ZARA case

ZARA 2000 CNMV (http://www.cnmv.es/FE/FEO3554_2.pdf) The organization of Zara´s integrated model is better understood through the analysis of the flows generated from the design stage of a clothing item to its final sale in a Zara shop. The following scheme summarizes the production flows of clothing items of the company´s integrated model. ZARA Shops Design /Patron/Product Purchase of fabric (externally) Own Fabrics Reception of produced items Fabric Processing COMDITEL (100%) Sewing (external studios) Inventory /Warehouse Fabric Dyeing FIBRACOLOR (39%) Quality ControlFinal Preparation Orders' Management Shipping/customs Production/ Purchase of Knittwear Zara Distribution Center Colouring Purchase from extenal producers Sale Design & Supplies Production and Purchases Logistics In a traditional clothing retail business, the selling price results from adding the cost of goods sold, overheads, and desired profit margin. In Zara´s case, the process this reversed and each clothing item starts with a selling price determined from its design stage. The pricing policy of Zara in each country is determined by Zara commercial department as a function of the process of close competitors. Afterwards, Zara searches for fabrics, other materials and suppliers that allow producing the clothing items at a cost that generates the target profit margin. The way Zara positions itself within its competitive environment differs from country to country. As so, Zara also sets different price levels in each of the countries in which it operates. Next, the selling price is communicated to the Central Purchases teams that must determine the profit margin in alignment with the economic objectives of the organization. The Purchases teams are the ones responsible for deciding the location of production and maintaining the order of manufacturing. Once the clothing designs have been determined these teams are in charge of agreeing with selected factories the volumes to be produced and the dates of manufacturing and delivering the final items. 1 INDITEX has around 20 companies involved in the production of clothing items; each of the companies is specialized in the production of specific items and most of them produce items only for ZARA. Each of the chains of the Group has autonomy in managing the commercial aspects of the business. At the same time, there are certain functions that remain, partially or totally, at the jurisdiction of the Central Corporate Services in order to ensure synergies and economies of scale. As Zara was the first and still most profitable chain of the INDITEX group special care and increased autonomy is considered when taking decisions at Group level. In terms of structure, each of the chains has its own management and headquarters that remain independent from INDITEX. The chains’ independence is encouraged by INDITEX that allows enough freedom for each chain to develop according to each own team’s orientation. The following table presents the allocation of functions according to the organizational level. Corporate Functions Strategic Management General Secretariat Legal Advice Financial Policy Financial Advice Capital Markets Administration and Insurance Communication Human Recourses Industrial Property/Infrastructures Shared Functions Property and Expansion Management Control General Services IT Chain Functions General Management Design Purchases Product Line Shop Image Shop Management Logistics Personnel Management The decision of whether to produce internally or purchase externally is made based on criteria of costs, delivery points and time, profitability etc and factories (internal or external to the group) compete in order to secure a contract. As a general policy, the GROUP factories focus more on the production of products of higher risk, i.e. on the most fashionable and with more peculiar characteristics. Normally, the GROUP factories operate single shifts; however, in seasons of high demand and change of collection some of them work double shifts. Capacity-wise the factories work at approximately 50%. The following table presents the industrial structure of the group. 2 Units provided 2000 To Zara To other chains in the Group 2.177.789 2.589 Conf Goa Arteixo Main Products Group Participation (%) 100 % Children wear Conf Fios Arteixo 100 % Shirts 3.176.564 Salmor Arteixo 100 % Skirts and Women’s 2.425.647 Name Location 1.394 Pants Nikole Arteixo 100 % Dresses and Tops 1.197.935 Denillo Arteixo 100 % Women’s Jackets and 1.675.699 Blazers Yeroli Arteixo 100 % Cuttings Denillo Choolet Arteixo 100 % Skirts and leather 1.556.795 112.344 jackets Trisko Arteixo 100 % Men’s Blazers and 1.706.603 Pants Zintura Arteixo 100 % Children wear 4.407.642 Kemmer Arteixo 100 % Pants and Skirts 1.247.903 Hampton Arteixo 100 % Skirts and dresses 2.653.874 Sircio Arteixo 100 % Women’s blazers and 1.205.286 Tops Tugent Arteixo 100 % Cuttings Sircio - Stear Arteixo 100 % Women’s Pants 5.019.147 Glencare Arteixo 100 % Women’s pants and 2.615.923 9.272 leather jackets Nosopunto Ferrol 51 % Knitting 3.610.143 1.908.835 Indipunt Naron 51 % Knitting - Jema Cre Ferrol 46% Knitting 608.829 139.020 Kettering Badalona 100% Knitting 6.044.390 389.493 Tempe Elche 50% Shoes 3.924.464 1.247.735 Total 45.254.633 38.10.682 Inf 3 The factories Directors are responsible for the services and the quality of production. The Commercial Department provides him/her with the raw material and his/her job s to adjust the production process and meet the demand expressed. The factories are equipped with automated equipment for the branding process (optimizing the use of each fabric), the cutting (robotic equipment taking measures and cutting fabrics) and ironing. The sewing and assembling of the clothing items is not as automated and done in external tailor’s studios that are almost 400 in number and are mostly located in Spain and Portugal (96%). Each factory works with each own tailors and the factory’s director is responsible for negotiating the prices and controlling for the quality of the services received. The studios based in Spain are supplied the raw material without invoicing them to the GROUP and their payment is based on the services provided. On the contrary, the studios based in Portugal (or any other country) record purchases of raw materials and then sell to the group the finished goods. Once the clothing items are ready they are sent to the factory for their finalization (i.e. ironing, packaging etc), go through quality control and are sent to the Distribution Center. The main Distribution Center is based in Arteixo (A Coruña) and is the one handling the majority of logistic operations of Zara throughout the globe. The only exceptions are the shoe line that is distributed from the centre in Elche and the cosmetics line that is directly sent to the shops by the suppliers. The Distribution Center of Zara employed approximately 800 people in January 2001 and can seasonally grow to 1200 (on the basis of temporary contracts). Other, smaller size distribution centers are based in Argentina, Mexico and Brasil. Items are distribution commonly twice a week mostly by land transport (80%) and less by air transport (20%). The latter is mostly done through the airports of Santiago de Compostela and Porto. Every week the number of items handled in the distribution centered amounts to 2,5 million units of which 65% are packages and 35% are hangers. The average inventory stock is around 6-10 million items and determines the weekly supply to the shops. The proper programming of entry of new items from the suppliers every week ensures that items are delivered to the shops on time and that the inventory remains sufficiently high. The production of the items preceded the marketing campaigns of every season for approximately three months and the average stay of an item in stock is approximately 37 days. In reality the distribution center works in a rhythm that allows single sifts four days a week, a rhythm that reveals the potential of growth without further 4 investments. The surface of the distribution center is occupied only by 50% while some chains (like Pull and Bear) can afford for their own distribution centers and hence release even more space. The actual transfer of items takes 24-36 hrs in Europe and 24-48 outside Europe, a speed ensured by an information system developed within the Group. As the shops are the final destination of the product, the information required to complete the transaction circle needs to be collected in situ by the manager of each shop. He/she is responsible for the product (its assortment and replacement), the employees of the shop and the maintenance of the shop and its image. The shop director reports to the Shops Division and is in charge of transmitting the client’s opinion regarding the product. All the transactions of INDITEX with the rest of the companies falling within the GROUP are done in market prices and transfer prices are set according to the margins applied in the sector as a whole. Required: Discuss how the following concepts apply to this case study: • Centralization-decentralization • Responsibility Centers • Transfer Pricing 5