Zara's Supply ChaJn'Managem~nt Practices

~'Zarahas managed to fill a hole and seize an opportunity in Spain. It has done forfashion what IKEA did for furniture, filling the gap between hypermarket anddesigner clothing jn a very desir(Jbleway. ,,1

- Valerie Van den Boffc~t:"Head Wolff OIins, Spain, in 2004.

"Zara is nimbler and faster to the market. This will be important as fashion trendsglobalize. ,,2 .

-Keith Wills, European Retail Analyst, Goldman Sachs3, in 2000.

ZARA'S FAST FASHION STRATEGY

In 2004, a famous pop star toured Spain to give a series of concerts. Her outfitsattracted instant attention froin teenagers and young girls across Spain. By the timethe pop star had reached the last leg of her tour, Spanish girls. wete sporting outfit~similar to the ones she had worn during her first concert. The outfits were designed~nd distributed by apparel retailer Zara, which quickly gauged the demand for them

and stocked u? its stores across S'painin less than tw~ weeks. .

According to a survey conducted by Interbrand,4 Zara was.the only Spanish brand tobe featured in the list of 'The 100 Top Global Brands' in 2005. It was featured at'thenth position in the list that featured Coca-Cola, Microsoft, and IBM in the first threepositions. The survey featured only those brands with a value of more than US$ '1

billion, which derived around 33% oftheir revenues outside their country of-origin.and whose financial data was publicly available. Interbrand describing -Zara, said,"Cutting-edge Spanish apparel retailer epitomizes cheap chic knocki!1g out mass-produced copies of catwalk fashions almost ovemight."s

Zara introduced about 12,000 designs every year; the shdf life of each design wasabout four weeks. In January 2006, Zara had 853 stores, located across the world.(Refer to Exhibit I for the geographical spread of Zara's stores). These stores received,two deliveries from Zara's central distribution center every week. The deliveries werecustomized in accordance with the data sent by them every day, Zara pioneered theconcept of customized retailing and was able to conceptualize the garment, develop,and deliver it to the stores within two to three weeks.

The key to Zara's success was its verticall inte rated structure where desi n,-rod' tributlOn,and retal mg were integrated. Maria J'.Garcia, spokeswomanfor Zara, said, "The vertical integration 0 our production system allows us to place a

I Joanna Doonar, "Branding Espana to the Rest of the World," Brand Strategy, March 2004.2 WilIiam Echikson, "The Mark of Zara," BusinessWeek, May 29, 2000.3 Goldman Sachs Inc. is one of the world's oldest investment banks founded in 1869. It is a

primary dealer in the US (reasul)' securities market. Goldman offers its clients mergers &acquisitions advisory, provides underwriting services, engages in proprietary trading, investsin private equity deals and also manages the wealth Ofaffluent individuals and families.

4 Interbrand Corporation is a leading brand consultancy, serving clients worldwide. Foundedin London, lnterbrand is headquartered in New York.

5 "Global Brand, The 100Top Brands," BusinessWeek, August 01,2005.

. Retail. Management -Y'

garment in any store around the world in a period between- two to three weeks.,,6(Refer to Table I for the time taken for Zara to make garments) Zara's vertically

integrated su .' . , he attention of industl}'ylayers ariO anarysts.ccording to Richard Hyman of Verdict,7 a retail cons!lltancy in London, "Vertical

mre,gratiQI1l13~p;nne Qut of fashion in the consumereconomy,L:lr:li<;";i spprtaeular"

exception to the rule."s -"-- -Table I! Zara's Supply Chain - Time Taken from Start" to Finish

Process Time Taken

Style i~ea,quantity etc., conveyed to Head quarters

Fabric trom Stock

Design

One day

One day

Three days

Style Approval

Prototype Development! Fit Sample/ Approval

Garment Production

One day

Three days -

Ten days

Shipment Five days

Adapted from "Devangshu Dutta, Brand Watch Zara, images Fashion Forum,"www.3isite.com; FebruGlY 12,2004.

