Friday, October 10, 2014

Exception in Supply Chain Management – ZARA(INDITEX)

Generally, when we speak of supply chain, it always involves the division of various companies in assorted departments at different stages of supply chain. Under certain circumstances, like IKEA, consumers even perform in the supply chain. In addition, the defect of any link would have a ripple effect on the whole supply chain.

However, ZARA survives and thrives in the competitive market through a unique pattern of supply chain management. From 1996 to 2013, Inditex's sales, of which about 80% is from Zara, has increased from 1 billion euros to 16.7 billion euros. And between 2000 and 2006, Inditex achieved sales growth of 30% a year, a net margin of 11%, and a return on average equity of 29%—well ahead of Gap, H&M, or Mango.[1]
Through a responsive supply chain, it only takes ZARA 15 days to manufacture from scratch, which is unprecedented in the fashion industry. Since designers usually spend several months in designing clothing of the next quarter, ZARA’s sales profit could be higher among rivals. Contrary to competitors in apparel industry who are scrambling to adopt outsourcing strategy, Zara keeps almost half of its production to himself. And rather than maximize production capacity like peers, ZARA deliberately keeps some extra capacity; 
 
To unravel the secrets of ZARA’s supply chain management, there are three principles we should pay attention to.

1Establish a closed-loop communication
This "fast" system relies heavily on continuous exchange of information between various parts of the supply chain. Weekly computer communication or telephone conversations prompt each store transfer information in a timely manner to La Coruna, the headquarters of ZARA(INDITEX).
Once the team has selected a prototype for production, the designers will adjust the color and materials via computers. The continuous flow of real-time data alleviates the Bullwhip Effect, avoiding the malignant effect of excessive production. On the other side, small-lot production prompts customers to patronize Zara shops more frequently, so reduce the need for advertising.

2) Keep the whole supply chain in a single rhythm
Zara takes complete control over the supply chain. It is ZARA who is responsible for the design and distribution of all their products, enjoys a low proportion of outsourcing, and possess almost all of the stores.
The control over the supply chain enables ZARA to set speed for products and information, so that the entire supply chain could operate in a fast and predictable rhythm. Take retail stores for instance, store managers order twice a week. Store managers could know exactly when will the goods arrive after the goods have been shipped. After the trucks arrive at the shops, fast-paced still maintain. Since the clothes have already been hung on the racks, you can put them into the stores directly.

3) Use capital to improve the flexibility of supply chain
Zara has invested a lot in production and distribution to improve the response speed of the supply chain so as to satisfy needs in the market.  ZARA always produces complex products while leaves the simple ones outsourced.
On the one hand, many ZARA’s factories only arrange one shift, on the other hand, all the products are concentrated in La Coruna by central distribution center processing. Since plant capacity and processing capacity of the distribution center are all maintained at a low level, it guarantees a quicker response in the season or when sudden demand comes. Meanwhile, thanks to the fast response of plants and distribution center, the working capital is significantly reduced. Under that circumstance, the liberated capital could offset the investment in extra production and processing.

Even though we know that ZARA operates quite well, but does this works for all companies?

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