Zara's Supply ChaJn'Managem~nt

Practices

~'Zarahas managed to fill a hole and seize an opportunity in Spain. It has done for fashion what IKEA did for furniture, filling the gap between hypermarket and designer clothing jn a very desir(Jbleway. ,,1 - Valerie Van den Boffc~t:"Head Wolff OIins, Spain, in 2004. "Zara is nimbler and faster to the market. This will be important as fashion trends
globalize. ,,2
.

- Keith Wills, European

ZARA'S FAST FASHION STRATEGY

Retail Analyst, Goldman Sachs3, in 2000.

In 2004, a famous pop star toured Spain to give a series of concerts. Her outfits attracted instant attention froin teenagers and young girls across Spain. By the time the pop star had reached the last leg of her tour, Spanish girls. wete sporting outfit~ similar to the ones she had worn during her first concert. The outfits were designed ~nd distributed by apparel retailer Zara, which quickly gauged the demand for them and stocked u? its stores across S'painin less than tw~ weeks.
.

According to a survey conducted by Interbrand,4 Zara was.the only Spanish brand to be featured in the list of 'The 100 Top Global Brands' in 2005. It was featured at'the nth position in the list that featured Coca-Cola, Microsoft, and IBM in the first three positions. The survey featured only those brands with a value of more than US$ '1 billion, which derived around 33% oftheir revenues outside their country of-origin. and whose financial data was publicly available. Interbrand describing -Zara, said, "Cutting-edge Spanish apparel retailer epitomizes cheap chic knocki!1g out massproduced copies of catwalk fashions almost ovemight."s Zara introduced about 12,000 designs every year; the shdf life of each design was about four weeks. In January 2006, Zara had 853 stores, located across the world. (Refer to Exhibit I for the geographical spread of Zara's stores). These stores received, two deliveries from Zara's central distribution center every week. The deliveries were customized in accordance with the data sent by them every day, Zara pioneered the concept of customized retailing and was able to conceptualize the garment, develop, and deliver it to the stores within two to three weeks. The key to Zara's success was its verticall inte rated structure where desi n, -rod' tributlOn, and retal mg were integrated. Maria J'.Garcia, spokeswoman for Zara, said, "The vertical integration 0 our production system allows us to place a
I Joanna Doonar, "Branding Espana to the Rest of the World," Brand Strategy, March 2004. 2 WilIiam Echikson, "The Mark of Zara," BusinessWeek, May 29, 2000. 3 Goldman Sachs Inc. is one of the world's oldest investment banks founded in 1869. It is a primary dealer in the US (reasul)' securities market. Goldman offers its clients mergers & acquisitions advisory, provides underwriting services, engages in proprietary trading, invests in private equity deals and also manages the wealth Ofaffluent individuals and families. 4 Interbrand Corporation is a leading brand consultancy, serving clients worldwide. Founded in London, lnterbrand is headquartered in New York. 5 "Global Brand, The 100Top Brands," BusinessWeek, August 01,2005.

. Retail. Management

Y' garment in any store around the world in a period between- two to three weeks.,,6 (Refer to Table I for the time taken for Zara to make garments) Zara's vertically integrated su .' ., he attention of industl}'ylayers ariO anarysts. ccording to Richard Hyman of Verdict,7 a retail cons!lltancy in London, "Vertical mre,gratiQI1l13~p;nne Qut of fashion in the consumereconomy,L:lr:li<;";i spprtaeular"

exception to the rule."s -Table I! Zara's Process

-"

Supply Chain

Time Taken from Start" to Finish Time Taken One day One day Three days One day Three days Ten days Five days

Style i~ea,quantity etc., conveyed to Head quarters Fabric trom Stock Design Style Approval Prototype Development! Fit Sample/ Approval Garment Production Shipment

Adapted from "Devangshu Dutta, Brand Watch Zara, images Fashion Forum," www.3isite.com; FebruGlY 12,2004.

