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Critiques [CITATION Sch15 \n \t \l 1033 ] mention that a centralized supply chain raises
costs for the business and hinders a smooth operationalization, making it more difficult for
the shipment to travel from A to B.

A decentralized supply chain may result in “loss of efficiency”, when compared to the
centralized planning[ CITATION Sah11 \l 1033 ].

The decentralized supply chain approach can present disruptions throughout the different
locations which can cause a temporary block of operations. However, when demand is
deterministic (meaning when inventories can be computed with certainty), a decentralized
supply chain is preferred because it would reduce cost variance. Moreover, if demand is
stochastic (meaning the demand is not known with certainty) the decentralization would
also be preferred because although disruptions might devastate some inventory or supply
chain operations, it would not destroy them in a single spot, as it would if the supply chain
would have been centralized. This would make it easier for the company to recover from the
loss [ CITATION Sch15 \l 1033 ].
Therefore, the decentralized supply chain is optimal for both scenarios.

The articles present pros and cons of centralized and decentralized supply chain. Although
some researchers suggest that a decentralized approach is more efficient when handling a
deterministic supply chain, this only strengthens the need for this research and for Zara’s
supply chain optimization in order to function at maximum capacity.

Sub-Question 2: What are GRI standards concerning supply chain operations?

GRI standards are criteria that check sustainability practices of companies and help
understand and communicate the impact on the planet. These standards are formulated for
each field of business (Economic, Environmental, Social etc.) but this report will only focus
on the Supply Chain GRI Standards, as these are relevant for answering the research
question [CITATION GRI20 \l 1033 ].

The principles have been developed in 1997 by the non-profit organization Coalition for
Environmentally Responsible Economics (CERES) and launched the standards in
2016[ CITATION GRI20 \l 1033 ].
The purpose of researching the GRI criteria is to place Zara accordingly on the standards
scale and to investigate how it can improve its processes in order to improve the centralized
supply chain, while complying with set sustainability standards.

GRI is focused only on taking the most important information from the supply chain and
reporting it, whereas CSR (Corporate Social Responsibility) focuses on a more in-depth
analysis.

However, the GRI is a most appropriate framework for this research, as it deals with
problems of sub-contracting, which Zara is facing. Moreover, the GRI standards point out
that the actions of one enterprise can “affect the ability of another to fulfill its social and
environmental responsibilities”[ CITATION Mar10 \l 1033 ] .

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 Also, the GRI clearly states the company’s responsibility and involvement regarding the
buyer company’s responsibility towards ethical practices. Therefore, it becomes relevant for
the given situation when analyzing Zara’s problem with sub-contracting [ CITATION Mar10 \l
1033 ].
Year Name of Name of source Brief Summary Application in my
Researcher own research
Origina 1998 Benita M. International The article explains the Investigate the
l Source Beamon Journal of components of the supply chain
(model Production multi-stage supply operations and the
1)
Economics chain and investigates different pros and
sources and theories cons of supply chain
that support the good models
functionality of it.
Source Georgios Supply Chain The article debates the
1 Saharidis Optimization: scheduling and
Centralized vs planning processes in
Decentralized the centralized and
Planning and decentralized supply
Scheduling chain models
Source 2015 Amanda J. Centralization The journal article The article suggests
2 Schmitt, Siyuan versus investigates centralized that decentralized
Anthony Sun, decentralization: and decentralized supply chain would
Lawrence V. Risk pooling, risk supply chain activities be optimal for a
Snyder, Zuo-Jun diversification, when disruptions are company that faces
Max Shen and supply chain present disruptions and
disruptions risks.

Source 2011 Georgios K.D. Supply Chain The book section The conclusion
3 Saharidis Optimization: researches the effects reached is that
Centralized vs of centralized and centralized supply
Decentralized decentralized planning chain proves more
Planning and in supply chains efficiency, which
Scheduling supports Zara’s
choice.

Year Name of Name of source Brief Summary Application in my

Researcher own research
Origina 1997 Coalition for Global Report GRI standards are usedImportant to
l Source Environmentall Index to measure aunderstand how
(model y Responsible company’s sustainable sustainable Zara’s
2)
Economics performance in varioussupply chain is, also
(CERES) fields tackling the
problem of
subcontracting
Source 2010 Radu Mares The Limits of The article explains Helps understand
1 Supply Chain different standards and and present

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 Responsibility: A frameworks and limitations of GRI
Critical Analysis applies these to the standards but also
of Corporate supply chain reinforces why they
Responsibility responsibility are fitting for the
Instruments current Zara
research

In conclusion, the presented theories and definitions will serve as guidelines and indicators
for answering the sub-research questions and ultimately reaching a logical and researched
answer to the main question.

