Supply Chain Management Strategy

Assignment 1

Group Qualitative Case Study

ZARA Demand Management

Julius Danielczak; Jie (Darrich) Neo; Samuel Nheu; Daniel Simiele; S3283281 S3328664 S3238302 S3333231

Lecturer: Dr. Charles Lau Tutor: Meihua Gu Word count: 2,501

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Contents
1. INTRODUCTION ...................................................................................................... 3 2. EXECUTIVE SUMMARY .......................................................................................... 4 3. DEMAND MANAGEMENT ....................................................................................... 5 3.1 Design and Forecasting ......................................................................................... 5 4. CHALLENGES.......................................................................................................... 7 4.1 Product Quality ...................................................................................................... 7 4.2 Manufacturing conditions ....................................................................................... 8 4.3 Inventory levels for different countries with different seasons ................................ 8 4.4 Copyright infringements ......................................................................................... 8 4.5 Centralised Distribution Centres: ........................................................................... 9 5. RECOMMENDATIONS .......................................................................................... 10 5. 1 Quality ................................................................................................................. 10 5.2 Manufacturing conditions ..................................................................................... 10 5.3 Inventory levels .................................................................................................... 11 5.4 Copyright Infringements ....................................................................................... 11 5.5 Centralisation of Distribution Centres ................................................................... 11 6. CONCLUSION ........................................................................................................ 12 7. References ............................................................................................................. 13

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1. INTRODUCTION
The fashion industry is maintained on a sense of uncertainty, trends change all the time making it even harder to predict a market and in turn forecast the required supplies and raw materials needed to make a product In recent times, the retail industry has possessed characteristics parallel to a push model where the retailer pushes clothing styles and outfits to the market. This strategy in todays retail environment will effectively fail as new entrants and competitors can enter the market on any given day and time, This in turn forces retailers to listen to their customers and deliver products according to their desired demands, essentially allowing the customers to have an important role in the overall success of the organisation. Fashion chains like Zara emphasise the importance of recognising what makes a customer tick and can then respond quickly to satisfy their needs. In addition, different geographic locations have different patterns of spending, styles and customer incomes. Accurate evaluations must be made in establishing the given demand within respective markets. This paper will focus solely on key points relevant to the demand management of established fast fashion retailer; Zara. Firstly, the demand management techniques used by Zara will be discussed accordingly and will attempt to explain how they provide the organisation with a competitive advantage over its competitors. The latter part of this paper will focus on current implementations within Zaras business model that may have the potential to weigh the company down and will suggest possible recommendations that can be made.

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2. EXECUTIVE SUMMARY
Demand management is an essential aspect of any business, with regards to Zara, demand management is of utmost importance in allowing the fashion retailer to distinguish itself from its competitors and gain a competitive advantage over those organisations within the fashion industry. One day its in and the next day its out- this phrase is extremely symbolic to the current supply chains implemented by Zara, where designs are drawn, manufactured and transported at rapid rates. The change in customer demands has prompted fast fashion retailers to create a wedge within the market-share and efficient management of these unique demands has allowed some fashion retailers to gain majority of their respective market share. Zara has successfully implemented a vertical demand management integration business model which in turn has allowed Zara to beat the pants off the competition, and it has turned the founder of Intidex, Amancio Ortega, into Spains wealthiest man and the world richest fashion executive. (Gallaugher et al, 2008). The high respect Zara has emphasized on their demand management model and customer base has allowed the organisation to grow in leaps and bounds to become the world leader within todays ever changing fashion industry.

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3. DEMAND MANAGEMENT

3.1 Design and Forecasting

Zaras success has been watched closely by the public and envied by its competitors. Its explosive growth has been attributed to its cutting edge supply chain techniques and technologies, but the most noteworthy factor that contributed to the growth is its management on customer demand. By introducing the following processes, tools and methods, Zara has managed to develop sales-winning designs, something its competitors rack their brains to create. For each of Zaras product lines; men, women and children, each have creative teams of designers, sourcing specialists and product development personnel. The teams will simultaneously work on products for the current season by expanding on successful product lines and continuing in-season development as well as in preparation for the following season. It was decided by senior management that they will not employ design maestros, instead keeping the focus flat and on careful interpretation of catwalk trends suitable for the mass market (Ghemawat & Nueno 2006). This enabled them to reduce high wage costs and focus their time and effort on selling cost effective fashion.

Another tool that is heavily used by Zara is how they gather data directly from customers. This is possible through a variety of ways such as through direct conversations from store personnel to customers casually enquiring if they would prefer a certain apparel in a different colour, different length etc. Store personnel, are equipped with PDAs can immediately relay this valuable information back to company headquarters to allow for further design changes to meet these ever-changing needs. Another method to gather data that Zara employs is to investigate items left behind by customers in fitting rooms and piles of unsold items (Gallaugher et al, 2008). This is an

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effective way to identify what types of items are unpopular and what should be discontinued.