ABOUTZARA
Zara was founded .by Amancio Ortega Gaona (Ortega), who was born in Leon, Spain, . in 1936. Ortega worked as an assistant in an apparel shop and in 1963 he set up his own fashion retail business named Confecciones Goa, in Arteixo-La Coruna, to manufacture housecoats9."In 1975, when a German retailer cancelled a major order, Qrtega started selling the clothes 1Tom a small outlet in his factory and called the outlet Zara. Zara went on t6 become .the flagship brand of the holding company, Industria de Diseno Textil,"SA, popularly called lnditex, which was founded in 1979. Ortega was credited with democratizing fashion in Spain; he was responsible for making designer clothing accessible to the masses. Between 1976 and 1984, Zara's presence was extended to major Spanish cities. The first store outside Spain was op'ened in 1988 in Portugal. The next international ventures were New York in 1989 and Paris in 1990. By the end of 1990, Zara had operations in 82 cities across Spain and three cities internationally. In the late 1990s and early 2000s, .Zara continued its global expansion and opened stores in'several countries. These Included the UK, Japan, Chile and Uruguay (1998), Canada, Germany, Poland, Brazil, UAE, Saudi Arabia, and Bahrain (1999), Australia and Denmark (2000), Holland, Luxembourg, Iceland, and the Czech Republic (2001).
6 Stephan A. Schapiro, "f!ying Off the Rack," Air Cargo World Online, September 2001. 7 Verdict Research is one of the leading publishers that carry out analyses of the retail industry. Through its reports, Verdict presents forecasts and analyses, which are used by retailers, manufacturers, analysts, media etc. 8 "Floating on Air," Economist, May 19,2001. 9 A woman's garment, usually long !\nd loose, used for informal wear at home.

. In

2002,Zara entered Italy;_Switzerland, inland,Malta, Singapore,the Do~inican F

- Republic,

andEI Salvador. In 2003, tne new m-arkets in which the cpmpany established its stores were Sweden, Russia, Ireland, Slovenia, M-alaysia and Jordan. Zara entered.Hungary, Romania, Estonia, Latvia, Lithuania, Hong Kong, Morocco,

andPanamain 2004.

In 2004, Inditex owned about 100 companies engaged in several activities related to textiles,sych as textile purchasing, textile manufacturing, and logistics. Through these companies, Zara was able integrate its operations. For exarp.ple,Comditel specialized in procuring undyed fabrics which could be dyed or printe? as per the orders obtained. Zara procured 40% of the fabric from Comditel, which finished the processes of dying and printing in about 4 to 5 days. Dyestuff was obtained from another company, Fibracolor. Synthetics we~e supplied by external suppliers. By 2005, Zara had become the third largest clothing retailer in the world in terms of revenues. As of January 2006, lara operated in 58 colintries..For the year ending January 2005, the company accounted for 67.4% of Inditex's turnover with sales of 3819.6 million. About 65.8% ofZara's revenues came from international markets. According to Inditex, "Zara is a high-fashion concept offering apparel; footwear, and, accessories fQr women, men, and children, fi'om newborns to adults aged 45. Zara stores offer a 'colhpelling' blend of fashion, quality, .am! price offered in attractive stores in prime locations on premier commercial streets and in upscale shopping
-

centers. Our in-house design and production capabilitiesenable us to offer fresh

designs at our Zara stores twice a week throughout the year." 10 Zara always had something new to offer its customers and the supply of these 'products was limited. By not resorting to mass production, Zara\)'as able to maii1tain the exclusivity of its products. This also helped in creating a scarcity value .shoppers were not sure .if they could get the same product later and went ahead with buying the product instead of postponing their purchase.. Zara also scored high on

offeringgarmentssimilar to those createdby famousfashionhousesat a fraction of

the price. 111 order to maintain a constant flow of new supplies, the garments needed to be created at quick intervals according to the demands of customers and h,!d to be replenished rapidly. Commenting on Zara, Richard Perks, retail analyst with Mintel, II said, "They've got to get the design. They've got to engineer it for low-cost production. They've got to take the gray fabric and print it. They've go to get it out to their outworkers to be made up and they've got to ship it .from Galicia right across Europe. That is an unbelievable achievement.,,12

SPOTTING TRENDS
One of the secrets behind Zara's success was its ability to spot emerging trends and react quickly. Zara had a dedicated design team in Arteixo, A Corufia, in northern Spain. Ideas for new designs or for modifications to be made in existing designs
Offer Document Inditex, 200 I.

10

II Mintel provides consumer, media, and market research services. It has several clients across the globe. The company was recognized as a business super brand in the UK for four years. The major products provided by Mintel include market and consumer research reports and interactive reports. 12 "Zara: A Model Fashion Retailer," CNN, July 22, 2004.

mainly came ITom Zara's stores. The store managers and sales staff .updated the head office every day about the moving stock and about customers' demands. Across..all the stores, Zara' s sales staff was equipped with wireless handsets which provided data to the store manager abQut.the pieces sold. The ma,:ager consoli~ated the data and sent it to the company headquarters through the Internet. The staff also p~ovided inputs regarding the new lines...colors, styles, and fabrics that customers were demandillg. It was quite common for Zara's sales personnel to inform headquarters about a new style that a custol11erhad been wearing. This could eventually become

part of Zara's line.