ABOUTZARA

Zara was founded .by Amancio Ortega Gaona (Ortega), who was born in Leon, Spain,. in 1936. Ortega worked as an assistant in an apparel shop and in 1963 he set up his

own fashion retail business named Confecciones Goa, in Arteixo-La Coruna, tomanufacture housecoats9."In 1975, when a German retailer cancelled a major order,Qrtega started selling the clothes 1Toma small outlet in his factory and called theoutlet Zara. Zara went on t6 become .the flagship brand of the holding company,Industria de Diseno Textil,"SA, popularly called lnditex, which was founded in 1979.

Ortega was credited with democratizing fashion in Spain; he was responsible formaking designer clothing accessible to the masses. Between 1976 and 1984, Zara'spresence was extended to major Spanish cities. The first store outside Spain wasop'ened in 1988 in Portugal. The next international ventures were New York in 1989and Paris in 1990. By the end of 1990, Zara had operations in 82 cities across Spainand three cities internationally.

In the late 1990s and early 2000s, .Zara continued its global expansion and openedstores in'several countries. These Included the UK, Japan, Chile and Uruguay (1998),Canada, Germany, Poland, Brazil, UAE, Saudi Arabia, and Bahrain (1999), Australiaand Denmark (2000), Holland, Luxembourg, Iceland, and the Czech Republic (2001).

6 Stephan A. Schapiro, "f!ying Off the Rack," Air Cargo World Online, September 2001.7 Verdict Research is one of the leading publishers that carry out analyses of the retail

industry. Through its reports, Verdict presents forecasts and analyses, which are used byretailers, manufacturers, analysts, media etc.

8 "Floating on Air," Economist, May 19,2001.9 A woman's garment, usually long !\nd loose, used for informal wear at home.

. In 2002,Zara enteredItaly;_Switzerland,Finland,Malta, Singapore,the Do~inican-Republic, andEI Salvador. In 2003, tne new m-arkets in which the cpmpany

established its stores were Sweden, Russia, Ireland, Slovenia, M-alaysia and Jordan.Zara entered.Hungary, Romania, Estonia, Latvia, Lithuania, Hong Kong, Morocco,andPanamain 2004. .

In 2004, Inditex owned about 100 companies engaged in several activities related totextiles,sych as textile purchasing, textile manufacturing, and logistics. Through thesecompanies, Zara was able integrate its operations. For exarp.ple,Comditel specializedin procuring undyed fabrics which could be dyed or printe? as per the orders obtained.Zara procured 40% of the fabric from Comditel, which finished the processes of dyingand printing in about 4 to 5 days. Dyestuff was obtained from another company,Fibracolor. Synthetics we~e supplied by external suppliers. -

By 2005, Zara had become the third largest clothing retailer in the world in terms ofrevenues. As of January 2006, lara operated in 58 colintries..For the year endingJanuary 2005, the company accounted for 67.4% of Inditex's turnover with sales of€3819.6 million. About 65.8% ofZara's revenues came from international markets.

According to Inditex, "Zara is a high-fashion concept offering apparel; footwear, and,accessories fQr women, men, and children, fi'om newborns to adults aged 45. Zarastores offer a 'colhpelling' blend of fashion, quality, .am! price offered in attractivestores in prime locations on premier commercial streets and in upscale shopping

- centers. Our in-house design and productioncapabilitiesenable us to offer freshdesigns at our Zara stores twice a week throughout the year." 10

Zara always had something new to offer its customers and the supply of these'products was limited. By not resorting to mass production, Zara\)'as able to maii1tainthe exclusivity of its products. This also helped in creating a scarcity value -

.shoppers were not sure .if they could get the same product later and went ahead withbuying the product instead of postponing their purchase.. Zara also scored high onofferinggarmentssimilar to those createdby famousfashionhousesat a fraction of .

