How Zara fashions its supply chain

Home is where the heart is

ouis Grestner Junior once said that everything starts with the customer; and while few would argue with the former IBM CEO, ensuring that the right products end up with the customer is arguably even more important. However, this will only occur if the supply chain is efcient enough to make the journey from factory to shelf as smooth as possible.

You would be forgiven for assuming that such a task should pose few problems. However, customers are notoriously strange creatures and habits can be short lived. Throw in the fact that trends inevitably come and go some much quicker than others and it becomes obvious that the success of any organization will depend heavily on its ability to meet demands and respond quickly to uctuations and change.

Sainsburys and the bare necessities

Get it wrong and the consequences can be painful as Sainsburys discovered to its considerable cost. Only a decade or so after being the UKs leading supermarket, a lack of investment had already left the company trailing in the wake of rivals Tesco and Asda. It goes without saying that the last thing Sainsburys needed was for its new, automated supply chain to fail. However, empty shelves in its stores were testimony that it did. Any supermarket knows that poor stock availability is a cardinal sin and even the slickest marketing becomes impotent when the products involved are buried away in some depot instead of being at the end of the supply chain that matters. In this case, some Sainsbury outlets struggled to even provide an acceptable percentage of staple products. Dissatised customers understandably went elsewhere and, in late 2004, the company posted its rst ever loss. Rather ironic since many retailers believe that modifying the supply chain is one way of dramatically trimming expenses.

Any supermarket knows that poor stock availability is a cardinal sin and even the slickest marketing becomes impotent when the products involved are buried away in some depot instead of being at the end of the supply chain that matters.

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VOL. 21 NO. 10 2005, pp. 28-31, Q Emerald Group Publishing Limited, ISSN 0258-0543

DOI 10.1108/02580540510626709

 Besides, going for broke in one fell swoop will inevitably be fraught with danger when it essentially requires the fusing of various operations around products that have a limited shelf life.

So where did Sainsburys go so badly wrong? Perhaps at least part of the answer lies in the old saying that great haste makes great waste. Haste was certainly the name of the game here because the company:
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introduced technology more quickly than initially planned cutting the timescale from seven years down to three; and launched much of the automation simultaneously instead of going for a more measured approach favored by many others.

We all know that Rome was not built in a day and Sainsburys should have remembered this, too. Besides, going for broke in one fell swoop will inevitably be fraught with danger when it essentially requires the fusing of various operations around products that have a limited shelf life. It is understandable that Sainsburys would see reducing the amount of stock carried by its stores as a way to tackle shrinkage. However, its dependence on just-in-time (JIT) replenishment was equally awed because the accuracy of such a predictive model is highly questionable. It cannot, for example, factor in variables like the weather into the equation. And with the UK weather so notoriously unpredictable, the implications are all too apparent. Other retailers have pointed out the limitations of JIT software in respect of the grocery trade and prefer instead to stick to ordering based on actual rather than anticipated sales. The best model probably lies somewhere between the two. The sellout to technology saw Sainsburys reduce its number of distribution centers in favor of four giant warehouses, two being fully automated. What was the consequence of this? When the system could not satisfy demand, a plan B involving manual operations was conspicuous by its absence. This all adds weight to the belief that supermarkets and technology do not always mix. For its sins, Sainsburys has been forced to eat a large slice of humble pie and go back to basics. The company has reopened old distribution centers, while plans to close others have been shelved. Even more painful is the fact that much of the 3 billion invested in the automated system has had to be written off.

Heinz: getting the best out of technology

However, technology can play an important role in supply chain management and Heinzs 350,000 sq.ft automated UK National Distribution Center (NDC) is testimony to this. The key difference, however, is that the NDC was introduced to support rather than replace eight smaller depots. Designed and managed by leading third party storage provider Wincanton, the NDC depends heavily on automation to serve Heinz and its customers. The depot usually operates over six days each week to handle around 1.6 million cases. At peak times, this gure can rise by an extra half million. Highly impressive stuff but what happens when things go wrong? Prevention is invariably better than cure and it is no different here. The key objectives for Heinzs operational team are:

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To plan meticulously so that the system runs smoothly and steadily. A proactive approach towards maintenance in order to nip any potential problems in the bud and lessen the chances of a mechanical breakdown throwing a proverbial spanner in the works. This also provides the ideal opportunity to modify and improve the system.

