BEST PRACTICES IN SUPPLY CHAIN MANAGEMENT AT ZARA BY SIYU LIU, ALFONSO IZQUIERDO AND POORANAN MURUGESAN

Agenda Historic development of the three companies – Facts and Figures Current state of Supply chain management organization Current product strategy Competitive situation Assessment of the best practice in Supply Chain Management Prognosis of future development Conclusion

HISTORIC DEVELOPMENT OF THE THREE COMPANIES FACTS AND FIGURES

BENETTON COMPANY OVERVIEW Founder Gilberto Benetton, Carlo Benetton Founded 1965 in Italy Products Shoes, Bags, Clothing,Accessories Markets 120 Countries Style and Features Casual, Fun, Colorful, Fresh Mediterranean, Latin style (2011) 9,557 (2011) 2.032 Billion Euro

BENETTON HISTORIC DEVELOPMENT

BENETTON HISTORIC DEVELOPMENT

BENETTON DUAL SUPPLY CHAIN SYSTEM

HENNES & MAURITZ 25 Countries Founder Erling Persson Founded Products 1947 in Sweden Products Clothing,Accessories Markets 25 Countries Style and Features Wide range from party dresses, sport shirts to suits and other formal wears (2010) 59,440 (2010) 14.24 Billion Euro

H&M HISTORIC DEVELOPMENT

H&M HISTORIC DEVELOPMENT

information on sales and stock H&M SUPPLY CHAIN SYSTEM information on sales and stock status

Clothing, Accessories, Shoes, Bags ZARA Founder Amancio Ortega Founded 1975 in Spain Products Clothing, Accessories, Shoes, Bags Markets 69 Countries Style and Features Wide range from party dresses, sport shirts to suits and other formal wears (2012) 69,240 (2012) 15.946 Billion Euro

ZARA HISTORIC DEVELOPMENT

ZARA HISTORIC DEVELOPMENT Reduce transportation cost

CURRENT STATE OF SUPPLY CHAIN MANAGEMENT ORGANIZATION OF ZARA

SUPPLY CHAIN MANAGEMENT ORGANIZATION

SUPPLY CHAIN MANAGEMENT ORGANIZATION ZARA Other Retailers

Zara- Supply Chain Management

Zara- Supply Chain Management Fast Fashion- Manufactured quickly and Sold at affordable prices Competitors like H&M, Forever 21 followed Zara’s Fast Fashion model. Produce and deliver in 3 weeks model. In typical season, Zara produces 11000 different items.

Zara- Product Lines Women Woman Basic TRF Children Men At each Store, each product line has a Section Manager, sales people and Cashiers.

Zara- Supply Chain Management Commercials Direccion de Tiendas Store Managers

Zara – Supply chain Seasons-Autumn/winter and Spring/Summer First designs were presented 6 months before each season During the season, Suppliers with short lead times allowed it to introduce new designs For basic, easy to forecast Products, Zara used cheaper suppliers with longer lead times

Zara – Supply Chain All products came to logistic centers in Spain. A Coruna - 50% of all Women and Men’s wear Zaragoza – 50% of all Women and Men’s wear Meco – All children’s wear

Zara – Order Cycle For Every season, new collections are sent to store based on commercials. 25000 units were sent to each store Replenishments was ordered by section managers Twice a week, Section manager receives offer in his or her PDA. European stores received deliveries in 24 hours Asian stores received deliveries in 40 hours

Zara – Supply chain Improvements Consolidating Transport cost. 100 Million Euro state of art logistics centre for Children’s Merchandise in Madrid Unloading the merchandise were outsourced to logistic providers. Attaching Alarm tags were shifted from Back room to factories.

Zara – Supply chain Improvements Automatic replenishments of basic(10-15%) products. Algorithm for allocating Inventory at logistics centers to stores. Commercials had the intelligence to find out if a manager is making mistakes.

Zara – In Store Logistics Processing deliveries Managing product flow between backroom and selling floor Managing display areas and fitting rooms Conducting physical audits.

