Professional Documents
Culture Documents
Supply Chain Management of ZARA
Supply Chain Management of ZARA
Supply Chain Management of ZARA
Management
Table of Contents
1. Introduction....................................................................................................2
2. Supply Chain Model........................................................................................3
2.1 Design and order administration................................................................4-6
2.2 Sourcing and Manufacturing.....................................................................6-9
2.2.1 Suppliers of Zara............................................................................9-11
2.3 Distribution................................................................................................11-13
2.4 Retailing.....................................................................................................14
2.5 Merchandising............................................................................................15
2.6 Store Operations.........................................................................................15
2.7 Contracts......................................................................................................15-16
3. Cultural Aspects.................................................................................................17
3.1 Cultural comparison between countries.......................................................18-20
3.2 Cultural challenges.......................................................................................21
3.3 Key policies for senior management and leadership....................................22
4. Unethical Risk Management in Supply Chain...................................................23
4.1 Supply Chain ethics......................................................................................23
4.2 Unethical activities in supply chain management.........................................23
4.3 Tools for unethical risk management in supply chain...................................24-26
5. References............................................................................................................27
1. Introduction
Supply chain is defined as the global network used to deliver products and services from raw
materials to end customers through an engineered flow of information, physical distribution
and cash. Supply Chain Management encompasses the planning and management of all the
activities involved in designing, sourcing and manufacturing, distribution, retailing and
logistics. It also includes coordination and collaboration with channel partners which can be
suppliers, intermediaries, third party service providers and customers (Ayers).
Zara is a Spanish clothing brand based in Arteixo, Glacia owned by a Spanish tycoon
Amancio Ortego Gaona. Zara is a flagship chain store of Inditex Group which is the world’s
largest apparel retailer. The business model of ZARA is characterized be a high degree of
vertical integration as compared to models developed by international competitors. The
vertical integrated business model include all the phases of fashion process: Design,
manufacture, logistics, distribution to its owned stores. The key to this model is ability to
deliver products to customer as per their desire in shortest span of time. Time is the main
factor that is been considered as compare to the production cost in ZARA. Vertical
integration shortens the turnaround times and achieves greater flexibility thereby reducing the
stock inventory to minimum and hence reducing the fashion risk to greatest possible extent.
The best feature of ZARA supply chain management is that it takes maximum five to six
weeks to deliver the product to the customers as compare to its competitors which deliver the
final product in five to six months (Garcia).
The total brand value of ZARA is $9.4 billion as of May 2015 and the revenue generated is
around $14.8 billion.
Zara has 2000 stores strategically located in 88 countries around the world. It becomes
challenging for such a firm to supply the orders as per the latest demand. Although Zara uses
its flexible business model in order to adapt to new changes as per the season and thereby
delivering the best output to the consumers as per their desires. Specific retail locations are
selected after an extensive market research to ensure that the target market segments by
ZARA is of sufficient size in that particular locality to render the store financially viable.
Moreover ZARA always tries to locate its stores in most up market with high traffic and
prestigious locations. These prime locations gives the opportunities to the customers to
browse the stores as and when they are going back from work.
The supply chain management of ZARA is divided into four categories as shown below:-
Information Flow
Sourcing &
Manufacturing
Distribution
Retailing
Zara designs all its products. It has a “commercial team” which consists of designers, market
specialists, and buyers. All of them are involved in detailed designing of the products where
the designers are the key players. Almost 40,000 products are designed every year out of
which 10,000 are selected for production.
The teams work on both next season’s design and simultaneously updating the current
season’s design in order to maintain a competitive edge. There is dynamic atmosphere among
the designers and design inspiration is from global sources which includes catwalk,
magazines, trade fairs, discotheques etc. Zara creates two basic collection each year- one in
fall/winter, other in spring/summer season. The designers take around nine months before the
start of season to make initial sketches. After the sketches are done, the sketches are redrawn
using Computer Aided Design (CAD) and further adjustments are done in order to find the
better matching of weaves, textures and colours. Later, the fabric and other components are
finalised by the designers. Simultaneously the price of the product is determined at which it
will be sold in future. The samples are presented in front of sourcing and product
development unit for selection process. The sourcing unit identifies the production
requirement and decides whether the item will be insourced and outsourced.
Based on this, the sourcing unit allocates a timeline to ensure that initial collection arrives
before the start of selling season.
The process of adapting to the changing trends and differences across market is more
revolutionary in order to find the demand of customers. The demand of target customers who
are very young and fashion conscious city dwellers plays an important role. Thus frequent
conversations with store managers becomes important to capture the sales data in IT system.
