Zara 1 Introduction "You need to have five fingers touching the factory and five touching the customer." – Amancio Ortega, Zara founder, on retail success Zara is the premier brand of Inditex Corporation and began in La Coruna, Spain in 1975. Since then, Zara has grown to become the largest retailer in the world and now operates 1557 stores in 78 countries in Europe, the Americas, Asia and Africa (Clark & Keeley 2008). While many multinational retailers reported falling profits in the wake of the economic recession, Inditex attained a net profit margin of 13.87% in the 2010 financial year, an increase from 12.04% in 2008. Zara has emerged as a profitable company of fast-growth in a competitive retail industry due to its highly responsive and tightly controlled vertically integrated supply chain that has leveraged its speed and flexibility to achieve international success. Operations Strategy Zara’s operations strategy involves maintaining tight control over all operational aspects to allow for high flexibility and to be able to rapidly respond to changing fashion trends to meet the needs of their customers. Zara is an externally supportive operation where operations management is seen a central element to its competitive strategy and success. Vertical integration is high, with the company managing all aspects of design, storage, transport, logistics, and the majority of production. Analysis of the Four V’s illustrates that Zara differentiates itself from other large multinational low-priced retailers who traditionally use mass production by offering low volumes of individual items with a high variety of garments and accessories with high variation, which is typically characteristic of specialized or bespoke boutiques, yet dissimilarly has low visibility. L Volume H H Variety L H Variation in Demand L H Visibility L Figure 1. Dimensions of Zara plotted on the Four V’s Zara 2 Although lower volumes of individual garments result in higher unit costs, Zara’s in- house design and manufacturing team allows a high level of control and efficiency. Garments can be quickly created to meet the latest fashion trends; design, production, and delivery of a new product to stores worldwide takes 15 days on average, making Zara twelve times faster than Gap, a major rival, despite offering around ten times as many unique items (Gallaugher 2008). Zara also offers a high variety of items, a tendency of low volume operations. Each store has multiple departments, and within each department there is further segmentation. The women’s department consists of TRF, trendy casual wear; Zara Woman, higher-end casual and business wear; as well as Zara Studio, which are more luxurious and higher priced garments. Within each segment different styles of footwear, handbags, and other accessories can also be found, resulting in literally thousands of products being offered in a Zara store at any given time. The high variation in consumer demand is confidently met by Zara’s flexible operations of high variation. The extensive vertical integration of Zara’s processes is the backbone of its operations strategy, and distinguishes it from competitors such as H&M, which has 900 suppliers and no factories of its own while almost 60% of Zara’s products are produced in-house (Gallaugher 2008). The vertical integration is so comprehensive that Zara itself creates 40% of its fabrics and purchases most dyes from its subsidiary company, and allows for flexibility by ordering approximately half of its fabrics undyed in case of any trend shifts in colour or pattern (Gallaugher 2008). Despite Zara’s tendency to occupy positions on the scale’s left side, visibility is low. Zara’s employees and operations facilities are typically not seen or monitored by customers, unlike in boutique stores with ample contact with sales associates. Zara’s retail employees are usually behind the sales counter or in the change rooms, but do not frequent the sales floors to aid customers in locating sizes or make suggestions as typical retail stores do as part of a service based operations strategy. Performance Objectives Using the five key performance indicators (KPIs) illustrates that each performance objective has a relationship with the other objectives. Zara’s focus on speed, flexibility, and Zara 3 dependability increases the cost of its products, albeit not to the extent that it is out of line with its competitors. To mitigate costs, quality of products and service is reduced. Quality Cost Speed Flexibility Dependability Figure 2. Zara’s performance plotted on the Key Performance Indicators Speed and flexibility are paramount to Zara’s operations strategy and are likewise key performance objectives. Zara’s success has been the result of their responsiveness to fluctuating customer demands, which explains its decision for high vertical integration. Zara’s senior managers maintain that capital asset investment in production and distribution facilities increases flexibility