Most products are manufactured on a limited production run. Though there is the cost of lost sales, it also creates several advantages that outweigh the disadvantages. Firstly it creates exclusivity; many fashion followers will always want to stand-out from the crowd and not look like each other wearing the same clothes. Secondly, it allows Zara to encourage customers to purchase items right away at full prices (Gallaugher et al, 2008). The reason customers are willing to do this is because they know if they dont purchase the item they like there and then, the item will be gone in 2 weeks as they will no longer produce or carry that item. Most notably, limited runs allow for much lower risks of over producing slow and unpopular garments, Hence saving lots of resources in trying to make up for this activity.

From these design methods of following, rather than leading in fashion innovation, forecasting can be much safer which reduces the risk of creating slow moving and dead stock. By analysing popular item designs from fashion leaders, creating slight modifications and then producing and shipping in bulk ensures Zara is adapt to meeting customer needs of wanting everything now.

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4. CHALLENGES
With an ability to meet high demand and variety in a short span of time, Zara undoubtedly faces several challenges which are discussed in this section.

4.1 Product Quality

Quality has always been a main concern for shoppers. In a 2012 article published on WantChinaTimes.com, author, Cheng M. reports that since August 2009, Zara was involved in at least seven incidents whereby products were faulty. It further mentions that despite being questioned, Zara remained quiet and this lack of response subsequently led to Zaras integrity over its quality being questioned. Furthermore, in 2011 another article from Peoples Daily Online reported that Zara, amongst several other brands such as Hush Puppies from the USA, had failed quality tests established by the Beijing Consumer Association. These tests involved criteria such as fibre content, colour fastness and pH value, which could result in skin irritation should alkaline levels be too high. Zaras result was considered the worst, through failing three successive tests. Reasons that contributed to such results included having different contents than it stated, for instance instead of having 75 percent cotton, 20 percent wool and 5 percent terylene, a type of polyester, the fabric tested at 68 percent cotton, 10 percent wool and 12 percent other contents(Daily et al, 2011). Having high quality products ensure customers are returning customers not merely just one offs. Failure to provide quality to a standard may cost Zara in the future.

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4.2 Manufacturing conditions

Another issue that is somewhat related to quality is sweatshop labour. Having a large amount of new designs every week is an impressive feat, but with other large apparel companies such as GAP, NIKE and Wal-Mart facing inhumane labour issues, Zara had to ensure that its products were not manufactured in conditions that are likely to put it under similar media and social fire (Gallaugher et al, 2008). Distinguishing itself from sweatshop labour places Zara in an impressive position as a firm with a strong set of ethics and standards in regard to sweatshop labour.

4.3 Inventory levels for different countries with different seasons

Through its expansion, as of 2011, Zara had operations in 78 countries (Belle Kwan, 2011). With operations at a global scale, Zara may face higher manufacturing costs in comparison to its competitors. For example, during the period between December to February, Europe will be experiencing wintery conditions while countries such as Australia, New Zealand, and South Africa will be experience hotter weather conditions. Despite the additional profits it can generate in the short term, in order to meet all demand and be accommodating, Zara will be producing a larger more diverse range of products which may lead to higher costs than its competitors in the long run. (Universia Knowledge @ Wharton, 2012)

4.4 Copyright infringements

According to Gallaugher et al, 2008, Zara creates new designs through several methods, one of which consists of redesigning apparel by other brands. The article stated that a fan of Madonna was able to wear a similar shirt Madonna wore in her first performance in Spain to one of her concerts towards the end of the tour. This was within a space of two weeks and shows how responsive the Zara supply chain is. This then suggests a question; will Zara be capable of continuing this method without infringing on
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copyrights in the long term? Within the highly competitive industry of fashion, Zara might be heading into lawsuits should it not find a method to remain original.

4.5 Centralised Distribution Centres:

The location of a distribution facility in La Coruna and Zaragoza in Spain has the potential to cause major difficulties within the supply chain. The distribution centre in Zaragoza is the size of roughly 90 football fields and the main cog in the wheel for the constant movement of supplies both into and out of the distribution centre. Whilst Zaras distribution strategy is as effective as any other major retailer in the world, the possibility of unforeseeable disruptions can leave Zara distribution network in disarray. Due to the geographical positioning of its distribution centres Zara may be limited in what they can do to mitigate risk. In case of disruptions such as natural disasters, political risks or weather disruptions, Zaras supply chain is susceptible to fail. The failure to have a geographical spread of its distribution centres in times of disaster may lead to long lead times, the potential for damaged stock and a supply chain in despair. The financial ramifications Zara such as loss of sales, increased inventory holding costs and a backlog of frustrated customer orders could damage the reputation of Zara as a reliable fashion retailer.

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5. RECOMMENDATIONS
5. 1 Quality
Having failed three successive quality tests in China, it is crucial for Zara to re-convince its customers that product quality is assured in order to not only retain its current customers, but also attract new customers. This can be achieved through internal testing of raw materials, in-process goods and finished products. Zara could also conduct regular auditing, managing and revisions of its production processes to ensure production integrity. Other methods may include introducing product quality officers who can supervise processes and setting benchmarks and incentives for employees and also suppliers to ensure quality remains at the highest standard.