Various other sources of information includes TV, internet, university campus, film industry,
and even Zara’s fashion conscious staff. Market specialist plays an important role in linking
the designers and stores. Several dozens of items are designed each day but only one third of
the items goes into production. Due to time constraint, very limited volumes of items are
prepared and presented in key stores to determine customer response. If the customer
response is unambiguously positive then those items are produced on large scale.
Market specialist are in constant contact with the store managers through phones discussing
the sales order, new lines and other matters. The store managers are equally in contact with
Market specialist and thereby rely heavily on these discussions before placing the final order.
Thus the failure rate is supposed to be 1% compared with an average of 10% in this sector.
Overall, the responsibility of the design team is to track customer preferences and use sales
information along with other factors for a detailed analysis of product life cycle. Based on
this analysis the orders are repeated and new designs are given to internal and external
suppliers. Thereby the design teams with market specialists bridge the merchandising and
back end production process (Kasra Ferdows).
Zara manufacture approximately 50% of its product in its own store in Spain but uses
external suppliers for all its sewing operations. Zara sources fabrics, threads and other
components from external supplier with help of purchasing offices in Barcelona, Hong Kong
along with sourcing personal in headquarters located at Arteixo, Spain. About one half of the
purchased fabric is not dyed in order to provide latest season fashion with maximum
flexibility, thereby reducing the waste cost. Comditel, a 100% owned subsidiary of Inditex
deals with number of external suppliers of fabric and other components. Comditel deals with
dyeing, patterning and finishing undyed fabric.
Due to the vertical integration of Zara, it makes around 40% of its own fabric and purses rest
of the dyes from its own subsidiary. After cutting and dyeing, the items are stitched with help
of many local cooperatives. Since Zara manufactures around 60% of its own product, hence it
is more flexible in variety, amount and frequency of new style that are produced. Fifty
percent of the items that are sold by Zara are being manufactured in Spain, 28 % in Europe,
and 24% in Asia and rest of the world. Zara has a global distribution centre that functions as
mentioned below:
There is more risk involved in most fashionable item hence these type of items are produced
on small scale and if the customer response is positive then these items are reordered
depending upon the demand. The items that are price sensitive rather than time sensitive are
been outsources to Asia as the manufacturing cost in Europe is 15-20% higher as compare to
Asia. Zara has the ability to create rapid product turnover due to limited stock production and
controlled inventory. This creates opportunities in retail stores of Zara.
The quick response system of Zara is unique which consists of human resources and
Information technology. Zara focuses on ultimate customers and emphasizes on the use of
quick backward vertical integration rather than manufacturing efficiencies. It becomes crucial
for Zara to speed up the information flow from consumer desires to apparel designers. The
combination of vertical integration, technology-orchestrated coordination of suppliers, fined
tuned logistics and just in time manufacturing makes Zara so much competitive.
Inventory optimization helps the firm determine the exact requirement of items that needs to
be delivered twice a week and how much stock needs to kept to fulfil the requirement of
retail stores. The average time taken by Zara to implement an idea into a final product is
maximum 15 days as compare to other firms which takes four to five months. Zara is twelve
times faster than its competitors in delivering a product. Generally, there is a lead time of
about four to five weeks for new garments and two weeks to restock. In this period, Zara is
able to find the response of fashion items that are selling well and items that are to be
discontinued.
The procedure of design and procurement starts five to six months prior to the selling season
in order to find the requirement of approximately 65% of the fabric needs, rest depends on
the latest trends of market. Zara manufactures about 15-20% of the items before the season in
order to check the response of customers towards the newly designed items, it later
manufactures 50-60% at start of season and rest is manufactured in the season. The
manufacturing of the items is done is such a way that customer inputs are received at all
stages in order to determine the items produced are according to the expectations of the
fashion diva’s.
Zara always keeps the customers priority first and always delivers as per the below strategy:-
ZARA
SCM Focus Speed
Target Customers Young Women
Products Fashion conscious item
Manufacture System Small quantity batch production
Outsourcing Vertical Integration
(Design-Manufacture-Sales
R&D Strategy Trendy designs
Inventory Control Low inventory, short implementation
cycle
The production commitment of the company is different from other apparel industries. The
inventory of Zara is regulated and the items are been revealed on different stages as per
modified designs to maintain curiosity among the customers and not unlike other industries
where the designs are revealed in one stage and the same stock is repeated throughout the
season , thereby creating monotony among customers.