by allowing scheduling control impossible to achieve if the organization was dependent on distant external supplier. Zara’s flexible cross-functional teams, which are regularly rotated, can design, revise, and commit resources to a finalized new product design in mere hours (Ferdows et al. 2004). This flexibility means that Zara can react to unexpected demands faster than rivals and capitalize on this speed by designing new garments that have evidence of customer demand throughout the season, unlike competitors who design months in advance and must hope that consumers deem their on-trend. Personal digital assistants connect retail store managers and the store’s point-of-sale system to market specialists in Zara’s La Coruna headquarters to transmit orders, as well as customer input and trends noticed by staff in sold and unsold items so designs can quickly be improved or production increased (Bonnin 2002). Distribution is also fast: shipments of pre-priced and security tagged items that are already hung on display racks from La Coruna reach most European stores in 24 hours, American stores in 48 hours, and Asian stores in 72 hours so that once received, store managers can immediately place them on the sales floor (Ferdows et al. 2004). The speed and flexibility of Zara’s operations are order winners as Zara’s on-trend items have short lead times and are often in stores before competitors, attracting fashionable customers who want to be the first wearing a new trend. Zara 4 Dependability is another key performance objective, and is reinforced by Zara’s tight control policy. The entire supply chain moves quickly as outlined above, but is predictably timed. Store managers follow a stringent order deadline, that if missed cannot be rectified. Southern European stores must place their orders by 15:00 Wednesday and 18:00 Saturday, while 15:00 Tuesday and 18:00 Friday deadlines apply for all other stores (Gallaugher 2008). A missed Tuesday deadline means a store manager must wait until Saturday. La Coruna’s central warehouse prepares all the shipments that the trucks or airplanes rush to stores on consistent schedules that store managers are aware of. Regular customers also know the days that new deliveries reliably arrive, and on these days will visit stores more frequently, making Zara’s dependability another order winner. Quality is adequate at Zara, but is not a main objective for operational strategy. With regards to products, items are typically made using cheaper synthetic fibres or cotton instead of higher- quality natural fibres such as wool or silk, and fabrics are not as colourfast. As well, because they are made so quickly made, quality control is not strict. A 2010 Beijing Consumer Association test found that Zara down coats had 18.5% lower down content than labelled (Jia & Yan 2011). However, many of Zara’s customers do not value quality but instead the design or style of a product, which are of high quality: though rarely unique, they mimic haute couture designs that consumers covet. With regards to service, quality is also not a strategic focus. The Fashion section of the Telegraph reported that “the service level is on a par with Burger King,” describing Zara’s low visibility and contact with customers (Portas 2011). The middling quality at Zara conforms to the middle-priced fashion retail industry’s standards, and thus is an order- qualifier, but not necessarily an order-winner. All the above KPIs have implications on cost, the most important aspect of an organization’s operations. To attain the speed, flexibility, and reliability of Zara’s responsive vertically integrated operations major capital investments have been made in technologies and in production and distribution facilities. Twice weekly deliveries across the world by truck and air- freight are expensive, but are required by Zara’s fast fashion strategy. However, Zara’s IT expenditure is less than a quarter of the fashion industry average, and targets their technological investments at areas in the supply chain that will derive the most impact (Sull & Turconi 2008). Zara’s small batch production of items is costly, but minimizes the risk of unpopular Zara 5 merchandise, such as during 2003’s unseasonably warm autumn (Tinlady 2006), and has created a sense of exclusivity for customers, who are conscious that once an item is sold out, it is gone. As a result, Zara stores have a quick inventory turnover, eliminating the need for sales; 85% Zara products are sold at full price, while the industry average is only 50% (Ghemawat 2001). The frequent exclusive designs facilitated by the flexibility and reliability of Zara’s operations has also decreased advertising costs; Zara spends only 0.3% of revenue on advertising, while the average for fashion retailers is 3.5% (CNN 2001). The average Zara customer will visit a store 17 times annually because merchandise changes so frequently, but only visit competitors three times (Kumar & Linguiri 2006).