Once a tiny lingerie store in La Coruna, Spain, Zara has transformed into a retail giant, with 2,000 stores, $20bn in sales, and a headquarters supported by a sprawling network of underground tunnels.
The retail industry was swinging and missing – and founders Amancio Ortego and Rosalia Mera knew why. Consumers wanted to wear current couture designs at non-couture prices. Zara made the runway accessible; from a cost, quality, and speed perspective. Many companies claim “fast fashion” – few can claim instant fashion.
Zara’s feats, such as in 2012 when the retailer debuted pieces inspired from the fall runway shows just two weeks earlier, have forced industry leaders figure out how they can compete with Zara’s masterful operational execution. Renowned Louis Vuitton Fashion Director Daniel Piette seemed to have echoed industry sentiments when he said that “Zara is quite possibly the most innovative and devastating retailer in the world.”
VERTICAL INTEGRATION AND SUPPLY CHAIN OPTIMIZATION
Most apparel retailers determine 50% of their designs for a seasonal line 6 months in advance, with 80% of the inventory committed by the beginning of each season. These retailers are generally paying for rented factory time; scheduling beforehand cuts costs, eliminates the need for rush orders, and ensures the factories will be available for their production. These retailers are effectively betting on trends half a year in advance, hoping the tide hasn’t turned by the time the season approaches.
Contrarily, Zara determines only ~20% of a season’s line 6 months in advance, entering the season with ~50% of committed inventory. For the remaining 50% of its line, Zara adopts Toyota’s Just-in-Time system, responding real time throughout the season. Zara’s operations enable the global Company to be nimble with regards to quantity, frequency and variety of new products to be launched.
Zara masterfully pulls this off through its vertical integrated, highly centralized operating model. Zara uses state-of-the art distribution systems in its design and manufacturing headquarters, located in La Curuna, Spain. The Cube (i.e. “command central) is linked through underground tunnels to its 11 Zara-owned factories, all within a 10-mile radius. The tunnels are fitted with high speed ceiling rails to transport garment racks, 400+ chutes, conveyor belts, and optical scanning and sorting devices.
Zara’s thorough logistics and scheduling feed into the supply chain and distribution rhythm. Raw materials, delivered from European suppliers, are received within 5 days of being ordered – the Company manages this mainly by buying fabrics in only four basic types and doing all the cutting and dying in-house. The materials are transported from the Cube via rail to the factories for production, and later returned to the Cube as finished products for shipment to stores. Zara can deliver items to stores worldwide in just a few days (48 hours to reach the US). Items, which are already on hangers, tagged, and priced, go straight from the delivery trucks to the sales floor.
“INVENTORY = DEATH”
Through its Just-in-Time production model, the Company is able to order in small batches during the season based on current trends. Small batches not only minimize losses if the trend doesn’t materialize, but also lends itself to the customers’ perception of “exclusivity”. Inventory optimization models are used at corporate to assist in determining appropriate volumes for each retail location. Zara lines rarely stay on shelves for more than a month – the Company captures 12 inventory turns per year compared to the industry average of 3-4 per year.
STRIPES ARE IN? STRIPES IT IS!
Given seasonality and continuously changing fashion trends, the general issues that come along with forecasting demand are often exacerbated in the retail industry. Zara’s Just-in-Time model alleviates the pressure of changing based on demand, since change is part of the system. The centralized structure and scheduling allows store managers to order and receive clothes twice a week, often 2-3 days within order placement.
Besides placing orders, store managers provide data on popular styles and customer feedback to Zara headquarters daily, which is then relayed to the design team who incorporates the ideas real.
TRANSLATION TO BUSINESS MODEL
The intricate operating and distribution model, aside from solving the pain points of the customer, feed into other aspects of the business model that both bolster the customer experience and increased profitability. New shipments of clothing arriving throughout the week, coupled with limited quantities of each line, “creates an environment of shortage and opportunity,”1 encouraging frequent customer visits (an average of 17 visits per year). While other retailers rely on discounts to unload excess inventory, Zara is able to push its limited inventory at full price; Zara sells 15-20% of its products at less than full price, versus 30%-40% for competitors. The low inventory costs allow Zara to swallow premium pricing on rush orders, wage rates, and capital investments – something other retailers are too cash-strapped to invest in.
If Zara can continue to balance the forces of quality, cost, efficiency, and speed while demonstrating high fashion relevancy, the retailer will have very little competition to fend off.