Abstract
Zara has been operating in Europe since the year 1975. This paper includes a study of the strengths and weaknesses of Zara Company supply chain management system. It divides the supply chain process into three distinct phases. It shows how the company has managed to embrace technology to deliver its products to customers in real time.
The paper also contains a comparison between Zara and its main global competitor in the market. The paper concludes by outlining some of the challenges the company is facing as it expands into the Middle East and other regions in the world.
Introduction
Sako (2011) notes that globalisation has led to business organisations spreading all over the world. He continues to outline that global competition and customer demand has also led to the expansion of outlets and branches of these business organisations all over the world. This has made organisations to increase their business muscle and expand their supply chains globally. Therefore, the management of these supply chains is vital to the success of these international organisations.
Supply chain management plays a vital role in managing a company’s key processes of developing, producing, distributing, and selling its products in the region within which it is operating from. The success of supply chain management systems is a critical determinant of an organisation’s success. Therefore, every business organisation should carefully manage its supply chain systems (Simchi-Levi, Kaminsky & Simchi-Levi 2009).
This paper will look into the supply chain system of a global fashion outlet called Zara. Using Zara as a case study the paper will address issues affecting the supply chain management and most importantly, how the company has managed to stand out in the competition. This is given the fact that the fashion industry is a highly competitive one and firms operating therein need to put in place strategic measures for them to survive.
Zara Company: A Brief Profile
According to Mcafee (2011), Zara is a Spanish fast fashion manufacturing and retail company that is popular all over the world. Amancio Ortega and Rosalia Mera founded this company in 1975, with its first store in Coruna, Spain. The first store was successful and this enabled them to open other stores throughout Spain.
With the fast growth of the company, there were changes needed in manufacturing, production, and designs of the products availed to the customers. The company embraced information technology to adapt to these changes in an efficient manner. These enabled the company to expand its international presence.
Currently, it has stores in more than 400 cities in over 73 countries in the world. This particular study is intended to outline the success of the supply chain system adopted by Zara throughout the world with emphasis on Kuwait. This means that as much as the author will look at the experience of other supply chains in other parts of the world, Kuwait will be given special attention.
Zara is a flagship company of the Inditex Group that owns several other companies that are involved in textile, manufacturing, design, and distribution. Inditex Group also owns other brands such as Pull and Bear, Massimo Dutti, Bershka, Oysho, Stradivarius and Uterque. Due to its highly effective business model which is both flexible and innovative, the group has become one of the largest fashion retailers in the world today (Jayaram, Tan & Nachiappan 2010).
Zara produces over 11000 different items annually. This means that the company offers more products than other fashion retail companies in the world. It has a business model of adapting and reacting to changes rather than predicting them through the use of information technology systems.
This has also led the company to transfer fast fashion production to low cost countries, invest more on opening new stores and spend less on advertising (Jayaram et al. 2010). This has largely contributed to the company’s competitiveness in the global market.
Supply Chain Management at Zara
At this juncture, the author will look at the supply chain management adopted by Zara Company in the market today. As already indicated, special attention will be given to the company’s Kuwaiti operations.
Procurement and Distribution
Reduction in the purchasing price is the main driver of the procurement process at Zara in Kuwait. This enables the company to offer its customer’s quality products at a fair market price as compared to the competitors. Unlike many other companies in the industry, Zara procures its raw materials directly from suppliers hence reducing the costs that are incurred through intermediaries (Akcalı & Cetinkaya 2011).
In Kuwait, the distribution centres are located in various geographical areas. The warehouses of the company supply at least 70 per cent of the entire inventory. The centres are subdivided in accordance to the quality and type of items each receives from the manufacturers and other suppliers.
Many of the items have a very high turnover rate of between one and two times a week. The items which are only targeted to the market in Kuwait are packed in pallets. The main duty of the staff at the distribution centres is to ensure a consistent and steady flow of the items coming and leaving the warehouses (Jayaram et al. 2010).
Currently, Zara is using technological innovations such as bar codes, RFID and Magic Wand to manage the distribution centres. Zara employees have the necessary knowledge for analysing the levels of inventory. The bins and shelves are labelled using bar codes to make it easier for them to locate items.
