Zara Case Study Harvard Answers For Interview

It's not unusual to pass a Zara store and do a double-take - didn't you just see that on the catwalk? As a brand, they value their speed and responsiveness to the latest fashion trends. Owned by the distribution group Inditex, we had a look at what makes Zara so fast that the New York Times called it "mind-spinningly supersonic".

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Amancio Ortega founded Zara in 1975 as an attempt to better understand world markets for his fashion merchandise. From that first store in Spain, Zara has since expanded to 1,770 stores in 86 countries around the world. 

In 2012, Inditex, Ortega’s parent company made up of Zara and other retail concepts and suppliers, reported total sales of US$20.7 billion, with Zara representing a powerful 66 percent, or US$13.6 billion, of that total.

What’s the secret to Zara’s competitive advantage? Its supply chain.

Zara produces around 450 million items a year. How can it stay so efficient with the sheer volume that passes through its supply chain? Regular, small batch deliveries happen with clock-work precision twice a week to all of their stores around the world. 

Ensuring all this runs smoothly is what Zara does best - controlling more of its manufacturing and supply chain than most of its competitive counterparts. 

Synergy between business and operations strategy

Zara’s overarching strategy is achieving growth through diversification with vertical integrations. It adapts couture designs, manufactures, distributes, and retails clothes within 2 weeks of the original design first appearing on catwalks.

The company owns its supply chain and competes on its speed to market, literally embodying the idea of “fast fashion”.

Just in time production

The retail giant delivers fashionable and trendy numbers catered for different tastes through a controlled and integrated process – just in time.

Zara keeps a significant amount of its production in-house and makes sure that its own factories reserve 85 percent of their capacity for in-season adjustments. In-house production allows the organization to be flexible in the amount, frequency, and variety of new products to be launched.

The company often relies heavily on sophisticated fabric sourcing, cutting, and sewing facilities nearer to its design headquarters in Spain.

The wages of these European workers are higher than those of their developing-world counterparts, but the turnaround time is miraculous.

Zara also commits six months in advance to only 15 to 25 percent of a season’s line. And it only locks in 50 to 60 percent of its line by the start of the season, meaning that up to 50 percent of its clothes are designed and manufactured smack in the middle of the season.

If a certain style or design becomes the new must-have on the street, Zara gets to work. Designers churn out the new styles and they're fast-tracked to stores while the trend is still going strong. 

Store managers communicate customer feedback on what shoppers like, what they dislike, and what they’re looking for. That data is instantly funneled back to Zara’s designers who begin sketching on the spot.

Zara also has extra capacity on hand to respond to demand as it develops and changes. For example, it operates typically 4.5 days per week around the clock on full capacity, leaving some flexibility for extra shifts and temporary labor to be added when needed.

This then translates to frequent shipments and higher numbers of customer visits to the stores, creating an environment of shortage and opportunity.

This strategy allows Zara to sell more items at full price because of the sense of scarcity and exclusiveness the company exudes. Zara’s total cost is minimized because merchandise that is marked down is reduced dramatically as compared to competitors.

Zara gets 85 percent of the full price on its clothes, while the industry average is 60 to 70 percent. Unsold items account for less than 10 percent of its stock, compared with an industry average of 17 to 20 percent.

“Most companies are riddled with penny-wise, pound-foolish decisions to reduce cost,” noted Kasra Ferdows, a professor at Georgetown University’s McDonough School of Business in this article on Bloomberg. “Zara understands that if they don’t have to discount as much, they can spend money on other things. They can see the benefit of this certainty and rhythm in the supply chain.”

This is also the reason why Zara can afford the extra labor and shipping costs needed to accommodate and satisfy changes in seasonality and customer demand.

Inventory management

You'll be hard pressed to find any excess inventory or deadstock in a Zara warehouse.  Throughout the supply chain, lean is word, all the way from raw materials to the finished garments on the shelves. 

Inventory optimization models are put in place to help the company to determine the quantity that should be delivered to every single one of its retail stores via shipments that go out twice every week. The stock delivered is strictly limited, ensuring that each store only receives just want they need. This goes towards the brand image of being exclusive while avoiding the build up of unpopular stock.

This quick in-season turnaround, from production facilities located close to Zara’s distribution headquarters in Spain, allows Zara to ship more often and in smaller batches. If the design Zara hastily creates in an attempt to chase the latest trend does not in fact sell well, little harm is done.

