A case study analysis of Zaras Operations Strategy
|✅ Paper Type: Free Essay||✅ Subject: Business|
|✅ Wordcount: 3298 words||✅ Published: 1st Jan 2015|
Zara is the largest division and flagship brand of the Spanish retail group Inditex  . It sells up-to-the-minute ‘fashionability’ at low prices, in stores that are clearly focused on one particular market. (Slack, Chambers, Betts, & Johnson, 2006)
The first store opened by accident in 1975 due to a large pyjamas order cancellation. This typically can be said to be an emergent strategy as the Zara store today was not an intended strategy. 
As described in a case study of Zara’s supply chain, the company is vertically integrated, controlling most of the processes in its supply chain. On the average, 50% of its products are manufactured in Spain, 26% in the rest of Europe and 24% in Asian countries. Zara outsources products of high labour intensive processes but maintains in-house capital intensive processes, protecting knowledge and know-how. It takes less than two weeks for a skirt to get from Zara’s design team in Spain to a Zara stores in any part of the globe, as much as 12 times faster than the competition. And with shorter lead times, Zara can ship fewer pieces, in a greater variety of styles, more often and they can more easily cancel lines that don’t sell as well, avoiding inventory backlogs. (Upadhyay, 2009)
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Zara’s quick response capacity is made possible by the fact that it controls the 3 main stages of its operations that define the competitive edge of the company: design, manufacturing and distribution. This strategy is embraced to focus on the operations which can enhance cost efficiency while boosting service delivery and value proposition. As a fashion imitator, Zara ‘s priority was to focus its attention on understanding the dynamic fashion trends, aligning these changes to meet its customers’ wants rather than on promoting predicted season’s trends via fashion shows and similar channels of influence, which the fashion industry traditionally used. Other production activities are completed via a network of about 500 subcontractors in close proximity to Zara’s operations at La Coruna. 
Mr. Ortega the CEO of the Inditex, the parent company of Zara, once said that the secret to retail success is to ‘have five fingers touching the factory and five touching the customer’. (Slack & Lewis, Operations Strategy, 2008)
This paper uses the models and frameworks of the Operations Strategy module to describe & analyze how Zara’s operations strategy led to a sustainable competitive advantage in the global apparel industry.
What is Operation’s Strategy?
Just as there is no consensus on the definition of ‘strategy’ means, ‘operations strategy’ cannot be explicitly defined. In their book, Operations Strategy, Nigel Slack and Mike Lewis described the four distinct perspectives on operations strategy, that have emerged, as illustrated in Fig. 1 (Slack & Lewis, Operations Strategy, 2008, p. 2):
Operations Strategy Perspectives:
Figure 1 showing the four perspectives on operations strategy (Nigel Slack, 2008)
Top down vs. Bottom up:
Zara boosted its innovation in a fast changing market by adapting the bottom up perspective of strategy in its operations. This is a key driver of competitive advantage through constant innovation to develop new-products that provide customers with new perceived benefits.
Zara did not only depend on the fashion trends in the industry but leveraged word-of-mouth information to create clothing that will appeal to its customers. Another bottom-up strategy was that its store managers could report directly to the Zara headquarters, the feedback on preferences from their customers. Through these means, sales forecasts were pragmatic and product launches were swift as Zara was equipped with the information needed to be competitively agile in copying and launching products to align with emerging trends in the fashion industry. This agility is defined by Martin Christopher as
‘a business-wide capability that embraces organizational structures, information systems, logistics processes, and, in particular, mindsets.’ (The Agile Supply Chain: Competing in Volatile Markets, 2000)
Zara has demonstrated this characteristic of by its flexibility.
Market Requirements vs. Operations Resource:
Whatever the operations strategy of an organization, it must in some way reflect the requirements of the organization’s market. The fashion market is a fast changing one characterized by quick shifts in consumer demands. As described by Inditex CEO, Jose Maria Castellano, “the fashion world is in constant flux and is driven not by supply but by customer demand. We need to give consumers what they want, and if I go to South America or Asia to make clothes, I simply can’t move fast enough.”  (123helpme.com, 2008)
Zara’s Resource Utilization and Competitive Advantage
In an article written by John Fernie and Leigh Sparks, (Zara: Time-Based Competition in a Fashion Market, 2004) they described Zara as:
‘A company with rapid growth and ongoing success in a fiercely competitive environment. These are based on the dual objectives of working without stocks and responding quickly to market needs. It does this as well as, or even more effectively than, it’s internationally acclaimed rivals such as Benetton or Gap, with one of the most effective quick-response systems in its industry.’
