Zara: Integrating Both Sides of the Coin

Amancio Ortega founded Zara in 1975 as an attempt to better understand world markets for his fashion
merchandise. From that first store in Spain, Zara has since expanded to 1,770 stores in 86 countries
around the world. In 2012, Inditex, Ortega’s parent company made up of Zara and other retail concepts
and suppliers, reported total sales of US$20.7 billion, with Zara representing a powerful 66 percent, or
US$13.6 billion, of that total. And in 2007, Inditex received the Global Retailer of the Year award from
the World Retail Congress.

Zara sells what has been referred to as “fast” or “disposable” fashion. It copies runway fashions and
produces quality goods and sells them at affordable prices. Zara determines the existing market price for
a product, and then establishes a price below the lowest competitor’s prices for a similar product.

Zara controls its products from the design decision to the point of sale. This level of control allows Zara
to keep the costs low. Designers closely monitor popular fashions, styles that celebrities are seen
wearing, cloths worn on MTV, and so on. Store managers also communicate customer feedback on what
shoppers like or dislike. That data is instantly funneled back to Zara’s designers who begin sketching on
the spot. While Zara subcontract a lot of its manufacturing, it keeps a significant amount of its production
in-house. In-house production allows the organization to be flexible in the amount, frequency, and
variety of new products to be launched. But the company relies heavily on sophisticated fabric sourcing,
cutting, and sewing facilities nearer to its design headquarters in Spain. The wages of these European
workers are higher than those of their developing-world counterparts, but the turnaround time is
miraculous.

A just-in-time manufacturing system was implemented, and its most fashion sensitive items are produced
internally. Zara has the ability to develop and begin manufacturing a new product line in 3 weeks
compared to an industry average of 9 months. Zara also commits 6 months in advance to only 15 to 25
percent of a season’s line. It only locks in 50 to 60 percent of its line by the start of the season, meaning
that up to 50 percent of its clothes are designed and manufactured in the middle of the season. Inventory
optimization models are put in place to help the company to determine the quantity that should be delivered
to every single one of its retail stores via shipments that go out twice every week.

Approximately 10,000 separate items are produced annually, all shipped directly from a central
distribution centre twice each week. Thus, no warehouses are needed because inventories are minimal.
Only a limited number of products are shipped to its stores, to maintain the perception of scarcity. The
most fashionable items are considered riskier and are produced in smaller quantities. The rapid product
turnover also keeps customers coming back to the stores more frequently.

Zara’s strong distribution network enables the company to deliver goods to its European stores within 24
hours, and to its American and Asian outlets in less than 40 hours. And Zara locates attractive storefronts
in prime locations in major shopping districts and designs them with the comfort of customers in mind.
An emphasis on an attractive décor motivates customers to return frequently. Salespeople frequently
change the location of items in the stores, which also contributes to the perception of scarcity.

Zara spends a relatively small amount on advertising – usually only for its end-of-season sales –
compared to its major competitors such as Benetton, The Gap, and H&M of Sweden.

Source: 2007, Zara, [Link] July 5; 2007, Inditex, [Link] July 5; 2006, Inditex SA:
Net climbs 22% amid cuts in costs, store openings, Wall Street Journal, December 14, B10.
[Link]

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General Administration  Reputation
 Received Global Retailer award
 Produce a variety of fashion, “fast” or “disposable” fashion.
 Good planning with vertical integration strategy – from design to point of sale (allows to keep the costs low)
 Designers monitor popular fashions, styles of celebrities

Human Resources Large teams of designers, subcontractors, etc.

Technology Development Various types of information technology, bar codes, point-of-sale, PDA

Procurement Quality sourcing: fabrics from France, Italy, etc.

Inbound Logistic Operations Outbound Logistic Marketing & Sales Service

 Just-in-time manufacturing  Flexible: in-house  Centralized logistics - all  Market-based, affordable prices,
system, save cost, minimal production and shipped directly from a lower than the lowest
inventories subcontracting large central distribution competitor’s price
 Inventory management –  Automated quality centre twice a week, no  Locate attractive storefronts at
inventory optimization control warehouses are needed prime/best locations in may
model because of minimal shopping districts
inventories  An emphasis on an attractive
 Limited no. of products décor motivates customers to
are shipped to stores, return
perception of scarcity  Change the location of items
(rapid turnover keeps frequently – scarcity
customers coming back)  Little advertising, saving cost
 Strong distribution  Strong coordination
network – prompt  Good environment, with music
distribution
 Trucks subcontracted,
lower cost
Value Chain for Zara: Differentiation and Low Cost

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Strengths

Low cost structure

Close to customer tastes and strong appeal to (female) customers

Vertical integration strategy

Use of information technology

Weaknesses

High labour wages

High retail store cost

Strong coordination efforts (internal and external)

Advertising may be necessary in some countries