Efficiencies through digitialization of supply chain at Inditex

The essay explores the supply chain efficiencies that Inditex gains through digitalization

In an increasingly digitalized and connected world, fashion trends are spreading and changing faster than ever and consumers increasingly want to update their wardrobes faster and for a cheaper price. Basically consumers are expecting fashion retailers and brands to react instantly to new trends. In fact it is estimated that consumers keep their clothing approximately half as long as 15 years ago. [1] In order to be successful going forward, fashion retailers need to be able to get new trends to the market as quickly and cheaply as possible. How could fashion brands possibly answer to this challenging trend?

Inditex, the company behind brands such as Zara and Massimo Dutti is one of the most successful fast fashion companies in the world. The success of Inditex is largely based on their ability to forecast demand and match data with supply through the use of digitalization, and thus cater to the demand by the consumers for quick introductions of new and trendy clothes for a cheap price. This has allowed Inditex to grow by a 10%+ annual rate between 2007 and 2016 [2].

One of the key ways that Inditex has utilized digitalization in its supply chain is through the use of RFID (radio frequency identification). Inditex rolled out the use of RFID technology in 2014 and it allows for the individual identification of each of its garments through radio waves. In more practical terms, the RFID pieces are inserted inside the safety alarm of clothes. [3] The individual identification of its garments enables Inditex’s brands (e.g. Zara) to immediately order more items to its stockroom when an item is sold. [3] It also provides Inditex with immediate data on which products are the most popular ones and feeds this data to production and fulfilment systems. [4] This allows Inditex to produce more of the items in the highest demand and thus minimize waste in its supply chain. The use of the RFID technology to identify individual pieces of clothing also enables Inditex to control its inventory more efficiently both for its stores and warehouses to reduce inventory loss. [5] Furthermore as merchandise is unloaded to the warehouses and stores, the RFID system immediately recognizes which pieces of clothing should be unloaded. [4] This reduces the manual labor time needed in the unloading process and thus streamlines logistics. Finally in-store customer service is improved by Inditex’s ability to immediately identify a piece of clothing requested by the customer either in the store storage area or the central warehouse. [5] This allows Inditex to immediately send this piece of clothing to the store or directly to the customer’s home. The use of RFID is one of the main enablers of Inditex being able to create up to 65,000 new design per year [6] and having the ability to supply orders to stores and online customers in 2 – 48 hours. [7]

Digitalization of the supply chain for consumer goods can be divided into six different categories: Planning, Physical flow, Performance management, Order management, Collaboration and Supply Chain strategy. [8] I think it is fair to argue that Inditex is so far doing a very good job within utilizing digitalization for Planning and Order management. From an outside in perspective a recommendation for the Inditex management would be to put increasing focus on the four other categories. For the Physical flow part, management should focus increasingly on how to utilize robotics in warehouse management and autonomous and smart vehicles in transportation processes to reduce costs and further improve supply chain productivity. [8] Moreover, Inditex should make sure to gear Performance management towards real-time analysis and improvement rather than doing it retrospectively on for example a monthly basis. Furthermore, Inditex is currently quite heavily vertically integrated, however for the Collaboration part, Inditex should consider whether it would make sense to outsource part of the supply chain and rather operate in close co-operation through the use of technology with its supply chain partners. Finally for the Supply Chain strategy part Inditex should make sure to utilize techniques such as microsegmentation and mass customization. [8] This increases in importance for example as consumers are looking for more customization for their products (e.g. Nike already allows its customers to design their own shoes [9]).

To summarize, Inditex is a front-runner within fashion when it comes to utilizing digitalization in its supply chain. However, Inditex still has several areas of supply chain digitalization it can develop its capabilities within in order to maintain its top position in the market.

There are two open questions that I think are interesting in this context. How can Inditex make its supply chain more sustainable by utilizing digitalization? Secondly how should retailers on a more detailed level think about the utilization of autonomous and smart vehicles in its supply chain?

