CASE STUDY CONCEPT: Zara’s Unique Business Model is Driven by Its Supply Chain Capabilities.
[Updated July 25, 2018] Zara changes its clothing designs every two weeks on average, while competitors change their designs every two or three months. It carries about 11,000 distinct items per year in thousands of stores worldwide compared to competitors that carry 2,000 to 4,000 items per year in their stores. Zara’s highly responsive supply chain is central to its business success. The heart of the company and its supply chain is a huge, highly automated distribution center (DC) called “The Cube”. The screenshot below shows a closeup satellite view of this facility.
The company was founded in Spain in 1974. It is the flagship business unit of a holding company called Inditex Corporation with headquarters in Arteixo, Galicia; a city in northwestern Spain near where the company founder, Amancio Ortega was born. In 2018 Zara was ranked as the 46th most valuable brand in the world by Forbes (see bibliography below).
Agents for the company are always scouting out new fashion trends at clubs and social gatherings. When they see inspiring examples they quickly send design sketches to the garment designers at the Cube. New items can be designed and out to the stores in 4 – 6 weeks, and existing items can be modified in 2 weeks.
The company’s core market is women 24 – 35 years old. They reach this market by locating their stores in town centers and places with high concentrations of women in this age range. Short production runs create scarcity of given designs and that generates a sense of urgency and reason to buy while supplies last. As a consequence, Zara does not have lots of excess inventory, nor does it need to do big mark-downs on its clothing items.
In Spain customers visit Zara stores 17 times per year on average compared to 3 times per year for competitors. Because their clothing designs change often, it is harder for people to see them clearly on the Internet and thus they are encouraged to come into the stores instead and try on the unique fashions that Zara offers.
Zara has 12 inventory turns per year compared to 3 – 4 per year for competitors. Stores place orders twice a week and this drives factory scheduling. Such short term focused order cycles make forecasts very accurate, much more accurate than competitors who may order every two weeks or every month.
Clothing items are priced based on market demand, not on cost of manufacture. The short lead times for delivery of unique fashion items combined with short production runs enable Zara to offer customers more styles and choices, and yet still create a sense of urgency to buy because items often sell out quickly. And that particular item or style may not be available again after it sells out. Zara sells 85 percent of its items at full price compared to the industry average of selling only 60 percent of items at full price. Annually there is 10 percent of inventory unsold compared to industry averages of 17 – 20 percent.
Zara spends its money on opening new stores instead of spending a lot on ad campaigns. Estimates vary on the number of Zara stores worldwide. An article in the New York Times Magazine (November 2012, “How Zara Grew into the World’s Largest Fashion Retailer” see reference in bibliography below), places the store count at around 5,900. An article in Forbes simply states there are more than 2,200 stores (May 2018, “The World’s Most Valuable Brands – #46 Zara“, see bibliography below). Annual sales at the end of 2017 were estimated by Forbes to be $18.98 billion. Because Zara is a privately owned company, it is not required to disclose information routinely released by public companies. Zara uses a flexible business model where its stores can be owned, franchised or co-owned with partners.
Manufacturing and Supply Chain Operations Make Zara Unique in Its Industry
Factories can increase and decrease production quickly, thus there is less inventory in the supply chain and less need to finance that inventory with working capital. They do only 50 – 60 percent of their manufacturing in advance versus the 80 – 90 percent done by competitors. So Zara does not need to place big bets on yearly fashion trends. They can make many smaller bets on short term trends that are easier to call correctly.
Zara buys large quantities of only a few types of fabric (just four or five types, but they can change from year to year), and does the garment design and related cutting and dyeing in-house. This way fabric manufacturers can make quick deliveries of bulk quantities of fabric directly to the Zara DC – the Cube. The company purchases raw fabric from suppliers in Italy, Spain, Portugal and Greece. And those suppliers deliver within 5 days of orders being placed. Inbound logistics from suppliers are mostly by truck.
The Cube is 464,500 square meters (5 million square feet), and highly automated with underground monorail links to 11 factories within a 16 km (10 mile ) radius of the Cube. All raw materials pass through the cube and all finished goods also pass through on their way to stores. The diagram below illustrates Zara’s supply chain model.
The 11 Zara owned factories are connected to the Cube by underground tunnels with high speed monorails (about 200 kilometers or 124 miles of rails) to move cut fabric to these factories for dyeing and assembly into clothing items. The factories also use the monorail system to return finished products to the Cube for shipment to stores. Here are some facts about the company’s manufacturing operations:
- Zara competes on flexibility and agility instead of low cost and cheap labor. They employ about 3,000 workers in manufacturing operations in Spain at an average cost of 8.00 euros per hour compared to average labor cost in Asia of about 0.40 euros per hour.
