Zara Inventory Management Case Study

“One day it’s in and the next day it’s out” – a popular phrase that often resounds when the apparel industry comes to mind.

The fashion industry is known to run on a high degree of uncertainty.

With ever changing trends it is even harder to predict the market and hence forecast the required raw materials and supplies. In the past the apparel industry has been categorized as more of a push model where the retailer outlets push styles and new outfits to the market.

However, the same strategy is doomed for failure as of today, with new entrants and competitors at every corner, brands are being forced to listen to their customer. It’s important to recognize what chimes with the consumer and quickly respond by satisfying this need. Additionally, every geographic location differs in spending patterns, styles, per capita income etc. and all the clothing lines need to accurately evaluate the demand that will exist in every market.

What increases the complexity of the supply chain is the dependence on exports from other developing countries. Almost 30% of all garments produced in the world are exported in developing nations. Hence, there is a large cost involved in transporting materials and finished goods.

Zara has maintained it’s stand as a leader in the apparel industry and what makes it so profitable is it’s unique supply chain strategies. Zara uses the following principles to increase their net income and maintain a standing of being a brand that is both fashion forward and affordable.

  • Quick response to Demand – Zara follows a pull model in their inventory and supply chain management. They create up to 1000 designs every month based on store sales and current trends. They monitor customer spending’s in the store to evaluate and understand what types of designs are being consumed and then accordingly iterate on their next designs.
  • Small Batch Productions – Zara has a fast turnover, they produce small number of quantities for every product. This gives them the opportunity to quickly understand what designs are successful. It is also a great way to explore new designs and understand its acceptance rate in the market. This also heavily reduces the risk of producing large quantities of something that the customer does not want. Even though it might seem like a bad idea to invest in different designs, Zara optimizes by using the same material only in different ways.
  • Central Distribution Center – Zara has very strong IT systems that back it’s distribution. All the clothes are shipped back to Spain, the central location. From here, it is distributed to different countries and stores is based on individual requirements and needs of the particular locality.

As industries and competitors follow up on Zara’s unique supply chain model, it is. Will Zara not be threatened by the new entrants or old catching up and continue to practice it’s well tested and tried model or they will they be agile and innovate to sustain a competitive edge through supply chain?

7 Rules of Fashion Supply Chain (Zara Case Study)
Fashion industry is one of the most primitive form of supply chain management and its practices have been extended, adopted and become the best practices that we use today. This article will show you the development of fashion industry and how one company manages to bring the operations into the next level.

Fashion SCM 1.0
In 1984,  US Apparel Industry created the task force called “Crafted With Pride in the U.S.A. Council” with the goal to improve the overall competitiveness of the industry. One year later “Kurt Salmon Associates” was assigned to investigate the whole apparel supply chain. The result showed that materials were in the warehouse or in transit as long as 40 weeks! In order to reduce lead-time, Quick Response (QR) strategy was developed and there are 2 core principles, namely, partnership between retailers and suppliers to improve the information sharing and the adoption of technologies such as EDI, UPC Code and point of sales data (POS).

Fashion SCM 2.0
When QR strategy has become saturated, companies have to find the ways to differentiate themselves, some adopt ERP system, others adopt Just-in-Time manufacturing concept. However, there is one company that stands out.

Zara who is the fashion retailer in Spain, has managed to get the attention from academics and the first case study about its strategies was published by Harvard Business School in 2003. In 2004, Kasra Ferdows, Michael A. Lewis, and Jose A.D. Machuca published the article on Harvard Business Review named “Rapid-Fire Fulfillment”. This article was the result of 3-year interviews with the senior management of Zara. We’ve identified 7 rules that we can learn from them as below.

