ZARAS OPERATIONS STATEGY, A

CRITIQUE OF A BUSINESS CASE.

1.Excecutive summary.
Operations management is in regard to all operations within the organization
responsible for creating goods and services that organizations pass to their
customers. This function is at the heart of all organizations, giving the means of
achieving their aims and reason for their existence. These activities include:
managing purchases, inventory control, quality control, storage and logistics. A
great deal of focus in operations is on efficiency and effectiveness of such a
process.
An example of successful operations strategy in the retail industry is the strategy
employed by Zara which is discussed in this critique. Zara started a s a single
shop in La Coruna and then rapidly spread its wings to 68 countries; opening a
store each day - one of the fastest global expansions the world has ever seen.
Throughout the entire system of Zaras business; designing, sourcing,
manufacturing, distribution process and retailing come out a number of success
factors: short cycle time, small batches per product, extensive variety of product
every season and heavy investment in information and technology. This elements
feature in every aspect of the business.
2. Introduction.
Zara is the flagship brand of the Spanish fashion retail giant, Inditex,
(Industrias de Deseno Texti S. A.) Founded in 1975 ; this super- heated
performers in soft retail fashion market in recent years; is engaged in
textile design, manufacturing and distribution .The group operates
approximately 1500 stores .The company primarily operates in Europe,
where about 80% of its sales are made with La Coruna , the city that sa
w its earlier operations, home of its central offices. Zara contributes
about 2/3 of the companys sales making it undoubtedly the firms
growth engine. As other retailers like Marks and Spenser and Gap join
retailers in reporting falling profitability it is interesting to note that
Zaras profitability is still soaring; among the highest in the industry.
What makes Zara such successful when other competitors are falling?
Which business model does Zara use? What are the challenges that Zara
faces? The questions can be best answered through a SWOT analysis of
the firm.
3.0 S.W.O.T Analysis.
3.1

Strengths.

Zaras strong supply Chain Management.

An efficient supply chain is becoming more and more key success factor for
companies. According to McMillan and Mullen (Operations Management Vol-2, 2002),
the purpose of SCM is to integrate all tasks associated with the bi-directional flow of
materials, information and finance into organized, coherent, managed processes in
order to provide end-to-end management and control.

To analyze Zara supply chain, it is interesting to look closely at the product

design,
inventory management, evaluation of suppliers and vendors,
logistics management, material management, time scheduling, information
systems which are the main
contributors in allowing Zara to offer cutting
edge fashion at affordable prices.
Zara as part of the Inditex group has a very strong distribution network.
Hence their superior supply chain management enables the retailer to
deliver goods within 24 hours of the receipt of order at its European
stores and 40 hours at its American and Asian outlets. Inditexs logistics
is carried out from distribution centers located in Spain. Currently the
companys logistic department employs more than 5,000 people and
distributed 697 million garments, in the financial year of 2008
This competitive distribution network enables Zara to enhance its
operational efficiencies and thus increase its customer satisfaction
It is also interesting to consider other key performance indicators of Zara
comparing to other peers in the retail market
Design and Production- Just in Time Production

Zara delivers fashionable and trendy cloth addressing all tastes through a controlled
design and integrated process Just in Time . Just In Time concept is a concept
from Japanese philosophy focusing on the elimination of waste in management or
production system. Zara designs all its products itself. Concurrent method design
could be an adjective to the of product design process which involve the whole
commercial team , designers, market specialist, procurement team as well as
continuous feedback from store managers to ensure that the products reach the
customer just in time.
Young Designers (26 average) draw the design sketches then discuss it with market
specials and planning & procurement staff. Designs inspiration is copied from
different sources (trade fairs, catwalks, magazines) from all around the world. It is
worth to mention that out of 40,000 designs only 10,000 are approved. This
illustrates the flexibility of ideas generation and on the other hand the huge
number of designs reflects the ability to meet almost all the fashion requirements
by customers of all ages (up to 55).
Zara business is organized around processes not functions, to close the information
loop. All team is involved in all processes. This method minimizes the time as
decision is conducted in one room, and in direct proximity to the information. As a
result, Zara reduces the inherent uncertainty associated with new designs in this
industry that is characterized by long lead times and very high variability of
demand e.g M&S could need a whole season to get a new item to stock

