Introduction

ZARA has been known as the most successful retailer of fashionable clothes at moderate prices.
Its unique strategies of a vertically integrated system of supply chain allow producing cheap but
fashionable garments within a short period. In contrast to other retail manufacturers, their
logistics system is much more effective because it meets the changing consumer demands. In
addition, the company attains much importance to the development of sophisticated IT systems
ensuring effective communication and information flow throughout the chains of the network.
Despite the successful growth and increased competitive advantage, ZARA supply chain
management still has a number of limitations. These drawbacks are specifically connected with
vertical orientations, geographically oriented demands, and high-level transportation costs. A
careful re-organization of company managerial systems can be the best solution for effective
handling of logistics and data exchange, as well as for increasing the company’s sustainability.
The primary goal of the project is to provide an analysis of ZARA’s logistics process to identify
the weaknesses and suggest corresponding improvements. The report, therefore, will provide
information about the past and current practices of the company’s supply chain management to
highlight the differences and track the existing inconsistencies.

A careful analysis of inbound and outbound logistics, as well as understanding the role of the
information flow within the organization will also contribute to providing viable solutions and
recommendations to the company’s strategies in the field of supply chain management.

Supply Chain Management (SCM) Practices: Inbound and Outbound

Logistics

Brief History of the Company and Its Supply Chain

The company was founded by Ortega Gaona who has introduced an alternative outlook on the
concept of clothes that should be consumed quickly rather than held in a cupboard. The company
has become the leading brand of the Inditex group due to its exclusive strategies and marketing
concepts.
In 1975, ZARA began selling the clothes in the native city (Dutta 2). Later, the popularity of the
brand was spread to other cities and neighboring countries. The major marketing concept,
therefore, consisted in distributing democratized fashion to the masses. Because the marketing
strategy was successful, the network of chains appeared in such leading cities as New York,
London, Rome, and Paris.

The main scope of the company’s supply chain management lies in distributing a cheap but
fashionable garment within 2 weeks. In order to meet the deadlines, the garment is produced in
limited supplies, which also enhances the concept of exclusivity. Hence, the retail concept is
based on rapid replenishment and regular creation of small amounts of new accessories and
clothes.

Judging from this philosophy, the speed of manufacture is extremely high and, therefore, the
effectiveness of the product distribution largely depends on the constant information exchange
throughout each stage of the company’s supply chain (Ferdows et al. n. p.). ZARA’s managers
realize that performance measures, office layouts, and operational procedures can be carried out
properly in case the information transparency and quick data transmission is ensured.

Flow and Cycle Diagram Identifying the Flow of Materials, Money, and Product

The network’s supply management concept is closely connected with time-based competition
allowing to source products at the international level. These factors contribute greatly to trades
off that have been introduced in order to develop strong relationships with supply chain
managers all over the world. In this respect, Zara also supports this concept, as presented in the
flow diagram below:
Regarding the diagram, the process of supply starts with cross-functional teams cooperating with
the company’s design department located in La Coruna. The team’s perception of the leading
fashion trends is further directed by regular inflows of EPOS information from ZARA’s stores
from all over the world (Dutta 3). Further, the marketing specialists proceed to consult the
supplies concerning the prices, costs, and margins (Dutta 3).

In order to define the volume of the production and establish deadlines, a global sourcing policy
provides a wide variety of fabric supplied from different countries. Such an approach
significantly reduces the risk of delays because if one supplier is unavailable, there are many
other fabric producers to rely on.
Hence, about 40 % of garments are imported whereas the rest is produced in Spain (Dutta 5).
Further, the finished products are price-tagged and labeled in La Coruna, the company’s
distribution center. The entire production cycle lasts two weeks to gain a time-based competitive
advantage and surpass its North American and European rivals.

Synergy between Zara’s business strategy and operational processes

Zara’s overarching strategy is achieving growth through diversification with vertical

integrations. It adapts couture designs, manufactures, distributes, and retails clothes within two
weeks of the original design first appearing on catwalks. This is in stark contrast to the average
six months it takes to produces items in the fashion industry.

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 production.

Zara’s success relies on keeping a significant amount of its production in-house and making 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 demand forecasting 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.

