Sunday, September 21, 2014

ZARA's Strategy:Is it time to move away from Outsourcing in the Fashion Industry?

ZARA has become Spain’s best known fashion brand and the flagship brand of £2.5 billion holding group Inditex. In 40 years since it began retailing clothes, it has emerged as one of the world’s fastest growing manufacturers of affordable fashion clothing. However Zara’s success story lies in its unique break through supply chain strategy by which it has differentiated itself from its competitors.

Today’s consumers are spending less on clothing and more on healthcare, electronics, leisure ,travel etc and they can choose from a wide array of inexpensive products. Thus to capture today’s elusive consumer, clothing giants need to find a breakthrough in the market.
Previously, the design and production process needed long lead times of six months between the design of garment and delivery to retailers which limited the abilities of manufacturers and retailers to satisfy consumer demand. Zara has adopted the new business model which enabled short lead times and restricted the design and distribution process to just 10 to 15 days . The firm chose to follow the strategy of captive outsourcing and developed its own in house team designers which made clothing according to the latest trends.  It has shortened conventional supply chain response from 5-7 month down to 2-2½ months and their customers are eagerly awaiting next week’s new fashion.

 Small and frequent shipments keep product inventories fresh and scarce, forcing customers to frequent the store often to buy the latest fashion clothes before they are sold out. Owing to the twice weekly deliveries of replenishment stock as well as new items, customers constantly return to stores to browse new items. Zara's global average of 17 visits per customer per year is considerably higher than the three visits to its competitors namely H&M, GAP, Banana Republic and Forever 21.

Zara is essentially a vertically integrated retailer as it coordinates all activities from its headquarters in La Curona in Spain which enables ZARA to respond to consumer’s demand of the latest trends.  This is an extra-ordinary strategy at a time when “out-sourcing” is the hottest term in the industry.
Zara’s exerts control during the production process which is a differentiating factor as compared to it’s competitors. New technologies helped Zara adopt best production practices, warehouse procedures and stock count systems. All this helped Zara to keep inventories low

The retail managers are the eyes and ears of the company which provide word of mouth information on customer wants and preferences. Zara as a whole from operational procedures to its office layout is designed to make information flow as effectively as possible. Zara doesn’t have unnecessary layers of bureaucracy which enables it to have a very fast response to fashion and social blunders do not become financial burdens. For example if one or two items do not sell they can be easily replaced by new trends since Zara produces in small quantities and information from store managers is reported back every day. This is quite at odds with relying solely on electronically collected data, an approach used by competitors. A quick turn around on merchandise helps generate cash, reduces inventories and eliminates the need for significant debt

 Poor communication is often the major culprit of bottlenecks. Zara invested in information technology (IT) early on. Their in-house IT is simple and effective. Vendors and suppliers report that people are accessible and answers can be obtained quickly. Internal communication is maximized by housing on one floor, the designers, pattern makers and merchandisers, as well as everyone else involved in getting the product completed.

ZARA produces around 11,000 items, which are a lot of items compared to many competitors, which produce around 2,000-4,000items. The “ZARA concept” was developed in order for consumers to feel value, ZARA works by satisfying the consumers need by shortening the clothing lifecycle. It is an ongoing development where ZARA is constantly analyzing its value chain and trying to attain control on as many sections as possible. As mentioned above, ZARA differs from most apparel retailers because ZARA controls almost every step of its supply chain. 50% of the products ZARA sells are produced in-house, 26% in other countries in Europe and 24% in Asian countries. The most high fashion clothes are made by ZARA in firm-owned factories in Spain, while low-cost basic clothes are outsourced to Asian countries.

Research shows that combining high fashion with rapid production works extremely well to induce sales oriented individual to buy early. In fact, a firm's profits can spike up as much as 350% among this die-hard group.
Fast fashion is not just good for retailers, say the researchers, it's also good for consumers. "From a social point of view, 75% of the time fast fashion leads to greater overall welfare as people get a premier item that they value highly. Because production times are short, they get it when they need it. Plus, there's less overproduction and waste.
Thus Zara tries to maintain control over its entire supply chain rather than outsourcing to China and some other countries where labor is cheap whereas most companies in the fashion industry are firmly entrenched in a business model that involves outsourcing production and distributing products through cheaper, "slow boat" channels. However with the minimum wages increasing and labor becoming more and more expensive in China, will other manufacturers follow Zara’s vertically integrated supply chain?


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