Procurement
Zara manufactures 60% of its products. By owning its in-house production Zara is
able to be flexible in the amount, frequency, and variety of new styled products.
Zara has outsourced less manufacturing than its peers. It has 22 factories and
runs many of them often only in one shift leaving extra capacity to respond
quickly to seasonality and unforeseen demand. Comparing to peers which rely
heavily on overseas suppliers/manufactures which dont provide same flexibility
as these suppliers could request orders to be placed few months in advance.
Zara is outsourcing all the labour intensive tasks mainly the sewing, while the
cutting is done in-house. This produces of saving labour cost, flexibility of
meeting deadlines, keeping the designs/fashions strictly controlled.

Labeled and priced goods are immediately hanged upon arrival-Zara Burjuman,
Dubai, July 2005

Information Systems
Operations in the firm are technology enabled making Information systems one
of the drivers of the quick response communication strategy at Zara.Zara applies
technology in areas that speed up complex tasks, lower cycle time and reduce
error. It is technology that helps Zara identify and manufucture the clothes that
customers want, get those products to the market quickly
Zara stores managers carry handheld Casio computers to send online information
to headquarters like selling trends, customers comments, or placing orders.
Designers send their design suggestions to factory and to distribution
department by scanning a design into a computer and electronically transmit to
factory computers including computers controlled cutting equipment.
Designers input the designs patterns into CAD systems which automatically feed
into the cutting machines in the factories ensuring the required quality of
outputs and having a minimum fabrics waste.

Inventory Management
Zaras parent company, Inditex, had the lowest inventory, as a percentage of
annual sales, compared with its nearest global competitors, such as Gap,
Benetton, and H&M.Zara seems fully aware of the adage: invetory= death.
The firm therefore avoids building inventories in any part of its supply chain from
raw materials to end user. Inventory optimization models are in place to help the
the firm determine how many of which items in which sizes should be delivered
to stores during the twice aweek shipment ensuring sores stock just what they
want.

Zara designs around 10,000 new models every year and replenishes ranges
within every one of its 650 retail stores twice per week, but in strictly limited
quantities of stock. This ensures Zaras brand promise to customers of
exclusivity, and also of design freshness. But it also avoids build-up of large
quantities of unpopular stock.

Centralized Logistics and Distribution

Zara controls and optimizes across different steps of the supply chain, not within
them, even though it may increase costs at some steps, Zara sticks to a deep,
predictable and fast rhythm, based around order fulfillment to stores. says
Professor Ferdows.
There are two orders per week from each store on specific days and hours, with
shipments in La Coruna usually prepared overnight. Trucks leave at specific times
and shipments arrive in stores at specific times. Garments , are pre-hung,
already labeled and priced.
As a result of this clearly defined rhythm, not only every stage of the supply
chain from design to procurement, production, distribution, and retail know
their activities, but even the regular customers know to visit stores more often
on shipment days for the fresh designs.
This large and high-tech facility also has extra capacity on hand to enable Zara
to react to weekly and monthly demand fluctuations. For example, it operates
typically 4.5 days per week, around the clock on full capacity, and extra shifts
and temporary personnel are added when needed.
It is interesting to know that Zara can get the product from the idea to the store
in15 days time, where the industry standard is 6 months, the design and
production process is very efficient and harmonized due to the use of the
different methods that suites their line of business and set new model to look
for.