The batch is small, so there’s not a ton of unsold inventory to get rid of. And because the failed experiment is over in a jiffy, there’s still time to try a different style, and then a different one after that.

Centralized logistics

“The secret to their success has been centralization,” says Felipe Caro, an associate professor at the University of California at Los Angeles’s Anderson School of Management and a business adviser to the company. “They can make decisions in a very coordinated manner.”

Zara sticks to a deep, predictable and fast rhythm, based around order fulfillment to stores.

Each Zara outlet sends in two orders per week on specific days and timing. Trucks leave at specific times and shipments arrive in stores at specific times. Garments are already labeled and priced upon destination.

As a result of this clearly defined rhythm, every staff involved (from design to procurement, production, distribution, and retail) knows the timeline and how their activities pan out with respect to other functions. That certainly also extends to Zara customers, who know when to visit stores for fresh new garments.

Solid distribution network

Zara’s strong distribution network enables the company to deliver goods to its European stores within 24 hours, and to its American and Asian outlets in less than 40 hours.

According to Nelson Fraiman, a Columbia Business School professor who wrote a 2010 case study about Zara, the retail giant can get a product out from concept to store in just 15 days, while the industry standard is 6 months.

Fast fashion success

This brand’s success story shows the strength of its operations. Its cross-functional operations strategy, coupled with its vertically integrated supply chain, enables mass production under push control, leading to well-managed inventories, lower markdowns, higher profitability, and value creation for shareholders in the short and long term.

Zara is all about staying on top of the hottest trends, and exuding an exclusive feel, but its supply chain is the real star of the show. These rockstar-level logistics take it from being just another fashion retailer to an industry example of fast fashion done right. 

References: 1 | 2 | 3 | 4

Images: 1 | 2 | 3 | 4

See also:

3 lessons startups can learn from Alibaba

Tesla created a custom-built supply chain that competes with the best, and so can you

Out of stock problems? Walmart, Nike and Best Buy had them too, but here's how you can do better

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Inditex now makes 840 million garments a year and has around 5,900 stores in 85 countries, though that number is always changing because Inditex has in recent years opened more than a store a day, or about 500 stores a year. Right now there are around 4,400 stores in , and almost 2,000 in Spain alone. Inditex’s main rivals are way behind. Arcadia Group, which owns Topshop, among others, has about 3,000 stores worldwide; H&M, based in , has 2,500 (when you include its smaller lines of stores); and , based in Spain, 2,400.

In an Inditex conference room, Echevarría gave me a multimedia presentation about the company. The number of stores in different countries popped up on the screen — including 289 in and 45 in the . Since the time of our meeting, in late July, Inditex has reached 350 stores in China and opened another in the United States. The company’s march appears to be as inexorable as the passage of the seasons. But can Inditex survive its own expansion?

“When we open a market, everyone asks, ‘How many stores will you open?’ ” he said. “Honestly, I didn’t know. It depends on the customer and how big the demand is. We must have the dialogue with the customers and learn from them. It’s not us saying you must have this. It’s you saying it.”

The roots of Inditex go back to 1963, when Ortega, the son of a railway worker, started a business making housecoats and robes in La Coruña. In 1975, he opened his own store in town. He called it Zorba, after the 1964 film

“I don’t think they were thinking of making history, just that it was a nice name,” Echevarría said. “But apparently there was a bar that was called the same, Zorba, like two blocks away, and the owner of the bar came and said, ‘This is going to confuse things to have two Zorbas.’ They had already made the molds for the letters in the sign, so they just rearranged them to see what they could find. They found Zara.” The holding company Inditex was created in 1985.

Ortega wanted to maintain his own manufacturing business in La Coruña, so from the beginning his business model differed from the norm. A traditional ready-to-wear fashion company in the West sends the designs for its clothes to independent factories in countries like China and India, where the labor to make them is cheap. These clothes are then shipped back and stocked in stores in spring and fall, with smaller shipments throughout the year.

But a brand at Inditex will make a fall collection, for example, and then ship only three or four dresses or shirts or jackets in each style to a store. There’s very little leftover stock, few extra-smalls or mediums hiding in the back. But store managers can request more if there’s demand. They also monitor customers’ reactions, on the basis of what they buy and don’t buy, and what they say to a sales clerk: “I like this scooped collar” or “I hate zippers at the ankles.” Inditex says its sales staff is trained to draw out these sorts of comments from their customers. Every day, store managers report this information to headquarters, where it is then transmitted to a vast team of in-house designers, who quickly develop new designs and send them to factories to be turned into clothes.

