ZARA

The 21st-century Supply Chain Spanish clothier Zara turns the rules of supply chain management on their head. The result? A superresponsive network and profit margins that are the envy ofthe industry. ire Fiilflllment by Kasra Michael A. Lewis, and Jose A.D. Machuca hen a German wholesaler suddenly can- celed L1 big lingerie order in 1975, Amancio Or-W tet;;a thought his fledgling clothing company might go bankrupt. All his capittil was tied up in the order. There were no other buyers. In desperation, he opened a shop near his factory in La Coruna, in the far north- west corner of Spain, and sold the goods himself. He called the shop Zara. Today,over 650 Zara stores in some 50 countries attract well- heeled customers in luxury shopping districts around the world, and Senor Ortega is arguably the richest man in Spain. The clothing company he founded, called Inditex, has been growingever since he opened that first Zara shop. From 1991 to 200^, Inditex's sales - 70"-:. of which spring from Zara - grew more than 12-fold from €367 million to €4-6 billion, and net profits ballooned i4-ft)ld from €31 million to €447 million. In May 2001, a particularly tough period for initial public offer- ings, Tnditex sold 25% of its shares to the public for €2.3 billion. While manyof its competitors have exhibited poor financial re- sults over the last three years, Zara's sales and net income have continued to grow at an annual rate of over 2O'H.. !04 IIAIWARD The 21st-century Supply Chain The lesson Ortega learned from his early scare was this: To be successful, "you need to have five fingers touching the factory and Hve touching the cus- tomer." Translation: Control what hap- pens to your product until the customer buys it. hi adhering to this philosophy, Zara has developed a superresponsive supply chain. T'he company can design, produce, and deliver a new garment and put it on display in its stores worldwide in a mere 15 days. Such a pace is unheard- of in the fashion business, where de- signers typically spend months planning for the next season. Because Zara can offer a large variety ofthe latest designs quickly and in limited quantities, it col- lects 85% ofthe full ticket price on its re- tail clothing, while the industry average is 60% to 70%. As a result, it achieves a higher net margin on sales than its com- petitors; in 2001, for example, when In- ditex's net margin was io.5"i., Benetton's was only 7%, H&M's was 9.5%, and Gap's \N^s near zero. Zara defies most of the current con- ventional wisdom about how supply chains should be run. In fact, some of Zara's practices may seem questionable, if not downright crazy, when taken in- dividually. Unlike so many of its peers in retail clothing that rush to outsource, Zara keeps almost half of its production in-house. Far from pushing its factories to maximize their output, the company intentionally leaves extra capacity. Rather than chase economies of scale, Zara manufactures and distributes products in small batches. Instead of relying on outside partners, the company manages all design, ware- housing, distribution, and logistics functions itself. Even many ofits day-to-day operational procedures differ from the norm. It holds its retail stores to a rigid timetable for placing orders and receiving stock. It puts price tags on Kasra Ferdows (fcrdow!>k(a\^eori;etiwn.edit) is the Heisky Family Professor of Global Manufacturing at Ceorgetowii University's McDonough School of Business in Washington DC. Michael A. Lewis is a professor of operations and sup- ply management at the University of Bath School of Man- agement in the UK. Jose A.D. Machuca is a professor of op- erations management at the University of Seville in Spain. items before they're shipped, rather than at each store. It leaves large areas empty in its expensive retail shops. And it tolerates, even encourages, occasional stock-outs. During the last three years, we've tried to discover iust how /ara designs and manages its rapid-fire supply chain. We conducted a series of interviews with senior manag- ers at Inditex and examined company documents and a wide range of other sources. We were particularly curi- ous to see if Zara had discovered any groundbreaking innovations. We didn't find any. Instead, we found a self- reinforcing system built on three principles: • Close the communication loop. Zara's supply chain is organized to transfer both hard data and anecdotal in- 106 HARVARD BUblNLSS RhVih.W Rapid-Fire rulftllment formation quickly and easily from shoppers to designers and productionstaff. It's also set up to track materials and products in real time every step ofthe way, including in- ventory on display in the stores. The goal is to close the information loop between the end users and the up- stream operations of design, procurement, production, and distribution as quickly and directly as possible. • Stick to a rhythm across the entire chain. At Zara, rapid timing and synchronicity