Word Count: 797

[1] Remy Nathalie, Speelman Eveline, Swartz Steven, “Style that’s sustainable: A new fast-fashion formula.” McKinsey & Co, October 2016, https://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/style-thats-sustainable-a-new-fast-fashion-formula, Accessed November 2017

[2] Inditex Group, 2017 Company Profile, p. 16, https://www.inditex.com/documents/10279/245194/Group+Profile/7e81b535-64aa-40bf-8625-c498a72be73d , Accessed November 2017

[3] Inditex Group, “Inditex deploys RFID technology in its stores”, July 2014, https://www.inditex.com/en/article?articleId=150174&title=Inditex+implanta+la+tecnolog%C3%ADa+RFID+en+sus+tiendas , Accessed November 2017

[4] O’Marah, Kevin, “Zara Uses Supply Chain To Win Again”, Forbes, March 9, 2016, https://www.forbes.com/sites/kevinomarah/2016/03/09/zara-uses-supply-chain-to-win-again/#390d51b51256 , Accessed November 2017

[5] Miraleds Tatiana, Garrido Azevedo Susana, Charrua-Santos Fernando Bigares, Mendes Luis Antonio, Oliveira Matias Joao Carlos, “IT applications in logistics and their influence on the competitiveness of companies / supply chains”, Scientific Annals of the ‟Alexandru Ioan Cuza” University of Iaşi Economic Sciences, Vol 62, No 1 (2015), http://saaic.feaa.uaic.ro/index.php/saaic/article/view/158 , Accessed November 2017

[6] Inditex Group, 2017 Company Profile, p. 11, https://www.inditex.com/documents/10279/245194/Group+Profile/7e81b535-64aa-40bf-8625-c498a72be73d , Accessed November 2017

[7] Inditex Group, 2017 Company Profile, p. 11, https://www.inditex.com/documents/10279/245194/Group+Profile/7e81b535-64aa-40bf-8625-c498a72be73d , Accessed November 2017

[8] Alicke Knut, Rexhausen Daniel, Seyfert Andreas, “Supply Chain 4.0 in consumer goods” McKinsey & Co, April 2017, Accessed November 2017 via Harvard Business School student online portal

[9] Nike, “NIKEiD”, https://www.nike.com/us/en_us/c/nikeid , Accessed November 2017

Previous:

Disrupting Material Handling in India Through Digitalization

Next:

Brexit and BMW: Disintegration of European supply chains?

3 thoughts on “Efficiencies through digitialization of supply chain at Inditex

  1. Interesting article – I was aware that Inditex was a leader in fast fashion, but hadn’t considered how digitization in their stores and supply chain enabled this.

    One immediate question that jumped out to me based on your wording: When the RFID system allows shirt’s ID number to let Zara know that a shirt has been sold – does the system automatically order the shirt, or do you mean that it records the sale instantaneously, amalgamates the data, and then a human can places orders for more stock? If your meaning was that the system automatically orders the shirt, this is fascinating to me. On the positive side, it would better ensure that this particular shirt is in stock in the future. But there are also questions with this – how often are these automatic computer orders responded to and shipped (i.e. is it daily shipments with higher cost, or bundled weekly)? what are the tradeoffs between ordering based off current customer demand versus planning for next season’s styles and demands? It seems to me there are industries where automated replenishment of stock through digitization would work well, and other industries where it would not.

  2. Interesting question around how Inditex might use digitization to make their supply chain more sustainable. One suggestion is to look into ways to use technology to automate their manufacturing process, which to my knowledge, still depends heavily on lower-cost labor in developing countries. Could Inditex use 3D printing or robots to manufacture some items or certain elements of a product? This could not only reduce the amount of labor required, but might also enable Inditex to set up manufacturing facilities that are less reliant on labor closer to some of their stores in parts of Europe and the US which would reduce overall transportation costs within their supply chain.

  3. This is a really interesting article about how the flow of information is increasing exponentially, and how firms which can capitalize on that information to be more nimble and responsive in their operations can make outsize profits. I wonder to what extent Inditex could integrate this RFID-sensing technology into a big-data algorithm or sales-analytics team which watches sales velocity, combining current orders with past trends to produce batch orders tailored to expected market demand. I imagine that batching of appropriate size and avoiding being stuck with inventory at the end of the season would lower costs. If algorithms allowed Inditex to scale, could they move to higher-scale, more automated production processes?

Leave a comment