The store managers were selected' carefully as thi::yhad an important role to play in providing the crucial information which formed the base for new designs. People with retailing experience, who could spot the right trends, and possessed a design sense were selected fur .the position. The store managers followed the trends in local fashion carefully. AccordIng to a store manager in London, "I follow trends in London very closely, If Sienna Miller is doing boho, Zara will do boho. We're on top of every new style.~'13 Another sourc~. for the ~ew designs was the team of designers who traveled across the world loqking for n-ewdesigns and the emerging trends. Zara kept scouting around at fa::;hion shows,' disc<?thequ~s,universities, !11oyiesa,nd mlisic vi.deos to spot new' tr~nds.
. .

Designing' Zara had a team of 200 designers, with each de~igiJerchurning out about 60 styl.esa year on an average. The designers were encouraged to experiment, but within Zara's defined parameters. They were expected to adapt haute cOliture14styles to the mass market, while not bringing in their own styles Qrinfluencing the designs. According to
.

KenWatson(Watson),Directorof a LondonbasedIndustryforum,who conductedan

in-depth study of Zara, "Zara doesn't want any'prima donna designers. They want young 26-year-olds who will work within their system." 15Zara had three design

centers- one each for men's, women's,and children'sapparel. Each line had separate
procurement; design, and production planning staff.

The store.managers across Zara's stores. placed orders twice a week, on Wednesdays and Saturdays inSouthem Europe and Spain and on Tuesdays and Fridays in the other parts of the world. At the Zara headquarters, the sto~e specialists collected the . information obtained from. different stores qcross the globe. This was then fed into a database. Each of the store specialists was responsible for a group of stores. They obtained infonnal feedback ITom the store managers and also visited the stores periodicalJy to assess the trends. Most of the store specialists had worked as store managers and had a deep knowledge about managing stores.

13Angela Saini and Sarah Ryle, "New Kids on the High Street cut a Dash with Fast Fashions," www.observer.guardian.co.uk. June 05, 2005. 14The term 'haute couture' is French. Haute means 'high' or 'elegant.' Couture literally means 'sewing,' but has come to indicate the business of designing, creating, and selling custom-

made,high fashionwomen'sclothes. .

15 Rayan J Thomas, "Uncovering Zara," Apparel Magazine, January 2006. .

Based on th~ feedback from the stores, the store specialists provided the designers . with an outline of the new styles, designs, and fabric-as demahded by the stores. The procurement and production managers provided inputs regarding the capacity and manufacturing costs. The desigqerscameout with the design specifications and the technical brief. With all the teams working in tandem, the prototypes were ready within a few hours. Commenti'I1gon the fact that several teams worked together, spokeswoman from Zara, Carmen Melon, said, "We have five different teams sharing the same space, so design people work together with product people mid merchandising, as well as the people who provide the samples and patterns.,,16 Once the team came out with' a prototype, designers used CADI7 to further enhance the color and textures. Sampling did not take much time as the fabric was already available with Zara. The approvals were also obtained in quick time since th~ whole team wa5 at one place. As soon as the approvals were 'obtained [Tomthe team and the final consent [TomOrtega, the fabric was sent for cutting. Ol1ega was involved in the day to day operations of the company. According to Martin Varsavsky, founder of Spain's Jazztel telecom, "He is very hands-on 'about the designs. Everything creative

is passedon by him.,,18

'

Zara also brought out its own collections periodically, one during spring/s'ummer and another during fall/winter. The designers started working on the designs, colors, and fabric about eight months in advance. Severalpattems were deli~erated upon pefore the 'final designs wer~ decided on. Once the designs had been'decided upon, fabric procurement and production planning began.
,

Production
Depending on the styles and sizes to be produced, the fabric was cut at Zara's own high-tech automated cutting facilities. Several layers of fabric, meant for garments of a particular design, were laid out on cutting tables, vacuum sealed, and cut by machines, based on a computer layout of the sample pieces. The layout was prepared so as to minimize wastage. The fabric was then marked for sewing. The pieces cut in Zara were distrib~ted for sewing among 350 small workshops in Galicia and northern Portugal. These workshops, which were not owned by Zara, employed about 11,000 workers and were provided with a set of instructions. The garments. were generally ready within a week or two, depending on the number of garments. With the fabric in stock, Zara was ready with-the final product, including, designing, pattern. making, and cutting within 10 days.

