Great post Tobi, I’m a long-time Zara fan so it was really interesting to learn more about their operating model. As I read through the post, there were certain tradeoffs that seem to arise through this model. First, in order to quickly manufacture and stock stores with the latest products it seems Zara has to produce the clothing close to its distribution center in Spain which I’m sure would require higher labor costs. Many other stores that focus on new design and quick turnaround for inventory, like Gap, mostly produce their clothing in low labor cost countries lie China. The production tradeoff at Zara seems to be between quick design turnarounds at higher labor/distribution costs. Also, knowing that they have many international store location in the US and in China, it might make more economical sense to have a distribution site outside of Europe that are closer to the markets where they have large market penetration and higher concentration of stores to maximize efficiencies in the distribution network. There could then be a tradeoff in terms of lower overhead costs by optimizing one larger distribution center versus multiple and more diffused/ localized centers that might better allow the company to stock the shelves of stores in international markets more effectively and respond to demand even more quickly.
While their vertically integrated model focuses on JIT and ordering and producing in small batches, I can also see inventory issues still arising as “trendy” goods may be great on the runway but not that wearable or popular in real life. In these scenarios, it would appear that Zara would have difficulty managing inventory that does not sell quickly given the short cycle time that products are allowed to be displayed on the shelf. I would want to know how Zara manages clothing that doesn’t sell in this short time window. I would also be interesting in finding out what analytics Zara uses to predict demand and order the right amount of items at each of their stores. As we saw in the supply chain simulations, predicting demand can be extremely difficult and over ordering and inventory holding costs can have huge financial penalties for Zara stores. I would love to know how or if processes changes as they have undergone massive global expansion.
Great article Xavi! I think like you mentioned IKEA’s business model focuses on reducing variability in terms of their designs and keeping a limited amount of styles, colors and features that make things easy to assemble for the customer but also allows them to better control their inventory. As you mentioned and Marissa noted above, because they are able to carry a limited amount of options and all their items are able to be deconstructed and held in a box, IKEA can stack items in their warehouses efficiently and hold a large volume of furniture items at each store location. This better ensures that items will be instock for their customers and ties into their operating model of being a one stop shop for all household furniture needs and ties to the supplier model you mentioned in the post.
I have been really surprised that there has not been a competitor in this low cost and decent quality space. A big complaint about IKEA furniture has been its lengthy and difficult home assembly process and its lack of high quality materials. There is a new startup that might soon disrupt the IKEA business model. Greycork is a new company that focuses on making higher quality and more long term furniture at even lower costs than IKEA. The new company identified that the younger generation tends to move at least a few times to different apartments throughout their 20s and 30s and want furniture that will last them through this process but that is easier to build and store. Their furniture is made out of higher quality materials like solid ash wood and fiberboard and the biggest competitive advantage is that the furniture is meant to be built in under 5 minutes! Additionally, the furniture is designed to have a few connectors and also ships directly to you in a lightweight box. This allows greycork to lower inventory holding costs and extracts similar operational efficiencies as IKEA but has more customer value in terms of cost and time savings. It will be interesting to see if new companies can optimize this business model and finally create a better alternative to IKEA in the near future. Please check the Business Insider link to Greycork if you are interested! http://www.businessinsider.com/theres-a-new-cheaper-alternative-to-ikea-2015-8
Great article Azeem! I think Shake Shack’s rapid expansion in the fast casual space is truly impressive. I read recently that Shake Shack is expanding most heavily in the Middle East including new locations in Lebanon, Quatar and Dubai. I wonder what aspects of this market particularly are beneficial to their specific business model and how they choose their international location targets. Additionally, we have discussed the difficulties of maintaining and preserving operational efficiencies but most importantly brand value when expanding too quickly. I would be interested to know what Shake Shack is doing to ensure that they are able to scale their idea effectively internationally without losing brand equity.
I recently read another article on the company that stated that because Shake Shack focuses so heavily on reliable and high quality products that they tried to move from frozen crinkle fries to fresh fries. However, there was a lot of variability in the fresh potatoes that were delivered to the store and the customers actually preferred the taste of the frozen fries so they switched back to frozen fries. This was an example where the financial benefits actually were aligned with the qualitative data, however I am sure that as expansion continues, there will be difficulties in making operating decisions that completely tie with the business model and mission. I look forward to seeing how Shack Shake handles these issues and further improves their operational strategy.