Human resource management

The human resource at Zara are one of the components behind the unique
efficient and quick response system. People are highly motivated which reflects
Zara HR policy. Zara hires young people, provides training and fair incentive
schemes which result in high and effective communication
People at Zara also sell and market the name and represent the fashion. The
store manager we met at Zara was dressed in a fashionable way. We sell
fashion, he says.
People plays a vital role in Zara business model whether designers, buyers,
logistics and sales staff. For example the store manager is a key player of the
decision to make a specific model.

Low marketing / advertising cost

Fashion retailers spend on average 3.5% of revenue on advertising their products,
while Zara's parent company Inditex spends just 0-0.3%. Zara depends on word of
mouth shuning advertisements.
Zara relies on its stores to project its image. Zara has coordinators whose main
task is to change the layout of the shop every week. An item that you see today
at the right side of the shop next week (if not sold yet) will be displayed at some
other side in some other way.

Synergy between Business and operations strategy

Zaras strategy is growth through diversification with both horizontal and vertical
integration. Zara copies fashion by adapting couture designs. It manufactures,
distributes, and retails clothes within 2 weeks of the original design appearing on
catwalks. It owns the entire value added chain and competes on the basis of
speed to market, having invented the concept fast fashion. Finally it is
important to highlight the smooth integration between Zara business strategy
and it is operation strategy.
Zara operations are in line with the business strategy.Zara manufacturing and
distributions systems enable delivery from concept to store within 14 days.
Ownership and control of manufacturing facilities in Spain allows for quick
response.
Ownership of high tech distribution systems that allow for very fast delivery from
factory to stores all over Europe. Zaras use of sales staff for market research
purposes allows quick response to customer preferences and local differences.

Customer survey
The Zara survey is an attempt to reflect the specific segment of Zara customers
and their level of satisfaction, accessibility and usage as a comparative tool to
what the companys claim on the statements such as we are selling fashion and
not clothes. By that, a questionnaire designed and tested on 20 subjects of
which 14 were female and 6 male. The average age was 27. All the interviewed
subjects were selected among those who were familiar with the brand and
purchased at least one item from Zara during the last six months as inclusion
criteria. The main objective of such data collection was to get the brand
feedback and reputation. Also the subjects were always allowed to select more
than one box in the questionnaire. For example one might be interested to
purchase all Shirts, T-Shirts and Trousers from Zara and so on.
3.2 Key Success Factors behind Zara

Fashion and Variety

Zara main competency is selling Fashion and Trendy cloth with high range of
variety. Zara designers are on a constant lookout for new ideas to keep the

product line fresh. Zara introduces 11000 new garments in a typical year. Many
lines will only be available for a matter of weeks before being replaced.
As per Adel Hassan (Store Manager at Zara- UAE, Burjuman center), We do sell
fashion. We ask our customers what they want, and then we give it to them.
Affordability
I can get a fashionable outfit at Zara at a price which is half the price of a
similar design and fabrics at any branded shop in Dubai, Daad Jumblat says.
Zara prices are affordable for people of different income class.

Speed and quick responsiveness to Market

Zara is geared around speed and responsiveness providing fresh baked products.
Store managers communicate customer feedback on what shoppers like, what
they dont like and what theyre looking for. That data is instantly funneled back
to Zaras designers who begin sketching on the spot. The responsiveness effects
the customer behavior as it plays role in pushing the customer to buy quickly and
have higher visits frequency as new models arrive very frequent. This creates
an environment of shortage and opportunity in Zaras retail stores. The
environment also increases the regularity and quickness, in which
consumers visit the stores and buy the products. The usual customers
know that new products are introduced every two weeks and most likely
would not be available the next day. Therefore, Zaras scarcity
background allows the company to sell more items at full price. This
strategy minimizes Zaras total cost because it reduces the percentage
of markdown merchandise compared to its competitor.