~Due to this flexibility in production processes, when the demand for any design was ~w; Zara was able to stop its production. At the same time, it was able to modify its processes to produce more bf the designs in demand. Analysts opined that it was Zani's ability to respond quickly that put the company on a different plane as compared to the other' fashion retailers.

After the stitched garments arrived at the manufacturing centers, they were checked nvice for quality, ironed, tagged, and then wrapped in plastic bags and sent to the distribution centers. About 60% of Zara's total production was carried out in Portugal
-16 "Zara: A Model Fashion Retailer," CNN, July 22, 2004. J7 Computer-aided design (CAD) is the use of a wide range of computer-based tools that assi~t engineers, architects, and other design professionals in their design activities. 18Richard Heller, "Inditex Index, Inside Zara," Forbes, May 28, 200 I.

and Spain. The comp(!nyconsidered several factors like expertise, cost, and especially time s~nsitivity before opting for outsqur~ing. Zara carried ,out some of the capital intensive m.anufacturing processes including dyeing and cutting the fabric indigenously while the labor inte!lsive steps like sewing were out~ourced. Garments that required styling and reflected fashion trends were made by Zara while the basic .designs and knitting were outsourced. On the flip side, the people cost that Zara had !o incur was higher compared to other retailers who outsourced their production to Asia. Distribution The distribution of garments was carried out at Zara's 500,000 square meter distribution center in Arteixo. This center was located centrally among 14 manufacturing plants in La Coruna. Zara had its own railway track of 211 km through which the goods moved from the manufacturing plants to the distribution center. In 2002, another distribution center was opened at Zaragoza in Spain to complement the existing facility. The merchandise moved through optical Teading devices that sorted out more than 60,000 items every. hour. The distribution center had two levels and was fully automated. On one level was the section on folded apparel packed into cardboard boxes. The boxes were dropped through a s~aft according to their destination. On the. other lever were garments placed on hangers. These garments were sorted bas.ed on their styles. There were two ,belt systems -- one for folded and one for hung garments. The garments were then routed using automatic, routing devices. All the garments were pre-priced and the lots labeled according to their destination. At the loading docks, fleets of trucks took the goods to their destinations. Twice a week, the garments were shipped out of the distribution center. Non-European consignments were sent to the airport at Santiago di Compostela. For stores within Europe, they were sent through trucks, which received the consignments within 24 to 36 hours. The stores located outside Europe received the consignment witl)in two
days. '

The distribution center was us'ed to select, 'sort, reroute, and resort men;:handise between manufacturing units and stores and was not used to store merchandise. About Zara delivering its products twice a week, The New Yorkerl9 wrote, "Twice-weekly deliveries may be' common in the grocery business, but in fashion retailing they're. unheard of. The curse of the rag trade, after all, is the enormous lag time between the initial sketches of that new A-line skirt and its arrival in stores. Instead of reacting quickly to what customers want now, most retailers must guess what they'll want six or nine months hence. That's hard enough if you're selling televisions or bicycles. In the fashion business, it's close to impossible.,,2O Once the trucks reached the stores, the garments could be put on display straight away as they were pre-priced and already ironed. Zara was able to achieve an accuracy level of 98.9% in its shipments. The items sent to a particular store had the items that the store managers had asked for and sometimes new items that were proving popular
19 The New Yorker is an American magazine that publishes reports, criticism, essays, cartoons, poetry, and fiction, The first magazine was published in 1925. Earlier, the magazine was published every week, Later, the format was changed to forty weekly magazines and six special issues, 20 James Surowiecki, "The Most Devastating Retailer in the World," The New Yorker, November 2000.

with stores at other nearby locations. With new stock arriving twice a week, the stores always had something new to offer.and the customers waited eag:rly for the new arrivals. According to Zara, on an average, customers visited Zara's stores 17 times a year, c'ompared to the three to four visits its competitors received (Refer to Exhibit III for Zara's production process). Store Outlay Zara was very particular about the location of its stores. The stores were mostly located in prime locations across the world. For example, Zara outlets were located in 34th Street, Fifth Avenue, SoRo in New Yark; Regent Street in London, and Cha.mps Elysees in Paris. All of Zani's stores were uniform in outlay, including lighting, fixtures,. window display, and arrangement of garments. A typical.store had a floor space of 1200 square meters. The stores were brightly lit with a mix of halogen and fluorescent lighting. The back. walls were fully lit and the lights placed around and above the merchandise diffused light from.all sides. Color was not used much in the interiors, which were mostly in .white, natural' pine, mill work, and .brust1ed.stainless steel hues. The glass paneled fayade was brightly lit with a promine.ntdisplay of products, mannequins, and posters showingZara's clothes. .
.