Since Zara has a very wide network across the world, hence delivery of raw materials
becomes crucial within the define timeperiod. In order to deliver the raw materials on time,
the transport logistics should be strong and reliable. Zara makes sure the order of raw
material is placed before start of season in order to avoid any last minute rush. Moreover,
Zara has a very strong and flexible transport system that ensures timely delivery of raw
materials. Also, majority of the fabric suppliers are based in Europe and Spain, hence the
delivery of raw materials is speedy. The raw materials that have cost constraint and no money
constraint are usually delivered from across the world mainly HongKong and rest part of
Asia.
2.3 Distribution
Distribution System
Zara has four main warehouses in Spain that receive shipments of finished clothes from
internal and external suppliers across Europe and different parts of world. These finished
items are then directed to Zara store in the world twice a week during regular periods and
twice during sale seasons. New models of items are incorporated with each delivery for
constant refreshing stock maintenance in stores. The products are inspected in order to check
if there are any defects in the stock that has to be delivered, after proper inspection the stock
is immediately shipped. There is a rule in Zara that the stock will not be kept on hold in
warehouses for longer period. As a result the items are shipped as soon as the stock arrives
from various suppliers after inspection. In order to increase the delivery speed, the shipments
are scheduled by time zones and the stock is shipped either through land or air. The retail
stores that are located closeby Spain recieves the stock through land transport. Rest the
shippment is done through air across the world for speedy delivery.
Leon 40.000 sq mt
Madrid 160.000 sq mt
Zaragoza 125.000 sq mt
The software of logistic system is designed by the company’s own team, hence it reduces the
time between receiving the order at distribution center to the delivery of order in stores. On
an average it takes 24 hours to deliver the order within Europe and 48 hours for order
delivery in America or Asia. The distribution center moves around 2.5 million items per
week. Trucks serve closer locations like Europe and chartered cargo flights serve destinations
that are far from central distribution center.
2.4 Retailing
The aim of Zara is always to offer fresh newly designed style garments and acessories like
bags, jewelry, scarves, shoes at relatively low prices in order to draw attention of fashion
divas so that these customers become regular. Zara focuses on backward vertical integration
instead of manufacturing efficiencies to determine the next order of customers. As the
inventories are strictly control, hence Zara ensures that backward vertical integration is been
tracked carefully so that the following orders can be delivered on time with new designs and
latest fashion inventory. The merchandising and store operations help in achieving the goal
for the firm. The deadlines to order items are very strict and are been followed across the
world. If any store misses the deadline then it has to wait for the next upcoming deadline.
Orders have to be placed before 3 PM on Wednesday and 6 PM on Saturday in Spain and
southern part of Europe while in rest of the world orders needs to be placed by 3PM on
Tuesday and 6 PM on Friday. The orders are closely tracked through centralized IT system
that helps in maintaing the track record of incoming orders across the globe.
2.5 Merchandising
The merchandising policies of Zara’s product focus on high fashion content, changing
product lines and reasonable physical quality. Product lines are divided in three main
categories – Women’s wear, Men’s wear and children’s line. Women’s line is segmented in
three set of offerings price, fashion content and age targets. Since Zara has zero advertising
policy hence the expenses saved in zero advertising is utilised in international expansion of
the market making it more economical. This signifies Zara mainly relies on its store to project
the image of clothing. This is the reason why Zara acquires global prime locations acroos the
world. There are special departments in Zara that do an extensive reasearch in finding the
prime locations where Zara stores will be made.
Sale is not the end of process rather it’s restart as the store provide feedback to the design
teams about the trends. Store layouts are spaciously designed so that the customers can easily
explore the options available and share their feedbacks to the store manager. The store
manager constantly updates the design teams about the customer feedbacks and accordingly
the designers start working on the updated trends in order to prepare for the next assignment.
Customer feedback are of utmost importance to the store managers to find the exact
requirement of customers so that the next order sales increases by providing the exact item
that customer requires.
2.7 Contracts
A voluntary, deliberate and legally binding agreement between two or more companies is
called a contract. Contracts not only helps in building trust between two parties but also
influence decisions regarding Plan Procurement Management process. The assests that
influence the Plan procurement management process in the organisation are :-
Formal procurement, policies and guidelines.
Management system considered in developing procurement plan and selecting
contractual relationships that will be used among the company and suppliers.
Established mutli-tier supplier system of prequalified suppliers based on experience.