- Zara factories in Spain use flexible manufacturing systems for quick change over operations.
- 50% of all items are manufactured in Spain
- 26% in the rest of Europe
- 24% in Asia and Africa
The screenshot below illustrates how the Zara supply chain is organized. Manufacturing is centered in northwestern Spain where company headquarters and the Cube are located. But for their main distribution and logistics hub they chose a more centrally located facility. That facility is located in Zaragoza in a large logistics hub developed by the Spanish government. Raw material is sent by suppliers to Zara’s manufacturing center. Then finished garments leave the Cube and are transported to the Zara logistics hub in Zaragoza. And from there they are delivered to stores around the world by truck and by plane.
(click on screenshot for larger image)
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Zara can deliver garments to stores worldwide in just a few days: China – 48 hrs; Europe – 24 hrs; Japan – 72 hrs; United States – 48 hrs. It uses trucks to deliver to stores in Europe and uses air freight to ship clothes to other markets. Zara can afford this increased shipping cost because it does not need to do much discounting of clothes and it also does not spend much money on advertising.
A Lean and Agile Supply Chain
Stores take deliveries twice per week, and they can get ordered inventory often within two days after placing their orders. Items are shipped and arrive at stores already on hangers and with tags and prices on them. So items come off delivery trucks and go directly onto the sales floor. This makes it possible for store managers to order and receive the products customers want when they want them, week by week.
Zara stores respond practically in real-time as styles and customer preferences evolve. It is a great business model for success in the high-change and hard to predict fashion industry. It means about half of the clothing the company sells, most of its high margin and unique fashion items (but not its lower margin basic items), is manufactured based on highly accurate, short-term (2 – 6 week) demand forecasts. Because this business model tracks so closely to real customer demand from one month to the next, it frees the company to a large degree from getting caught in cyclical market ups and downs that ensnare its competitors (those cycles are driven by boom-to-bust gyrations generated by the bullwhip effect). Turbulence in the global economy since 2008 has hurt sales at many competing fashion retailers, but Zara has seen steady, profitable growth during this time.
However, a fast-moving and finely tuned supply chain like Zara’s requires constant attention to keep it running smoothly. Supply chain planners and managers are always watching customer demand and making adjustments to manufacturing and supply chain operations. The screenshot below shows the result of one simulation using the supply chain model outlined above. Adjustments need to be made to production rates, vehicles, and delivery routes and schedules to get this supply chain to work well.
Zara is a clothing and fashion retailer that uses its supply chain to significantly change the way it operates in a very traditional industry. No other competitor can copy its business model until it first copies its supply chain. And since supply chains are composed of people, process, and technology, even the latest and greatest technology is not a competitive advantage all by itself. People must be well trained, and processes must be put in place that enable people to apply their training and their technology to best effect.
Buying technology similar to that used by Zara is easy. But for the technology to be used profitably, competitors must learn about the mental models and the operating procedures used by Zara. Good mental models enable people to understand the potentials and see the opportunities that a real-time supply chain offers. Effective operating procedures enable people to act on what they see and capitalize on the competitive advantages their technology gives them.
Zara has spent more than 30 years building its unique real-time supply chain and training its people. So competitors have a lot of learning to do to create the mental models, and roll out the operating procedures needed to do what Zara does so well.
[ See our blog article “Five New Supply Chain Technologies and How to Use Them” for more about new technologies and how they can be used to improve supply chain operations and create competitive advantages for companies.]
YOUR CHALLENGE – Imagine you are in charge of Zara’s supply chain operations. This case study and supply chain simulation will give you an appreciation of what that job is like. In this exercise your mental model of Zara’s supply chain will expand and your understanding of how this supply chain works will deepen. You will see the continuous adjustments that need to be made to keep the supply working and to keep operating expenses and inventory levels under control.
FIRST, get this supply chain to run for 15 days. Load a copy of the Zara supply chain model from the online library into your account. Then start running simulations to see how the supply chain works. Start by doing whatever seems necessary to keep the supply chain running without stock-outs or over-stocks for 15 days. When you run the first simulation you will see a problem occurs on day 5. As will all cases, there are many possible ways to respond. And depending on how you respond, other problems will appear as you work toward getting your supply chain to run for 15 days. Do whatever seems necessary to get the supply chain to run for 15 days. Then refine your solutions to get the supply chain to run at lower costs in transportation, facility operations and on-hand inventory across the supply chain.
