Operations & Supply Chain Management Coursework

Report Submitted to

Mr. Deji Sotunde

Grenoble Ecole de Management BIB 2

Juan Pablo Medina

ID #: A4050420

December 1, 2014
1

Table of Contents

1.0Introduction.. 4

2.0 Zaras Value Chain.4-5

3.0 Competitive Priorities.6-7

4.0 Zaras Operations..7-9

5.0 Zaras Processes..9

5.1 Zaras Service Process.10

5.2 Zaras Manufacturing Process.11

6.0 Conclusion12

7.0 References.13
2

1.0 Introduction
Zara and Sainsbury are ones of the biggest and most important companies in their respective
countries. While one is a supermarket retailer, the other one is clothing manufacturer and
retailer. Their supply chain processes are key to their success.
Nowadays consumers have taken charge of the shopping process. In order for Sainsbury, Zara
and other retailers to survive they had to change their business model and operations towards
a more customer-centric approach. These days is all about providing customers a unique
brand experience across all the different services provided (browse, shop, order, receive, and
return merchandise). This requires the replacement of old product-centric and channelspecific operating practices with a next generation retail operating model that is customer
centric. One that benefits from recollected customer data, shopping patterns, and preferences
to create a superior brand experience and service. This is a very complicated task that
includes integrating e-commerce, order management, supply chain planning and execution
systems. It requires looking at retail operation from the consumers point of view this means
as a brand and not from the retailer point of view with different channels and products. How
else can firms provide consumers with perfectly consistent brand experience where they can
browse and purchase your products from anywhere at any time using any device and receive
it anywhere they choose? (JDA, 2014).

2.0 Zaras Value Chain

Zara is very unique company. It runs a vertically integrated business model. This means they
own and control their supply chain (Production, Distribution, and Sales). To be able to do this
they must do both types of process service and manufacturing. We can use Michael Porters
(1985) value chain analysis to the factors that has contributed to Zaras success. Zara has
differentiated successfully from its competitors by adding value in every step from their
process, from sales to production.
It all starts on the firms retail stores. Store managers have the autonomy to decide which
products are they going to sell and which should they put on sale. Most importantly they are
the one who are in charge of forwarding consumer demand and preferences (consumer
information= Input) to the commercial team in the companys headquarters in Spain. In Spain
the information is process and analyse by the team of commercial and designers (staff=input)
who are the ones in charge of deciding which clothes to produce based on the information
provided.

Afterwards the

designs

are

made on Zaras manufacturing facilities

(input=equipment) with in-house made or procured overseas textiles (input) by the companies
3

operators. Then all the products are sent to Zaras distribution centres (infrastructure=input)
who are the ones in charge of the inbound logistics of receiving and organizing them for
shipment (transportation services=input) to all the different stores around the world. The use
of information systems (IT systems=input) by the company help keep track of the stock
keeping units and coordinate the whole process effectively. This IT systems help organize and
distribute the products according to demand in each store. The quantity produced was as well
based on data gathered before on the consumer demand, this also reduces the inventory risks
and costs. Zara avoids keeping inventory to reduce the associated cost of storing it, this is one
of the main drivers of value for Zara in my opinion. Zara is convinced that its customers and
stores are best form of marketing for their organization. Based on this concept, they just spend
0.3% of their revenue in advertising (McAfee et al., 2007). Zara has successfully accomplish
this thanks to its fast and integrated supply chain which produces short lead times, and allows
them to deliver their products(clothes, hats, shoes etc.=output) in just one month. In this
process is where the firm really adds value to its products. Other activities in the firm such as
procurement,

technology development,

human

resources

management

and

firms

infrastructure are very similar to other firms.

We can see all this process summarize on the figure below.
Infrastructure

Multinational company headquarters in Spain

Human R

Services provided by parent company, Inditex

Tech Develop.

Efficient IT systems developed in-house

Procurement

Strategic location near suppliers, Vertical Integrated

Margin

Inbound L.

Operations

Outbound L.

