Supply chain analysis – behind Zara’s retail success

by | Nov 25, 2020 | Blog

In 1975, Amancio Ortega founded the fashion brand, Zara, in Spain in a bid to reach an international market with his merchandise. As of January 31, 2020, Inditex SA operated 7,469 stores worldwide under 8 brand names, including Zara, Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home, and Uterqüe.

While Inditex has indicated that it will close as many as 1200 Zara stores worldwide due to the pandemic, the Inditex group in the first quarter generated net sales of €3.3 billion, a drop of about €2.6 billion from the same period in 2019. (The group does not publish individual figures for each brand.)

Inditex is one of the most profitable fashion industry models. While some might question the ethics of fast fashion and low wages for employees, the group has been so successful because it took control of the supply chain and changed the way that consumers access fashion.

  • Inditex owns the factories that the clothing is manufactured in.
  • Inditex hires cheap labor.
  • Inditex uses low-quality materials to produce lower-priced clothing.

The Inditex company has 1,866 suppliers and 7,232 factories all over the world. Zara stores receive new products twice weekly, and the company produces more than 10,000 new designs each year. It takes between 10 and 15 days for items to go from design to sales floor, as the items are not original designs, but those taken from the runway and modified to emulate designer label items.

However, increasingly consumers are becoming more aware of the environmental impacts of fast fashion. Rivers in China, India, and Bangladesh have been made toxic by the disposal of wastewater effluent from factories, and many of these factories are textile and garment manufacturing facilities. However, as the group refuses to be transparent about its supply chain, it can only be speculated that the group is contributing to the destruction of the environment through poor oversight and management.

Zara alone produces about 840 million garments every year for its 7,000 stores worldwide. It is well-known that garment works are poorly paid, and often working in extreme conditions with no ability to unionize and demand high wages and better working conditions.

Inditex last year claimed that 3532 of its supplier factories are paying workers a living wage (the company has more than 7000 factories worldwide), yet declined to indicate a benchmark for a living wage and offered no explanation as to how it reached this conclusion.

It is well documented that poverty pay is the industry norm for garment workers. While the company refuses to provide figures indicating the base pay for workers in their factories around the world, it cannot be known if they are, in fact, meeting with any living wage baselines. The company has a responsibility towards its employees, but it refuses to publicly disclose its supplier list.

Supply chain transparency is of paramount importance. Without it, both environmental responsibility and working conditions cannot be understood in real terms, and multinational companies, such as Inditex, are able to avoid detection when they could be exploiting the environment and the people they employ.

Despite this, the business strategy has been hugely successful.

Focusing on Zara, the overarching strategy is achieving growth through diversification with vertical integrations. The company hacks a couture design, manufactures, distributes, and retails the rehashed design all within two weeks of an original couture garment debuting the runway. In contrast, high-end and high-quality garments produced by designers take at least six months from concept to catwalk.

Just in Time

Leaning heavily on the Japanese Just in Time inventory management theory, the group has transformed how consumers buy fashion, and in particular from one of its most notable brands, Zara. JIT inventory management is more appealing to retailers, as it allows them to sell a product before buying it, then purchase the item via a third party and have it shipped directly to the customer.

While a JIT inventory management strategy has a number of potential benefits for businesses, such as:

  • Lower inventory holding costs – no need to have unsold inventory held in warehouse space.
  • Improved cash flow – without the need for inventory storage, capital expenditure is reduced, and cash can be invested elsewhere.
  • Less dead stock – because inventory levels rely on customer demand, there is a reduced risk of unwanted stock.

However, there are disadvantages, such as:

  • Order fulfillment issues – not being able to fulfill an order request in a timely fashion.
  • Little room for error – JIT requires accurate demand forecasts and up-to-date insights into customers’ buying habits. Miscalculations have a significant negative impact on business operations.
  • Price shocks – JIT models do not take advantage of the best prices on goods. When prices go up, profit margins go down.

One of the ways that Inditex overcomes these disadvantages is by owning and controlling so many parts of the supply chain. Zara’s success relies on keeping a significant amount of its production in-house, with its factories reserving 85 percent capacity for in-season adjustments. In-house production means that the company can respond to consumer trends fast.

The company also relies heavily on sophisticated fabric sourcing, cutting, and sewing facilities near its design headquarters in Spain. While those working for the company in Europe are better paid than their counterparts in other parts of the world that are impoverished, such as Bangladesh, there is evidence that the company pays workers poorly in places like Hungry, where much of their collection is manufactured.

Zara commits only six months in advance to a meager 15 to 25 percent of a season’s line. By the start of the season, it locks in a further 50 to 60 percent of its line. Up to 50 percent of Zara clothes are designed and manufactured in the middle of the season. This gives the brand the flexibility to churn out items that are appealing and copy couture designs that resonate with consumers, hitting stores while the trend is still getting attention.

Zara factories typically operate 4.5 days per week around the clock at full capacity, leaving time to ramp up manufacturing with extra shifts and temporary labor added when needed. This means new items are flowing into stores on a regular basis, compelling shoppers to visit stores more often and make purchases more often. It is a self-sustaining feedback loop with many exploited and few rewarded.

The business strategy also allows the company to sell more items at full price because of the sense of scarcity and exclusiveness. However, items that do not sell are reduced dramatically, which encourages people to purchase more items.

Zara makes 85 percent of the full price on its clothes, compared with the industry average at between 60 and 70 percent. Unsold items account for less than 10 percent of the overall stock, compared with an industry average of between 17 and 20 percent. The overall idea is that Zara produces less, and therefore discounts less, making more in the long term. The company reduces its costs in other areas, such as shipping costs and storage, which are considerable expenses.

Less is Less

Zara does not deal in excess inventory or deadstock. The entire supply chain is about minimalism, from the number of garments produced, the quality of textiles used, the wages paid to workers, and the quality of store fittings. A close inspection of Zara stores reveals that the minimum quality and quantity is a standard practice used to drive down costs and maximize profits.

Inventory optimization models are used to help the company to determine the quantity that should be delivered to every single one of its retail stores. The stock delivered is strictly limited, ensuring that each store receives only what is expected to sell. This is designed to heighten a shopper’s sense of urgency as limited stock generates a feeling of exclusivity.

Small batches of items are quickly produced and shipped. Items that sell well are made in larger batches, while those that fail are not given a second run. This means that the company can have very tight control over manufacturing quantities.

Centralized order fulfillment

The secret to Inditex’s success has been centralization. Zara has a predictable, fast-paced strategy that has not changed. Each Zara outlet sends in two orders per week on set days. Logistics are planned and deliveries happen at predictable times twice weekly. Garments are pre-labeled and priced upon arrival at the store. Workers simply have to pull off a plastic sheet and place items on the floor in set locations which are sent through from upper management.

Every person knows their part in the system. Every employee knows the predictable timeline for their store. Each employee does one job and has zero autonomy over decisions that other store managers would make, such as where to pace excess stock, or how to arrange the shop floor.

Zara’s reliance on centralized order fulfillment enables the brand to maintain incredibly efficient workflows – from design to sales. The company’s approach set an example to other businesses wanting to streamline operations and supply chain management, which are critical to profitability and achieving scale.