Zara’s operational goals to achieve short lead times, lower inventory and increase variety of styles/choice, together with its focus on creativity and quality is a key driver of the sustainable competitive advantage that it enjoys in the industry today.
Figure 2 Zara’s internal operations and resource utilization that help meet the market demands.
Adapted from (Nigel Slack, 2008)
From the above illustration in Figure 2, we can deduce that operation’s strategy is concerned with the reconciliation of market requirements and operations resources.
Key drivers of this reconciliation are the importance of setting appropriate performance objectives and understanding the decision areas that determine resource deployment.
Reconciliation of Market Requirements with Operations Resources
Figure 3 Reconciliation of Market Requirements with Operations Resources
Using the framework in fig 3, Zara’s operations along its value chain is analysed as follows:
Factors affecting Zara’s Strategic Decisions
Zara employs a chase demand capacity management  in its operations. Spare manufacturing capacity is mirrored in the company’s storage function, where up to 400 extra staff can be drafted in during busty periods. As new stock delivery schedules are regimented, customers know when new stock is due and traffic in stores is heavier at such times. As a result, the company is able to adjust its resources to match the demands as appropriate. Procurement and production planners make preliminary, but crucial, estimates of manufacturing costs and available capacity. The cross-functional teams can examine prototypes in the hall, choose a design, and commit resources for its production and introduction in a few hours, if necessary. (Ferdows Kasra, 2005)
A small change in retail orders, for example, can result in wide fluctuations in factory orders after it’s transmitted through wholesalers and distributors. In an industry that traditionally allows retailers to change a maximum of 20 percent of their orders once the season has started, Zara lets them adjust 40 percent to 50 percent. In this way, Zara avoids costly overproduction and the subsequent sales and discounting prevalent in the industry.
The vertical Integration advantage can be seen in Zara’s centralized logistics and distribution.
According to Kasra Ferdows, Michael A. Lewis and Jose A.D. Machuca’s article in the Havard Business Review, (Ferdows, Lewis, & Machuca, 2005) Zara’s designers create approximately 40,000 new designs annually, from which 10,000 are selected for production. With about 5 to 6 colours in most garments of five to seven sizes, Zara’s system has to deal with something in the realm of 300,000 new stock-keeping units (SKUs), on average, every year. As part of its vertical integration, Zara maintains a very high control of its supply networks as a strategy in achieving fast response. It supplies products to its 650 retail stores twice per week (Rice & Hoppe, 2001) in strictly limited quantities of stock. This ensures Zara’s brand promise to customers of exclusivity and design freshness, thereby minimising inventory of old stock in any part of its supply chain from raw materials to end user.
In 2004, a University of Philadelphia article by Craig et al (Craig, Jones, & Nieto, 2004) identified Zara’s strategy as ‘internalization’ whereby majority of the processes in its operations are handled by the company while outsourcing only labour intensive tasks has set Zara milestones ahead of its competitors in the apparel chain. In contrast to Zara, Express, a US traditional retailer owned by Limited Brands outsources all of its production while focusing on distributing and retailing those goods. This is due to the fact that the global apparel industry is highly labour-intensive” rather than capital-intensive and most competitors seek to cut costs in production as a profit boosting measure than explore other strategies as Zara has done. (Craig, Jones, & Nieto, 2004, p. 4)
Zara’s communication and coordination through high technology information systems is one of Zara’s success factors relative to its competitors. In 2002, Accenture (a global management consulting, technology services and outsourcing company) published an article by Roger W. Dik and Hans Von Lewinski on its website on how Zara reconstructed its supply chain so that daily sales data are immediately shared with its stores, its headquarters and its concentrated production network by providing the shops with the necessary technology such as customized handheld computers and logistics capabilities to collaborate with other partners in the company’s supply chain. These computers process data on orders, sales trends and consumer reactions to products in stores. (Dik & Lewinski, 2002), (Ferdows, Lewis, & Machuca, 2005).