the price. 111order to maintain a constant flow of new supplies, the garments needed tobe created at quick intervals according to the demands of customers and h,!d to bereplenished rapidly. Commenting on Zara, Richard Perks, retail analyst with Mintel, IIsaid, "They've got to get the design. They've got to engineer it for low-costproduction. They've got to take the gray fabric and print it. They've go to get it out totheir outworkers to be made up and they've got to ship it .from Galicia right acrossEurope. That is an unbelievable achievement.,,12

SPOTTING TRENDS

One of the secrets behind Zara's success was its ability to spot emerging trends andreact quickly. Zara had a dedicated design team in Arteixo, A Corufia, in northernSpain. Ideas for new designs or for modifications to be made in existing designs

10 Offer Document Inditex, 200 I.

II Mintel provides consumer, media, and market research services. It has several clients acrossthe globe. The company was recognized as a business super brand in the UK for four years.The major products provided by Mintel include market and consumer research reports andinteractive reports.

12 "Zara: A Model Fashion Retailer," CNN, July 22, 2004.

mainly came ITom Zara's stores. The store managers and sales staff .updated the headoffice every day about the moving stock and about customers' demands. Across..allthe stores, Zara' s sales staff was equipped with wireless handsets which provided datato the store manager abQut.the pieces sold. The ma,:ager consoli~ated the data andsent it to the company headquarters through the Internet. The staff also p~ovidedinputs regarding the new lines...colors, styles, and fabrics that customers weredemandillg. It was quite common for Zara's sales personnel to inform headquartersabout a new style that a custol11erhad been wearing. This could eventually becomepartof Zara's line. . . .

The store managers were selected' carefully as thi::yhad an important role to play inproviding the crucial information which formed the base for new designs. People withretailing experience, who could spot the right trends, and possessed a design sensewere selected fur .the position. The store managers followed the trends in local fashioncarefully. AccordIng to a store manager in London, "I follow trends in London veryclosely, If Sienna Miller is doing boho, Zara will do boho. We're on top of every newstyle.~'13

Another sourc~. for the ~ew designs was the team of designers who traveled across theworld loqking for n-ewdesigns and the emerging trends. Zara kept scouting around atfa::;hionshows,' disc<?thequ~s,universities, !11oyiesa,nd mlisic vi.deos to spot new'tr~nds. . .

Designing'

Zara had a team of 200 designers, with each de~igiJerchurning out about 60 styl.esayear on an average. The designers were encouraged to experiment, but within Zara'sdefined parameters. They were expected to adapt haute cOliture14styles to the massmarket, while not bringing in their own styles Qrinfluencing the designs. According to

. KenWatson(Watson),Directorof a LondonbasedIndustryforum,whoconductedanin-depth study of Zara, "Zara doesn't want any'prima donna designers. They wantyoung 26-year-olds who will work within their system." 15Zara had three design

. centers- one each for men's,women's,and children'sapparel.Each linehad separateprocurement; design, and production planning staff.

The store.managers across Zara's stores.placed orders twice a week, on Wednesdaysand Saturdays inSouthem Europe and Spain and on Tuesdays and Fridays in the otherparts of the world. At the Zara headquarters, the sto~e specialists collected the

. information obtained from.different stores qcross the globe. This was then fed into adatabase. Each of the store specialists was responsible for a group of stores. Theyobtained infonnal feedback ITom the store managers and also visited the storesperiodicalJy to assess the trends. Most of the store specialists had worked as storemanagers and had a deep knowledge about managing stores.

13Angela Saini and Sarah Ryle, "New Kids on the High Street cut a Dash with Fast Fashions,"www.observer.guardian.co.uk. June 05, 2005.

14The term 'haute couture' is French. Haute means 'high' or 'elegant.' Couture literally means'sewing,' but has come to indicate the business of designing, creating, and selling custom-made,high fashionwomen'sclothes. .

