Zaras Operations Strategy Prepared by A AsefVaziri Based

Zara’s Operations Strategy Prepared by A. Asef-Vaziri Based on the Book: Operations Strategy; Principles and Practice

What is the Best Strategy? Zara: timely yet limited variety at modest cost and quality. Aravind and Shouldice Hospitals: low cost, high quality, minimal variety, average to long response time. Corolla: flow shop, decentralized assembly plants close to market, short flow time, low cost. Ferrari: job shop, only a single plant in Italy, longer flow time, high cost. Mc. Master Carr: a materials, repair, and operations (MRO) product distributor, a process with high flexibility, high quality, short response time, but at a high price Wal Mart: Short flow times, low inventory, low cost, average quality. Zara’s Operations Strategy Ardavan Asef-Vaziri Jan-1011 2

Trade-Off Different companies intentionally choose different processes to accomplish the same goal. Mc. Donald vs. In ‘N’ Out. Different processes lead to different advantages and disadvantages. We always face trade offs. It is not difficult to deliver books very fast. It is not difficult to deliver books at a very low cost. But, it is difficult to deliver books fast and at a low cost. Trade-off: decreasing in one of the four dimensions of Cost, Quality, Variety, and Time (CQVT) to increase on another CQVT dimension. World class firms also try to push the efficient frontier on these dimensions outward. As technology and management practices advance, the efficient frontier moves upward. Zara’s Operations Strategy Ardavan Asef-Vaziri Jan-1011 3

Zara: Resource View - Sizing, Timing, Type, and Location p p p High vertical integration. Ownership of the capital resources allows tight coordination. A design center, some manufacturing facilities (also outsources locally), two major DCs, and 90% of 724 retail stores. Production Capacity. The design capacity of 11000 new styles/yr by over 200 professionals is in line with the timely fashion (design to rack of 3 weeks). Distribution Capacity. Owns two central warehouses in Spain. The recent over 10 million square feet DC has a throughput of 80 thousands garments/hr. Direct access to highway and Rail Road and proximity to airport favors fast handling of international cargo. Zara’s Operations Strategy Ardavan Asef-Vaziri Jan-1011 4

Zara: Resource View - Sizing, Timing, Type, and Location p p p Vertical integration. High ratio of tangible fixed assets to sales of 34%. The average capacity utilization is 50%, many facilities are single shift. Supply Network. The supply network centered in Spain (25% from the rest of Europe and 25% from the rest of the world). The proximity of suppliers inputs are received quickly fast speed to market. Local facilities are used to produce the products with most demand uncertainty and time sensitivity, off shoring for basic products with more predictable demands. Utilization. Industries exercising (fast response times + high demand volatility) experience low capacity utilization; high safety capacity. Zara’s Operations Strategy Ardavan Asef-Vaziri Jan-1011 5

Zara: Process View – Supply, Technology, Demand, and Innovation p p p Delayed Differentiation. Postpone the dyeing of fabric: almost half the raw materials are purchased undyed. Product-Process Matrix Match. Short lead time for products with high variability in their demand. Local manufacturing processes have short setup times and run in small batches, while off shore manufacturing of more predictable demand can have longer lead times and large production batches. Centralization. Distribution is highly centralized to reduce the number of stocking points and the associated handling time and so that one store's upside demand fluctuations can offset another's downside. Zara’s Operations Strategy Ardavan Asef-Vaziri Jan-1011 6

Zara: Process View – Supply, Technology, Demand, and Innovation p p Transportation Network. The hub and spoke system uses the appropriate transportation mode (truck, RR, or air) depending on the store location and the time sensitivity. Frequent deliveries with short lead times. It maximizes the flexibility of inputs and increases responsiveness, while controlling working capital (inventory). Information Technology. IT enables the daily information flow between store managers (requesting products and providing customer feedback) and design and production (sharing information of upcoming products). Zara’s Operations Strategy Ardavan Asef-Vaziri Jan-1011 7

Zara: Process View – Supply, Technology, Demand, and Innovation p Demand Management. Intentionally short style campaigns that are likely to run out of stock create a scarcity image. Customers visit stores frequently and are likely to buy what is available at that moment because that particular product may no longer be available next time. The combination of short campaigns and limited inventory reduces markdowns and leftovers. Zara’s Operations Strategy Ardavan Asef-Vaziri Jan-1011 8

Zara: Process View – Supply, Technology, Demand, and Innovation p p Fast Product Design. Fast new product design is a key enabler of Zara's strategy. Ideas inspired by urban hot spots, fashion shows, and store customers are transmitted to the creative teams. Design style platforms are created ahead of the season and are modified just before production based on feedback from retailers regarding the most recent fashion. This postponement of design styling requires fast and efficient information transfer. Standardization and Customization. A firm believer that people, cultures and generations share a special sensitivity for fashion. Standardizes a majority of its designs but allows some adjustments to local taste. Zara originally insisted on a standard set of sizes for all countries but had to add smaller sizes for Japan and larger ones for the U. K. and Germany Zara’s Operations Strategy Ardavan Asef-Vaziri Jan-1011 9

Strategic Fit Zara Has tailored the four drivers of the Resource View (Sizing, Timing, Type, Location) and the four drivers of the Process View (Supply, Technology, Demand, and Innovation) and the four drivers of the Competencies View (CQVT) of its operations strategy to its fast fashion, cheap chic customer value proposition. Zara’s Operations Strategy Ardavan Asef-Vaziri Jan-1011 10

Should Every Retailer Adopt the Zara Model? p p Zara's operational system is not a panacea. Sweden's Hennes & Mauritz AB (H&M) competes with Zara. It produces much fewer new styles per year with a much slower design to rack time of 16 weeks. Without the stringent speed requirement, H&M has more leeway in configuring its operations; more outsourcing and higher capacity utilizations resulting in much lower fixed capital. The lower safety capacity and responsiveness is replaced by higher safety stock to buffer demand uncertainty. Zara’s Operations Strategy Ardavan Asef-Vaziri Jan-1011 11

Should every retailer adopt the Zara model? p p The Zara model is not used in other industries such as toys, cell phones, or auto manufacturing. Zara’s model requires: 1. High customer willingness to pay for speed to market. 2. Short product life cycles with high demand uncertainty. 3. Low cost of excess capacity with low importance of scale economies. 4. Low cost of stock outs and distribution relative to inventory holding. Great operations strategies are tailored to each company's competitive strategy. While companies may share some elements, a complete tailored operations system is unique Zara’s Operations Strategy Ardavan Asef-Vaziri Jan-1011 12