  1. Produce in small lot: small lot is the unique characteristics of lean manufacturing which is not the case here. The logic behind this is that small lot creates the sense of exclusivity. Customer need to make a quick decision otherwise the next day the products they want will be gone. So customer visits Zara’s stores to see new products more often and this creates the huge amount of traffic and revenue.
  2. Centralize design and product development: the norm in the apparel (and some other) industries is to develop new products by both in-house staffs and through merchandisers. In the latter case, suppliers need to send samples (through merchandisers) to buyers many many times. Elimination of this back-and-forth communication reduces the time to market drastically.
  3. Utilize work cell organization: each new product development team has its own designers, sales, procurement and production planners the same way as in a cellular manufacturing. This help Zara to streamline the internal communication a lot.
  4. Control scheduling strictly: at Zara, store managers can place order 2 times a week, shipments are prepared and delivered within 24 hours (in Europe) and products will be on displayed at stores the same day they arrived. Since everything runs in a stead pace, they can reduce a waiting time at every step of the way.
  5. Keep production in-house: Zara tries to stay away from low-cost country sourcing and make an investment in the in-house manufacturing as much as possible. The reason is that they believe the in-house production help them to increase the overall flexibility.
  6. Automate production and warehouse facilities: since Zara believes in time based competition, automation is the key to help them to increase the speed and the accuracy of the operations.
  7. Adhere to all rules: implementing any one of these rules alone is not quite effective. Then, they have to stick to all rules so the whole supply chain is running like the well-oiled machine.

Source:SupplyChainOpz


Conclusion
Zara’s supply chain is a very good example of the strategic alignment because people, processes and practices support time-based strategy perfectly.

Related:Omni-Chan­nel Ex­pertise in Fashion Retail

Download the White Paper:The State of the Retail Supply Chain

Source: http://www.supplychainopz.com/2013/09/7-rules-fashion-supply-chain-management.html

In the success stories of H&M, Zara, Ikea and Walmart, luck is not a key factor.
In fact, a case study show these triumphs can be replicated in any industry.


The clothing retailer H&M was founded in 1947, but during the last decade the company has made it to the top with $20.3 billion yearly sales.
Forbes now lists H&M #31 in its brand value Top 100, along with Apple and Coca-Cola. In decade, retail giant Walmart has grown from $70 to $127 billion.

Similar fortune is walking with highly successful clothing chain Zara ($14.4 billion yearly) and furniture megastore IKEA ($28 billion).

Price Economy with Short Lead Times

H&M has 3500 stores in 55 countries, with a huge supply network, warehousing and logistics to handle.

H&M’s operations are built around a team of 100 designers, who work closely with a baffling number of companies on the production side – having no factories of its own.

H&M cooperates with over 700 suppliers, 60 pattern makers and 20 worldwide production centers.

Though it’s vital to follow fashion trends, the clothing retailer’s success is bound to price economy. This is where inventory management strategy steps in.
H&M manufactures 80% of its retail inventory in advance and, during the year, introduces the remaining 20% based on present-day market trends.

Affordability is reached with strong supplier relationships, paired with manufacturing strategies that reduce lead times.

H&M has 30 international supply partners, and a central inventory management software system.

Adopting a modern IT infrastructure has brought the average lead times down by 15-20%.

Flexibility and short lead times reduce the risk of buying the wrong items. This allows H&M stores to restock quickly with the bestselling products at economical prices.

Zara Avoids Inventory Buildup

Zara is an large retail chain with its 6,900+ stores in 86 countries, and 450 million items sold in year.

The retailer has opened about 400 stores annually on average over the past 5 years spread out among eight brands.

The brand is renowned for its ability to deliver new clothes to stores quickly and in small batches.

Twice a week, at precise times, store managers order clothes, and twice a week, on schedule, new garments arrive.

To achieve this, Zara controls more of its supply chain than most retailers do. On the contrary to H&M, Zara keeps a most of its production in-house.

For Zara, its supply chain is its competitive advantage. In-house production allows it to be flexible in the amount, frequency, and variety of new products to be launched.

Incredibly, it designs, manufactures, distributes, and retails clothes within 2 weeks of the original design first appearing on catwalks.

Six months in advance, Zara commits to only 15 to 25 percent of a season’s line. And it locks in merely half of its line by the start of the season, meaning that up to 50 percent of its clothes are designed and manufactured right during the season.

If a style becomes highly popular all of the sudden, Zara react instantly, creating a new design in the popular style, then gets new items into stores while the trend is still peaking.

From Customer Feedback to Inventory Management

Zara’s inventory management software lets the store managers to communicate customer feedback on what they’re looking for, what they like and dislike. Zara’s designers keep sketching, based on the data.

Constant slight changes give customers a sense of scarcity and exclusiveness. This strategy allows Zara to sell more items at full price. Less mark-downs, less inventory piling up in any part of supply chain from raw materials to finished products.