15 Rayan J Thomas, "Uncovering Zara," Apparel Magazine, January 2006..

Based on th~ feedback from the stores, the store specialists provided the designers. with an outline of the new styles, designs, and fabric-as demahded by the stores. Theprocurement and production managers provided inputs regarding the capacity andmanufacturing costs. The desigqerscameout with the design specifications and thetechnical brief. With all the teams working in tandem, the prototypes were readywithin a few hours. Commenti'I1gon the fact that several teams worked together, -spokeswoman from Zara, Carmen Melon, said, "We have five different teams sharingthe same space, so design people work together with product people midmerchandising, as well as the people who provide the samples and patterns.,,16

Once the team came out with' a prototype, designers used CADI7 to further enhancethe color and textures. Sampling did not take much time as the fabric was alreadyavailable with Zara. The approvals were also obtained in quick time since th~ wholeteam wa5 at one place. As soon as the approvals were 'obtained [Tomthe team and thefinal consent [TomOrtega, the fabric was sent for cutting. Ol1ega was involved in theday to day operations of the company. According to Martin Varsavsky, founder ofSpain's Jazztel telecom, "He is very hands-on 'about the designs. Everything creativeispassedon by him.,,18 '

Zara also brought out its own collections periodically, one during spring/s'ummer andanother during fall/winter. The designers started working on the designs, colors, andfabric about eight months in advance. Severalpattems were deli~erated upon peforethe 'final designs wer~ decided on. Once the designs had been'decided upon, fabricprocurement and production planning began.

, Production

Depending on the styles and sizes to be produced, the fabric was cut at Zara's ownhigh-tech automated cutting facilities. Several layers of fabric, meant for garments ofa particular design, were laid out on cutting tables, vacuum sealed, and cut bymachines, based on a computer layout of the sample pieces. The layout was preparedso as to minimize wastage. The fabric was then marked for sewing.

The pieces cut in Zara were distrib~ted for sewing among 350 small workshops inGalicia and northern Portugal. These workshops, which were not owned by Zara,employed about 11,000 workers and were provided with a set of instructions. Thegarments. were generally ready within a week or two, depending on the number ofgarments. With the fabric in stock, Zara was ready with-the final product, including,designing, pattern. making, and cutting within 10days.

~Due to this flexibility in production processes, when the demand for any design was~w; Zara was able to stop its production. At the same time, it was able to modify its

processes to produce more bf the designs in demand. Analysts opined that it wasZani's ability to respond quickly that put the company on a different plane ascompared to the other' fashion retailers. ~After the stitched garments arrived at the manufacturing centers, they were checkednvice for quality, ironed, tagged, and then wrapped in plastic bags and sent to thedistribution centers. About 60% of Zara's total production was carried out in Portugal

-16 "Zara: A Model Fashion Retailer," CNN, July 22, 2004.

J7 Computer-aided design (CAD) is the use of a wide range of computer-based tools that assi~tengineers, architects, and other design professionals in their design activities.

18Richard Heller, "Inditex Index, Inside Zara," Forbes, May 28, 200 I.

and Spain. The comp(!nyconsidered several factors like expertise, cost, and especially

time s~nsitivity before opting for outsqur~ing. Zara carried ,out some of the capitalintensive m.anufacturing processes including dyeing and cutting the fabricindigenously while the labor inte!lsive steps like sewing were out~ourced. Garmentsthat required styling and reflected fashion trends were made by Zara while the basic

.designs and knitting were outsourced. On the flip side, the people cost that Zara had !oincur was higher compared to other retailers who outsourced their production to Asia.

Distribution

The distribution of garments was carried out at Zara's 500,000 square meterdistribution center in Arteixo. This center was located centrally among 14manufacturing plants in La Coruna. Zara had its own railway track of 211 km throughwhich the goods moved from the manufacturing plants to the distribution center. In2002, another distribution center was opened at Zaragoza in Spain to complement theexisting facility.

The merchandise moved through optical Teading devices that sorted out more than60,000 items every. hour. The distribution center had two levels and was fullyautomated. On one level was the section on folded apparel packed into cardboardboxes. The boxes were dropped through a s~aft according to their destination. On the.other lever were garments placed on hangers. These garments were sorted bas.ed ontheir styles. There were two ,belt systems -- one for folded and one for hung garments. -The garments were then routed using automatic, routing devices. All the garmentswere pre-priced and the lots labeled according to their destination.

