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Chapter 3: Zara: Fast Fashion from Savvy Systems

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1 Chapter 3: Zara: Fast Fashion from Savvy Systems
Controlling the supply chain is key, Jennifer S. Altman A Zara store in Manhattan

2 To understand and appreciate :
Why Study Zara? To understand and appreciate : The counterintuitive and successful strategy of Zara The technology, which has made all of this possible


4 ZARA · Fall / Winter 2011 - TRF - Young
Latest Fashion ZARA · Fall / Winter TRF - Young "TRF" is short for Trafaluc- offered by Zara for the youth/teenage (Store in Sydney) Spanish shoppers stick to the shops strictly allocated for their age range. Zara is an exception with its three different ranges Trafaluc for teens, Zara Basic for twenties and thirties and Zara Woman which is aimed at exactly that, the 'woman‘.

5 Humble beginning: Amanciao Ortega Gaona
At age of 13, worked as a gofer in a shirt store In 1963, he started his own lingerie production firm. In 1972 he founded Confecciones Goa, S.A., the first garment-making factory of Inditex 1975, he started Zara When a German wholesaler suddenly canceled a big lingerie order in 1975, Amancio Ortega thought his fledgling clothing company might go bankrupt. All his capital was tied up in the order. There were no other buyers. In desperation, he opened a shop near his factory in La Coruña, in the far northwest corner of Spain, and sold the goods himself. He called the shop Zara. Amanciao Ortega Gaona is a very well known industrialist and fashion designer. He is the chairman and co-founder of Inditex Group. In 2001, Inditex Group went public and he possessed over 59% of shares which made him a wealthy man. Forbes has listed him as one of the richest person in the world. Ortega always keeps a low profile and never appears in any interview. Amancio Ortega gaona was born in Leon, Spain on 28 March, His mother worked as a maid and father worked on railroad. By the time Ortega turned 13, he started working as a delivery boy for a local shirtmaker in the hub of the Iberian textile industry which is called La Coruna, Galicia. He worked at several stores and learned the changing process of cost and product when material travels from manufacturer to the customer. Very soon he began to focus on providing the products straightly to the customers without any involvement of the middle man. Amancio Ortega Gaona was better called as Amancio Ortega who never went for higher studies. Into the early days of 1960’s, he continued working in textile line and attained good knowledge. He soon became manager of a clothing store and observed that only rich people could pay to buy good clothing. This made him more firm to make fine clothing available and reachable to every people. Very soon, he began to manufacture his own line of products. He started buying low priced cloth material from Barcelona and cheaper but good quality products to the local shops. In the year 1963, Ortega turned 27 years of age and by this time he established his own firm named Confcciones Goa which was known for selling good quality bathrobes. Amancio Ortega kept on building his firm. In the year 1975, Ortega started his first retail shop named Zara which was situated across the lane from one of the most famous retail store of La Coruna. Very soon, Zara became a well known name for providing good quality designer range of products at an affordable price. By the year 1989, Ortega successfully opened around one hundred stores of Zara in Spain. In 1985, he established Inditex which turned out to be one of the biggest textile companies by holding Zara and other small stores. He always focuses on cutting the cost of his products so that it may become reachable for common man. Ortega rarely needed any advertisement for Zara as it already became very successful and renowned name in the textile industry.

6 Fashionable But Not Pricy
In the early 1960s Ortega became the manager of a local clothing shop, where he noticed that only a few wealthy residents could afford to buy the expensive clothes. Thus he started producing similar items at lower prices, purchasing cheaper fabric in Barcelona and cutting out pieces by hand using cardboard patterns. Ortega then sold his items to local shops; he used the profits to start his first factory in 1963 at the age of 27. Read more: Amancio Ortega 1936— Biography - Early career, The zara phenomenon, Inditex

7 Impacts of Amanciao Ortega’s Earlier Experiences
When Amanciao Ortega was 13 years old he worked as a delivery boy for a shirt maker who produced clothing for the rich. He later worked as a draper's and tailor's assistant. In seeing firsthand how costs mounted as garments moved from designers to factories to stores, Ortega learned early on the importance of delivering products directly to customers without using outside distributors. He would later employ such a strategy with great success at Zara, attempting to control all of the steps in textile production in order to cut costs and gain speed and flexibility. Read more: Amancio Ortega 1936— Biography - Early career, The zara phenomenon, Inditex

