While traditional fashion retailers forecast trends 12 months in advance to develop their production schedules, Zara meets customer demand focusing on fashion trends as soon as they appear. Store managers collect hard data, such as orders and sales trends, and soft data, such as customer reactions and \u201cbuzz\u201d around a new style. They transfer this information to headquarters, where designers, market specialists and procurement and production planners are sit together and constantly develop new products to meet fashion trends. Working in cross-functional teams increases both the speed and the quality of the design process. Though it is more expensive, Zara has three separate staffs dedicated to each of its clothing lines: women, men and children. This choice ensures that information flows fast, direct and unencumbered by problems in other channels. To close the communication loop from shoppers to designers and production staff, Zara controls the entire supply chain: it keeps around half of its production in-house; it manages design, warehousing, distribution and logistics functions itself; it runs nearly all of its retail shops instead of relying on franchises. This enables Zara to get direct access to the critical last step of the supply chain \u2013 customers. Constant flow of updated data throughout the vertically integrated supply chain mitigates the bullwhip effect. The latter would otherwise be especially severe as demand in fashion industry is extremely volatile and, while traditional retailers change a maximum of 20% of their orders once the season has started, Zara adjusts 40% to 50% of them.<\/p>\n
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Flexibility in operations<\/strong><\/p>\n Once a new trend is identified, Zara can ramp up or down production of specific garments quickly and conveniently. Its highly automated factories normally operate only one shift and can easily run extra hours to meet seasonal or unforeseen demand. Zara tolerates lower capacity utilization in its factories and distribution centers, in order to react to unexpected demands faster than its rivals. The company indeed realized that waiting time increases exponentially when capacity is tight and demand is highly variable. Zara\u2019s factories constantly create unfinished \u201cgreige goods\u201d. Adopting a \u201cjust-in-time\u201d approach, Zara sends \u201cgreige goods\u201d to its network of finishing shops and turns them into products, as soon as a new design is developed. Complex and trendiest items are made in Zara\u2019s own factories or within proximity to the company\u2019s headquarters, so that production process, from start to finish, takes only two to three weeks. All finished goods pass through the distribution center in La Coru\u00f1a, where operating hours are flexible to accommodate fluctuation in the orders. In a normal week, the facility operates around the clock four days and only one or two shifts on the remaining three days.<\/p>\n <\/p>\n Low prices with high margins<\/strong><\/p>\n Responsiveness to customer demand allows to keep high turnover and enables Zara to charge relatively low price without affecting its margins. The company typically sells its products just few days after they are made, operating with negative working capital. Zara manufactures and distributes products in small batches. Customers can always find new products but in limited supply. They are incentivized to buy immediately because products sell out very quickly and pricing is relatively cheap. Unsold items account for less than 10% of stock compared with an industry average of 17% to 20%. Short window of opportunity for purchasing items also motivates consumers to visit the stores more frequently \u2013 typical customers visit Zara\u2019s shops an average of 17 times a year vs. an average of 4 visits a year to any other retailer. Zara\u2019s strategy also allows to minimize the recourse to markdowns with positive impact on margins.<\/p>\n <\/p>\n Performance<\/strong><\/p>\n Alignment between business model and operating choices has translated into successful financial performance. Higher margins, turnover and reduced inventory risk makes Zara four times more profitable than the average retailer. Inditex, Zara\u2019s holding company, posted a 26% jump in net earnings to \u20ac1.16bn in the first six months of 2015. Sales rose 17% to \u20ac9.42bn and 7% on a like-for-like basis. Gross margin has increased slightly from 57.6% to 58.1%. Iniditex\u2019s share price has constantly outperformed the European market over the last 5 years. Zara\u2019s founder, Amancio Ortega, is now the second-richest man in the world, surpassing even Warren Buffet.<\/p>\n
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