At the loading docks, fleets of trucks took the goods to their destinations. Twice aweek, the garments were shipped out of the distribution center. Non-Europeanconsignments were sent to the airport at Santiago di Compostela. For stores withinEurope, they were sent through trucks, which received the consignments within 24 to36 hours. The stores located outside Europe received the consignment witl)in twodays. '

The distribution center was us'ed to select, 'sort, reroute, and resort men;:handisebetween manufacturing units and stores and was not used to store merchandise. AboutZara delivering its products twice a week, The New Yorkerl9 wrote, "Twice-weekly

deliveries may be' common in the grocery business, but in fashion retailing they're.unheard of. The curse of the rag trade, after all, is the enormous lag time between theinitial sketches of that new A-line skirt and its arrival in stores. Instead of reactingquickly to what customers want now, most retailers must guess what they'll want sixor nine months hence. That's hard enough if you're selling televisions or bicycles. Inthe fashion business, it's close to impossible.,,2O

Once the trucks reached the stores, the garments could be put on display straight awayas they were pre-priced and already ironed. Zara was able to achieve an accuracy levelof 98.9% in its shipments. The items sent to a particular store had the items that thestore managers had asked for and sometimes new items that were proving popular

19 The New Yorker is an American magazine that publishes reports, criticism, essays, cartoons,poetry, and fiction, The first magazine was published in 1925. Earlier, the magazine waspublished every week, Later, the format was changed to forty weekly magazines and sixspecial issues,

20 James Surowiecki, "The Most Devastating Retailer in the World," The New Yorker,November 2000.

with stores at other nearby locations. With new stock arriving twice a week, the storesalways had something new to offer.and the customers waited eag:rly for the newarrivals. According to Zara, on an average, customers visited Zara's stores 17 times ayear, c'omparedto the three to four visits its competitors received (Refer to Exhibit IIIfor Zara's production process).

Store Outlay

Zara was very particular about the location of its stores. The stores were mostlylocated in prime locations across the world. For example, Zara outlets were located in34th Street, Fifth Avenue, SoRo in New Yark; Regent Street in London, and Cha.mpsElysees in Paris. All of Zani's stores were uniform in outlay, including lighting,fixtures,. window display, and arrangement of garments. A typical.store had a floorspace of 1200 square meters.

The stores were brightly lit with a mix of halogen and fluorescent lighting. The back.walls were fully lit and the lights placed around and above the merchandise diffusedlight from.all sides. Color was not used much in the interiors, which were mostly in.white, natural' pine, mill work, and .brust1ed.stainless steel hues. The glass paneledfayade was brightly lit with a promine.ntdisplay of products, mannequins, and postersshowingZara's clothes. .

. Zara planned its store windows and displays carefully. At the company'sheadquarters, there were 25 full length display windows. These windows had display'platforms and variable light, which helped Zara in determjning how the.display unitwoulii look on bright days, on cloudy days, and during the night. A team of windowdesigners worked to arrive at the look of the windows at each of their stores. Thewindow presentation designs were then sent to the stores and most of Zara's storesacross the world sported those designs.

The display of clothes was given prominence in the stores. When the shipmentsarrived, there were codes on all the items which conveyed to the staff where exactly.the items needed to be placed. In the stores, the clothes were organized by color ratherthan type of garments. This .was done in order to encourage customers to spend moretime at the stores and to spot the matching items. According to a sales assistant in oneof Zara's stores, "We always have something that looks like.what the customer wants.If the flowery dress sells out, there will be a white one of the same design in stock.Customers won't leave the store empty~handed.,,21 .