Zara planned its store windows and displays carefully. At the company's
headquarters, there were 25 full length display windows. These windows had display' platforms and variable light, which helped Zara in determjning how the. display unit woulii look on bright days, on cloudy days, and during the night. A team of window designers worked to arrive at the look of the windows at each of their stores. The window presentation designs were then sent to the stores and most of Zara's stores across the world sported those designs. The display of clothes was given prominence in the stores. When the shipments arrived, there were codes on all the items which conveyed to the staff where exactly. the items needed to be placed. In the stores, the clothes were organized by color rather than type of garments. This .was done in order to encourage customers to spend more time at the stores and to spot the matching items. According to a sales assistant in one of Zara's stores, "We always have something that looks like.what the customer wants. If the flowery dress sells out, there will be a white one of the same design in stock. Customers won't leave the store empty~handed.,,21 . All of Zara's stores .were located at places where there was constant pedestrian flow and they had huge windows to display the merchandise. This acted as a major pull factor in atttacting customers: Zara believed that these locations themselves provided the required advertising - the company spent very little (about 0.3% of its total revenues) on advertising or on the launch of new stores. On Zara's store de-Signs, Domenico De Sole, the CEO of Gucci22,said, "What always strikes me is the very high quality of their store presentation. I respect people who know how to present their product. Their stores, a.ndparticularly their windows, are very elegant.,,23
21 Angela Saini and Sarah Ryle, "New Kids on the High Street cut a Dash with Fast Fashions," www.observer.guardian.co.uk. June 05,2005. 22 Italy-based Gucci Group NV is one of the world's leading multi-brand luxury goods companies. The group companies design, produce, and distribute high-quality personal luxury goods, including ready-to-wear apparel, handbags, luggage, small leather goods, shoes, timepieces, jewellery, tics and scarves, eyewear, perfumes, cosmetics and skincare

products.
23Richard Heller, "Inditex Index, Inside Zara," Forbes, May 28, 2001.

Zara's h~ge stores presented the -ambience of up$c:aleboutiques, w1th marble floors and.effective lighting. One of the customerS visiting Zara iF!New York commented, "You feel like you're in a classy European boutique.,,24 Most of the stores were company owned and in some markets particularly in Asia, Zara adopted the route of alliances and tTanchises. All the franchise operations were controlled by strict quality procedures laid out by Zara..It provided the franchise partn~rs with extensive training in human resources and logistics. Even while entering into agreements with tTanchisees, Zara retained the right to open its own stores in the location and buyout tTanchisedoperations in case it experienced any problems with running the stores.

REAPING THE BENFITS

Instead of projecting sales for a certain color, fabric, or style and launching such products, Zara reacted swiftly to emerging trends in the fashion industry. The company ensured that its stores were stocked with th.eproducts that the customers wanted at that point of time. In contrast, other retailers took between 8 and 12 months to forecast and arrive at a style and send it for production. Zara's initial forecast was limited to the. kind of fabric. and the amount of fabric it would buy. The fabric thus proGured was unprocessed- and undyed and Zara colored the product only before selling It, based on the need and deman.d by consumers. Zara sourced undyed.fabric tTomthe Far East, f',Jorocco,and India. When Zara opened stores in new locations, the shop assistants clearly told the customers that the styles changed every week and that they might not find the same piece in the stores again. Once a product was in the stores, Zara quickly moved on.1o the next style. With new styles being introduced eyery week, consumers were likely to visit the store more often. Producing a product in limited quantity had another advantage. If the style did not sell as expected, Zara did not lose much, as there was not much stock to be discounted. On an average, Zara sold only 18% of the clothes through discount sales twice a year, as against the industry average of 36% and constant markdowns. Analysts opined that Zara's main advantage was its ability to respond during the season. If any collection was not doing well during the season, Zara could immediately realign its resources, whereas the other retailers had to resort to ?iscounts and advertising to clear their stocks. Zara used the pull process instead of forecasting to gauge market trends. As soon as a proquct was sent to the stores, Zara would know if the new design was going to succeed or not, based on immediate feedback fTomthe sales force and store managers. Products that did not sell as expected were immediately discontinued. According to Watson, "The fundamental thing about using small batches and this model is that [you] are continually making decisions based on consumer demand. And if you cut your demand to your supply and are able to do it quite quickly as it begins, you're alw~ys on the upward start of the demand curve, which is the highest rate ofsales.,,25 DefYing conventional wisdom, Zara adopted practices that resulted in higher costs. These included three product lines, deliveries twice a week, using planes and trucks to transport its goods instead of cheaper alternatives like trains and ships, and shipping
24 William Echikson, 'The Mark ofZara," BusinessWeek, May 29, 2000.

