The counter products
Zara has taken a counter-intuitive approach to many of the elements in their supply chain, particularly in sourcing, design, manufacturing and logistics. Zara is also vertically integrated in an industry that tends to be the opposites. Most of Zara’s competitors in the fashion sector outsource all of their production. Their competitors hire other companies to make the products that are sold in their stores, becoming more of distributor and vendor for the products rather than a manufacturer. Zara on the other hand produces half of its products in-house, maintaining large production facilities close to its markets.
Their approach to product designs and product lines is also counter-intuitive. Companies usually try to achieve economies of scale to reduce their costs. They carry a small range of product designs and product lines, but produce them in large quantities. By having a narrow range of products, they can be produced using a standard template in the factory, reducing the amount or recalibration and adjustments to the factory machinery, and thus reducing costs. Zara’s practice is exactly opposite of this; they produce a huge range of product designs and product lines in very small quantities. They manufacture and distribute small batches of products rather than using
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Their retail practices are also counter-intuitive and different than most retail practices. They have very strict timetables for placing orders and receiving stock. Most retailers allow their locations more leeway and discretion in placing orders and maintaining their stock levels. Zara allows the managers at the retail locations a little discretion in determining what is carried in their stores, but much of the inventory decisions are made by the “commercials” at La Coruna. They could ship items that the stores did not order and were used to assess demand for those items in various locations.
They put price tags on all the items before they are shipped from the Zara facilities to the distribution centers. Prices are established based on the Spanish market, and then prices for other countries are set at a fixed percentage of this baseline, taking into consideration the distribution costs. This gives the managers at the stores no ability to adjust prices for what they think their market can bear.
The manufacturing facilities are also counter-intuitive, especially for this type of industry. Most companies in the fashion sector are either manufacturers of the clothes, or distributors of the clothes, but rarely both. Zara has invested a large amount of capital into their factories, plants, distribution centers and retail outlets. Most companies try to reduce costs by avoiding capital expenditures when they can, but Zara invested heavily into their capital.
The most counter-intuitive element of their supply chain is the fact that they tolerate and encourage stock-outs. Most companies try to maintain a certain safety stock for their inventories and have automatic reorder points when stock reaches certain levels. Zara encourages stock-outs as a means of inducing and increasing demand. Customers can never be sure if something they see and like will be there the next time they come back, which causes them to make impulse purchases. For most company, stock-outs are strongly avoided if at all possible.
Inventory is loosely tracked and total accuracy is not sought after. As Sanchez said at the beginning of the case, “instead of selling clothes they’ll be counting them all the time, trying to make sure their online inventory figures are 100% accurate. Bad idea.” It is not often where a company decides not to track inventory at a detailed level. Inventory control is usually used to help prevent theft from employees and to ensure that inventory and sales are recorded properly. Instead, Zara uses “theoretical inventory” that assumes that shipments and sales are being recorded properly and that there is no theft taking place. Salgado summed up their inventory control when he said, “Having 100% control is most of the time just too expensive. Being 95% right is pretty good, and often you don’t need more accuracy.”
Another one of their practices that is counter-intuitive is the fact that the factories and distribution centers do not run at full capacity. Factory managers use simple applications to plan production. Managers know the quantities and due dates for all production requests and use the information to load their factories and plan the jobs. However, the factories are highly automated, which minimizes labour costs and minimizes scrap. The machines can cut over 100 layers of fabric at a time, which allows them to decrease the cycle time from when a design is conceived to when it can be produced. They are then able to send the cut fabric to external workshops for sewing. Most companies would keep the factories running at full capacity, and if inventory was not required at their own stores, they would seek external business opportunities to maximize their profit. In other words, instead of letting the factor and distribution centers sit idle, they would contract out to provide services and manufacturing for other companies.
They also do not maximize the manufacturing and transportation batches. Instead of waiting until they have a full order for a product, or a full truck or cargo container, they process orders and shipments on a regular schedule. They try to keep delivery cycle times stable, reducing the variability in the supply chain. While reducing variability and complexity in the supply chain is a goal of the supply chain manager, usually another goal is to maximize production and shipping capacity. Zara tends to favour steady delivery cycles and do not delay orders if quantities do not reach a certain level.
IT is completely insourced, and uses relatively simple and somewhat outdated software applications. Typically IT is one of the first functions that is outsourced to 4PLs since it is not a core competency. However, IT spending as a percentage of revenue is around five times smaller than that of other retailers. As well, IT employees account for less than 0.5% of Inditex’s total workforce, whereas many retailers devote as much as 2.5% of their employees to IT. Keeping IT simple and insourced seems to be working for Zara as the supply chain seems to function well, they do not have high turnover in the IT area, and it is relatively inexpensive.