Will climate change dampen Inditex (Zara)´s rapid-fire fulfillment supply chain?
Climate change is a prominent issue facing the world. Its impact include rising sea levels, changing weather patterns and exterme weather, pressure on water and food, political and security risks, human health risks, as well as impact on wildlife and ecosystem (1). Indeitex, a spanish clothing and accessories company, is the world´s largest apprarel retailer. Its brand Zara (number 51 of the world´s most valuable brands) (2), is the leader in fast fashion. By the end of 2016, Inditex generates 23 billion euro in revenue (3). Why should Inditex´s management concern about climate change´s on its supply chain?
(a) Size. Global clothing production has doubled between 2000 and 2014. From a supply chain perspective, just making 1kg of fabric generates 23kg of greenhouse gases on average (4). As the largest apparel retailer, Inditex contributes significantly.
(b) The uniqueness of Inditex´s supply chain. Its management philosophy is about speed and responsiveness of the whole chain (as opposed to isolated parts). Use Zara as an example, unlike competitors, it manufactures roughly half of its products in its own factories, have a centralized distribution center (all finished product passed through the distribution center in La Coruna in Spain), has twice weekly shipment, and deliberately operates its manufacturing and distribution centers at low utilization. These design help to react to peak or unexpected demands faster than rivals. (5). Due to this uniqueness, the climate change impact could be amplified. For example, the centralized distribution center means more transportation, and a low utilization manufacturing center means higher capacity / building facilities are needed. These all mean higher energy and resources consumption that contribute to climate change.
Sustainable management of supply chain is identified as high strategic relevance for Inditex internally and externally (6). Its current effort focuses on eco-store and logistics management.
Inditex applies many cutting edge technologies to reduce stores environmental impact. In 2016, 71.6% stores are eco-efficient and it is expected to reach 100% by 2020. This is achieved by, for example, installing LED lighting, centralized energy monitoring system etc.
The 10 logistics centers are run and owned by Inditex in Spain, with most production in proximity, so as to cut travel distances and reduce energy consumptions and emissions. Going forward, it aims to apply latest technology and software to make dispatch time management more efficient and precise and double the speed with which boxes are moved, stored and collected.
In 2016, inditex worked 53 suppliers globally with close to 7000 factories. Most of them have different manufacturing standard. In most cases, Inditex´s ability to influence is very limited for their climate change standard. Therefore, in order to achieve sustainability for the whole supply chain, Inditex has developed a supplier selection protocol and is working to increase supplier tractability in the short term. Another goal is to standardize packaging among suppliers, so as to increase packing density and cut transportation (and therefore emission) in the medium term.
Implement natural disaster recovery plan for distribution contractors
Due to climate change, the tendency of natural disaster like flood becomes much more frequent and irregular. It might have an immediate and significant impact on the transportation network. Considering Inditex sources from 53 countries for supply, which are shipped to “proximity”6 countries for production, and further shipped to 10 concentrated distribution center in Spain, and twice a week dispatched to 7292 stores in 93 countries, the probability that its transporation network be impacted by natural disaster is high. To guarantee the responsiveness of the supply chain, inditex shall make sure all of its external distribution partner has a natural disaster recovery plan in the short term, and identify a few strategic partners that would prioritize Inditex shipment in times of natural disasters for the long term.
Ongoing evaluation of supply chain design with data
Inditex mentions that “it is no coincidence that our ceaseless search of greater efficiency ties in perfectly with our all-encompassing commitment to sustainability.” This is a paradox with its fire-filling supply chain philosophy, where sometimes half empty plane or factories (low utilization) are deliberately designed. If efficiency and sustainability are overly emphasized, there is a risk the responsiveness of the supply chain be jeopardized. Therefore inditex shall continue to collect data and run computational optimization model to find the optimal balance.
Finally, shall Inditex open a manufacturing and distribution centers in Asia? With the increasing number of stores, does it make sense to ship raw material from Asia to Europe, and finished good back to Asia? This doesn’t seem to be the most climate friendly supply chain design. What will be the critical mass needed, so that such a regional centre will not jeopardize the global responsiveness while shorten the transportation (and reduce emission) in the region?
(1) Herderson, R:M., et al, Climate Change in 2017: implications for business (HBS No. 317-032)
(2) Forbes https://www.forbes.com/companies/zara
(3) Anual report 2016, Inditex http://static.inditex.com/annual_report_2016/en/year-review/commercial-presence/
(5) Rapid-fire fulfilment, Kasra Ferdows, Michael A Lewis, Jose A.D: Machuca, Harvard Business Review