Because of its agile supply chain, Zara works on a short sales and operations planning cycle (let’s assume Zara works on a 15 day cycle where its competitors work on 30-day or even 60-day planning cycles). That 15-day operations planning cycle is what we are simulating in this case study. You will need to adjust store delivery frequencies and amounts, and adjust manufacturing rates and supplier deliveries also. As you work on getting the supply chain to run for 15 days, you will form a picture in your mind, a mental model, that shows you how this supply chain works (how the products, facilities, vehicles and routes interact).
NEXT, do some research on store rental costs, labor rates, transportation costs and product demand in different markets. Go to websites of commercial real estate brokers in cities of interest and see what you can find out about rents (for cities in North America start with www.cityfeet.com and for cities in other parts of the world start with www.knightfrank.com). Research salaries and median income in different cities to find out about labor rates. Go to 3PL and logistics services company websites to find out about transportation costs. Search for fashion industry clothing demand forecasts around the world. Consider subdividing the two high level products (Zara Basics Pack and Zara Fashion Pack) into lower level product categories to get more insight and accuracy. What are some lower level product categories that make up the Fashion Pack, or the Basics Pack?
Do the best you can with the time available for this research. Do internet searches on relevant key words and phrases. See what comes up and select sources that seem the most trustworthy and accurate (that’s what we did when we created this case study; our assumptions and sources are shown below). If you can’t find the exact numbers you are looking for, then estimate numbers you need based on other numbers you do find in your research (please read “All Supply Chain Models are Approximations“). Do not spend more than your allocated time doing research. As the saying goes, “Good is good enough.” Document your sources; make your best estimates; and move on.
THEN, update and expand the Zara supply chain model using your research data. Update product prices and demand at the stores based on your research. Experiment with adding new stores in other cities in Europe and overseas in North America, South America, Africa or Asia (represent all stores in a single city with just one or two stores and keep total number of facilities in your model to about 15 – 20). For added realism see how stores in New York and Shanghai are located in the existing supply chain model in the SCM Globe library. Stores can be on actual Zara store locations or can be placed in the middle of a cluster of actual Zara stores; enter collective demand, costs and on-hand inventory for all actual stores represented by a single store in your model.
Note in the existing model how flights from the logistics hub in Spain land at nearby airports for stores in New York and Shanghai, then delivery trucks move garments from those airports to the stores. Use that same approach as you expand into other countries outside of Europe. Add new vehicles and create delivery routes for them to deliver products to the new stores. Adjust your supply chain model to support these new stores and still run for 15 days. And once you get it running for 15 days, then make adjustments to lower transportation and operating costs and on-hand inventory.
CREATE A FINAL PRESENTATION showing your expanded supply chain model and describing the supply chain challenges you encountered. Explain why successful solutions to those challenges provides such a competitive advantage for Zara.
- Explain the supply chain principles and best practices you used to solve the challenges you encountered. What were your biggest challenges and how did you solve them?
- Show how a supply chain with these capabilities makes it possible for Zara to use its fast fashion business model. If Zara competitors were to emulate Zara’s business model, what supply chain capabilities would they need?
- Identify places in your expanded supply chain model (facilities, vehicles and routes) where you used new technology such as that explained in the blog article “Five New Supply Chain Technologies and How to Use Them” in order to get the supply chain performance you are showing in your simulation results.
- Use screenshots and data from your simulations to illustrate your report.
NOTE: This is an ADVANCED LEVEL case study – work through a beginning level case such as Cincinnati Seasonings before attempting to work with this case.
Working on this case will be challenging… but the skills and insights you develop here will be the same skills and insights you use to manage a real supply chain like Zara’s.
FIND USEFUL IDEAS in the Online Guide that you will need for expanding and improving your Zara supply chain model:
- See techniques for expanding this supply chain model in “Tips for Building Supply Chain Models”
- Reduce on-hand inventory and calculate optimum delivery amounts and schedules in “Cutting Inventory and Operating Costs“
- Make sure you are familiar with the techniques presented in “Analyzing Simulation Data“
- There is a lot going on in this case, so consider using the 5-step S&OP process as a framework to organize the work you do, using S&OP this way is explained in a case called “Java Furniture Company” — scroll down to the heading in that case “Simulations Create Common Understanding and Drive Sales & Operations Planning (S&OP)”
- Consider using some of the beta test reporting templates presented in “Supply Chain Optimizing & Reporting Templates“
- Look through the Table of Contents of the Online Guide to find other useful information
SAVE BACKUP COPIES of your supply chain model from time to time as you make changes. Click “Save” button next to your model in Account Management screen. There is no “undo”, but if a change doesn’t work out, you can restore from a saved copy. And sometimes supply chain model files (json files) become damaged and they no longer work, so you want backup copies of your supply chain to restore from when that happens.