All of Zara's stores .were located at places where there was constant pedestrian flowand they had huge windows to display the merchandise. This acted as a major pullfactor in atttacting customers: Zara believed that these locations themselves providedthe required advertising - the company spent very little (about 0.3% of its totalrevenues) on advertising or on the launch of new stores. On Zara's store de-Signs,Domenico De Sole, the CEO of Gucci22,said, "What always strikes me is the veryhigh quality of their store presentation. I respect people who know how to presenttheir product. Their stores, a.ndparticularly their windows, are very elegant.,,23

21 Angela Saini and Sarah Ryle, "New Kids on the High Street cut a Dash with Fast Fashions,"www.observer.guardian.co.uk. June 05,2005.

22 Italy-based Gucci Group NV is one of the world's leading multi-brand luxury goodscompanies. The group companies design, produce, and distribute high-quality personalluxury goods, including ready-to-wear apparel, handbags, luggage, small leather goods,shoes, timepieces, jewellery, tics and scarves, eyewear, perfumes, cosmetics and skincareproducts. .

23Richard Heller, "Inditex Index, Inside Zara," Forbes, May 28, 2001.

Zara's h~ge stores presented the -ambience of up$c:aleboutiques, w1th marble floorsand.effective lighting. One of the customerS visiting Zara iF!New York commented,"You feel like you're in a classy European boutique.,,24 Most of the stores werecompany owned and in some markets particularly in Asia, Zara adopted the route ofalliances and tTanchises. All the franchise operations were controlled by strict qualityprocedures laid out by Zara..It provided the franchise partn~rs with extensive trainingin human resources and logistics. Even while entering into agreements withtTanchisees,Zara retained the right to open its own stores in the location and buyouttTanchisedoperations in case it experienced any problems with running the stores.

REAPING THE BENFITS

Instead of projecting sales for a certain color, fabric, or style and launching suchproducts, Zara reacted swiftly to emerging trends in the fashion industry.The company ensured that its stores were stocked with th.eproducts that the customerswanted at that point of time. In contrast, other retailers took between 8 and 12 monthsto forecast and arrive at a style and send it for production. Zara's initial forecast waslimited to the.kind of fabric.and the amount of fabric it would buy. The fabric thusproGured was unprocessed- and undyed and Zara colored the product only beforesellingIt, based on the need and deman.d by consumers. Zara sourced undyed.fabrictTomthe Far East, f',Jorocco,and India.

When Zara opened stores in new locations, the shop assistants clearly told thecustomers that the styles changed every week and that they might not find the samepiece in the stores again. Once a product was in the stores, Zara quickly moved on.1othe next style. With new styles being introduced eyery week, consumers were likely tovisit the store more often.

Producing a product in limited quantity had another advantage. If the style did not sellas expected, Zara did not lose much, as there was not much stock to be discounted.On an average, Zara sold only 18% of the clothes through discount sales twice a year,as against the industry average of 36% and constant markdowns. Analysts opined thatZara's main advantage was its ability to respond during the season. If any collectionwas not doing well during the season, Zara could immediately realign its resources,whereas the other retailers had to resort to ?iscounts and advertising to clear theirstocks.

Zara used the pull process instead of forecasting to gauge market trends. As soon as aproquct was sent to the stores, Zara would know if the new design was going tosucceed or not, based on immediate feedback fTomthe sales force and store managers.Products that did not sell as expected were immediately discontinued. According toWatson, "The fundamental thing about using small batches and this model is that[you] are continually making decisions based on consumer demand. And if you cutyour demand to your supply and are able to do it quite quickly as it begins, you'realw~ys on the upward start of the demand curve, which is the highest rate ofsales.,,25

DefYing conventional wisdom, Zara adopted practices that resulted in higher costs.These included three product lines, deliveries twice a week, using planes and trucks totransport its goods instead of cheaper alternatives like trains and ships, and shipping

24 William Echikson, 'The Mark ofZara," BusinessWeek, May 29, 2000.

25 J Ryan Thomas, "Uncovering Zara," Apparel Magazine, January 2006.

some of the g.armentson hangers, which occupied more space, .thus increasing freigl1tchaI:.ges.However, these practices helped Zara maintain a low inventory and higherprofit margins. Analysts opined that Zara's supply chain did not' minimize costs butworked towards maximizing revenues.