are paramount. To this end, the company indulges in in approach that can best be characterized as"penny foolish, pound wise." It spends money on anything that helps to increase and enforce the speed and responsiveness ofthe chain as a whole. • Leverage your capital assets to increase supply chain flexibility. Zara has made major capital invest- ments in production and distribution facilities and uses annually, t'rom which 10,000 are selected for production. Some of them resemble the latest couture creations. But Zara often beats the high-fashion houses to the market and offers almost the same products, made with less ex- pensive fabric, at much lower prices. Since most garments come in five to six colors and five to seven sizes, Zara's sys- tem has to deal with something in the realm of 300,000 new stock-keeping units (SKUs), on average, every year. This "fast fashion" system depends on a constant ex- change ofinfomiation throughout every part of Zara's sup- ply chain-from customers to store managers, from store managers to market specialists and designers, from de- signers to production staff, from buyers to subcontrac- tors, from warehouse managers to distributors, and so on. Most companies insert layers of bureaucracy that can bog down communication between departments. But Zara's Empty racks at Zara don't drive customers to other stores- Being out of stock in one item helps sell another. them to increase the supply chain's responsiveness to new and fluctuating demands. It produces complicated prod- ucts in-house and outsources the simple ones. It took Zara many years to develop its highly respon- sive system, but your company need not spend decades bringing its supply chain up to speed. Instead, you can borrow a page from Zara's playbook. Some of Zara's prac- tices may be directly applicable only in high-tech or other industries where product life cycles are very short. But Ortega's simple philosophy of reaping profits through end-to-end control ofthe supply chain applies to any in- dustry-from paper to aluminum products to medical instruments. Zara shows managers not only how to ad- just to quixotic consumer demands but also how to resist management fads and ever-shifting industry practices. Close the Loop In Zara stores, customers can always find new prod-ucts-but they're in limited supply. There is a sense oftantalizing exclusivity, since only a few items are on display even though stores are spacious (the average size is around i,ooo square meters). A customer thinks,"This green shirt fits me, and there is one on the rack. If I don't buy it now, I'll lose my chance." Such a retail concept depends on the regular creation and rapid replenishment of small batches of new goods. Zara's designers create approximately 40,000 new designs organization, operational procedures, pertormance mea- sures, and even its office layouts are all designed to make information transfer easy. Zara's single, centralized design and production center is attached to Inditex headquarters in L.a Coruria. It con- sists of three spacious halls-one tor women's clothing lines, one for men's, and one for children's. Unlike most companies, which try to excise redundant labor to cut costs, Zara makes a point of running three parallel, but operationally distinct, product families. Accordingly, sep- arate design, sales, and procurement and production- planning stafts are dedicated to each clothing line. A store may receive three different calls from l.a Corufia in one week from a market specialist in each channel; a factory making shirts may deal simultaneously with two Zara managers, one for men's shirts and another for children's shirts. Though it's more expensive to operate three chan- nels, the information tlow for each channel is fast, direct, and unencumbered hy probiems in other channels- making the overall supply chain more responsive. In each hall, floor to ceiling windows overlooking the Spanish countryside reinforce a sense of cheery infor- mality and openness. Unlike companies that sequester their design staffs, Zara's cadre of 200 designers sits right in the midst ofthe production process. Split among the three lines, these mostly twentysomething designers - hired because oftheir enthusiasm and talent, no prima donnas allowed-work next to the market specialists and NOVl Mm H 21)04 107 The 21st-century Supply Chain procurement and production planners. Large circular ta- bles play host to impromptu meetings. Racks ofthe lat- est fashion magazines and catalogs till the walls. A small prototype shop has been set up in the corner of each hall, which encourages everyone to comment on new gar- ments as they evolve. The physical and organizational proximity ofthe three groups increases both the speed and the quality ofthe de- sign process. Designers can quickly and informally check initial sketches with colleagues. Market specialists, who are in constant touch with store managers (and many of whom have been store