The information gathered by the employees is then sent to the main server at the distribution centres. All members of staff in the company’s branch in Kuwait can then access the information about the storage and shipping of products. This saves on a lot of time that would have otherwise been spent on paperwork.
It also makes human resource management easier because the supervisors can get information on what every employee on the ground is up to. Ultimately, this increases the level of customer satisfaction and distribution efficiency in the company as a whole (Mcafee 2011).
Logistics Management
Zara has a wide and fast transportation system that caters for the distribution of the goods. The centres are serviced by at least 50 trucks. The trucks make it possible for products to be transported to the company’s stores at least 3 times a week. The company has a record of only hiring the very best drivers who have at least 3 years’ experience with trucks. They are also monitored continuously to make sure they always comply with Zara’s code of conduct (Sako 2011).
Zara has also implemented the cross docking system of logistics management where the trucks pick up finished products from the manufacturing plant and take them directly to consumers. The system has come in handy to assist in the handling of finished items and thus relieves a large volume of goods from the distribution centres.
This has increased the efficiency of the system because customers are able to have finished products delivered to them in good time as opposed to retailers pushing them into the supply system (Sako 2011). As a result of this, less time is wasted in the supply chain system.
Inventory Management
Because of the expansion of the company’s operations, Zara set up a system of satellite communications in 1990. This has made it very easy to analyse what is taking place in the company and to come up with mitigation actions during challenges and such other events. The company tries to make sure that the inventory always remains productive because the stock is managed at the store level. This also helps to reduce the price charged on finished goods and the size of their packing (Ghemawat 2011).
Sako (2011) points out that the company’s management information system is very important when it comes to availing inventories in the case of products that are in high demand while at the same time reducing the inventory in general. The scholar adds that counting, packing, and inventory control is made efficient and easier by the use of RFID technology.
The company also has a Massively Parallel Processor which helps the top management to keep the level of stock and product movement in check. The MPP also has a mitigation plan in the case of emergencies. Magic Wand is used in the stores and all distribution centres to keep record of the changes in the inventories and deliveries. The management of orders and replenishment of stores is done by the use of Point of Sale Computer Systems.
The company uses a patented algorithm to determine how much of each product should be delivered to stores or distribution points. Mcafee (2011) points out that each store has an inventory database that is used by employees to keep an eye on the product levels. In addition, the database is configured to provide information on whether or not goods are in the store, distribution centre or anywhere in- between. Drivers are charged with the responsibility of making sure that the system at the store records all products that are unloaded from their trucks.
Zara Key Success Strategies
Several strategies have been identified as the major keys to the success of the company. Some of them will be analysed below:
Exclusivity
Zara is more dedicated to designing and manufacturing very few pieces of a particular outfit. This exclusivity makes their outfits unique and this draws the attention of the customers and helps them to make quick decisions to purchase (Jayaram et al. 2010).
Horizontal Supply Chain
Zara relies heavily on information technology for its operations. A lot of information on customer reactions to new trends is transferred to other sectors such as the designing and manufacturing sectors. This helps Zara to quickly change to other trends when seasons change. It also helps the company in forecasting of fashion trends since it is more involved in copying trends instead of engaging itself in a trial and error making of fashion.
This gives Zara a competitive advantage in the industry (Jayaram et al 2010). Information technology has contributed to the success of the company. Much of the investment the company makes with regard to research and development is related to information technology.
Supply Chain Risks
Some of the possible supply chain risks encountered in the Middle East especially in Kuwait include trade policies. To this end, it is noted that there is an increase in government regulations and interference with imports and exports. These regulations and policies have a direct and major impact on Zara’s operation of its supply chains especially in the Middle East. Zara mostly sets up its outlets in politically stable countries such as Germany, USA, and such others (Akcalı & Cetinkaya 2011).
Supply Chain Reengineering
Zara’s supply chain throughout its outlets is well engineered to provide high flexibility of high-quality production and delivery of fashion garments and clothes. This makes it possible for the company to adjust and adapt to the market and make significant profits as it expands. However, reengineering this supply chain model in the Middle East may be difficult due to political and economic influences (Akcalı & Cetinkaya 2011).
Hill & Hill (2011) are of the view that reliable and new transportation methods play an important role in the management of supply chains. A key issue in the fashion industry is the delivery of a product or item on time since trends change very fast and customers always pick the recent fashions and leave the previous designs on the shelves.