Inventory optimization models are used, so the company can determine the quantity to be delivered to a single retail store twice a week.

The stock delivered is strictly limited, ensuring that each store receives just what it needs. Thus, the brand image looks exclusive, and building up of unpopular stock is avoided.

The batches delivered are small, so if the hastily created design does not sell well, little harm is done inventory-wise.

Peaks in demand can be address quickly, as a Zara factory usually operates only 4.5 days per week on full capacity, leaving flexibility for extra shifts.

The core of Zara’s success is centralized enterprise
resource planning. Inventory, products and logistics are managed in central cloud based software.

The merchandize is already priced and labelled for selling when it to a store. The operations are monitored in real time, and changed accordingly. At Zara, change doesn’t disrupt the system; it’s part of the system.

 

IKEA – Cost-per-Touch Inventory Management

Image – Karl Baron

The IKEA Group has operations in 43 countries.

Total of 303 stores in 26 countries.
In 2013, the IKEA Group stores had 684 million visits.
The IKEA range consists of approximately 9,500 products.
Every year IKEA launch about 2,000 new products. IKEA have 12 in-house designers and 60-70 external designers via contracts.

IKEA is the synonym for do-it-yourself assembly furniture. This obviously lowers packaging cost, but there’s more to IKEAs success.

Every IKEA store has a warehouse. The main showroom is for customers to browse products. Then they can obtain the products themselves from the floor pallet location.

Having customers to retrieve the packed items themselves is an inventory strategy called “cost-per-touch.” Companies find that the more hands touch the product, the more costs are associated with it.

 

In-Store Logistics

Besides cost-per-touch, IKEA also relies on something unique regarding its product reordering. It has in-store logistics personnel handling inventory management.

These in-store logistics managers use a stock replenishment process called minimum/maximum settings for the reordering points.

Two factors are set for each product: the minimum amount of products available before reordering, and the maximum amount of a product to order at one time.

Using IKEA’s central inventory management software, logistics managers also have Point of Sale (POS) data of how much an item sells. The inventory management software also displays warehouse management, shipping and distribution center data.

IKEA uses separate high-flow and low-flow warehouse facilities. Products stocked in a low-flow facility are not in high demand.

Operations there are mostly manual, since workers won’t be moving inventory around too much. For items stocked in high-flow facilities, storage and retrieval operations are more automated.

This inventory strategy also reduces the cost-per-touch aspects of stock management.

Every product is designed by IKEA itself so the company maintains control over manufacturing costs. IKEA seeks to use as few materials as possible to make a product while not compromising on quality or durability.

By using fewer materials, the company cuts on transportation costs and get favorable supplier prices.

This allows the company to stay competitive against other retailers in the industry as it continually seeks for advanced methods to streamline supply chain and inventory management.

 

Inventory Management Cooperation with Suppliers

Over the decade, Walmart has become the world’s largest retailer with the highest sales per square foot.

This retail giant stocks products made in more than 70 countries, operates more than 11,000 stores in 27 countries around the world, and manages an average of $32 billion in inventory.

Walmart uses innovative technology to track inventory and restock their shelves, thus allowing the retail chain to cut costs.

Strategically, the idea is to minimize links in supply chain, sharing information with suppliers, and linking purchasing to sales in a more direct way.

The technical backbone of Walmart’s supply chain innovation is inventory management software, which allows to implement automated re-ordering and cross docking and other inventory tactics.

Cross docking is the centerpiece of Walmart’s strategy to replenish inventory efficiently. It means products are loaded from inbound or outbound truck trailers right away without extra storage.

Suppliers and manufacturers within Walmart’s supply chain synchronize their demand projections under a collaborative planning, inventory forecasting and stock replenishment scheme.

The network of global suppliers, warehouses, and retail stores has been described as behaving almost like a single firm.

Competitive Advantage with Inventory Management Software

H&M, Zara, IKEA and Walmart are really large retail operations with tens thousands of employees and numerous operations to run.

They surpass competition in supply chain optimization and strategic thinking. To make it work, they all use inventory management software as a backbone of operations.

Back in then days, building the necessary software instruments meant a massive investment and in-house effort.

Today, technology has created an environment where practically every company can optimize their business model and streamline processes.

In fact, even though the technology is becoming increasingly popular, it is still possible to gain a competitive advantage, taking advantage of a full business management software package.

 

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