managers themselves), provide quick feedback about the look ofthe new designs (style, color, fabric, and so on) and suggest possible market price points. Procurement and production planners make pre- liminary, but crucial, estimates of manufacturing costs The constant flow of updated data mitigates the so- called bullwhip effect - t he tendency of supply chains (and all open-loop information systems) to amplify small disturbances. A small change in retail orders,for example, can result in wide fluctuations in factory orders after it's transmitted through wholesalers and distributors. In an industry that traditionally allows retailers to change a maximum of 20% of their orders once the season has started, Zara lets them adiust 40% to 50%. In this way, Zara avoids costly overproduction and the subsequent sales and discounting prevalent in the industry. The relentless introduction of new products in smal! quantities, ironically, reduces the usual costs associated with running out of any particular item. Indeed, Zara makes a virtue of stock-outs. Empty racks don't drive cus- tomers to other stores because shoppers always have new Fe^v managers can imagine sending a half-empty truck across Europe or running factories for only one shift- and available capacity. The cross-functional teams can ex- amine prototypes in the hall, choose a design, and commit resources for its production and introduction in a few hours, if necessary. Zara is careful about the way it deploys the latest in- formation technology tools to facilitate these informal exchanges. Customized handheld computers support the connection between the retail stores and La Coruna. These PDAs augment regular (often weekly) phone con- versations between the store managers and the market specialists assigned to them. Through the PDAs and tele- phone conversations, stores transmit all kinds of infor- mation to La Coruna-such hard data as orders and sales trends and such soft data as customer reactions and the "buzz" around a new style. While any company can use PDAs to communicate, Zara's 1lat organization ensures that important conversations don't fall through the bu- reaucratic cracks. Once the team selects a prototype for production, the designers refine colors and textures on a computer-aided design system. If the item is to be made in one of Zara's factories, they transmit the specs directly to the relevant cutting machines and other systems in that factory. Bar codes track the cut pieces as they are converted into gar- ments through the various steps involved in production (including sewing operations usually done by subcon- tractors), distribution, and delivery to the stores, where the communication cycle began. things to choose from. Being out of stock in one item helps sell another, since people are often happy to snatch what they can. hi fact, Zara has an informal policy of moving un- sold items after two or three weeks. This can be an expen- sive practice for a typical store, but since Zara stores re- ceive small shipments and carry little inventory, the risks are small; unsold items account for less than 10% of stock, compared with the industry average of i7'!^ > to 20%. Fur- thermore, new merchandise displayed in limited quanti- ties and the short window of opportunity for purchasing items motivate people to visit Zara's shops more fre- quently than they might other stores. Consumers in cen- tral London, for example, visit the average store four times annually, but Zara's customers visit its shops an average of 17 times a year. The high traffic in the stores circumvents the need for advertising: Zara devotes just 0.3% ofits sales on ads, far less than the 3% to 4% its rivals spend. Stick to a Rh3rthm Zara relinquishes control over very little in its sup-ply chain - much less than its competitors. It de-signs and distributes all its products, outsources a smaller portion of its manufacturing than its peers, and owns nearly all its retail shops. Even Benetton, long rec- ognized as a pioneer in tight supply chain management, does not extend its reach as far as Zara does. Most of Benetton's stores are franchises, and that gives it less sway 108 F I A R V A R P R D S I N I S S HI V I I W Rapid-rire Fulftllment over retail inventories and limits its direct access to the critical last step in the supply chain-the customers. This level of control allows Zara to set the pace at which products and information tlow. The entire chain moves to a fast but predictable rhythm that resembles To- yota's'Ta/:f time" for assembly or the "inventory velocity" of Dell's procurement, production, and distribution sys- tem. By carefully timing the whole chain, Zara avoids the usual problem of rushing through one step and waiting to take the next. The precise rhythm begins in the retail shops. Store managers in Spain and southern F.urope place orders twice weekly, by s:oo PM Wednesday and 6:00 i'M Satur- day, and the rest of the world places them by 3:00 PM