The updated real time data exchange between the stores and manufacturing units helps Zara mitigate the risk of the bullwhip effect. This effect is defined by Cachon et al (Cachon, Randall, & Schmidt, In Search of the Bullwhip Effect, 2007) as
‘the phenomenon of increasing demand variability in the supply chain from downstream echelons (retail) to upstream echelons (manufacturing)’. Information Technology has helped Zara to minimize production volatility that may arise from the bull-whip effect, hence bringing about a highly positive correlation in the demand and supply of products. Zara’s strategy qualifies its operations as a ‘Type A’ Product-Process Mix, with high flexibility, low inventory volumes and high variety as in Figure 4 below:
Figure 4 showing Zara as a type ‘A’ Product -Process Mix with high flexibility, low inventory volumes and high variety
Development and Organization
As further described by Ferdows et al in their article, Zara’s Secret for Fast Fashion, Zara’s development and organization facilitated an easy flow of information from customers to store managers, from store managers to market specialists and designers, from designers to production staff, from buyers to subcontractors, from warehouse managers to distributors, and so on. (Zara’s Secret for Fast Fashion, 2005). By having operations in close- proximity to its headquarters allowed for better and faster communication between functional areas for faster decision making.
Key Success Objectives for Zara’s Performance
Speed and responsiveness to Market, Zara has changed the way clothing industry works where deigning, production and delivery to the retailers requires period of six months. The design and distribution cycle of the company takes just 10-15days in the whole process. Zara’s speed to market in product development exceeds the capabilities of its competitors. This in itself provides additional value to stakeholders, customers, and stores in producing quality clothing at affordable prices. The proximity of their manufacturing and operational processes allows Zara to maintain the flexibility necessary to design and produce over 12000 new items annually. This capability allows Zara to achieve their strategy of expedited response to consumer demand. The process of obtaining market information and relaying it to design and production teams expedites product development by shortening the throughput time of their products from design to store.
Due to Zara’s ownership and control of production, they ensure timely delivery and service. Although most of their stores run out of stock, signifying that they have low dependability in terms of product availability, another perspective of dependability in terms of keeping to date with fashion is achieved.
Zara brand has been said to be ‘synonymous with the cutting edge of fashion at affordable prices.’ (123helpme.com, 2008)
Another Quality advantage is the added sense of quality to the product as the tags would be labelled with “made in Europe” rather than “made in China” due to Zara’s trade-off between Low labour costs in Asia and operational efficiency.
Designers (of average age 26) draw the design sketches then discuss it with market specials and planning & procurement staff illustrating a flexibility of ideas generation and on the other hand the huge number of designs reflects the ability to meet almost all the fashion requirements by customers of all ages (up to 55). This adaptive model rather than traditional merchandising is very different from its competitors. Many competitors rely on a small elite design team that plans both design and production needs well in advance. Stores have little autonomy in deciding which products to display or put on sale because Headquarters plans accordingly and ships quantities as forecasted.
Zara owned many of the fabric dying, processing and cutting equipment that provided Zara added control and flexibility to adopt new trends on demand. The added flexibility helped Zara on two fronts: shorter lead times and fewer inventories. (OPPapers.com, 2009)
Zara produces most of its products in Europe. Compared to their competitors, they outsource very little to Asia  . Though the cost of production in Spain is 17-20% more expensive than Asia, Zara does have a competitive advantage over its competitors in regards to operations. Though there is a cost advantage in their approach in regards to labour, the lack of flexibility in changing orders based on current trends hinders their operational efficiencies. Inventory costs are higher for competitors because orders are placed for a whole season well in advance and then held in distribution facilities until periodic shipment to stores. Lower inventory cost is a key sustainable advantage as it enables Zara to manufacture and sell its products at cheaper prices.
Adapting the Slack & Lewis Strategy Matrix (Nigel Slack, 2008) for Zara, The supply networks, capacity and Process technology’s speed is critical to the organization’s performance as shown in Fig 5.
The smooth integration between Zara business strategy and it is operation strategy as illustrated in the strategic matrix above brought about a promotion of innovativeness through a blending of its performance objectives and decision areas. (Grant, Lambert, Stock, & Ellram, 2006) This aligned Zara operations with its business strategy, ensuring comprehensiveness, correspondence and coherence to achieve its mark in the garment industry as a world leader today.
Appendix 1: Mintzberg’s Concept of Emergent Strategy
Appendix 2: typical Zara ’empty’ stores
Appendix 3: Zara’s Capacity utilization (Ferdows, Lewis, & Machuca, 2005)
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