When most of tne European retailers were moving their production processes to lowcost countries like China and India to minimize their costs, Zara made efforts to keepits costs low; despite manufacturing in. Spain and other European countries. Thecompany did not own any of the workshops where the sewing was done. Theseworkshops employed women from villages and small towns. Their average wage wasaround US$ 500 a month as against the US$ 1,300 per month paid to industrialworkers. However, these wages w~re still 5 to 7 times higher than those paid in Indiaor Chiria. Zara was thus able to achieve the flexibility of making and distributing thegarment in a few days, something which would ~ave not been possible if themanufacturing was dony in these low cost countries. According to David Bovet ofMercer Management Consultant, "The dominant way of thinkirig for a while now hasbe.en, find .the cheapest cou~try out there and get it to produce your stuff, but whatZa~ahas said is that proximity matters. Even if you save a couple of bucks an hour byshipping the stuff off to the Third World, you end up p.ayingmor.ein the end, becauseit destioysyour flexibility.,,26

'Zara's use of information technology (IT) was limited. According to Andrew McAfee,specialist in the corporate use of IT at !farvard Business School, "The company keepsits technology simple - even a little.old-fashioned - but as a result spends five to tentimes less on information technology than its rivals.,,27

LOOKING AHEAD

Industry analysts were of the opinion that Zara could not continue with its supplychain model for too long. With many retailers moving their manufacturing processesto India and China to control costs, Zara would have to follow suit sooner or later inorder to remain competitive. However, if the production was to move out to low costcountries, Zara could lose its advantage and might not be able to refurbish.its productlines in quick succession, the analysts felt.

By 2008, the quotas28 imposed on the Chinese textile industry by the US and theEuropean Union would be removed. Most of the leading European textile companieswere expected to move their manufacturing processes to Asia, particularly to China,due to lower costs. Several luxury apparel brands would also start sourcing fromChina. According to NathanCockerll, analyst with Credit Suisse First Boston

26 James Surowiecki, "The Most Devastating Retailer in the World," The New Yorker,November 2000.

27 "The Future of Fast Fashion," Economis.t, June 18,2005.

28 In order to protect European manufacturers from Chinese imports, a quota was imposed on10 categories of clothes from China. Under the terms, the quotas restricted the annualimports of the specified items till 2008. America also entered into a similar agreement for 34categories of clothes. After the quotas are removed, the European manufacturers who are notable to m.anufacturegarments in China would be able to manufacture them and,source theirproducts from China.

Retail Management

(CSFB)29;'.T.he ~conomics of .Asiansourcin& ac;tua1!ywQrk better for some luxurycompanies than fast-fashion retailers, because the imirgins on more expensive-goodsaren't affected as much by the cost of putting them ona plane.,,3o.

Analysts cautioned Zara against aggressive ex\?ansion. They pointed out that thefarther Zara moved-its operationsfrom Spain, further away it would be -fromitscentnilized-.~istribution system, which would lead to higher costs. Analysts warnedthat vertical integration, which was Zara's strength, could also turn out to be itsweakness, if it continued expanding to far off locations in Asia and Americ~. One ofthe disadvantages of vertical integration was the lack of economies of sc~le, whereZara was unable to reap the advantage of producing large quantities of products to sellthem ~t competitjve prices.

Retail experts suggested that lara should complete its expansion in the Europeanmarkets before venturing into the Asian markets. .In case lara wanted to expandfurther, analysts opined that it needed to decentralize its production processes andhave a production' center for a cluster of countries along with distribution centers.

Questions for Discussion:

1. According to Richard Hyman,"V ~rtical integration has gone out of fashion in theconsumer economy; lara is a spectacular ~xception to the rule.'" Explain howlara used its vertically integrated supply chain to its apvantage. What are thedrawbacks of havipg a highly vertically integrated supply chain for a fashionretailing company? Explain.