More than half of Inditex’s manufacturing takes place either in the factories it owns or within proximity to company headquarters, which is to say in Europe or Northern . Inditex owns factories in Spain and outsources production to factories in , and — considered costly labor markets, typically. The rest of its clothes are produced in China, , and , among other countries. The trendiest items are made closest to home, however, so that the production process, from start to finish, takes only two to three weeks. Inditex’s higher labor costs are offset by greater flexibility — no extra inventory lying around — and on faster turnaround speed.

That means that if Inditex stores in , and São Paulo all have customers responding enthusiastically to, let’s say, sequined cranberry-colored hot pants, Inditex can deliver more of these, or a variation on hot pants, sequins or that cranberry color, to stores within three weeks. The company tries to keep the stock fresh; one promise its stores make is that you will always be buying something nearly unique. Merchandise moves incredibly quickly, even by fast-fashion standards. All those thousands of Inditex stores receive deliveries of new clothes twice a week.

In this way, says Masoud Golsorkhi, the editor of Tank, a London magazine about culture and fashion, Inditex has completely changed consumer behavior.

“When you went to Gucci or in October, you knew the chances were good that clothes would still be there in February,” he says. “With Zara, you know that if you don’t buy it, right then and there, within 11 days the entire stock will change. You buy it now or never. And because the prices are so low, you buy it now.”

Inditex owes none of its success to advertising. That’s because Inditex doesn’t advertise. It hardly even has a marketing department, and it doesn’t engage in flashy campaigns, as its competitors do, teaming up with fashion designers like , , and Marni. Zara’s designers are completely anonymous; some would say this is because they are copiers rather than designers.

The marketing Inditex does do is all about real estate. The company invests heavily in the beauty, historical appeal and location of its shops.

“The high street is really divided according to brand value,” says Golsorkhi, who is also a consultant for fashion brands. “ wants to be next to Gucci, Gucci wants to be next to Prada. The retail strategy for luxury brands is to try to keep as far away from the likes of Zara. Zara’s strategy is to get as close to them as possible.”

For example, in , where I live, Zara, Uterqüe and Massimo Dutti can all be found on Tesvikiye Caddesi, a tony and heavily trafficked avenue. They are one street away from Cartier and and Chanel. But Inditex is even more ambitious than that when it comes to finding valuable real estate. In 2003, Inditex built a Zara in the San Antonio el Real, an 18th-century convent in Salamanca, and in a historic cinema in Elche (also in Spain). The company likes special buildings. Last year, it paid $324 million to buy space at 666 Fifth Avenue in New York, according to the company, a building best known for being the most expensive ever sold in .

“In New York, they did one page saying they were opening — in ,” Echevarría said. “But it’s not a campaign; it’s an announcement; it’s information. The company does not talk about itself. The idea was that the client was to talk about the company. It was not to say how good it could be. The customer would say that if it was deserved.”

In the last five years, Inditex’s overall sales have grown to 13.8 billion euros a year from 9.4 billion euros. Profit has risen to almost 2 billion euros a year. The company expanded to 110,000 employees in 2011, from around 80,000 in 2007. In short, while Spain has been suffering through real estate and debt crises (following the global financial crisis), Inditex has prospered. Echevarría said that is because the customer is always determining production — not the other way around. Every piece of clothing the company makes has, in a way, been requested. A business model that is so closely attuned to the customer does not share the cycle of a financial crisis.

Fast fashion has also become more hip in recent years; even celebrities like Kate Middleton have been photographed wearing Zara. “It’s generally the way the retail market is going — it’s not just Zara,” says Isabel Cavill, a senior analyst with Planet Retail, a consulting firm based in London. “There’s a bit of cachet in picking up something that looks like £500 for £50.” If people compliment your nice dress, you can proudly boast that you got it for a steal.

Increasingly, H&M and Mango have raced to keep up with Zara. But the Inditex effect is not confined to cheap, fast fashion. It has forced — or inspired, depending on how you look at it — people to spend their money in a different manner. In Zara, every purchase is an impulse buy; there’s no longer any saving up for that gorgeous leather jacket in the window. You are buying clothes not because you love them, but because, at $50, those hot pants are as cheap as Sunday brunch for two — and likely to be gone in a matter of days. It’s a way of consumption that has conditioned buyers to expect this up-to-the-minute trendiness and variety in higher-end labels as well.