Zara - Competitive Situation COMPETITORS American Forever 21, Swedish Hennes & Mauritz(H&M), Japanese Uniqlo ADVANTAGES Market Leader High cost Supply chain management with low inventory and higher profit margins, which maximized revenues 18% of clothes were sold in Discount sales compared to industry average of 36% Aggressive expansion strategy

ZARA OVERVIEW: ASSESSMENT OF THE BEST PRACTICE IN SUPPLY CHAIN MANAGEMENT System is designed for short production cycles, quick response (QR) to demand, and reduced number of markdowns Manufacturing ASIA (20%) Low QR Low Cost Design Distribution Sale DISTRIBUTION CENTER Increased shipment frequency increases QR Small batch production lowers cost of demand uncertainty STORES Decentralized store management supplements QR Managers determine products to sell and return INDITEX MANAGEMENT / DESIGNERS Determine apparel designs and manufacturing locations IN-HOUSE (40%) High QR High Cost EUROPE / N. AFRICA (40%) High QR High cost Returns from stores either rerouted or disposed of in local stores near dist. center IT SYSTEMS Provides accurate demand information to determine manufacturing locations and production levels

Zara’s Fast Track to Fashion The key to the Spanish clothing chain is efficiency – with a side order of fashion sense. Instead of setting the trends, Zara follows them. It relies on a combination of fashion reconnaissance -- spotting trends everywhere from the street to movies to couture fashion shows -- and information from its customers to keep its merchandise fresh. Spanish retailer Inditex, owner of cheap-chic clothing chain Zara, pioneered the concept of fast fashion. While most of the retail industry takes months to bring new merchandise to market, Zara is able to move from designer’s drawing board to shop floor in as little as two weeks thanks to its tight control over every step of the process.

Vertically Integrated Supply Chain Total control of the production process From their perch in the massive 11,000 sq.-ft. hall, they work with Zara’s “commercials” (Zara’s term for the folks who act as liaisons among the chain’s 2,800 global store managers, designers, and production planners). The designers sketch out new styles and determine which fabrics offer the best combination of fashion and price. Tag Team In Arteixo, Spain, Zara’s 200 in-house designers work in teams for the company’s women’s, men’s, and children’s clothing lines.

Zap It The design team electronically sends the patterns to Zara’s factory across the street, where a prototype is made. The patterns are optimized via computer so that no fabric is wasted.

The fabric is rolled out on a large table and covered tightly in plastic before a laser-guided machine cuts it according to the pattern. The fabric is then bagged and distributed to local sewing cooperatives, which return the finished garments to the factory within a week. In the Bag Massive rolls of fabric are moved in the factory by lifting equipment.

Each garment is checked for quality Each garment is checked for quality. Those that do not pass the test are cast aside. Once the checks are complete, the garments are individually pressed. Press and Go Once the finished clothing is back at the Arteixo factory, workers handle finishing touches, such as adding buttons and detailing.

“Stores managers feel like the owners of the store” But management realized labeling all garments and applying security alarms at the factory saved both time and money. The less time management spends on tasks such as tagging merchandise, the more time it can spend selling. Alarming Efficiency Next, labels for each country are attached. Zara used to rely on store managers to do this once the product reached the store.

At the massive 500,000 sq.-ft. center, all merchandise is allocated first by country, then by individual store using a moving carousel of hanging rails. Although more than 60,000 items move in and out of the center each hour, only a handful of workers are needed to monitor the process. Lonely Job Once tagged, the garments are sent to Zara’s nearby distribution center via tunnel.

