Zara is able to sell fashionable clothing to consumers. It can quickly respond to consumer trends and bring garments to market that follow trends in the local market. This concept of “fast fashion” allows trends to move from catwalk/conception to retail location quickly, in some instances in just a few weeks. It also affords these fashionable items at reasonable prices. Consumers therefore look to Zara for affordable, trendy clothing.
Zara is able to deliver on this promise for trendy, affordable goods because of the strategic choices it has made within its supply chains. They allow Zara to quickly adapt the clothes that it sells in its stores. Zara created two basic collections each year, but regularly introduced other items throughout the seasons.
Characteristics of importance:
•ZARA receives textiles from their own suppliers, often undyed ‘gray’ fabric, which allows for customization closer to the sale date.
•Low levels of inventory – they produce a lot of products, thousands of skews and much higher than the average company, but they only produce a few of each item. This helps them keep their inventory levels low, and also drives multiple visits to consumers to the store to see the latest trends.
•Shortened period of garment development from market research → sample creation → shipping final garment to stores. Design/production and majority of suppliers are located close to the action where it will be sold helps shorten this process. (Versus other companies who outsource in third world countries). This shortened cycle time reduced working capital.
•40% of finished garments were manufactured internally; and many of the ‘risky’ fashion items were contracted by local suppliers so they were able to get them to market quickly, get feedback, and order more of the lot based on consumer shopping data •Different than other competitors, Zara’s design teams bridged merchandising and production.
•Investing in prime locations
Under the Newsvendor paradigm, how would you compare the Overage and Underage costs of Zara and Gap?
The newsvendor model is relevant for Zara and Gap because even though the items are not technically ‘perishable’, consumers are less willing to pay high prices for clothing that is out of season or no longer on trend and therefore in the ‘fast fashion’ business we should consider the garments perishable. The Newsvendor paradigm helps us understand optimal inventory levels, considering that unsold garments will not garner as high a price (or no price at all), and that demand will be uncertain.
In order to calculate the underage and overage costs of each chain, we would need to understand the regular market prices for their goods, the cost to manufacture the goods, and the cost to liquidate the goods. See chart below for the data that we would need to calculate these values.
In general, I would guess that Zara has a higher underage cost because it doesn’t stock a lot of inventory and the underage cost reflects the cost of being a unit short in inventory. I would guess that Gap has a higher overage costs because they produce more units and therefore have a higher cost of units of excess inventories.