Tuesday and 6:00 PM Friday. These deadlines are strictly enforced: If a store in Barcelona misses the Wednesday deadline, it has to wait until Saturday. Order fulfillment follows tbe same strict rhythm. A cen- tral warehouse in La Coruiia prepares the shipments for every store, usually overnight. Once loaded onto a truck, the boxes and racks are either rushed to a nearby airport or routed directly to the European stores. All trucks and connecting airfreights run on established schedules-like a bus service-to match the retailers'twice-weekly orders. Shipments reach most European stores in 24 hours, U.S. stores in 48 hours, and Japanese shops in 72 hours, so store managers know exactly when the shipments will come in. When the trucks arrive at the stores, the rapid rhythm continues. Because all the items have already been pre- priced and tagged, and most are shipped hung up on racks, store managers can put them on display the moment they're delivered, without having to iron them. The need for control at this stage is minimized because the ship- ments are 98.9% accurate with less than 0.5% shrinkage. Finally, because regular customers know exactly when the new deliveries come, they visit the stores more frequently on those days. This relentless and transparent rhythm aligns all the players in Zara's supply chain. It guides daily decisions by managers, whose job is to ensure that nothing hinders the responsiveness ofthe total system. It reinforces the pro- duction of garments in small batches, though larger batches would reduce costs. It validates the company pol- icy of delivering two shipments every week, though less frequent shipment would reduce distribution costs. It jus- tifies transporting products by air and truck, though ships and trains wouid lower transportation fees. And it pro- vides a rationale for shipping some garments on hangers, though folding them into boxes would reduce the air and truck freight charges. These counterintuitive practices pay off. Zara has shown that by maintaining a strict rhythm, it can carry less inventory (about }0% of sales, compared to 14% to 15% at Benetton, HikM, and Cap); maintain a higher profit margin on sales; and grow its revenues. Leverage Your Assets '^m^'U a volatile market where product life cycles are M short, it's better to own fewer assets-thus goes the l.& conventional wisdom shared by many senior manag- ers, stock analysts, and management gurus. Zara subverts this logic. It produces roughly half of its products in its own factories. It buys 40% of its fabric from another Indi- tex firm, Comditel (accounting for almost 90% of Comdi- tel's total sales), and it purchases its dyestuff from yet an- other Inditex company. So much vertical integration is clearly out of fashion in the industry; rivals like Gap and H&M, for example, own no production facilities. But Zara's managers reason that investment in capital assets can actually increase the organization's overall flexibility. Owning production assets gives Zara a level of control over schedules and capacities that, its senior managers argue, would be impossible to achieve if the company were entirely dependent on outside suppliers, especially one^ located on the other side ofthe world. The simpler products, like sweaters in classic colors, are outsourced to suppliers in Europe, North Africa, and Asia. But Zara reserves the manufacture ofthe more- complicated products, like women's suits in new seasonal colors, for its own factories (i8 of which are in La Coruria, two in Barcelona, and one in Lithuania, with a few joint ventures in other countries). When Zara produces a gar- ment in-house, it uses local subcontractors for simple and labor-intensive steps ofthe production process, like sew- ing. These are small workshops, each with only a few dozen employees, and Zara is their primary customer. Zara can ramp up or down production of specific gar- ments quickly and conveniently because it normally op- erates many of its factories for only a single shift. These highly automated factories can operate extra hours if need be to meet seasonal or unforeseen demands. Spe- cialized by garment type, Zara's factories use sophisti- cated just-in-time systems, developed in cooperation with Toyota, that allow the company to customize its processes and exploit innovations. For example, like Benetton, Zara uses "postponement" to gain more speed and tlexibility, purchasing more than 50% of its fabrics undyed so that it can react faster to midseason color changes. All finished products pass tbrough the five-story, 500,000-square-meter distribution center in La Corufia, which ships approximately 2.5 million items per week. There, the allocation of such resources as tloor space, lay- out, and equipment follows the same logic that Zara NOVI MHI R 2004 109 The 21st-century Supply Chain applies to its factories. Storinj^ and shipping many of its pieces on racks, for instance, requires extra warehouse space and ela