25 J Ryan Thomas, "Uncovering Zara," Apparel Magazine, January 2006.

some of the g.armentson hangers, which occupied more space, .thus increasing freigl1t chaI:.ges.However, these practices helped Zara maintain a low inventory and higher profit margins. Analysts opined that Zara's supply chain did not' minimize costs but worked towards maximizing revenues. When most of tne European retailers were moving their production processes to low cost countries like China and India to minimize their costs, Zara made efforts to keep its costs low; despite manufacturing in. Spain and other European countries. The company did not own any of the workshops where the sewing was done. These workshops employed women from villages and small towns. Their average wage was around US$ 500 a month as against the US$ 1,300 per month paid to industrial workers. However, these wages w~re still 5 to 7 times higher than those paid in India or Chiria. Zara was thus able to achieve the flexibility of making and distributing the garment in a few days, something which would ~ave not been possible if the manufacturing was dony in these low cost countries. According to David Bovet of Mercer Management Consultant, "The dominant way of thinkirig for a while now has be.en, find .the cheapest cou~try out there and get it to produce your stuff, but what Za~ahas said is that proximity matters. Even if you save a couple of bucks an hour by shipping the stuff off to the Third World, you end up p.aying mor.ein the end, because it destioysyour flexibility.,,26 'Zara's use of information technology (IT) was limited. According to Andrew McAfee, specialist in the corporate use of IT at !farvard Business School, "The company keeps its technology simple - even a little.old-fashioned - but as a result spends five to ten times less on information technology than its rivals.,,27

LOOKING AHEAD
Industry analysts were of the opinion that Zara could not continue with its supply chain model for too long. With many retailers moving their manufacturing processes to India and China to control costs, Zara would have to follow suit sooner or later in order to remain competitive. However, if the production was to move out to low cost countries, Zara could lose its advantage and might not be able to refurbish.its product lines in quick succession, the analysts felt. By 2008, the quotas28 imposed on the Chinese textile industry by the US and the European Union would be removed. Most of the leading European textile companies were expected to move their manufacturing processes to Asia, particularly to China, due to lower costs. Several luxury apparel brands would also start sourcing from China. According to NathanCockerll, analyst with Credit Suisse First Boston

26 James Surowiecki, "The Most Devastating Retailer in the World," The New Yorker, November 2000. 27 "The Future of Fast Fashion," Economis.t, June 18,2005. 28 In order to protect European manufacturers from Chinese imports, a quota was imposed on 10 categories of clothes from China. Under the terms, the quotas restricted the annual imports of the specified items till 2008. America also entered into a similar agreement for 34 categories of clothes. After the quotas are removed, the European manufacturers who are not able to m.anufacturegarments in China would be able to manufacture them and,source their products from China.

Retail Management

(CSFB)29;'.T.he ~conomics of .Asiansourcin& ac;tua1!ywQrk better for some luxury companies than fast-fashion retailers, because the imirgins on more expensive-goods aren't affected as much by the cost of putting them ona plane.,,3o. Analysts cautioned Zara against aggressive ex\?ansion. They pointed out that the