“They broke up a century-old biannual cycle of fashion,” Golsorkhi says. “Now, pretty much half of the high-end fashion companies” — Prada and Louis Vuitton, for example — “make four to six collections instead of two each year. That’s absolutely because of Zara.”

The Inditex brands exist in a dizzying fashion time frame, where the latest trend seems to be wilting on a woman a few hours after she buys into it. The public relations person who gave me the rest of my tour of the Inditex premises — and requested not to be named, presumably in accordance with Inditex’s modesty rules — wore sleek black pants with zippered ankles, a loose yellow blouse and a black blazer with an upside-down V cut out of the back. She looked sharp and shiny as a penknife. I wore a dress that was at least six years old, which basically means I showed up for my fast-fashion tour in a poodle skirt.

The Zara headquarters is a huge airplane-hangar-size open space, with regional sales managers sitting at a line of desks running down the middle, designers on either side of them. The managers field calls from China or to learn what’s selling, then they meet with the designers and decide whether there’s a trend. In this way, Inditex takes the fashion pulse of the world. “The manager will say, ‘My customers are asking for red trousers,’ and if it’s the same demand in Istanbul, New York and Tokyo, that means it’s a global trend, so they know to produce more red pants,” the P.R. person said.

I remarked that it must be interesting to see what is fashionable in Turkey but not in New York and vice versa. I imagined that different nationalities still had different tastes, at least in terms of fashion. But I was wrong.

“Actually, the customer is more or less the same in New York and Istanbul,” she said. “There are differences, like Brazilian girls like more brilliant colors, whereas in they use more black. But in general when you find a fashion trend, it’s global.”

Earlier, Echevarría told me that neighborhoods share trends more than countries do. For example, the store on Fifth Avenue in Midtown New York “is more similar to the store in Ginza, Tokyo, which is an elegant area that’s also touristic,” he said. “And SoHo is closer to Shibuya, which is very trendy and young. now is a wildly trendy place to go, while Midtown — well, no is actually shopping on Fifth Avenue now.” The buyers there are suburban tourists, he meant.

I recalled how I returned to my hipsterish Istanbul neighborhood after a trip to Brooklyn not long ago and discovered that the Turks were all also wearing those huge scarves wrapped around their necks eight times. I was surprised by how fast a style traveled across the globe, because I don’t see many Turks reading fashion magazines. But it isn’t just magazines that tell us what to wear. People like Ortega do. Or, more accurate, we tell each other, through the conduit of his Inditex stores and others like them.

On my tour, I also visited the mock Zara and Zara Home stores that were set up inside the headquarters. The fall collection, about to be introduced around the world, sat in the storefront.

There were lots of studs in brassy gold, military colors, skulls, white lace shirts and animal prints that, the spokeswoman said, “have been trendy since last season and will continue a little bit, but just until Christmas.” A trend can last a half a year, but some are finished in a month. “They thought that animal prints would finish by summer, but it kept going,” she said. “In the beginning of this season we had fluorescent colors. It was a trend in April and May, and it was very successful and then that was it.”

We stopped in at Zara Home, which the representative said operated just like the clothing stores. (Last month, the company introduced in the United States, as well as Massimo Dutti, a higher-end clothing brand.) I was dubious that people throw away and replenish dishes and rugs the way they do miniskirts, but she assured me they do, especially when it was trendy. (I noticed skull-patterned stuff again.) Then we went to Zara Kids. It occurred to me that the avalanche of inexpensive clothing would likely put an end to the custom of hand-me-down baby clothes. Why deal with someone else’s stains when you can buy new (and on-trend) for $25?

“The trends for kids are the same for adults,” the spokeswoman said.

I looked at a jacket. “So I guess these Chanel-looking boxy things are in style for everyone.”

She nodded.

“Skulls for kids, too, huh?”

Inditex denies that it copies other designers. Yet in The New York Times last March, Alexandra Jacobs described a visit to the new Zara store on Fifth Avenue in New York, where she was reminded of Prada, , Balmain and many other high-end brands. took Inditex to court for selling the company’s signature red-soled shoes but lost, mainly because Inditex takes care to change its designs just enough to evade copyright laws.

“To the luxury brands, they are copycats, they are like mushrooms feeding off the main body of fashion,” Golsorkhi says. “I was of the same mind myself, but I have grown out of that because I realize that the fashion companies also copy each other. In the end, no one’s original.”