Zara’s business strategy allows the company 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
makes 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.

Lean inventory management

You'll be hard pressed to find any excess inventory or deadstock in a Zara warehouse.
Throughout the supply chain, lean is the 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 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 quickly, there’s still time to try a different style, and then a different one after
that.

Past Key Strategic Decisions in the Organization’s Supply Chain (Location, Production,
Inventory, and Transportation)

Location
For the purpose of controlling the marketing costs, Zara prefers creating prime retail locations to
spending money on advertising and attracting the buyers to their stores. As a result, the company
spends about 0.3 % only on advertising campaigns instead of 3.5 % spent by its competitors
(Dutta 6). Importantly, the company prioritizes the importance of choosing highly notable
locations, which makes advertising unimportant.

Production
Unlike other leading retailers located in North America and Europe, Zara’s managers do not
outsource their production completely. On the contrary, they locate about 80 % of production in
Europe, near the headquarters in Spain to take closer control of the facilities (Dutta 4). Such an
approach provides a greater extent of flexibility and minimizes the risk of failure. In addition, the
production of limited quantities also enhances the effectiveness of risk management, as well as
speed up the supply chain process.

Inventory
The inventory management is sufficiently ensured by effective IT solutions. At this point, the
information and communication networks that the company uses produce cost advantages to
operations and allow them to follow the fundamental principle of reacting quickly to the shifts in
demand.
In addition, success and flexibility allow the company’s managers to define quickly the deadlines
of production due to short lead-time, variety of fashion trends, and limited supplies (Ferdows et
al. n. p.). In the whole, ZARA’s inventory model is based on three main pillars: inventory in-
store, warehouse inventory, and demand forecast that is closely controlled by the creative
departments.

Transportation
Because ZARA is more inclined to use high technologies for transporting and distributing
products, the matter of transportation is indispensable for carrying out two-week shipments to
stores (Stewart 10). The fabrics and other materials are also quickly distributed because the
supplying centers are located near the headquarters.

Existing Problems and Weaknesses in the Current Supply Chain and

Logistics Process
Despite the incredible results that ZARA retailer has achieved, it can face a number of challenges
that can create serious problems. These limitations can be connected with just-in-time
management, transportation system, excess emphasis on technologies, and inappropriate
management of human resources (Gallagher 4).

In addition, the transportation process and shipment of materials within the regions can also
undergo unforeseen complications in the form of natural disasters, weather, terrorism, political
disturbances, or labor strife (Gallagher 6). The disconnection between the center and the creative
department can significantly halt the information exchange within the network throughout the
globe.

Aside from the operation vulnerabilities, the challenges can also be connected with financial
problems. In particular, due to the fact that the low-cost regions are supported either by a dollar
or by the Euro, the currency fluctuations can negatively influence the cost management at
ZARA.
Such a situation can lead to an increase in profit margins and transportation costs. It should be
stressed that a twice-weekly model of delivery is directly associated with the transportation costs
and, therefore, the circumstance can become the key to ZARA’s failure to control costs
(Gallagher 7).

Because time is one of the core advantages of the company, it should take possible challenges
into deeper consideration. The evaluation of rivals’ strategies is also crucial for predicting their
further steps because more and more companies have been emulating the vertically integrated
supply chain system introduced by ZARA.

Finally, apart from the strict monitoring of consumer demands, the company’s managers should
also take a closer look at the economic conditions (Dutta 3). Specific, the recession periods can
make consumers buy less and shift a share of wallet to lower-cost offerings (Gallagher 6). In
order to eliminate the emerged threats, the firm should conduct an in-depth analysis of future
marketing opportunities.

Web-Based Supply Chain Processes Evaluation

Existing web-based supply chain systems and processes related to electronic data
interchange

As it has been presented above, ZARA has successfully implemented a quick response program
ensuring effective production and distribution of products. Hence, excess inventory and
overproduction have been incorporated into the idea of customized retailing through a vertically
integrated channel (Cheng and Choi 13).

In order to monitor all stages of supply, effective informational technologies and web-based
supply chains should be introduced. In order to ensure quick information flow, Electronic Data
Interchange (EDI) is crucial for the Quick Response program being a fundamental technology
for processing the received data between the distributors and manufacturers (Leeman 142). More
importantly, the technology has been the core factor enabling technology for replenishment and
efficient coordination of a supply chain process.