3.3 Weaknesses
Zaras over- dependence on the European market
Most of Zaras stores as well as production sights are located in European
countries making the firm vulnerable to anything that may cause disruptions
in the region weather,terrorism, political unrest,labour strife or natural
disaster. According to the groups annual report (Inditex Group 2008), Inditex
operates 1,747 stores (all brands) only in Spain and another 1,362 stores in
the other European regions. Spain accounted for 33.9% of the group's
revenues during 2008 and the other European regions made up another
43.4% of Inditexs total revenues.
Hence it can be found that the group is heavily dependent on Spain and the
European markets for its revenues. Therefore the company and its flagship
brand is extremely vulnerable to economic, political or social change occurring
in these markets.
Vertical integration
Although vertical integration is an advantage to the firm, it also has

limitations. The integration for instance, often leads to the inability to acquire
economies of scale, which means they cannot gain the advantages of
producing large quantities of goods for a discounted rate. This leads to high
costs a incurred by the Inditex Corporation. Inditex also has to support their
own high capital investments for their chains and be able to financially back
their technology and skills beyond those currently available within the
organization (David145).
Zaras quick and frequent introduction of new products
Incurs increased costs, meaning higher R&D costs. They also have high costs
due to the constant changeover of production techniques to create their
different apparel lines. Which also means that employees must be trained in
order to use the new manufacturing techniques, which again leads to
increased costs. Most competitors dont experience higher cost in this area.

Inditex over dependence on Zara

Zara constitutes around 80% of Inditex business ( 8 companies) which means a
failure in Zara can put the whole group at a risk.
American Consumer Taste
American consumer view of Zara differs from the European one who view Zara as
fashionable house. If Zara needs to grow in American market it needs to address
specifically the American needs and perception of fashion

American Supply Chain

Zara supply chain in Europe proved to be extremely efficient. However , Zara has
not built a distribution strategy in America which is a constraint to the selling
ability in US.

Increase in Euro Rate

An increase in Euro rate will increase the consumer selling price in US dollar based
economies, consequently Zara will loose price advantage against relative
competitors outsourcing in US dollar based economies.

3.4 Opportunities
Plans for future expansions
The group has invested nearly to 2,800 million primarily put into the opening of
573 new stores in 2008 (Inditex Group 2008), both in those countries in which it
had a commercial presence already and completely new markets. During 2009, it
expects the opening of between 560 and 640 new stores (Datamonitor 2008). As
a result Zara could hope to sustain its stable revenue of previous years despite
the financial downturn (Journal of Fashion Management and Marketing 2009).
Offer more specialized products for different geographic location within the

same city
In the United States, the company is possibly experiencing cannibalization
because there are too many Zara stores that carry the same product within one
city. Zara could differentiate its product from location to location to increase
shopper traffic.
Asia Logistics center
Zara has set Asia as a top priority for its expansion, with plans to open stores in
countries throughout the region. This certainly makes sense, since Chinese
apparel retail market alone grew by 8.6% in 2007 to reach a value of $67,700
million. In 2012, the market is expected to gain a value of $96,000 million, which
would be an increase of 41.7% since 2007. China accounts for approximately
32% of the Asian market's value .
Growing online sales in the UK
Zara has an extensive market to exploit in the U.K Last year Great Britain
already overtook Germany as the largest European clothing market
3.5 Threats- porters Five forces
Rising Level of competition
Competitors are reducing their lead-time.Consumers decision to purchase a
certain article depends on personal taste (and peer group approval), trend as well
as price.Zaras rivals have studied the firms sauce and while non has attained
the efficiency of Amancio Ortegas firm, many are trying to learn from the
master.Example, H@M has increased the frequency of new items in stores.
Others are Forever21 and Uniqlo who now get new looks within 6 weeks.Benetton
reprenishes stores as fast as once a week.
Zaras worldwide retail sales reported a consistently strong performance
between 2006 and 2008, most recently outperforming its closest competitors. In
addition the company operates an extremely efficient supply chain and
distribution network within Europe as well as its American and Asian markets
(Economist 2006)
In more general terms the fashion industry is very fast and the products life
cycle very short. Furthermore it depends largely on recent trends, prices and the
customers satisfaction; hence the market is extremely competitive.