The next chapter will explain the research methodology used and how the findings have
been structured.

3. Research Methodology

In this chapter, the research process will be explained. The approach used will be desk
research.
Desk research refers to the collection of secondary data, mostly from online, credible
sources, with the goal of providing trustworthy information to answer the main research
question [ CITATION Cam20 \l 1033 ].

Data Collection
As mentioned, above through desk research (secondary sources), journal articles and online
databases will be found and analyzed, as they provide relevant data. For each framework
presented above, two articles will be investigated. Data will be collected from Google
Scholar, with an appropriate age filter, in order to only show data relevant to the actual
situation of Zara (from 2010 until present). Moreover, the databases provided by the
Rotterdam University of Applied Sciences will be searched (MarketLine, Euromonitor
Passport) for relevant demographic and trend factors for answering sub question 3.
The limitations that may appear when using desk research are the time differences between
the journal article publishing date and the actual situation in the world. Journal articles
require more time to be written and during that time, things may change in the industry,
limiting the accuracy of the study.

Data analysis
The database and journal articles will be searched for key terms (“fast fashion”, “trends”,
“China”) and findings that are relevant for the industry (fashion) and that will help answer
the main research question. Moreover, they will target current fashion trends in China
which will help Zara comply to the Asian norms and increase their sales on the Asian market.

Research Credibility
The reliability of the sources will be guaranteed by the source (academic journals and online
databases), the author (specialists in the field researched), by the time published and by the
location of the article online.

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Moreover, the principle of triangulation will be used in order to ensure the credibility of the
study.
Triangulation refers to “validation of data through cross verification from two or more
sources” [ CITATION Hon17 \l 1033 ].

Validity will be ensured by presenting only articles relevant to the research question:
identifying key words for searching and using only logically linked articles.

4. Findings

In this chapter, the findings for each research sub-question will be presented and analyzed.
First, the pros and cons of the vertically integrated supply chain will be discussed and
compares with Zara’s current operations. Then, the GRI standards will be explained and put
into parallel with Zara’s problems of subcontracting, with the goal to find a beneficial
solution for eliminating the risk.
Lastly, Chinese consumer trends related to fashion will be investigated in order to interpret
and predict the Chinese customers’ preference in the buying process, which can affect
Zara’s presence on the Chinese market.

1. What are pros and cons of centralized and decentralized supply chains?

Centralized supply chains imply the full control of the decision-making ability relies in the
hands of one individual. In theory, this high centralization practice proves to be highly
efficient, due to the rapid handling of decisions and fast interdependencies. Also,
centralization resolves possible conflicts between possible decisions (since the decision is
taken by one individual/party) and reduces the probability of unpredicted events that
require fast decisions [ CITATION Gia18 \l 1033 ].
Meanwhile, decentralized supply chains focus on the opposite. The decision-making
process is longer and smore complex, where more input is needed to reach a
consensus[ CITATION UKE17 \l 1033 ].

The centralized approach has worked for Zara in the past decade, as the company has risen
to be a high seller. The benefits are easy to be seen in their rapid expansion and growth and
in their ability to produce clothing fast and to distribute these to the stores, a whole
process that takes only 3 weeks [ CITATION AKa17 \l 1033 ].

However, due to the rapid growth of the company, the centralization technique brings
some risks and difficulties when having to manage multiple geographical areas and take
many decisions fast. Moreover, the vertical integration of the supply chain brings another
risk if not mitigated properly. As mentioned by Felipe Caro in the case, although Zara’s
centralization and vertical integration oppose some risks, changing these strategies would
imply a “different Zara”[ CITATION Ber15 \l 1033 ].

A logical answer to this problem would be to adjust the level of centralization throughout
Zara’s supply chain. While not discarding the centralization approach completely, some

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adjustments can be made to the degree of involvement. This would imply a mix of both
centralized and decentralized supply chain practices, designed to suit Zara’s needs.

According to the article “Centralized vs. decentralized supply chains: The importance of
decision maker’s cognitive ability and resistance to change” [CITATION Gia18 \n \t \l
1033 ], a high degree of centralization would be beneficial when there is a big demand
uncertainty.