Assumptions and Simplifications Used in this Model
Because Zara is a private company, specific details of the Zara business model and supply chain can be difficult to verify. Yet the supply chain model presented here is still a useful picture of the Zara supply chain and illustrates its operations and its capabilities (see more about this in “Supply Chain Modeling and Simulation Logic“). This case study and supply chain model is based on data from articles listed in the bibliography below. The assumptions and specifications listed here are built into the model, and you can easily change them as better data becomes available. New products, facilities, vehicles and routes can also be added to this model to further explore how Zara’s supply chain operates.
- Zara finished goods garments are combined into two categories of products, Zara Fashion Pack represents in-house manufactured high fashion items, Zara Basics Pack represents basic items contract manufactured by others
- Zara Fashion Pack = 100 garments; price of 5,000 euros; weight of 40 Kg; volume of 1 cubic meter;
- Zara Basics Pack = 200 garments; price of 3,000 euros; weight of 60 Kg; volume of 0.5 cubic meters
- The Cube employs 3,000 people at average rate of 8 euros per hour = 64 euros per day
- Automated warehouse in Zaragoza employs 800 people at avg of 64 euros per day and other facility operating costs for utilities, insurance, etc. cost additional 15,000 euros daily
- Raw fabric costs per case: Fabric 1 = 1 cubic meter; price of 1,000 euros; Fabric 2 = 0.5 cubic meter; price of 800 euros; Fabric 3 = 0.6 cubic meter, price of 1,200 euros
- Zara factories need mix of raw fabrics to create their finished goods; see the definition of these facilities to see individual requirements and production
- The Cube has 1.6 million cubic meters of product storage space
- 150 million items pass through Cube annually or 411,000 per day
- 11 actual Zara factories are represented by 5 factories in the model
- Monorail shipping containers are 50 cubic meters in volume, can carry 10,000 kilograms of weight, and travel at average speed including loading and unloading of 60 kilometers per hour
- Zara stores in a single city are represented by a single store that combines the demand of all stores in that city – not all cities are included and more cities can be added to this model
- All specifications for Products, Facilities, Vehicles and Routes in this supply chain model can be edited and changed
- New products, facilities, vehicles and routes can be added to this model
- Vehicle operating costs per km are set to be just half the normal cost for trucks and airplanes. This more accurately models the process where Zara pays for one-way shipping containers to move products from one facility to another without paying the full round-trip cost (carbon per km was also adjusted to half of normal for the same reason). This compensates for the model logic which calculates vehicle costs based on the round trip distance instead of the one-way distance.
- Full operating cost per km is used for the monorail vehicles that move products between the Cube DC and the Zara garment factories because Zara owns those vehicles and pays for full round-trip costs.
REMEMBER — There is a spreadsheet reporting template you can use to analyze downloaded simulation data. Import your simulation data into the template and create monthly profit & loss reports as well as generate key performance indicators. See more about this in the online guide section “Analyzing Simulation Data” – scroll down to the heading titled “Download Simulation Data to Spreadsheet Reporting Templates”. The sample template is set up for the Cincinnati Seasonings company, but look at how the reports read the simulation data and you will see how to change the spreadsheet as needed to accommodate this case study.
To share your changes and improvements to this model (json file) with other SCM Globe users see “Download and Share Supply Chain Models”
A web search on Zara supply chain operations yields many results; this case is based on information found in the articles listed below:
How Zara Grew Into the World’s Largest Fashion Retailer
History and business model of Zara – By Suzy Hansen, The New York Times Magazine, 9 Nov 2012
Logistics Clustering for Competitive Advantage
Zara’s global logistics hub outside Spanish city of Zaragoza – By Yossi Sheffi, Dir MIT Center for Transportation & Logistics, CSCMPs Supply Chain Quarterly, Quarter 3 2012
Polka Dots Are In? Polka Dots It Is!
How Zara gets fresh styles to stores insanely fast—within weeks. – By Seth Stevenson – Slate.com, 21 Jun 2012
The World’s Most Valuable Brands – #46 Zara
A ranking and brief profile of the 100 most valuable and recognized brand name companies – Forbes, May 2018
Zara’s Fast Fashion Edge
Speed and responsiveness to customer demand drives Zara’s business model
– By Susan Berfield and Manuel Baigorri – Bloomberg Business, 14 Nov 2013
Zara Uses Supply Chain to Win Again
In face of flat or declining retail industry sales, Zara stands out – By Kevin O’Marah – Forbes, 9 Mar 2016
We found the following slide presentations were also informative:
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