5.2 Manufacturing conditions

As mentioned by Gallaugher et al, 2008, Reebok which is now part of Adidas, had created a department that addresses human rights. By investing millions to develop information systems, Reebok was able to track and audit suppliers as well as practices that affect environment and labour issues. This then further expanded into the non-profit Fair Factories Clearinghouse, whereby specialists in human rights share information and systems with one another and apparel companies. In order to stay clear on such issues, Zara could consider having more interaction with Fair Factories Clearinghouse and gain insights into this information if it has not already. Also, regular visits to sites, constant supervision and concern for workers as well as audits and revisions on the labour process and environment could help Zara from negative effects that arise from unacceptably poor practices.

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5.3 Inventory levels

With Zaras operations expanding to more regions and countries, inventory levels are expected to be on the rise to accommodate the different seasons and styles. In order to control it, Zaras must focus on its reverse logistics and find methods that can clear out excess inventory and aim to achieve zero excess. One method that could be applied is to have another clothing brand under Inditex to sell unwanted Zara clothing at lower prices. This can clear unwanted stock and aim to recollect some value lost from holding stock for too long.

5.4 Copyright Infringements

The issue of infringement is a vague topic. This is due to the limited insight as to how Zara changes its competitors designs into its own and avoiding any major lawsuits. Despite so, fact remains that Zaras competitive edge was not only through the supply chain, but also products that look like its high end competitors, but only at a much lower price. With this similarity, the risk of infringement lingers. Some methods Zara could employ, is to establish a team of employees who constantly revise products for major similarities with its competitors. Zara could also aim to create its own style and ensure that products are designed towards that direction.

5.5 Centralisation of Distribution Centres

Many large firms often hedge their risks that could directly affect the supply chain. Having distribution facilities in just two locations in Spain certainly doesnt reflect this strategy. Creating distribution facilities in more than just one country aims to mitigate this risk. For example; opening up a distribution centre in a region such as the London, would mitigate any disruptions that may occur to the facility in Spain in the case of natural disasters or political unrest. Conducting market research on their most profitable

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regions, Zara may also consider opening another distribution centre in close proximity to customers in order to reduce customer waiting time and freight costs.

6. CONCLUSION
Demand management is an essential aspect of many organisations. Reflecting back to Zara, demand management plays a pivotal role in the overall successes of the organisation within fluctuating demand and a competitive fast fashion market. The various demand management principles implemented by Zara has as a result allowed the organisation to set itself apart from its competitors and become a leader in its respective market. The case study of Zara has portrayed the success the organisations has, and as a result has become the worldwide benchmark for supply chains due to its successful supply chain principles whilst understanding their loyal customer demands. In hindsight, this paper has also identified instances where the organisation itself may find downfalls to its overall competitiveness. Adequate recommendations have been made in order to mitigate any unforeseeable events that could potentially have a negative impact towards the organisation and its goal of providing customers with high end fashion, at reasonable price and in quick time. In conclusion, Zaras success and high competitiveness in todays extremely competitive and changing fashion retail market is paramount to the high respect emphasised on the organisations demand management model, the implementation of world class demand management practices has undoubtedly contributed to Zara having a stronghold within the quick fashion retail market.

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7. References
Cheng, M, 2012, Zara's sales soar despite questions over quality in China Want China Times, viewed 8th September 2013 <http://www.wantchinatimes.com/news-subclasscnt.aspx?id=20120101000005&cid=1102>. Daily, C, 2011 Top brands fail to pass quality test China Daily, viewed 5th September 2013 <http://english.people.com.cn/90001/90778/90860/7357071.html>. Gallaugher, J., Zara Case: Fast Fashion from Savvy Systems Flat World Knowledge, September, 2008. Ghemawat, P & Nueno, JL, 2006, Zara: Fast Fashion, Harvard Business School, viewed 2nd September 2013, <http://researchingsustainability.files.wordpress.com/2012/01/zara-harvard-case.pdf>. Kwan, B, 2011, Spanish domination - Zara brand profile, Marketing Magazine, pp. 4547. Somaiya, M, Fashion Forward - Zaras Supply Chain Strategies, Supply Chain Management, Viewed 1st September 2013, <http://cmuscm.blogspot.com.au/2012/09/fashion-forward-zaras-supply-chain.html>. Stevenson, S, 2012, How Zara gets fresh styles to stores insanely fast within weeks Slate Business, pp. 143-144. Universia Knowledge @ Wharton, 2012 'Zara: Changes are in store, but what will they mean for retail China, Viewed 3rd September 2013 <http://www.wharton.universia.net/index.cfm?fa=viewArticle&id=2190&language=englis h>. Zhelyazkov, G, 2010, Agile Supply Chain: Zaras case study analysis Manufacture and Engineering Management, pp. 11-22.

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