Vertical Integration

Short lead times

Large
distribution
centers
strategically
located

Good relationship
with suppliers and
proximity to them

Centrally located
operations

Marketing &
Sales
Little
Advertising

Service
Customer
centric
business
model

Data recollected
on store
sconsumer

3.0 Competitive Priorities

Competitive priorities are the group of objectives that a firm should determine when
competing in the market. This objectives maybe quality, time, cost or flexibility (Hayes &
Wheelwright, 1984). Firms should focus on what they think they do best, and if done
properly this will give them an edge over competitors, this what we call competitive
advantage. The majority of firms always say and promote or at least try to do their best on all
these aspects but in reality they dont. Depending on the business and its aims, the majority of
firms focus just on a couple but not all of these aspects. Although there are companies such as
Zara that are able to say they are strong in every of those aspects. There exceptional vertically
integrated business model has been key to their success. Since Sainsbury and Zara are both
retailers, although one is fashion and the other a supermarket, they both focus in similar
points but do it different ways. Therefore lets analyse Zara from a customer point of view,
and see if there competitive priorities have become their competitive advantage. Zaras main
objective is to provide customers with quality seasonal apparel at a low price. Clearly Zara
has change the fashion industry. There successful execution of their strategy has been the key
of it. Zara focuses on short lead times. This means they can identify a trend, produce it and in
approximately a month, this clothes would be on stores around the world. This is amazing
compared to other retailers who normally do this in at least four months. They are able to do
this by stocking lower quantities of products, enabling them to respond more quickly to
fashion trends. This also allows them to reduce warehouse costs since they ship directly to the
stores. In the cost and quality aspect Zara produces around 50% of their product in Spain or
Portugal, compared to their competitors that outsource the majority of their manufacturing to
Asia (The Economist, 2001). This ensures better quality for customers. The reason they are
able to offer their low prices comes from their exceptional business model which is vertically
integrated, as well as their almost inexistent budget for advertisement. Not many companies
can pride on having a competitive advantage on almost all fronts like Zara does. Now lets
take a look at Sainsburys strategy which is We know our customers better than anyone else.
We will be there whenever and wherever they need us, offering great products and services at
fair prices. Our colleagues make the difference, our values make us different. Clearly they
try to tackle all the aspects which Hayes and Wheelwright suggested in 1984 but the reality is
different. In the past years Sainsburys has been focusing on differentiating from their
competitors (Tesco, ASDA) as better quality brand. They have been successful due to their
strong relationships they have created with their local suppliers. Sainsburys pride themselves
on buying 100% of their meats from British suppliers. This idea was reinforce when meat
horse scandal occurred to its competitors. While the competitors were affected by this,

Sainsbury was able to come out stronger from this situation all this due to the fact they source
their products from local reliable farmers. Also their partnerships with celebrities like Jamie
Oliver, promoting healthy food and their sponsorship to the Paralympic games create that
additional value they were looking for, in comparison with their competitors. Regarding their
cost strategy, they have been trying to reduce cost by using renewable forms of energy.
Although they have been highly successful on this project at the moment their prices are
almost the same as its competitors. In the future this probably be different. Their flexibility
and lead time has also improve in the past years. In 2009 they signed a contract with IBM to
transform their supply chain network. IBM has helped Sainsbury in the past years by
implementing new systems that have heighten the stock availability for their customers
(IBM.com, 2014). This combined with the reorganisation of their distribution centres their
new strategically located distribution centres that have improve service to their stores have
influence on the growth of Sainsburys in the past years.

4.0 Zaras Operations

The fast fashion industry is in constant change. Every season new trends emerge or old ones
come back therefore being very difficult to forecast the demand. Zara has based its supply
chain on tackling this problem the best way possible, and clearly they have been successful at
it. Instead of trying to predict demand, they have created very quick and efficient supply chain
that can respond to it. Zaras idea has always been to maintain design, production, and
distribution as tight as possible. In comparison to their competitors Zara manufactures the
majority of its products in its headquarters in Spain or in closed locations nearby meanwhile
their competitors outsource the majority of its manufacturing to Asia where labour is very
cheap. This has enable them to react quickly to changes in consumer demand. With this in
mind, they have tried to keep all this processes as centralized as possible although for
products with longer lead times they prefer to outsource them to Asia. Not long ago Inditex
(Zara parent company) CEO once said 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 cant move fast enough. This statement is
supported on Zaras model that you see at the
left. As almost all manufacturers Zara follows
a finite capacity scheduling. The company has
invested a lot of resources in knowing exactly
6