In the light of lara's global expansion in far-off locations like Asia and America,what modifications according to you, the company has to bring in its supply chain'and w11Y? . ;'

Most of the supply chain management efforts by organizations now-a-days areaimed at minimizing costs rather than on maximizing revenues. However, lara'ssupply chain management practices are an exception. Do you think lara shouldcontinue with these practices or should aim at reducing costs so as to maximizeprofits? Take a stand and justify.

2.

3.

~ 2006. Iefai Center for Management Research. All rights reserved. This case waswrittel) by llldu; P., under-the direction of Vivek Gupta.

29 CSFB is a New York based investment banking and financial services firm. It is a division ofthe Credit Suisse group and has started operating under the the name Credit Suisse .sinceJanuary 16, 2006. The firm caters for three different categories of clients - institutional,investment banking and investment management clients.

30 Rana Foroohar, "Fabulous Fashion," Newsweek Internationar, October 17, 2005.

- Exhibit I

. Zara""" Global Presence (January 2006)

America Europe

Country No. of Stores Country - No. of StoreS

Argentina 6 Andorra 1

Brazil 14 Austria 8

Canada 14 Belgium 18

Chile 5 Cyprus 3

Costa Rica 1 Czech Republic 3

Dominican Republic 1 Denmark 4

EI Salvador 1 Estonia 1

Mexico 39 Finland 4

Pan-ama 1 France 90

Uruguay 2 Germany 41

Venezuela 9- Greece J8

USA 19 Hungary 2

Total 112 Ireland 5

Asia Italy 36

Country No. of Stores Latvia 1

Hong Kong 4 Lithuania 2

Japan 18 Luxembourg 2

Malaysia 3 Malta 1

Singapore 3 Monaco 1

Indonesia 2 Netherlands 6

Philippines 1 Poland 11

Total 31 Portugal 46

Middle East & Africa Romania 1

Country No. of Stores Russia 7

UAE 5 Slovenia 3

Bahrain 1 Spain 259

Israel 14 Sweden 4

Jordan I Switzerland 8

Kuwait 4 Turkey 13

Lebanon 2 UK 45

Morocco 1 Total 665

Qatar 1

Saudi Arabia 16 Grand Total 853

Total 45

Source: www.inditex.com.

Exhibit II. "

IND~TEX - International Expansion. -

Year Countries

1988 -

1989

1990

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Portugal

USA

France

Mexico

Greece

Belgium, Sweden

Malta

Cyprus,

NQrway,Israel. .

Argentina, Japan, UK, Venezuela, UAE, Lebanon, Kuwait, TurKey

Netherlands, Germany, Poland, Chile, Saudi Arabia, Bahrain, Canada,. Uruguay

Austria, Denmar~, Qatar, Andorra

Puerto Rico, Jordan, Ireland, Italy, Iceland, Luxembourg, -CzechRepublic

EI Salvador; Finland, .Singapo!e, Dominican Republic, Switzerland

Russia, Slovakia, Slovenia, Malaysia

Hong Kong, Morocco, Estonia, Latvia, Romania, Hungary, Lithuania,Panama

Morocco, Indonesia, Philippines, Costa Rica

Source: WWW.illditex.com.

Undyedfabric

suppliedfrom far-

east

.Exhibit III

Manufacturing Process ofZara

Sales personnel & store managersobtain customer feedback, monitor

local trends and update theheadquarters daily

Designers travel across the worldscouting for trends, ideas and

- designs

Data obtained used to decide on price, fabric etc.

Store specialists, designers, procurement andproduction managers work in tandem to arrive ~t

newdesigns ..

Sampling and approval

Fabric is dyed, cut and sent to workshops forstitching

Stitched garments are checked for quality and sentfor distribution

Garments are sorted out and sent to Zara storesacross the world

Adapted from J L. W Lo, B. Rabenasolo and A-M Jolly-Desodt, "Leveraging Speed as aCompetitive Advantage: A Case Study of an International Fashion Chain and its Competitors, "Fashion Net, International Conference 2004.