I. Fixed Price Contracts: In this category, the total price of a product is fixed. Fixed
price contracts includes financial incentives for achieving or exceeding project
objectives like delivery dates, exceptionally well designed product in limited
deadlines, or anything that can be quantified and measured. In case of any financial
damages the seller has to take full charge of the damages. Fixed price contracts are
further classified into three categories –
Firm fixed Price Contracts (FFP) : This type of contract is mainly possessed
by the buyer. In this contract the product cost is defined and will not change
until the scope of work changes. Any increase in the cost due to poor
performance is the responsibility of the seller. Under FFP contract, the buyer
should clearly specify the products that are to be procured or else increase in
cost will be the responsibility of buyer.
Fixed Price Incentive Fee Contracts (FPIF) : This price agreement gives
flexibility to the buyer and seller that allows performance deviation with
financial incentives. Financial incentives incorporates cost schedule . The final
contract price is determined after the delivery of product based on the
performance of seller.
II. Cost- reimbursable contracts: This category involves payments to the seller for all
the actual cost that have been incured while completing the work along with seller
profit. Cost – reimbursable contracts has three categories –
Cost Plus Fixed Fee Contracts (CPFF) : It is a fixed cost contract where the
seller gets the calculated cost for completed work. In this contract the fee does
not chnages until there is change in project scope.
Cost Plus Incentive Fee Contracts (CPIF) : In this contract the seller
recieves predetermined incentive fees based upon performance achievement.
If the final cost of the project is lesser or greater than the estimated project
cost then in that case the buyer and seller share costs based on pre-negotiated
cost sharing formula.
Cost Plus Award Fee Contracts (CPAF) : This cost is based on seller
performance and fee is determined by buyer based on the performance and is
generally not subject to appeals.
III. Time and Material Contracts: These contracts are mixture of cost – reimbursable
and fixed price contracts. Time and material contracts are used for staff augmentation,
experts acquistion, etc.
3. Cultural Aspects
The understanding of cultural aspects becomes crucial while doing business across the
globe. The cultural differences between the nations affects the business
communication which leads to failure of the company in that particular nation.
Sometimes the companies may loose business because of difference in understanding
the cultural requirements across the borders. The cultural classification system
designed by Geert Hofstede helps in understanding the dynamics of organisation
across national boundaries. The classification system consists of six dynamics:-
It expresses the degree to which the gender roles in an organisation are distinct
and adhered to within a society
A society that allows free gratification basic and natural human drives to enjoy
life and have fun. It restrains strict social norms that hinders the social life of
the society.
Society has to maintain links with its own past while dealing with present and
future challenges. In business terms the dimensions are referred as Normative
versus pragmatic (Hofstede).
Zara originated from Spain which has a hierarchical society. The people in
Spain accepts hierarchical order where everyone has a space and nobody
S needs further justification. Spain has a collectivist dimension where people
work together towards achieving an objective. This helps Zara to work with
P many non-European countries who follow the same dimension. Excessive
competitiveness is not a part of Spain dimension and people work in harmony.
A Higher Management authorities consult their subordinates to know their
opinions and make a collective decision. Spain is a country of rules where
I there is rules for everything. This results to a lot of stress, thereby
confrontation is avoided that can cause further tension and stressful
N environment. Spain is a normative country where people like to live in the
moment. People like quick results without any delays. Spain is not an
indulgent country.
Zara stores in India needs to take into account different perspective while dealing with
I indian market. India scores high on power distance which clearly indicates ther is high
appreciation for hierarchy and top down structure in society and organisations in
N India. India is a society with both individual and collective dimension. In
Masculanity, India is male dominated society where major leadership roles related to
D power and success are been occupied by males in industry and females occupy roles
that are related to less strategic and related to quality of life. In India, people have
I medium low preference for uncertainity avoidance. India has a long term pragmatic
culture where long term plans are prefered and people always plan for future. India
A has a restraint dimension with high tendency to cynicism and pessimism.
Gender: In countries like India where major leadership and powerful roles are
dominated by males and females look after the less strategic roles. In such
scenarios the organisation has to study the masculinity of the country and then
accordingly perform supply chain management functions for an effective
outcome.
Clothing size: Zara designs slim fit clothes where the size choices are limited.
In countries like US, the limited size becomes an issue hence the company has
to change the few manufacturing processes as per the needs and requirements
of the country. More size availability is required in order to increase the sales
output.
I. Financial and Accounting Policies: It provides guidelines about where the capital is
coming from, how the capital will be used and how recurring needs will be met.