8 Inditex Inditex, one of the world’s largest fashion distribution groups, has more than 5,000 stores in 77 countries. In addition to Zara, the largest of its retail chains, Inditex has seven other formats: Pull &Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe. Its unique management model, based on innovation and flexibility, and its vision of fashion – based on creativity and quality designs, together with the capacity to react quickly to market demands – has enabled it to enjoy rapid international expansion and an outstanding reaction to its various commercial concepts. The Inditex Group is made up of more than 100 companies operating in textile design, manufacturing and distribution.

9 OEM ODM  OBM OBM ODM OEM Demand Chain Creative Conceptualization R&D
BRANDING ODM R&D OEM (Supply Chain) Demand Chain

10 Net Worth Net Worth $31 B As of March 2011 The richest person in Spain
The #2 richest person in Europe The #7 richest person in the world

11 Went Public in 2001 In May 2001, a particularly tough period for initial public offerings, Inditex sold 25% of its shares to the public for €2.3 billion. Inditex's sales—70% of which come from Zara. Zara's sales and net income have continued to grow at an annual rate of over 20%. Ortega's owned 59% share of the company. Sales in 2000 • Inditex $2.43 billion • H&M $3.2 billion • Gap $13.6 billion

12 Gap versus Inditex at a Glance
€12.5 billion in global sales 2010 2010 €1.73bn ($2.45bn) of net profit 1 euro = US dollars

13 Zara in Australia 2011

14 Apple Beijing Store

15 Apple vs. Zara What is the similarity?
Jobs fostered an approach to product design that evoked haute couture as much as high-tech.

16 Zara’s Positioning “Armani at moderate prices!”
Fashions are more “Banana Republic,” prices are more “Old Navy.” Look like high fashion but are comparatively inexpensive. Cheap Chic Price Fashion Quality Customer segmentation Chic (pronounced /ˈʃiːk/ "sheek"), meaning 'stylish' or 'smart', is an element of fashion.

17 Zara Zara as a "fashion imitator" company and low cost products. Trends setter? Instead of setting the trends, Zara follows them.

18 Zara Positioning The Zara brand is well regarded among the core 25- to-35-year-old consumers?

19 What Is Fashion? Trend Fashion is the imitation of a given example and satisfies the demand for social adaptation. . The more an article becomes subject to rapid changes of fashion, the greater the demand for cheap products of its kind. — Georg Simmel, “Fashion” (1904) Classic Fad Simmel on fashion Fashion is a form of a social relationship that allows those who wish to conform to the demands of a group to do so. It also allows some to be individualistic by deviating from the norm. In the initial stage everyone adopts what is fashionable and those that deviate from the fashion inevitably adopt a whole new view of what they consider fashion. Ritzer writes, Simmel argued that not only does following what is in fashion involve dualities so does the effort on the part of some people to be of fashion. Unfashionable people view those who follow a fashion as being imitators and themselves as mavericks, but Simmel argued that the latter are simply engaging in an inverse form of imitation. — George Ritzer Georg Simmel 2008, [17] This means that those who are trying to be different or “unique,” are not because in trying to be different they are become a part of a new group that has labeled themselves different or “unique.”[8]

20 Fashion Diffusion 60s-70s

21 Innovation "Zara is possibly the most innovative and devastating retailer in the world." -- Louis Vuitton Fashion Director Daniel Piette Apple Commercial

22 Zara as a Rule Breaker Contract Manufacturing (Outsourcing, offshore outsourcing)? factory workers in Spain make an average of $1,650 a month, vs. $206 in China's Guandong Province 34% manufacturing is outsourced to Asia, and 14% to parts of Europe (mainly Italy and Turkey), those tend to be the more basic items. The high-fashion stuff, 49% of what it sells, is cut and finished in “proximity” (Spain, Portugal and Morocco), though some sewing is done by small local cooperatives. [ H&M 75% to Asia][[Check label]] Marketing? (Budget) 0.3% vs. 3.5% of revenue Batch Size? Zara produces in small batches which creates a sense of scarcity with consumers. (Buy now or never) Fail products% (10% vs. 1%)

