Zara Postponement Strategy

Introduction

In order to compete in the world of rising globalization and shortening of product life cycle nowadays, firms have to deal with the demand for increasing product variety to meet the diverse needs of customers. Mass customization has become a requirement for many businesses especially in the dynamic, fast-changing industries. However, the more product varieties, the more difficult it is to forecast demand, control inventory and manufacture. Therefore, some innovative companies have integrated “postponement” strategies with their supply chain operations to gain control of product variety proliferation.

Zara is one of the most successful fast-fashion chains in the world, which is famous for its ability to keep itself up to date with fashion trends and the incredibly short time to introduce new products. In order to react quickly to fashion changes and consumer demand, Zara maintains extremely efficient supply chain operations. By properly designing the product structure and the manufacturing and supply chain process, Zara can delay the point in which the final products assume their specific characteristics, thus raising the flexibility to handle the changing demand for the multiple products.

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This is known as the “postponement” approach. In this paper, we will analyze how Zara achieves mass customization through “postponement”, with a particular focus on the supply chain structure, relationship and enabling activities supporting postponement strategy across the supply chain.

Analysis

The Postponement strategy

Besides the supply chain efficiencies and marketing philosophies, one of the key factors for Zara’s success is its postponement strategy. Postponement is defined as “a strategy to intentionally delay activities, rather than starting them with incomplete information about the actual market demands” (Yang, Burns, & Backhouse, 2005).

There are various models on postponement covering a continuum from pure standardization to customization. In the context of this paper, we will be looking at “the postponement and speculation matrix” (Figure 1) by Pagh and Cooper (1998).

The postponement and speculation matrix

According the matrix, the “full speculation” strategy relies fully on forecasting, where all the manufacturing operations are performed before knowing customer demand. On the other hand, “manufacturing postponement” refers to the situation where certain stages of the manufacturing process for a product are delayed until receiving a customer order. In contrast, “logistics postponement” involves delaying the distribution or actual delivery of a product until customer demand is known. Finally, the “full postponement” strategy is the highest level of delay in the supply chain, which makes use of both manufacturing and logistic postponement. There are trade-offs between different levels of customer service and inventory, production and distribution costs when applying different strategies. For example, the full speculation strategy incurs low production and distribution costs but high customer service and high inventory costs, whereas the opposite applies to the full postponement strategy. Therefore, depending on the demand, costs, market and nature of the products or services, each strategy can be applied accordingly. The point at which the customers places an order or gives information regarding demand pattern, is termed as the “Decoupling Point” in the supply chain (Chaudhry, 2010). The Decoupling Point differentiates between two segments of the chain, one of which operates without clarity on customer demand whereas the other operates after information regarding final demand has been received (Figure 3).

Figure 3: Postponement process flow (Chaudhry, 2010)

Applying the matrix into Zara, the company uses the full postponement strategy, where the manufacturing and logistics operations are initiated after the knowledge on customer demand. The decoupling point is pushed upstream of the supply chain to accommodate wider variety to satisfy customer demand (Figure 4). Therefore, Zara is able to react to consumer demand by delaying decisions until the last minute. Zara commits to only 50 to 60 percent of production in advance of the selling season, compared to 80 percent for most clothing retailers.

Figure 4: Full Postponement Strategy

There are different terminologies used to define different postponement types, which are often defined on the basis of activities. The following section summarizes the key postponement types that Zara utilizes in their value chain.

a. Product development postponement

While the average design-to-sales cycle times in the apparel industry are more than six months, Zara has achieved cycle times of five to six weeks. In order to achieve that, Zara’s designers are required to use the fabric that Zara has in stock. Moreover, the firm employs standardisation of the design modules. At the start of each selling season, the designing team create a library of models that serve as platforms for the models that will be eventually launched (Swaminathan and Le, 2003). Then the designers will go to all the trendy places to get the feel of the last fashion trends and give adaption to the models from the library after carefully examining the trends. That enables them to create 5 to 8 new designs everyday and about 12000 new products and designs every year (Swaminathan and Le, 2003).

b. Manufacturing postponement

When using manufacturing postponement, firms are able to operate without holding finished good inventory while maintaining a majority of their stocks at pre-customised form. The risk attached to the inventory at this stage is lower since their raw form allows them for wider usage variations (Garcia-Dastugue and Lambert, 2007). Manufacturing postponement thus means that companies hold products at platform level, which will be customised later as per demand pattern. The principle of this is that forecasting demand at component level is easier than that at finished good stage (Yang at al., 2005). By adopting this strategy, Zara can avoid the high product obsolescence costs that are often faced by fashion apparel retailers.