Therefore, it is important to keep up with the customer needs by delivering products on time (Taylor 2012). Transporting the raw materials or fabrics to the factory at lower costs should be preferred. Highly reliable and energy efficient transportation systems should be adopted for the Middle East market for the delivery of raw materials and finished products.
Financial Comparison
In order to determine the effectiveness of the supply chain management adopted by Zara and the company’s expansion effectiveness, it is essential to make comparisons with the main competitor, in this case Hennes and Mauritz (hereafter referred to as H&M). These two companies are very different because H&M outsources its production, spends a lot of resources on advertising and is the price leader in the market.
The two also have some similarities. For example both target retailers at the low- price end, they are based in Europe and both of them have a strong strategy of expanding into other nations.
They also have very comparable financial status. In order to compare the performance of these two companies, it is best to use financial ratios as opposed to visually assessing their financial statements. The most recent data shows that Zara has higher liquidity ratio because of lower level of Euros in current assets and faster inventory turnover (Sako 2011).
The operating profit margin at Zara is 21.6 per cent while that of H&M is 13 per cent. From this, it is clear that the efficiency of generating profits per sale is higher for Zara. The operating income for H&M is higher because the company is involved in more expensive investments than Zara. However, Zara is more competitive in Europe because of its lower prices (Mcafee 2011).
Strategic Advantages
When compared to other traditional retailers, Zara is not only more profitable but its supply chain management system is its main source of competitiveness in the business. When compared to a company such as Express- which like H&M outsources the entire of its production processes- it is evident that operations at Zara are very different.
These other companies have resorted to outsourcing production because the industry is more labour intensive than capital intensive. Manufacturers in the industry always seek to reduce the market price of their garments by outsourcing labour. In contrast, Zara has come up with new ways of operating in the industry (Sako 2011).
The company works throughout the value chain and thus it is vertically integrated and capital intensive. Because of the vertical integration, Zara developed a strategy for merchandising called Herreros.
The strategy has assisted the company to come up with a unique fast- fashion system that creates opportunity and scarcity for its products. The company makes 60 per cent of its products and thus it is very flexible when it comes to frequency, amount, and variety of styles and designs. 85 per cent of the production goes on throughout the season (Mcafee 2011).
Because of the in- house- production at Zara, the product turnover is very high as a result of limited runs and strictly controlled inventories. This high turnover creates the opportunity for scarcity climate to be maintained in the stores. This climate enhances the frequency of consumers in the company’s stores.
The customers know that the products in the stores do not last for more than two weeks and so they have to buy them as soon as possible. This is the reason why Zara- unlike other companies such as Peacocks that went into a strategic drift and shut down- is able to sell many of its products at an optimal price. The strategy has highly reduced the overall costs incurred by up to 20 per cent in comparison to traditional retailers (Sako 2011).
The response team in the company is also far much better and efficient than that of the competitors. As a result of this, Zara is in a position to meet the needs of its clients faster and efficiently. The company does not lay a lot of emphasis on achieving manufacturing efficiencies but rather on backward, vertical integration. This is so as to become the leading fashion house in the industry (Jayaram et al. 2010).
Zara Supply Chain System: Challenges
There are several factors that may affect this company’s supply chain system in the Middle East. Some of them include management capabilities, warehouse capacity, transportation alternatives, financial resources, technical capabilities and competence, innovation and creativity. Others are IT systems and professionals, price, terrorism, natural disasters, quality, delivery, competitive climate, sophisticated customers, environmental concerns, information and knowledge, technological innovation, and religious concerns (Ghemawat 2011).
Inditex (Zara’s mother company) has 6 other business chains in the world. However, more than 85 per cent of all international sales come from Zara, the flagship company. In case Zara gets out of business sometime in the future, it would be very difficult for Inditex Group to reformulate its business model and as such it may just meltdown (Jayaram et al 2010).
Conclusion
In this paper, the researcher analysed the supply chain system adopted by Zara in the world. Special emphasis was made on the company’s supply chain management in Kuwait. It was found that Zara is a successful company in the fast fashion industry. It has an efficient supply chain management due to its use of information technology that supports a horizontal supply chain management. This is also likely to influence the success of Zara in the Middle East and Kuwait specifically.
References
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