Report On Zara Procurement Strategy [PDF]

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Report on Zara Procurement Strategy Zara’s History Mr. Gaona from Galicia, and worked as a clerk at a ladies' apparel retailer before starting his own housecoat manufacturing business in early 1963. The first Zara store was open in La Coruna in 1975. There were 82 Zara stores in Spain in 1989. Then he began worldwide expansion with Zara stores in Portugal, Paris, and New York. Zara’s parent company Inditex took on four other formats: Pull and Bear, Massimo Dutti, Bershka, and Stradivarius. Oysho, launched in 2001, was an intimate apparel and swimwear brand. During 2000, over half of Inditex sales were outside Spain. During 2000-01, Inditex received widespread favorable press & analyst coverage, which resulted in Inditex’s success and attributing it to Zara’s unique integrated business model. Due to the success of Zara, it was “possibly the most innovative & devastating retailer in the world.” Inditex made an IPO of stock in May 2001 and was the world’s third-largest clothing retailer at the time. Zara offered clothing for women (58% of sales), men (about 22%), and Children (about 20%). Zara stores provide a compelling blend of fashion, quality, and price offered in attractive stores in prime locations on premier commercial streets and upscale shopping centers. Zara’s in-house design and production capabilities enable us to provide fresh designs at its stores two times a week throughout the year. By 2001, Inditex was operating over 1200 stores in over 35 countries worldwide. Analysts projected that Inditex stores would easily exceed 2000 within five years. The vertically integrated model of Zara depended to a great extent on local Spanish sourcing for a large proportion of garment clothing manufacturers. But Castellano had considered that Zara would move more production offshore, probably to Asia, to take advantage of the lower wage costs. ZARA MODEL Zara Planning and Design Cycle There are two seasons: spring/summer collection arrives in stores in January-February & the Fall/winter collection comes in August-September (Vice versa in Southern hemisphere). About a year in advance, designers initiate to work to define dominant themes and colors and then to put together the first collection. Zara had about 200 designers. Designers were catwalkinfluenced. Thus were expected to adapt haute couture style for the mass market. Zara produces approximately 11 thousand styles each year, and all in relatively small batches, to begin with, this encouraged them to experiment. The Designers work in large open spaces at

Zara’s headquarters, with one design center for each of the women’s, men’s, and children’s lines. Design centers were light & modern, with pop music playing in the background. The store specialists work in the same rooms, review daily detailed printouts of store sales, and gather feedback from all store managers. Each store professional is responsible for a group of stores by region and visits them at times. Each store manager should have retailing knowledge for the commercial design sense and feel for market trends. As it is the occupation of the store manager to feed market information from the stores back into the design and production decision making. Production Sourcing and Scheduling Once the first collection was approved, the related fabric procurement and production planning started. Where garments were the 3rd party sourced and commitments made six months before the arranged store delivery. While garments for in-house production were planned for manufacturing so that they are ready in time. Of the outsourced output, about 60 percent came from Europe and 30 percent from Asia, with the balance from the rest of the world. The decision to source or to manufacture in-house was on several considerations, including relative cost, expertise, time sensitivity. There are 21 Zara factories, each managed separately. Garments with fashion styling tended to manufacture in- house while basics and knits tended to outsourced. Zara committed about 15-25% of its season inventory six months in advance of the season. By the beginning of the season, commitment for 50-60 percent of its season inventory given. Nearly a quarter of the season’s collection was made available at the beginning of the season. In-house production was weighted 85% to in-season output and 15% to the next season’s production.

In-house Manufacture Two necessary steps: Garment assembly, and finishing; Fabric procurement. Inditex owned a fabric sourcing corporation in Barcelona, several production companies of textile, and a share in a fabric finishing company called Fibracolor. Comditel managed about 40% of fabric procurement. Set up a time for dying or printing was about 4 or 5 days, the whole process taking about a week. Zara depended on external sourcing for synthetics & more fashion fabrics. Based on the sizes and styles, the Zara factories cut the fabric. The machine cut fabric based on a computer layout or pattern pieces. The design is set by people working at computer terminals who specialized in inappropriate design with minimum waste. The cut fabric pieces were marked and packet for sewing. Sewing was contracted out to a network of 400 smaller firms, the areas where wages were low and unemployment high. Zara enabled many women to work. Deliveries between the Zara owned factories and the subcontractors occurred many times in a week. Overall, the turnaround time for sewing ran a week or two. Tagging, pressing, and final inspection occurred in Zara factories. It takes around ten days to finish a style production.