Figure 5: Zara's Demand-Driven Approach (Cheng and Choi, 2010) Zara focuses its forecasting efforts on the type and quantity of fabric it purchases. By buying more than 50% of its fabric un-dyed, speed and flexibility are improved because the fabric can be used for a variety of garments and line later. Not only does it reduce the cost but it also reduces the chances of forecast errors. In undyed form, the fabric is more easily converted other uses. Furthermore, it gives Zara the flexibility to adapt to colours close to the selling season based on customer demand (Ferdows et al. 2004).

c. Logistic postponement

Zara has two main distribution centres in Spain that distribute all its EU distribution and some of its global distribution, and a few smaller satellite distribution centres elsewhere. Shipments from the distribution centres to stores are made twice a week, based on customer demand in each individual store. Moreover, the inventory is maintained on the basis of the sales history to individual stores. These helps reduce the stock-keeping units in the supply chain (Pagh and Cooper, 1998) while improving customer responsiveness (Yang et al., 2004a).

Factors affecting the postponement strategies

In order for those postponements to happen without affecting time to market, Zara operates an extremely efficient value chain management. Zara’s network is strongly integrated, where 60% of the production is carried out in-house in Europe and 40% of its fabric is sourced from its parent company group - Inditex. Products with highly uncertain demand are sourced from Europe whereas products that are more predictable are sourced from its Asian locations. All of the capital-intensive steps are executed within Zara-owned factories whereas labor-intensive operations are outsourced to their partners (Cheng and Choi, 2010). Zara works closely with its suppliers and customers, to enable constant information to flow smoothly and quickly up and down the supply chain. Its team uses state-of-the-art IT systems to track sales and customers’ preference for specific garments, styles, colors and combinations. Moreover, Zara is able to offer a wide variety of products to their customers. All of these processes enable quick dispatch of products driven by real demand. Zara is thus able to introduce new products more regularly in smaller patches, which in turn results in less markdowns and reduced stock holdings than competitors in general. Small patches of products may lead to stock-outs but it can also encourage customers to have more desire for the garments and visit the stores more frequently. Zara is also prepared to hold significant stocks of fabric to allow the clothing production system to be decoupled from the longer lead time fabric production system, which is helped by having a substantial level of fabric supply originating from Inditex.

Conclusion

The “postponement and speculation matrix” has helped us understand the factors that help Zara to become one of the most successful fast-fashion chains in the world. By applying full postponement strategy in both logistics and manufacturing postponement, Zara is able to quickly response to the constant changes in the fashion world and achieves competitive advantages over its rivals. The model comprises of different postponement strategies, which when analysed, indicated that Zara’s postponement applications were supported by its dynamic value chain structures. The analysis also demonstrated that the information linkage across value chain is one of the most important factors towards the application of postponement strategy. This ensures detailed information can flow smoothly, accurately and quickly across the value chain, which then gives companies the opportunities to tailor products and services around customer preferences. Firms can therefore achieve mass customization through postponement strategy without incurring huge operational costs that are associated with proliferating product variety.

Reference

Chaudhry, H.R. (2010). Postponement and Supply Chain Structure [pdf]. Available at: http://repository.lib.ncsu.edu/ir/bitstream/1840.16/6468/1/etd.pdf Cheng, T.C. and Choi, T.M.(2010). Innovative Quick Response Programs in Logistics and Supply Chain Management. Heidelberg: Springer, 54-57 Ferdows, K., Lewis, M.A., & Machuca, J. (2004). Rapid Fire Fulfillment. Harvard Business Review, November 2004, 104-110 Garciá-Dastugue, S. and Lambert, D.M. (2007). Interorganisational Time Based Postponement in the Supply Chain. Journal of Business Logistics, 28 (1), 57-81. Pagh, J.D. and Cooper, M.C. (1998). Supply chain postponement and speculation strategies: How to choose the right strategy. Journal of Business Logistics, 19(2), 13-32. Swaminathan. J.M. and Lee, H.L. (2003). Design for Postponement [pdf].