Zara’s ability to predict demand has proven to be accurate. In fact, there is more than
accuracy that has contributed to supplying the right demand of Zara’s product: the company
actually creates the demand. As presented in the case [ CITATION AKa17 \l 1033 ], Zara’s
unique approach has been creating a need in the minds of consumers; creating limited
stocks that will not be renewed, Zara has opened a door in the mindset of the customer that
there is a now-or-never situation. This strategy that has been used so far, proves that the
demand predictions are not difficult to be made, since Zara actually creates the desired
demand by providing limited number of items to a specific store.

Therefore, the level of centralization can be adjusted to a level that would better serve
Zara’s purposes and goals, while not splitting the company into “two brains”.

2. What are GRI standards concerning supply chain operations?

The GRI supply chain standards present guidelines and requirements for procurement
practices and supply chain operations. They concentrate on important effects on the
organization, on their activities or on relations with a supplier.
Zara’s concordance with the standards is an important aspect when discussing about the
issue of subcontracting.

Although the issue is not directly related to the centralized decision-making process within
the company and might seem out of Zara’s hands, it is actually quite important when
tacking the company’s rapid development and expansion. If the issue is not dealt with,
major implications will occur which will hold Zara responsible and will decrease the degree
of trustworthiness and transparency that the company faces. This has been seen in the
Rana Plaza incident in the past [ CITATION AKa17 \l 1033 ].

The research will emphasize on the following standards, as these are related to the problem
of subcontracting and will provide useful insight to take a decision to remove the
subcontracting issue.
- GRI 204: Procurement Practices
- Social standards

The GRI 204 describes how the procurement and interaction with suppliers should be
presented in a GRI report, in order to be declared compliant to the standards. It also
explains how the research of all the connections should be made, what do :suppliers”
actually imply, where the suppliers are from, where the budget resides etc. [ CITATION
GRI18 \l 1033 ]

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Researching Zara’s most recent report [CITATION ZAR18 \n \t \l 1033 ], the company
provides a very transparent approach and complies to the given standards. However, since
the company is so developed, it is hard to research every supplier across the entire chain, as
this would mean investigating suppliers of suppliers, etc.

Social standards deal with employment practices, education, equal opportunity, diversity,
child labor prevention, freedom of association etc. [ CITATION GRI181 \l 1033 ]
These standards should pe accredited to all the suppliers that Zara has contact with.

Regarding the issue of subcontracting, the GRI standards (as well as the CSR standards)
provide assurance of safe and ethical practices throughout the supply chain. Therefore, to
minimize the subcontracting problem even more, Zara can take into consideration working
only with suppliers that comply to the same GRI standards as them.

3. What is China’s current demand for fast-fashion clothing?

It is first important to mention that the current demand for fast-fashion clothing is relevant
because it determines Zara’s future sales and contributes to their reputation. If Chinese
consumers are not interested in Zara’s products and services anymore, then the company’s
image will no longer have a great impact on the Chinese market, making all efforts of a
smooth operationalization and supply chain activities renewal in vain.

Although China already has the largest e-commerce market, according to the studies
published by China Internet Watch [CITATION CIW16 \n \t \l 1033 ], the country is
expected to become the world’s largest consumer market too [ CITATION Rah18 \l 1033 ].
Studies have shown that women engage more with the shopping experience, shop more
often and viewed the shopping trips as leisure. However, men are also starting to become
more involved with fashion and improving appearance[ CITATION Rah18 \l 1033 ].
Information and brand research are often conducted through internal sources (e.g.
memory, consumer’s past behaviors etc.) but also external (e.g. acquaintances, friends
etc.). They often rely on external sources of information to base their purchase decision on.
Moreover, younger consumers tend to be more cautious to brand name and trends, while
older consumers evaluate prices and materials. In terms of product evaluation, “fit” and
“comfort” are situated at the top of the list [ CITATION Rah18 \l 1033 ].

As Zara’s main focus is on trends and fast fashion, the target group for the Chinese market
is the young consumer. As shopping is seen as a leisure activity in China, the environment of
a mall and a store is of utmost importance and plays a decisive role in the purchasing habits
of consumers. As for the overall look of the clothing, Chinese consumers do value comfort,
but also rate aesthetic principles as important, when deciding to purchase a
garment[ CITATION Rah18 \l 1033 ].

As a result, Zara fits in great in the need for aesthetically pleasing products and trendy
styles, as the company focuses on bringing runway trends directly to consumers. It is
important to keep in mind, however, that Chinese trends vary greatly from European.

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 5. Conclusions and Recommendations

This report analyzed the problem of Zara’s supply chain operability and researched the ways
in which this could be improved, by ultimately answering the main research question: How
can ZARA improve its centralized and vertically integrated supply chain to better target
Chinese market?