Threat of Substitutes
Consumers decision to purchase a certain article depends on personal
taste (and peer group approval), trend as well as price.
Generally speaking a substitute for fast fashion, at least for some
wealthy costumers, could always be designer clothes (as they are the
creators of trends for tomorrow) or even second hand clothes (for those
who purchase with a certain price in mind).
However, in conclusion it can be argued that there are no real substitutes

for clothing products in general, since it is one of the essential consumer

goods.

Bargaining Power of Buyers

Due to the economic downturn bargaining power of buyers is higher than
ever. Retailers have to make sure that they offer whatever their customers
are looking for, immediately and to an acceptable quality, in order to
remain competitive (Foreign Policy 2008).
Nevertheless it is proven that consumers are willing to pay more for a
certain brand name. Fashion articles strife for uniqueness and
exclusiveness, thus customers are obliged to pay a certain price in order to
acquire the exact piece of fashion clothing they were looking for.
Concluding it must be argued that bargaining power, during the
economic crisis may be much higher than normally, however in general the
bargaining power of buyers is moderate.
Bargaining Power of Suppliers
The bargaining power of suppliers depends on their products. However
especially in the textile industry, competition is numerous and suppliers
power thus marginal.
Raw materials are bought in so called low-cost-countries
Overall the bargaining power of Zaras suppliers is very low.

Counterfeit goods
The abundance of counterfeit goods and accessories is adversely affecting
the sales of branded products (Datamonitor 2008).
Its inability to penetrate the US apparel market
This may be due to American tastes that differ from European preferences.

Rising Labour Costs

As mentioned before the company is highly dependence on the European

market. Since labour costs in the EU are continuously rising, this is very likely
to have a negative effect on Inditexs revenues.
3.6 Financial performance Indicators
It is very important to highlight the result of the efficient operation strategy has
resulted in an excellent financial status. Inditex, ZARA parents company has
outperformed most of its peers; this edge on financial performance has given ZARA
prospects for future sustainable growth.
Turnover Growth: Average 25% for the last five years.
Operating Profit: Average 15% - higher then H&M, Benetton,
Working Capital: Is one of the lowest (20 m Euro compared to H&M 1035 m Euro the
net operating revenue are comparable) since Inditex is capable of turning capital

quicker and have higher assets.

Cost: Inditex cost is low. Operating cost, cost of goods, inventory, marketing cost,
employee/ store are examples of an effective and controlled cost management.
Recommendation:
1.Distribution center for America
To seek and develop new opportunities in the Americas Zara most likely should develop a
second central distribution center as an expansion of their smaller distribution center in
Latin America
2. Ecommerce
Internet retailing is growing, in the states consumers like to have the comfort of shopping
from their own homes at any time. If Zara wants to expand and compete in the US market
it is inevitable for them to develop their internet selling strategy noting that e-selling
would increase the sale time to 24/24 , 7/7. Since Zara product cycle is of the most
dynamic the ability of the consumer to be able to see the new line of Zara products online
is definitely an added value for Zara.
3 Differentiation between local stores
To motivate customer visit more stores and as a strategy to create traffic Zara should
differentiate its stores by offering different product lines in different shops.

In a nutcell , Zara has the potential for sustainable growth due to its competitive
advantage and its ability to face the challenges of the apparel industry. The company
keeps its operating income elevated, has a strong and unique business model, and has
various opportunities or expansion in the retail industry. To many Europeans, Zara is a
familiar face with consistently
trendy, well-priced new apparel every week. To Americans, it is a company that is just
getting its feet wet in the American market. Though, the Inditex branch is researching and
developing new methods for expansion, the company must continue to re-invent and
innovate themselves in order
to stay fr

References
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August, p.10

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2008
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