23 Pros and Cons of Contact Manufacturing
Costs Controls/Coordination Use IT for centralized planning & decentralized execution Reduce a single point of failure? Risks Sweatshop Environmental issues Quality

24 Outfit Clashes 撞衫 ultimate fashion faux pas -- wearing the same dress as someone else. Prevents Same-Dress Embarrassment Combo photo of actresses Christina Applegate (L) and actress Rachel Griffiths wearing the same dress as they arrive at the Premiere Women in Hollywood dinner in Beverly Hills, California September 20, REUTERS/Fred Prouser « Previous Post Next Post » Comments One comment so far | Comments RSS Sep 24, 2006 2:26 pm EDT I thought that Punked show had been canceled. Posted by Shawn Hendricks | Report as abusive Post Your Comment We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see Search Author Profile Worked as a Reuters editor, reporter and newseditor, in the U.S. and Asia. Whatever. Now writes a humor blog and a reader feedback blog. » View Profile More Oddly Enough Charging bear got close to police before shot dead Silver-screen strategy nets New York robbers $217,000 "Man-flu" is real to a fifth of British women Ice cream vendor gets prison for selling drugs with treats For Christmas at U.S. store: a $75,000 yurt Tag Cloud advertising animals Apocalypse beauty best of the best bikini Bob's Favorites Britain bullfighting Canada careers celebrities Christmas crime death drinks entertainment Fashion food gadgets goofy face museum guns hair health humor journalism love military models movies oh barf! photography politics puns quiz romance sex sports stupid technology toilets travel underwear Victoria's Secret wedding Archives

25 Zara as a Rule Breaker Markdown?
Markdown legend (?) 50% vs. 15% Frequency of new products arrival & store layout? Ship twice a week (Z-Day) Like walking into a new store every two weeks (with store layout changed – directed from the Cube) Out of stock (Good or Bad)? Encourages customers to visit often(# of store visit per year 3 vs. 17) Store product mix decision Zara retail store managers, not headquarters, determine their own store’s product mix.

26 Markdown Industry average markdown ratio is approximately 50%, while Zara ration is about 15%.

27 Zara as a Rule Breaker Store Ownership? (Rent vs. Own)
Location of warehouses/distribution centers? Spain Get merchandise to European stores within 24H hours, flying goods via commercial airliners to stores in the Americas and Asia in 48H. Some clothes it has made in China are shipped to Spain and then back to shops in China. Design Team (Star Designer?) Rotation (why?) Cross-functional teams The two planes to America each week could supply as many as 40 or 50 stores

28 The Cube

29 Shipping of Clothes from Distribution Center
Clothes are ironed in advance and packed on hangers, with security and price tags affixed. More than 2.6 million items move through the distribution center each week, See pictures at

30 Co-location leveraged at Zara
The cross-functional teams can examine prototypes in the hall, choose a design, and commit resources for its production and introduction in a few hours, if necessary Production Planner Buyer Marketing Specialist Designer In each hall, floor to ceiling windows overlooking the Spanish countryside reinforce a sense of cheery informality and openness. Unlike companies that sequester their design staffs, Zara's cadre of 200 designers sits right in the midst of the production process. Split among the three lines, these mostly twenty something designers - hired because of their enthusiasm and talent, no prima donnas allowed-work next to the market specialists and procurement and production planners. Large circular tables play host to impromptu meetings. Racks of the latest fashion magazines and catalogs fill the walls. A small prototype shop has been set up in the corner of each hall, which encourages everyone to comment on new garments as they evolve. The physical and organizational proximity of the three groups increases both the speed and the quality of the design process. Designers can quickly and informally check initial sketches with colleagues. Market specialists, who are in constant touch with store managers (and many of whom have been store managers themselves), provide quick feedback about the look of the new designs (style, color, fabric, and so on) and suggest possible market price points. Procurement and production planners make preliminary, but crucial, estimates of manufacturing costs shift and available capacity. The cross-functional teams can examine prototypes in the hall, choose a design, and commit resources for its production and introduction in a few hours, if necessary.