how much they can produce and in how much time they can produce it. They have found the
right strategy to allocate work the most efficient way possible, taking in consideration their
main objective that is to react to consumer demand. Thats why Zara manufactures at low
capacity to maintain a large capacity cushion, following a wait-and-see strategy to manage
capacity. This allows them to react quickly and successful to shifts in consumer demand and
at the same time lower their inventory costs effectively. Under normal circumstances they just
pre-commits around 50%-60% of its production in advance of the season, whereas other
clothing retailers commit around 80%-90% (Anderson, 2006). The objective of this is to
ensure production facilities are available for any increase on demand or if the opposite
scenario occurs. This scenario is when a clothing line is unpopular, Zara will have no problem
in dumping this line quickly and starting to manufacture a replacement as soon as possible.
This concept is further supported on the upstream business model Zara uses . Zara follows a
customer driven strategy. They utilize an in house developed Enterprise Resource Planning to
manage their information systems (Mcafee, Dessain, & Sioman, 2007). This ERP allows
managers from stores worldwide to send real time data on the customers selections to the
headquarters in Spain. Afterwards this information is process by the commercial and design
teams who then decide what to manufacture. Additionally design teams are send all around
the world to spot current trends and provide further market research. . Zara employs around
200 designers whom approximately produce around 12,000 different styles each year. From
the moment the information is send to the headquarters and time the new product arrives to
the store it may only take about three to four weeks. Zara has shortened the traditional supply
chain response in the industry from six months to one. Controlling notorious spots along the
supply chain has been key to achieve this speed. Thanks Zaras vertically integrated structure
potential bottlenecks can be addressed effectively. An example of this bottlenecks are the
dyeing and fit processes which are critical within the supply chain. Zara has controlling
interests on dye and finishing plants worldwide. This allows them to oversee the dyeing
process and have full control of it (Anderson, 2006).
Inventory management its one of the other factors that have characterized Zara along the
years. Their goal in this aspect has been to keep quantities produced of each product low but
produced wide range of different styles and products. Their short lead times allows to produce
more fashionable clothes and lower quantities helps them create the illusion of scarticity to
their customers, encouraging them to check out their stores more often. Inventory
optimization models have been crucial for them when finding the right economic order
quantity of the different products offered. Zara designs around 12,000 new models every year
and replenishes ranges within every one of its retails stores worldwide twice per week, but in
in strictly limited quantities of stock. This ensures brand promise of exclusivity and also of
7

design freshness. But most importantly avoids build of huge quantities on unpopular stock.
The relentless introduction of new products in small quantities, ironically reduces the usual
costs associated with running out of any particular item. Surprisingly, Zara makes a virtue of
stock-outs. Thanks to their continuous and ever changing range of products, stock-outs dont
drive shoppers out of the store, instead they happily buy any of the available products. This
helps Zara to reduce inventory, since being out of stock of one item helps sell another. In fact,
Zara has informal policy of moving unsold items after two or three weeks. Although this may
be expensive, Zara is able to this effectively since they receive smalls shipments and carry
little inventory. Thanks to this method unsold items account for less than 10% of stock
compared to the industry average of 17%-20%. Additionally, new merchandises and the short
window of opportunity for buying this items, motivate people to visit Zaras shops more
frequently. For example, shoppers in central London visit the average store four times
annually, but Zaras customers visit the shops an average of 17 times a year. Thanks to their
high traffic in stores they are able to just invest 0.3% of their sales on advertisement
(Ferdows, Lewis, Machuca, 2004).

5.0 Zaras Processes

As seen on the discussions above, we know that Zara doesnt function as a normal company.
We can say they are pioneers in the fast fashion industry. The biggest and most important
aspect that differentiates them is their vertically integrated model. This means they run both
manufacturing and services operations. Although they run huge operations they have kept
customers at the heart of their model. The way they have design their processes has been the
key for their success. Hence I will try to analyse them rather than proposing any suggestions
since I believe they have been exceptional on what they are doing

5.1 Service Process

Thus lets
its retail

analyse

operations using Chase (1978) customer-contact matrix for service processes.