“Catching fashion while it is hot” Short lead times “Catching fashion while it is hot” Focus on short time response Meet the customer expectation on time Using electronic bar codes, each shop’s orders are carefully placed onto the appropriate moving rail, ensuring each store gets exactly the right twice-weekly shipment. Quick Turnaround More than 2.6 million items move through the distribution center each week, and most spend little more than a few hours at the center. Produce a new style in 2 – 4 weeks

Garments are trucked from the distribution center to stores within a day. Instead of advertising, Zara lets its elegant, spacious stores in the world’s ritziest shopping locations do the talking. Show Time Just two days after leaving Zara’s distribution center in Spain, merchandise arrives in U.S. stores. Zara transports its merchandise to the U.S. and Asia by plane, enabling it to arrive in 48 hours. Delivery time in Europe is even faster.

Example

Zara (Inditex) has delivered financially whilst achieving the most aggressive growth of the industry “You need to have five fingers touching the factory and five touching the customer.“ Amancio Ortega, Chairman, Inditex (Zara) Product launch<15 days Fast customer feedback Short product life cycle 300,000 new SKUs / year Collaborative planning with POS data Synchronised planning framework Global sourcing Limited outsourcing (simple products only) Small production runs Limited outsourcing Real time product tracking. Oversized capacities Integrated IT systems Bi-Weekly replenishment Empowered sales manager Design Zara’s 3 guiding principles for supply chain Close the communication loop. Transfer data and anecdotal information from shops to designers and production Track materials and products real time every step of the way, including in stores. Close the information loop between the end users and the upstream operations of design, procurement, production, and distribution quickly and directly Stick to a rhythm across the entire chain. Rapid timing and synchronicity are paramount. Spend money on anything that helps to increase and enforce the speed and responsiveness of the chain as a whole. Leverage your capital assets to increase supply chain flexibility. Major capital investments in production and distribution facilities to increase supply chain's responsiveness to new and fluctuating demands. Produce complicated products in-house and outsource the simple ones. Plan Buy Make Move Sell Source: Kasra Ferdows; Michael A. Lewis; Jose A.D. Machuca, HBR 11/04

Main Brands

Prognosis of future development To step forward a business needs to align each dimension Processes Supply Chain Optimisation Integrate with Customers & Suppliers People Systems Virtual Supply Chain Synchronisation of Supply with Demand Advanced Decision Support Inter-business Working External Collaboration Reliability & Flexibility Cross-functional working Internal Communications Functional Working Transaction Processing Simplification & Control Skills & disciplines Data Accuracy Performance Measures Leadership & Vision Program Management + + Establishing the starting point focuses the action plans

Prognosis of future development The Supply Chain of the Future must be SMARTER...It will be Instrumented, Interconnected & Intelligent Automated Transactions & Smart Devices Use of sensors, actuators, RFID, & smart devices to automate transactions: inventory location, shelf-level replenishment detection, transportation locations & bottlenecks Supports real-time data collection & transparency from POS to manufacturing to raw material Sense-and-respond demand/supply signals allow “predict and act” Instrumented Optimized Flows Multi-Tier system integration across the network. Standardized data and processes. Collaborative decision making through decision support and business intelligence – starting with the customer Networked risk management programs for integrated financial controls with operational performance – monitored and measured Interconnected Networked Planning, Execution & Decision Analysis Simulation models to evaluate trade-offs of cost, time, quality, service and carbon and other criteria Probability-based risk assessment & predictive analysis Networked planning/execution with optimized forecasts & decision support Intelligent

Prognosis of future development How can it be so very difficult when we have the ability to use all these assets: Our Point of View on the Progression of Supply Chain Management to a Smarter Future Smart Supply Chain Future External Collaboration & Integration Networked Planning, Flexibility & stability Execution & Decision Analysis Intelligent Effectively driving profitable growth Horizontal Process Integration Optimized Flows Balancing risk and performance Interconnected Functional Excellence Integrated Static Supply Chain Transactions (ERP to ERP) Instrumented Managing complexity Automated Transactions (Sensors & Actuators)

Conclusion Zara’s production system is pulled by demand which allows a better alignment to customers’ expectations. Zara’s vertically integrated supply chain process is the keystone of its success since its ensure the needed flexibility to be able to react quickly to the market trends.