Provided by the ERP system, this mechanism is indispensable to handling distribution and
logistics processes. In addition, the information flow process is significantly enhanced through
the introduction of intranet communication. The company’s intranet is necessary for a holistic
evaluation of the incoming suggestions concerning the product design and price (Leeman 143).
As a result, the firm designs about 10 thousand items annually.

The assistance of Web-Based Technologies in Integration and Collaboration

Processes
Effective information exchange is the main condition for implementing collaborative and
integrative practices. In contrast to the traditional ordering process, ZARA retailers provide the
producers with all the necessary information that is impossible to handle manually (Schneider
240). Second, using intranet networks enables a constant flow of information and allows ZARA
to eliminate the threat of overproduction.

Importantly, the integration between business activities contributes to developing information

distribution leading to a tangible increase in performance and productivity. Due to the fact that
the primary goal of an ERP system consists in integrating information and activities from diverse
functional departments of a company, the introduction of workflow information systems can
improve the data exchange and provide transparency and accuracy of communication (Dutta 7).

At this point, vertically integrated types of supply chain management require technologies that
can embrace information from operational applications. In order to meet the challenges of remote
data processing, the company can introduce technological systems combining the analysis of
both external and internal data.
SCM Recommendations and Implementation Plan

Strategies for Four Key Decision Areas of Supply Chain

Location
The introduction of another distribution center can eliminate possible risks that a vertical
integration system of supply presents. In order to sustain a competitive advantage and growth,
ZARA should seek alternative opportunities for the global expansion in the apparel market.

In this respect, the company should develop another distribution center in the United States to
diminish the logistics level and deliver fashionable clothes in a timely manner. At this point, it is
possible to develop smaller distribution centers located in Brazil, Argentina, or Mexico, which
enhances the possibility of meeting the demands of the American customers.

Production
The production process can be significantly fostered through investment in Internet retailing
directed toward the American market. An online marketing strategy can advance the expansion
process to the U. S. market. In addition, the company should also introduce specialize products
with regard to various geographic locations.

Inventory
The inventory system can be improved in case Electronic Data Exchange systems are introduced
as powerful tools for integrating and collaborating the internal and external data obtained from
stores, designers, and marketing specialists.

Transportation
The existence of several retail centers can decrease transportation costs because air shipments are
much more expensive due to the rise in prices on fuel.

Functional Decisions Based on the Established Strategies

The presented strategies do not provide tangible shifts to the vertically integrated systems of the
company’s supply chain. ZARA’s managers, therefore, only need to develop the second retailing
center with a similar structure. The existence of an additional retailing department can deprive
the headquarters of certain responsibilities and provide greater control of other regions.

The integration of IT systems will eliminate the problems of coordination between the two newly
introduced centers. In addition, the re-organization process will touch on the design sphere
because the American department will be specifically oriented on a web-based supply chain
process. Hence, part of the responsibilities will be imposed on this department and, as result,
there will be designers oriented on different geographical regions.

The rationale for the Identified Strategies

The development of the second retail center in the American region can enable the international
company to foster the policy of global expansion. What is more important, the company can
create a solid platform for controlling the financial and economic conditions in the world.

As per the production process strategies, U. S. consumers are most likely to buy goods without
going outside because they feel more comfortable while having more time to select a product.
Further, a culturally and socially oriented policy of manufacturing can have a potent impact on
the increase in consumer demand. Finally, transportation and inventory can also be improved
with the integration of effective ERP systems enhanced by Electronic Data Exchange systems.

Summary of Recommendations
Excessive emphasis on the vertical integration system can create a threat to the effectiveness of
the global expansion of the world-known retailer. In this respect, ZARA should develop several
other creative departments that would control certain regions.

The re-organization, therefore, can greatly increase the customer demands because the
department will be specifically oriented on a particular cultural group. Hence, the centers can be
coordinated by means of EDI mechanisms integrated by ERP systems that provide greater
control and increase the production volumes all over the world. In whole, such a strategy
enhances ZARA’s competitive advantage.