Fast fashion
Zara, the most famous brand of the Inditex group, has led the way in the retailing of quick-turnover, inexpensive fashion goods. Zeynep Ton (Harvard) presents Zara, focusing on its supply chain and store management
The Inditex (Industria de Diseño Textil) group was incorporated in 1985. Ten years earlier, Amancia Ortega Gaona had created his first store for high-fashion, low-price women’s clothing in A Coruña, under the Zara brand. In 2001, Inditex went public and by 2008 its eight brands generated €1 billion in sales, through a network of over 4,000 stores and over 85,000 employees. In 2008, return on sales was at 12%.
Zara has been a pioneer in fast-fashion and set an example for other retailers such as Sweden’s H&M, America’s Forever21 and Japan’s Uniqlo. Professor Ton’s case (see reference below) looks at some of the specificities of Zara’s business model.
At the heart of the model lies the will to offer a wide range of fashion items, for a large part produced in reaction to store sales. Shortened production and delivery times allow Zara to replenish stores with the faster-selling items. From a Darwinian perspective, customers select the fashionably fit and Zara then devotes its resources to reproducing those winners.
To the store
For a typical season, Zara would produce about 11,000 items while other fashion competitors would limit themselves to 2,000-4,000 items. Zara’s 1000+ suppliers are spread over four continents with the bulk of less risky items sourced from Asia (lower costs but longer lead times), while for the higher-fashion, riskier items Zara can call upon shorter lead-time suppliers in the southwestern Mediterranean region.
About six months before the beginning of a season, Zara sends its designs to the manufacturers, committing about 30% of its production to its suppliers (with a higher commitment percentage for lower-fashion collections).
One particularity of Zara’s high-performance supply chain is that all manufactured goods are delivered to and then distributed from three centers in Spain: A Coruna serves Iberian Europe, the Americas and the Middle East; Zaragoza is responsible for non-Iberian Europe, Russia and Asia; the newest €100 million logistics center in Madrid handles all the children’s wear. The centralization of distribution in Spain spells air freight which amounts to about 1% of the selling price. Most countries also have smaller warehouses to handle any extra merchandise, returns and inter-store transfers. The inventory management system results in finished goods inventory turns around 4.5 (2005-2008).
At the store
To start out the season, each store receives about 25,000 units but thereafter Zara’s intensive sales review and reorder process kicks in. Twice a week, store section managers receive an offer from headquarters which lists, for each product, sales history and stock availability figures. The section manager places her order by the end of the day. Back at Spanish headquarters, an allocation process, designed in collaboration with academics, takes place (meaning stores do not receive exactly what they order). The allocations are then delivered to European stores within 24 hours, to the rest of the world within 40 hours, with each store receiving about 12,000 items per week.
In 2006, Zara introduced an automatic replenishment system for the more basic products (10-15%) of all products. But for the trendier items, it continues to rely on its store section managers and the twice-a-week ordering procedure. The CEO, Pablo Isla, points out that having thousands of people making thousands of small decisions has the advantage of limiting risk; since each small decision has a small impact on total sales, no manager is betting the store.
Managing the store
Zara’s business model also relies on experienced store employees. Average turnover at 15% is low compared to other large retailers. One contributing factor is the pay package. Starting wages are higher and employees receive a share of store sales based on hours worked and position occupied. Another factor is the possibility of internal promotion – a large majority (90%) of the store managers are former sales associates.
In keeping with the logistics excellence of the company, much of sales associates’ time is devoted to in-store logistics and specifically, delivery processing, backroom replenishment, display area management and physical audits. At least twice a week, store receives deliveries from third party-logistics companies. Before opening time, the managers and associates check the delivery for accuracy against the list provided by headquarters, and move the necessary items onto the selling floor. Section managers have leeway in managing the delivery process and set productivity targets; in France, for example, the target was at least 85 units of new merchandise per unit per person.
Sales associates deal with the backroom on a daily basis. While Inditex’s policy is to have a big store and a small backroom, local constraints on store size or cost can make that difficult. It is also Zara’s policy to only display a product on the floor if all sizes were available; missing sizes mean the product stays in the backroom until the missing sizes arrive. For the floor replenishment process, every hour, a women’s section and a men’s section sales associate gather sales data from the cashier and replenish accordingly from the backroom.
Good customer service means having enough staff to answer customer questions, to present the merchandise well and to keep cashier wait-time low (see chart below for an example of time scheduling in a store). While on the sales floor, associates answer customer questions and fold products to keep the display tables orderly. As the regional director of Zara France puts it in the case: “Our staff is more involved in managing products than in managing customers. Therefore, we need sales associates who can fold and talk at the same time” (p.8).
Finally, the sales associates are involved in physical audits. Every three weeks, a part of the store is scanned by model, color and size, with the objective of monitoring shrink. One to three times a season, depending on problems encountered, a full-store physical audit is conducted which involves the entire staff and requires around two and a half hours. On average, shrink in France runs at 1%.
For discussion purposes, the case puts itself in the shoes of the CEO, Pablo Isla, and poses the question of how to improve store management. At least three avenues could be explored. Processing of deliveries, which take up 5% of associates’ time, could be outsourced to third parties. Another path would be to standardize in-store logistics processes, but this would infringe upon store managers’ autonomy. Finally, Isla could leverage the managers’ autonomy and link their bonus to improved labor productivity.
Reference:
Harvard 9-610-042
“Zara: Managing Stores for Fast Fashion”
Professor Zeynep Ton, Elena Corsi, Vincent Dessain
Harvard Business School
Published June 2010