31 Watch the BBC news video below!
The Apparel Lifecylce Watch the BBC news video below! What is the risk faced by Zara?

32 Fashion Reconnaissance
Spotting trends everywhere from the street to movies to couture fashion shows and, Information from its customers to keep its merchandise fresh.

33 Results Zara has higher manufacturing costs than rivals. Inditex gross margins are 56.8 percent compared to 37.5 percent at Gap.

34 Information and IT Zara Store Design/Production Team
Hard data: POS data Soft data: Ask customers their preferences (PDA) Firm data: Nonsale data  What is this called in e-commerce? Design/Production Team fabric is cut and dyed by robots (laser cutting) Not mentioned specifically: ERP, SCM, CRM, e-commerce web site

35 Rapid-fire Fulfillment
Ferdows, K., M.A. Lewis, J.A.D. Machuca. “Rapid-fire fulfillment”, Harvard Business Review, 82(11), 2004.

36 Ten Fingers: Both Hands
“You need to have five fingers touching the factory and five touching the customer.” Translation: Control what happens to your product until the customer buys it. Do everything possible to let one hand help the other.

37 Vertical Integration 5 fingers on production & 5 fingers on customers
Logistics Design/ Store Customer Close the communication loop. Zara's supply chain is organized to transfer both hard data and anecdotal information quickly and easily from shoppers to designers and production staff. It's also set up to track materials and products in real time every step of the way, including inventory on display in the stores. The goal is to close the information loop between the end users and the upstream operations of design, procurement, production, and distribution as quickly and directly as possible. • Stick to a rhythm across the entire chain. At Zara, rapid timing and synchronicity are paramount. To this end, the company indulges in in approach that can best be characterized as "penny foolish, pound wise." It spends money on anything that helps to increase and enforce the speed and responsiveness of the chain as a whole. • Leverage your capital assets to increase supply chain flexibility. Zara has made major capital investments in production and distribution facilities and uses them to increase the supply chain's responsiveness to new and fluctuating demands. It produces complicated products in-house and outsources the simple ones. It took Zara many years to develop its highly responsive system, but your company need not spend decades bringing its supply chain up to speed. Instead, you can borrow a page from Zara's playbook. Some of Zara's practices may be directly applicable only in high-tech or other industries where product life cycles are very short. But Ortega's simple philosophy of reaping profits through end-to-end control of the supply chain applies to any industry- from paper to aluminum products to medical instruments. Zara shows managers not only how to adjust to quixotic consumer demands but also how to resist management fads and ever-shifting industry practices. 5 fingers on production & 5 fingers on customers 37

38 Man’s Department (ZARA store in Almere, The Netherlands)

39 Zara Has A Self-Reinforcing System ..
Close communication/ information loop Stick to a rhythm Leverage Your Assets Zara defies most of the current conventional wisdom about how supply chains should be run. In fact, some of Zara's practices may seem questionable, if not downright crazy, when taken individually. Unlike so many of its peers in retail clothing that rush to outsource, Zara keeps almost half of its production in-house. Far from pushing its factories to maximize their output, the company intentionally leaves extra capacity. Rather than chase economies of scale, Zara manufactures and distributes products in small batches. Instead of relying on outside partners, the company manages all design, warehousing, distribution, and logistics functions itself. Even many of its day-to-day operational procedures differ from the norm. It holds its retail stores to a rigid timetable for placing orders and receiving stock. It puts price tags on items before they're shipped, rather than at each store. It leaves large areas empty in its expensive retail shops. And it tolerates, even encourages, occasional stock-outs. During the last three years, we've tried to discover just how Zara designs and manages its rapid-fire supply chain. We conducted a series of interviews with senior managers at Inditex and examined company documents and a wide range of other sources. We were particularly curious to see if Zara had discovered any groundbreaking innovations. We didn't find any. Instead, we found a self-reinforcing system built on three principles:

40 Communication Loops Close the communication loop: Customer  Store Manager/Staff  Market Specialists (i.e., Fashion Buyer)Designer  Production Staff  Buyer (Procurement Specialist)  Subcontractor  Warehouse Managers/Distributor

41 Fast Fashion Just-in-Time  Quick Response  Fast Fashion
Information Technology Push vs. Pull Reactive Capacity Fast Fashion Competitors Forever 21 Uniqlo Renner (Brazilian)

42 Just-In-Time "postponement"
Zara's factories use sophisticated just-in-time systems, developed in cooperation with Toyota, that allow the company to customize its processes and exploit innovations. (Flexible Manufacturing) For example, like Benetton, Zara uses "postponement" to gain more speed and flexibility, purchasing more than 50% of its fabrics undyed so that it can react faster to midseason color changes.