Accounting policies deals with questions related to inventories, expenses and cost.
These policies can make a huge difference in success and failure of the organisation.
Capital: Long term versus short term capital to finance business activities.
Lease or Buy: Policy related to lease certain classes of assets will change the
nature of need for funds over time and nature of balance sheet.
Investment Risk: Financial policies are designed while evaluating the
proposal for investment in certain project. It measures the financial risk
involved in the project before investing.
Use of Assets: Specific policies target current assets and cash flows that are
needed for inventories.
II. Marketing Policies: It uses the competitive tactics in marketing mixture. Specifically
how will price promote, distribute, quality of product.
Products and Market
Distribution and Promotion
Price
III. Product Operations Management Policies: It includes issues like can business be
handled with present facilities and number of shifts, firm’s inventory safety level,
level of productivity and costs etc.
Capacity and utilisation
Location of facilities
Processes
Equipment and maintenance
Sourcing
V. Personnel, Legal and Public Relations policies: It includes standards and methods
used for promotion, recruitment through advertising or personal contact, adequate
work force, types of specialists required, payment policies, legal policies etc.
Personnel
Legal Issues
VI. Integrating Policies: It ensures there is internal consistency in policies developed for
line and staff. It is related to assessment of strength and weakness as they are related
to development of competitive advantage.
A system of moral principle where human actions or proposals are judged right or
wrong is defined as ethic.
Code of ethics is a document that represents values, how professionals are supposed
to approach problems.
Relationship Orientation
Channel Orientation
Completion Orientation
Environmental Orientation
Bias Attitude
Allowing only certain suppliers to bid.
Giving preference to suppliers.
Offering gifts
Allowing suppliers to bid after closing date.
Unethical Behaviour
Bribery
Misleading the other party purposefully.
Asking other party information about the competitors.
The ISM standards are used to identify the ethical practices that govern the supply
chain management of the organisation. The professionals involved in supply chain
must abide by these code of ethics in order to avoid unethical behaviour towards the
organisation. The ISM standards are as follows:-
Impropriety
Prevents the intent of unethical conduct in relationship, communication and
actions. Guidelines to implement impropriety
Maintenance of business professionalism in all communication that
includes social media.
Identify situations that can have negative impact on business
relationships.
Discuss potential impropriety with management and take
appropriate action.
Avoid actions that could lead to impropriety in organisation.
Avoid discussing personal matters.
Conflict of Interest
Ensures that personal business and other activities do not conflict with lawful
interests of your employer. Guidelines to avoid and manage conflicts:-
Potential Conflicts: Discuss the conflicts of interest with management
and reassign responsibilities.
Guidance on Conflicts: Notify the person under whose guidance the
responsibilities were allocated.
Conflict of Interest Statement: The employer must review conflict of
interest with its employees to ensure the conflicts are resolved before it
becomes a major issue.
Inside Information: The inside information should not be used for
personal gains.
Outside Information: Never use your position as an employee to
detriment your employer or its reputation.
Secondary Business/ Employment: Do not harm the interests of your
employer by engaging yourself in secondary business.
Influence
Any behaviour or action that influence supply chain management decisions
should be avoided. Guidelines to avoid matter of influence
Strictly follow employer policies in supply chain management
professionalism.
Avoid in gift giving activities that influence business decisions of
supply chain.
Avoid situations where relationships can have negative impact on
business decisions.
The negative impact of political matters in internal and external forces
of organisation can be mitigated by adopting organisational policies
based on ethical principles and standards.
Follow organisation media policies.
Reciprocity
Avoid improper reciprocal agreements.
Recommended guidelines
Understand suppliers that are also customer.
Apply and obtain ethical, legal guidance if reciprocity arises.
Recognise reciprocal relationships which can be illegal in some
countries.
Professional Competence
Develop skills, expand knowledge and conduct business that demonstrate
competence and promote supply chain management profession.
Recommended guidelines
Adopt and promote ethical standards
Support and participate in ethical trainings.
Mentor and teach those who want to learn.
Active involvement in supply chain management
Earn and maintain Certified Professional in Supply Management
(CPSM) and other professional certificates.
(Derry 2014)
References
Ayers, J. B. Retail Supply Chain Management
Derry, T. (2014). "Principle and Standards of Ethical Supply Management Conduct with guidelines."
Group, I. (2013). "Transparency is the fundamental principle that inspires inditex in its relations with
its stakeholders."
Business Policy and Strategy Management by William F.Glueck & Lawerence R. Jauch