farther Zara moved-its operations from Spain, further away it would be -fromits
centnilized-.~istribution system, which would lead to higher costs. Analysts warned that vertical integration, which was Zara's strength, could also turn out to be its weakness, if it continued expanding to far off locations in Asia and Americ~. One of the disadvantages of vertical integration was the lack of economies of sc~le, where Zara was unable to reap the advantage of producing large quantities of products to sell them ~t competitjve prices. Retail experts suggested that lara should complete its expansion in the European markets before venturing into the Asian markets. .In case lara wanted to expand further, analysts opined that it needed to decentralize its production processes and have a production' center for a cluster of countries along with distribution centers. Questions for Discussion: 1. According to Richard Hyman,"V ~rtical integration has gone out of fashion in the consumer economy; lara is a spectacular ~xception to the rule.'" Explain how lara used its vertically integrated supply chain to its apvantage. What are the drawbacks of havipg a highly vertically integrated supply chain for a fashion retailing company? Explain. 2. In the light of lara's global expansion in far-off locations like Asia and America, what modifications according to you, the company has to bring in its supply chain
'and w11Y? . ;'

3. Most of the supply chain management efforts by organizations now-a-days are

aimed at minimizing costs rather than on maximizing revenues. However, lara's supply chain management practices are an exception. Do you think lara should continue with these practices or should aim at reducing costs so as to maximize profits? Take a stand and justify. ~ 2006. Iefai Center for Management Research. All rights reserved. This case was writtel) by llldu; P., under-the direction of Vivek Gupta.

29 CSFB is a New York based investment banking and financial services firm. It is a division of the Credit Suisse group and has started operating under the the name Credit Suisse .since January 16, 2006. The firm caters for three different categories of clients - institutional, investment banking and investment management clients. 30 Rana Foroohar, "Fabulous Fashion," Newsweek Internationar, October 17, 2005.

- Exhibit I
. Zara""" Global Presence America Country Argentina Brazil Canada Chile Costa Rica Dominican Republic EI Salvador Mexico Pan-ama Uruguay Venezuela USA Total Asia Country Hong Kong Japan Malaysia Singapore Indonesia Philippines Total Country UAE Bahrain Israel Jordan Kuwait Lebanon Morocco Qatar Saudi Arabia Total Source: www.inditex.com. Middle East & Africa No. of Stores No. of Stores 4 18 3 3 2 31 No. of Stores 6 14 14 5 Country Andorra Austria Belgium Cyprus (January 2006) Europe

- No. of StoreS
1 8 18 3 3 4 1 4 90 41 J8 2 5 36 1 2 2 1 1 6 11 46 1 7 3 259 4 8 13 45 665 853

1 Czech Republic 1 Denmark 1 Estonia 39 Finland 1 France Germany 9- Greece 19 Hungary 112 Ireland Italy Latvia Lithuania Luxembourg Malta Monaco Netherlands Portugal Romania Russia 5 Slovenia 1 Spain 14 Sweden I 4 Switzerland Turkey 2 UK 1 Total 1 16 45 Grand Total 2

1 Poland

Exhibit II
. "

IND~TEX - International Expansion. Year Countries Portugal USA France Mexico Greece Belgium, Sweden Malta Cyprus, NQrway,Israel
. .

1988 1989
1990 1992 1993 1994 1995 1996 1997 1998 1999
.

Argentina, Japan, UK, Venezuela, UAE, Lebanon, Kuwait, TurKey Netherlands, Germany, Poland, Chile, Saudi Arabia, Bahrain, Canada, Uruguay Austria, Denmar~, Qatar, Andorra
Puerto Rico, Jordan, Ireland, Italy, Iceland, Luxembourg,

2000 2001 2002 2003

2004

- Czech

Republic EI Salvador; Finland, .Singapo!e, Dominican Republic, Switzerland Russia, Slovakia, Slovenia, Malaysia Hong Kong, Morocco, Estonia, Latvia, Romania, Hungary, Lithuania, Panama Morocco, Indonesia, Philippines, Costa Rica

2005

Source: WWW.illditex.com.

.Exhibit

III

Manufacturing Process ofZara

Sales personnel & store managers obtain customer feedback, monitor local trends and update the headquarters daily Designers travel across the world scouting for trends, ideas and - designs

Data obtained used to decide on price, fabric etc. Undyed fabric supplied from fareast

Store specialists, designers, procurement and production managers work in tandem to arrive ~t

new designs

..

Sampling and approval

Fabric is dyed, cut and sent to workshops for stitching

Stitched garments are checked for quality and sent for distribution

Garments are sorted out and sent to Zara stores across the world Adapted from J L. W Lo, B. Rabenasolo and A-M Jolly-Desodt, "Leveraging Speed as a Competitive Advantage: A Case Study of an International Fashion Chain and its Competitors, " Fashion Net, International Conference 2004.