43 Postponement Strategy
Operations reversal at Benetton: Single product Style with 4 colors choices Zara: Roughly half of the cloth arrives undyed!

44 Production Planning

45 Capacity Utilization For Faster Response, Have Extra Capacity on Hand
Waiting Time Zara's senior managers seem to comprehend intuitively the nonlinear relationship between capacity utilization, demand variability, and responsiveness. This relationship is well demonstrated by "queuing theory"--which explains that as capacity utilization begins to increase from low levels, waiting times increase gradually. But at some point, as the system uses more of the available capacity, waiting times accelerate rapidly. As demand becomes ever more variable, this acceleration starts at lower and lower levels of capacity utilization. Capacity Utilization

46 Zara Global Presence Zara welcomes shoppers in 78 countries to its network of stores in upscale locations in the world's largest cities. The retailer's international footprint proves that national borders are no hindrance to a shared fashion culture.

47 Inditext “There's no such thing as borders when it comes to sharing a single fashion culture.” Quote:

48 Global Presence Spain: 335 stores (159 with Zara Kids) France: 115 stores (4 with Zara Kids) Italy: 87 stores (12 with Zara Kids) China: 77 stores Japan: 68 stores United Kingdom: 65 stores Germany: 64 stores Portugal: 61 stores (21 with Zara Kids) Mexico: 51 stores Russia: 51 stores Greece: 48 stores (6 with Zara Kids) United States: 48 stores Poland: 33 stores Brazil: 31 stores South Korea: 30 stores Turkey: 29 stores Belgium: 27 stores Saudi Arabia: 24 stores Canada: 19 stores Israel: 19 stores Netherlands: 18 stores



51 Fifth Avenue Flagship Store
Earlier this year, Inditex spent $324 million on a New York property slated to become its new global Zara flagship store. The purchase of the National Basketball Association's old store on Fifth Ave. is the country's most expensive real-estate transaction, measured in dollars per square foot. In another recent deal also at 666 Fifth, Japanese clothing retailer Uniqlo agreed to pay $300 million over 15 years, in one of the most expensive leases ever in New York. In another recent deal also at 666 Fifth, Japanese clothing retailer Uniqlo agreed to pay $300 million over 15 years, in one of the most expensive leases ever in New York.

52 Why Going Online? When the economy was at it’s worst, online retail sales were the one area that either grew or didn’t suffer as much from the downturn. Not having an e-commerce operation at this point is inexcusable for a global retailer.


54 Zara Online Strategy The bottom line: Inditex is counting on online sales rather than store expansion to power sales at its Zara chain and trump rival H&M in the U.S. Inditex’s annual online sales will be €1.4 billion ($2 billion), or 7 percent of group sales by January 2014. And Gap, which has sold goods online for more than a decade, gets 9% of its sales online (now). Read more:

55 Why Is Zara Late for the E-Commerce Party?
Zara cited sourcing and logistics for their lack of online presence until now. The fashion retailer also reported that their clothes sell quickly, making it difficult to offer them online.

56 Online Start-Up Costs "It basically follows the same model as our regular store expansion," Mr. Isla says of the online rollout. "For us to enter a new country has a very small cost because, with our twice-a-week delivery model we have few start-up costs. We don't need large logistical infrastructures, marketing departments or big central operations. The model allows us to have a light structure, and that applies to online as well." Read more:

57 Costs of US Online Initiative
Inditex spent €24 million over the past two years in preparation for its online launch in the U.S. and it has high hopes for online demand. Some 200,000 people have downloaded the Zara application for Apple Inc.'s iPhone or iPad from the U.S., according to the company. Read more:


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