The research methodology used was desk research, based on the collection of secondary
data from trusted sources such as online journals and research databases. Relevant
searching terms (“fast-fashion”, “supply chain operalization” etc.) and filters (relevant years)
have been applied in order to ensure the reliability and credibility of the report. Moreover,
the triangulation principle has been used in order to overcome the limitations.

Sub-question 1: What are pros and cons of centralized and decentralized supply chains?

As the main advantage of centralized supply chain is keeping the decision-making process in
one place, as Zara develops, it becomes harder to maintain this principle. The de-centralized
supply chain approach would, however, split the current firm into two.
Therefore, Zara’s heavily centralized supply chain needs an upgrade in order to cut costs
and become more effective on the Chinese market. While keeping the business centralized
stays at the core of keeping Zara the same company as before [ CITATION AKa17 \l 1033 ],
the level of centralization through the company can be decreased. This way, the important
decisions will still go through the main management of the company, but some freedom of
choice will be granted when dealing with locations extended all over the globe.

Sub-question 2: What are GRI standards concerning supply chain operations?

When arguing the known problem of subcontracting, the GRI standards provide a secure
transaction between Zara and its suppliers. The investigated GRI standards that confirm a
transparent way of working are: GRI 204: Procurement Practices and Social Standards.
This issue can affect Zara’s operability and credibility when not dealt with properly, fact that
will eventually also affect the company’s presence in major countries (including China).
Therefore, it is suggested that Zara investigates their supplier’s accreditation in terms of
labor and employee safety and constantly updates their sustainability practices to inform
the public of their actions.

Sub-question 3: What is China’s current demand for fast-fashion clothing?

The current Chinese demand for fast fashion is important, as it impacts Zara’s future sales
in the region. If these sales are not increased (or at least kept constant), then the upgrade
of the supply chain would have been done needlessly.

When discussing about trend in China, the results show that Zara’s approaches are in line
with the preferred target group of Chinese consumers[ CITATION Rah18 \l 1033 ].
Moreover, Zara’s products match the criteria of the consumers: aesthetic and trendy.
Moreover, as shopping is viewed as a leisure activity, the customer’s visits to the Zara store

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have to be made very pleasing, so customers will return, and Zara would be able to keep its
high status.

Answer to main research question:

In conclusion, to answer the main question, there are several improvements that can
develop Zara’s current situation and structure the centralized supply chain to better target
the Chinese market. Firstly, the degree of centralization needs to be adjusted in order to
secure a smoother operationalization. Secondly, to minimize problems that can happen with
lowering the degree of centralization (such as subcontracting), the company could use the
GRI standards and reporting in order to verify the processes and activity of their suppliers
and implicitly the suppliers’ suppliers.
Next, in order to ensure that the Chinese demand for Zara’s fast fashion products does not
decrease, the company can keep up with trends and offer Chinese consumers the latest
designs.
These actions would ensure the growth of Zara in China, while keeping the company’s
culture and processes almost unchanged. Also, the activities would indorse a sustainable
growth and transparency, two important aspects of any company’s growth and operations.

Recommendations
Sub-question 1: What are pros and cons of centralized and decentralized supply chains?

A recommendation would be, based on studies conducted on the Chinese market

[ CITATION Rah18 \l 1033 ], to employ or work together with Chinese fashion market
specialists in order to certify a smooth communication and plan arrangements from
Location A (Spain) to location B (China). Moreover, trusted parties could be sent to China
regularly to check the manufactured items and confirm the quality of the goods that arrive
in China. This would cut the costs of sending all the garments back to Spain and again to
China. In a such developed business scheme, good organization of activities makes the
difference between success and failure.

Sub-question 2: What are GRI standards concerning supply chain operations?

An effective way of dealing with the issue of subcontracting is to work only with suppliers/
third parties that are also following the GRI standards and that can ensure the safety and
rights of the employees.
Moreover, because of a lower degree of centralization, this measure will safeguard the
quality of the goods but also the safe practices of the third parties, removing the worries
that may arise.

Sub-question 3: What is China’s current demand for fast-fashion clothing?

A recommendation that would improve the impact on Chinese lifestyle would be to work
together with Chinese fashion experts to reveal insights about the demand on the market.
This way, Zara could create the desired garments. Also, an innovative approach would be to
join forces with Chinese designers/ design students or admired fashion media persons in

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order to create a Chinese market targeted collection. This approach would engage with
Chinese consumers, as they would receive personalized items.

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