H&M also delivers frequent shipments of new items and imitates the latest trends. But even H&M offers original collections by famous fashion designers. Inditex has discovered it doesn’t need to.

“They have done process innovation very well,” says Nelson Fraiman, a professor at Columbia Business School who has studied the Inditex model. “Product innovation? No. But tell me one Chinese company that has done product innovation very well. They are brilliant at process. I think you should give a cheer for process innovation.”

Expansion, however, poses a threat to Zara’s process by putting stores far from the factories and logistics center in Europe. Echevarría said the company very carefully selects the cities where it opens new stores. Remember the slide presentation showing only 45 stores in the United States compared with hundreds in other countries? There are reasons for that. Foreign brands have a long history of failing miserably here.

“The United States is a graveyard of European retailers,” says José Luis Nueno, a professor of marketing at I.E.S.E. Business School in Madrid. “Everyone who has gone there has struggled. Laura Ashley has shut down and even Benetton is declining. The U.S. is really complex because it’s about putting stores in shopping malls in the middle of nowhere. Fashionistas live on the East and West coasts. Then everyone else dresses in the Gap and and T. J. Maxx. If you really wanted to cover the U.S., you would have to open 300 stores, and they would have to focus all their energy to make it work.”

There’s also the delicate matter of sizing.

“Would you expand in the United States?” Fraiman asks. “Zara to me is a European store for European style; it’s very fashion forward. And what is the problem in America? They don’t fit in the clothes. So why do it? Having to make larger sizes makes production so much more complex.”

Expanding in China, however, will make production more complex and also require heavy investment. The company plans to open more than 400 stores there this year. “Even opening three stores a week is very aggressive,” Fraiman says. “Their factories in La Coruña have a finite capacity to respond quickly. You open more and more stores, and you don’t have flexibility of the last-minute response. Once they have a big thrust in China, then what happens is that they will have to take the whole model” — the processing of customer reactions, the quick-turnaround design teams, the logistics platform — “and replicate it in China.” But the bigger Inditex gets, he says, the more it will lose control over quality and efficiency.

Still, remains central to Inditex’s plans, and the prospect of more than a billion Chinese consuming clothes at the fast-fashion clip worries some critics of the industry model. According to Elizabeth Cline, the author of “Overdressed: The Shockingly High Cost of Cheap Fashion,” Americans buy 20 billion garments a year, an average of 64 garments a person. When the Chinese are consuming at the same rate, that’s more than 80 billion garments a year. Golsorkhi says that fast fashion hasn’t changed the amount of labor needed to make clothes or the waste created by their production. Your new fluorescent miniskirt might only cost $40, but Bangladeshi workers still work for low pay in poor conditions to make it. Inditex says it works with unions and other organizations “to have the most respectful supply chain” and audits all of its partners every year, but like most major fashion companies that outsource the manufacturing of their clothes, it has received its share of complaints about factory conditions.

“The reality is: a T-shirt is a T-shirt is a T-shirt,” Golsorkhi says. “It costs the planet the same thing whether you have paid £200 for it or £1 for it. It does the same amount of damage. A T-shirt is equivalent to 700 gallons of water, gallons of chemical waste, so much human labor. But it used to be that we could do with three T-shirts a year. Now we need 30. Sometimes it’s actually cheaper to throw away clothes than to wash them. That has got to be wrong.”

It also may not be good for business in the long run.

“Eventually, there aren’t going to be resources to sustain fast fashion, so to me it seems to be a very vulnerable business model,” says Alex McIntosh, the business and research manager at the London College of Fashion’s Center for Sustainable Fashion. “Production costs will also get more expensive, and they won’t be able to keep this up. Value-based companies don’t have margins to absorb that additional cost. And then they will need to convince customers to spend more for clothes again.”

At the end of my tour, I went to one of the Inditex factories. There were about 100 workers, I was told; huge machines do much of the work. Hundreds of bright red three-quarter-length coats were hanging throughout the building, almost ready to be shipped. A line of women stood at ironing boards, smoothing out the wool-blend, looking for defects and, the spokeswoman told me with emphasis, attaching security tags. Inditex had discovered that if that task was left to the employees in the stores, it would take an extra few intolerable hours to get that trendy red coat from Galicia into your closet.

Continue reading the main story
Correction: November 25, 2012

An article on Nov. 11 about the Spanish clothing chain Zara and its parent company Inditex misspelled the surname of Inditex’s communications director. He is Jesus Echevarría, not Echeverría.

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