Zara Front
Back Ofiice

As you can see on the figure above, I consider Zaras retail operations as a hybrid operation. There
services have combined characteristics of back and front office operations. In Zaras stores around the
world there is always a constant interaction between customers and employees. Not just when they are
going to pay but most importantly when store managers gather feedback and data on their preferences.
The success of their process decision regarding customer involvement has permitted them to add
additional value to their operations. Another benefit from this, has been the reduce costs associated
with this. Since they know what customers want their margin of error is quite low, although they also
make mistakes. Fortunately for them this mistakes can be quickly fix thanks to its quick response time
(The Economist, 2001).This is one of the most important parts on Zaras whole operation, since here
9

is where all begins. The whole manufacturing and design process is based on data they gathered doing
in-store surveys and interviews. Therefore being high in interaction with the customers but not
providing a tailor service for each of them. All the questions and procedures to make this research by
stores managers is the same every week. The excellent execution of their process design decision
regarding customer involvement, is admirable.

5.2 Manufacturing Process

Now lets analyse Zaras manufacturing process using Hayes and Wheelwright (1984) product

process matrix. Based on Zaras competitive priorities which include low-cost operations, consistent
quality, and most important delivery speed they have decided to produce on small batches. This
process choice for manufacturing their products has been determining in Zaras success. Producing in
small batches has allow them to achieve great flexibility as well as reducing inventory costs
efficiently. All process design decisions have been based on their priority of being fast and flexible on
their products. Thats why they maintain all the complicated capital intensive operations like
computer-guided fabric cutting in their headquarters. Meanwhile it outsource the labour intensive
operations such as garment sewing to a network of local subcontractors. By shifting more production
to subcontractors, the company was able to respond quickly when items sold better than expect or to
cut off production when the demand of particular product fell (Sull and Turconi, 2008). Also Zaras
factories use just-in-time systems developed in cooperation with logistics experts from Toyota
10

Motors. This has given them a level of control and accuracy that would be impossible if it were
dependant on outsiders (Cappell, 2008). This has allow them to successfully combined make-to-order
and assemble-to-order strategies for their production and inventory. This make or buy decisions are
normally made by the procurement planners. They look at some specific parameters to make this
decision. Such parameters are levels of speed, cost-effectiveness, and availability of sufficient
capacity. For its in-house production, Zara obtains 40% of its fabric supply from another Inditex
owned subsidiary called Comditel. The majority of these fabrics are purchased undyed to allow faster
response and flexibility to changes in consumer demand. The rest of the fabrics come from many
different suppliers whom none account for more than 4% of Zaras total production (Ferdows et Al,
2003). All these decisions regarding their process design are what have contributed and make Zara
what they are today.

6.0 Conclusion
Zara has a magnificent and unique supply chain. They have been the pioneers in the fast fashion
industry during the past, making huge amounts of profits in the way. Although producing on Asia and
other cheaper places, would be the usual cheaper decision a firm would make, Zaras bet on handling
design, production, distribution, and sales has clearly pay off. By doing this they have been able to
react faster to fashion trends than its competitors and also reduce the bullwhip effect on its operation.
Their be-spoke IT systems have also contributed to this. Another key factor for their success is their
customer focus strategy. Nowadays understanding customers and knowing how to act based on this is
key to success. Therefore I would recommend to Sainsbury to keep their operations as tight and
centralized as possible. The key for preventing bullwhip effects on the supply chain is to have
constant and effective communication among the different layers in the organization. Having an
horizontal flow of communications among the company will help mitigate this effect, just as Zara
does. Also before I started writing this report I believed the key for the success of any company is
applying a combination of both lean and agile supply chains. Now that I have finish it, I can confirm
that this is the key to success in any operation. Sainsbury should focus their strategy on understanding
consumers and reacting effectively to the ever changing consumer preferences.

11

7.0 References

12