Zara Case Report
Zara Case Report
Zara’s business strategy is to closely link its retailing and manufacturing to respond to rapidly changing fashion trends and demands of target customers. Zara has been successful by aligning its major processes (Product Design, Manufacturing, Order Fulfillment, and Retail), decentralizing decision making, and emphasizing speed. By strategically aligning all facets of its business, including its information technology, Zara has been able to develop distinct capabilities that have allowed it to harness its competitive advantage. However, as Zara continues to grow and its customized IT architecture ages, Zara faces potential risks in maintaining its sustainable advantage. Zara’s main processes of product design, manufacturing, order fulfillment, and retail are aligned and interconnected by one common goal – to quickly produce and deliver garments that its customers want, when the customers want them. Zara’s order process achieves speed and accuracy by giving autonomy to store managers to decide which garments to replenish and request newly available garments.
By decentralizing much of its decision making, Zara treats each store as a micro market. Store managers gain and relay information on their respective market on a daily basis, enabling Zara to respond to each market quickly and precisely. Though the ordering process is decentralized, it is highly standardized and clearly defined with set protocols and hard deadlines that are instilled at the store-level. The ordering process is closely interconnected to the fulfillment process. During the fulfillment process, a group of commercials act as decision makers in matching up the aggregated demand (orders) from all of the stores with the supply that is housed in distribution centers and determining how available inventory is allocated to each store. This group of commercials also works with product managers to determine future production for each SKU and ship items that stores did not order to test demand. Not surprisingly, the group of commercials is located in La Coruna, where relatively centralized decisions are made. Conversely, store managers play a more passive role in the fulfillment process, more or less having to accept and adapt to the fulfillment decisions made by the group of commercials.
Unlike the order process, the fulfillment process is not as highly standardized as commercials use a level of subjectivity when assessing which stores have been most successful in selling an item and which stores have been shortchanged on fulfillment decisions in the past to allocate available inventory to each store; fulfillment protocols are not as clearly defined as ordering protocols. Zara’s quick and frequent ordering and fulfillment processes require a manufacturing process that is constantly active, nimble, and capital intensive. Zara’s vertically integrated manufacturing process and ownership of specialized factories give Zara these capabilities, as well as the control and ability to continually produce new designs throughout the year. As a result, Zara is able to introduce almost three times as many new items as its competitors. Zara also makes significant investment in delivering finished garments to its distribution centers by ground, sea, and even air, to reduce the lag time between shipments. Because of short lead times and just-in-time production, Zara’s manufacturing process is heavily reliant on the ability of store managers and commercials to sense what customers want and to make sound judgments on orders in the short-term, not necessarily in the long-term.
Zara’s manufacturing process is fairly standardized in terms of setting a process and a production network that ensures short lead times. Zara’s highly integrated and interconnected processes enable Zara to respond to the fast-changing and unpredictable tastes of its target customers. Because of the decentralized, yet standardized ordering process, Zara is able to aggregate demand in a timely manner. This speed and accuracy allow Zara to easily match its aggregate demand with its supply at a given time and quickly respond to surpluses and shortages. With timely information on its supply and demand and a vertically integrated manufacturing process, is able to produce frequently with short lead times. This interconnectedness allows Zara to respond quickly and accurately to its customer’s demands, resulting in Zara’s competitive advantage. Zara’s ability to quickly bring products to market by significantly reducing lead time is its competitive advantage. Short development time also allows Zara to produce more SKUs in a year than its competitors. Zara achieves its short lead time and product development cycles by using technology throughout its supply chain.
The ability to combine SCM, ERP and CRM with different home grown interfaces allow Zara to transfer information from customers to suppliers, and vice versa. Zara used several custom applications for its SCM, ERP and CRM functions that enabled it to customize its overall IT architecture to its particular business model. Some of the major challenges faced by Zara as it continues to grow are its old operating system, number of standalone applications supporting its information flow system, lack of analytical capabilities in its information system, and lack of JIT visibility of inventory. Zara’s current POS system is outdated and may not be supported by its vendors in the future. This can pose a significant threat to the company as it continues to grow and maintain its competitive edge. Any disruptions in its supply chain due to lack of support of its current POS system by its vendors can hinder Zara’s ability to effectively service its customers and might cause the company to lose customers due to poor customer service. Numerous standalone applications installed by Zara throughout its supply chain can pose a significant challenge to Zara’s future growth as well.
Maintaining and upgrading home grown applications can be expensive and can decrease the flexibility in Zara’s information system to service its diverse customer base as the company continues its geographic expansion. Zara’s current SCM lacks the analytical capabilities such as a data warehousing required to run a growing global company. The majority of decisions are made by commercial managers using raw data. Having data warehousing capabilities that can provide the required information to Zara’s managers at any given time will significantly help the company to efficiently run its business and grow perhaps even more seamlessly. Currently, the steps required in capturing and transferring data from stores to distribution centers at Zara is manual, cumbersome and rigid.
Store managers have to manually input the data into a disk and install the disk into their POS. The data is then transferred to distribution centers. Also, the rigid structure and lack of flexibility in its information flow hinders store managers to effectively manage store inventor. The lack of visibility into other store’s inventory can increase inventory within the supply chain because stores that are geographically close to one another cannot transfer inventory between stores in order to meet changing customer demand. Outdated operating system, home grown applications, lack of analytical capabilities and inefficient data flow process could harm the future of Zara’s current success and its competitive edge.