In-Season Production Zara committed only 50-60 percentage of production in advance of the season, the remainder manufactured on a rolling basis during the season. The in-house portion of in-season output could be altered in response to the market demand. As per to Miguel Diaz Miranda, VP of Manufacturing, The size of the production run-scale is not an issue. They cover the cost of the garments through markup. It is always the product that drives the customer. For an expected robust demand, they take a higher risk of the fabric purchasing decision. Sometimes they decide that from an economic point of view might not seem ok. For example, if an item was retailing well and if they think that they are saturating the market with one look. They will stop manufacturing it and create unsatisfied demand on purpose. It was the ability to respond to inseason that gave Zara a different fashion risk profile. Zara meets with alternative offerings when the original collection items perform poorly. Distribution Distribution of both in-house and outsourced manufactured garments was centralizing at Zara’s 50,000 m2 distribution center in Arteixo. Centrally located among fourteen manufacturing plants. Garments move along 210 km of track from the cluster of factories. Hanging garments is arrange on coded bars that sorted automatically by style within the distribution center, stockpicking is manually completed. Folded garments sorted on a carousel, with each garment dropped down a chute in the direction of a box for its endpoint store based on its bar code. About 2.6 million garments move through the distribution center every week. The distribution center utilizes at 50 percent capacity at the end of 2011. And more distribution capacity needed to come on-line, and the company was building a second distribution center in Zaragoza, Spain. Shipments were made out of distribution center biweekly, by truck to Europe, and by airfreight to stores outside Europe. No inventory held centrally, and there was almost no inventory at the stores that were not on the selling floor. Retailing Store managers asked for items that they wanted in their store, but the final allocation made centrally, taking into account inventory information and current store sales. Stores received a new inventory several times a week. Freshness in the assortment is essential. Unsold items could be returned for possible reallocation to other stores or for other outlet sales. Zara tried to minimize the vol. of merchandise moved at end-of-season sale prices. Zara experienced a 1520% markdown sale of season volume. Zara did not advertise, instead relied on word of mouth. Typical expenditure for retail advertising is 3-4 percent of sales. At Inditex, it ran at 0.3 percent, almost all of that for simple newspaper notices of the sales period. The Stores Zara stores were uniform, including as to lighting, fixtures, and window display, as well as the arrangement of garments, with a targeted floor space of 1200 square meters. Store locations were upscale in prime high street areas, and the store design, displays and windows emphasized an upscale, fashion-forward message. The organized arrangement of goods in uncrowded

spaces coordinated by color made the experience of shopping more like that in high-end luxury stores. Growth Strategy Most of the stores are company-owned. Although in some markets (Example: Middle East), Zara had opened a small number of stores through franchises. And in some other markets (Example: Japan), Zara had opened stored over alliances. Zara did not establish warehouses and local distribution centers when it entered a market or engage in-store- opening advertisings. A SOURCING DILEMMA Zara was on the right path for a continuance of the steady and organic growth of its business model and unique positioning. Management had regularly revisited Zara’s strategy. One of the elements of the strategy was production sourcing. Zara had announced that the percentage of outsourced manufacture would grow, initially to 60 percent, to take advantage of increased low-cost production coming on-line. SUBCONTRACTING BENEFITS AND RISKS Some of the motivations for subcontracting are Economies of scale- an essential objective in subcontracting is to reduce manufacturing costs by the aggregation of orders from many buyers. Certainly, the aggregation allows suppliers to take advantage of economies of scale, both in manufacturing and in purchasing. Risk pooling- outsourcing will enable buyers to transfer demand uncertainty to the CEM. One advantage that CEMs have is that they aggregate demand from many buying companies and thus reduce uncertainty through the risk-pooling effect. The CEMs can, therefore, minimize component inventory levels while maintaining or even increasing service level. Reduce capital investmentanother critical objective in outsourcing is to transfer not only demand uncertainty to the CEM but also a capital investment. Indeed, the CEM can make this investment shared between many of the CEMs customers. With the right focus on core competency by carefully choosing what to outsource, the buyer can focus on its core strength. The specific skills, talent, and knowledge sets that differentiate the company from its rivals and give it an advantage in the consumer's eyes. For instance, Nike focuses on innovation, marketing, distribution, and sales, not on manufacturing. Increased flexibility- It refers to three issuesthe ability to better react to changes in customer demand. The ability to use the supplier's knowledge to accelerate product development cycle time, the ability to gain access to innovation and new technologies. These are the critical concerns in industries where technologies change very frequently, e.g., fashion products. Loss of competitive

knowledge- essential components of outsourcing to suppliers may open up opportunities. Likewise, outsourcing implies that companies lose their ability to introduce new designs based on their agenda rather than the supplier’s agenda. Lastly, outsourcing the manufacturing of various components to different suppliers may prevent the development of new insights, innovations and solutions that typically require cross-functional teamwork. Procurement Strategy: Early procurement related to little value added to the organization. Zara recently adopted the right procurement strategies, which will result in good competition and a highly profitable company from others. The survey of electronic companies identified 19% profit gap is there between the least and the most successful companies. The lower cost of goods sold accounted for 13%. This industry is having the cost of purchased products and services as 60-70 percent of the cost of goods sold. 2005 comparison shows that the Pfizer Profit margin was 24%, compared to Dell’s was 5 %, and Boeing’s was 2.8%. Reducing Procurement cost by precisely one percent of revenue will leads to the net profit. To achieve an excellent profit margin, Pfizer would need to upturn its revenue by 4.17 %, Boeing by 35.7%, and Dell by 20%. The implication is that the smaller the profit margins, the more focus is on reducing procurement cost. Zara formed the structure of ensuring good supply, form partnerships, Simplify, and made automated operations. Focused on more purchasing power with minimum cost and more revenue with more profit impact. Challenge for the Zara is, therefore to develop a framework that will give a suitable supplier footprint. Zara should think through this strategy by keeping various factors in mind. The type of product or component purchased, forecasting ability, Profit impact, Technology, Product associated with this Zara took the concept of innovative and functional products. The right supply chain of products with excellent product strategies. Functional outcomes are slow products with low-profit margins like Soup, milk etc. Hightech products associated with fast products with high margins of innovative products like cosmetics, fashion items. The supply chain strategy for both products is different. An appropriate supply chain strategy for functional products is push and supply chain strategy for innovative products is pull. For the retailer who procures useful products, the focus should be on minimalizing total landed cost.