Nine IT systems control the supply chain and ensure that functions run smoothly. This also allows capacity to be increased with minimal impact on operations. However, manual input is also vital and a rapid response team is on hand to intervene when issues such as badly loaded pallets may threaten to disrupt the computerized functions at the depot. Technology often equals redundancy but Heinz sensibly opted to retrain its employees for other roles. The benet of bucking this trend? Having a multi-skilled workforce that can be redeployed where necessary and a pool of temporary staff ready and waiting for periods of seasonal or unforeseen demand. An ability to be exible is obvious crucial. The high level of efciency also extends to transportation. Wherever possible, Heinz delivers full consignments and minimizes expenses even further by handling return loads. That the organization retains its own drivers helps provide the icing on this particular cake. The cost of this? Attractive salaries and contracts that allow drivers the exibility to meet both work and family commitments. And the payoffs? Increased loyalty and savings on agency expenses

Total control at Zara

Strict control of its supply chain plays an even greater role in the success of Zara, whose 650 clothing stores serve around 50 different countries. As a result, the Spanish organization can boast an unprecedented capacity for quick response within an industry that rarely stands still. Zara has ourished on the principle of being responsible for its products all the way from initial conception to the customer. Ironically, this involves defying many industry norms. For instance, while rivals choose to minimize cost and risk by owning fewer assets, Zara only outsources the production of clothing which is not subject to seasonal variation. Zara carries out all operations under the same roof of its La Coruna headquarters. Informality rules the roost and functions such as design, production and marketing all rub shoulders with each other. This set up essentially removes the need for information to travel through widely dispersed channels. It thus:
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Shortens delay. Minimizes bureaucracy. Provides the opportunity for more immediate comment and feedback. Allows speedier decision making. Lessens the potential impact of changes in circumstances such as an amendment to retail orders. This reduces the risk of loss through overproduction.

The relative absence of technology provides further evidence of the depth of control exercised at Zara. Although PDAs are used to transmit information, they play second ddle to the telephone when it comes to making contact with store managers. Swimming against the tide must be in the genes of Zara founder Amancio Ortega. If not, why else should he choose to repeatedly defy sound business logic? Another indication of this aptitude is the existence of parallel facilities for mens, womens and childrens clothing at

Informality rules the roost and functions such as design, production and marketing all rub shoulders with each other.

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 Zara almost transforms restricted availability into a virtue.

company headquarters. This more expensive way of working is justied by the fact that a delay in one facility does not hinder the others. Likewise, the company ignores economies of scale to the extent that it manufactures at low capacity and leaves its elegant boutiques half starved of merchandise. Not surprisingly, there is method in all this apparent madness. Ortega points out that working to full capacity would strangle the system and leave little scope to react swiftly enough to changing demands. It is the same with its sparsely replenished stores, where small batches of stock regularly give way to newer lines. While this would stretch most supply chains, Zaras ability to coordinate its activities enables it to cut drastically usual industry timescales for the design and introduction of new garments from months down to around two weeks. This also forms part of the rationale for delivering in limited quantities. Zara almost transforms restricted availability into a virtue. Its clothing is highly regarded, so the customer has to move quickly or risk losing out. As a result, the company:
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sells its products more quickly and can thus operate with low working capital; boasts a signicantly lower percentage of unsold items; and enjoys higher net prots than its rivals.

Spare manufacturing capacity is mirrored in the companys storage function, where up to 400 extra staff can be drafted in during busty periods. Zara also shares Heinzs insistence on keeping everything running smoothly. To this end, store managers have to comply with strict ordering deadlines, while delivery schedules are similarly regimented. Customers also know when new stock is due and trafc in stores is heavier at such times. As a result, the company is able to cut back signicantly on its advertising. This is yet another benet of a system whose whole is clearly greater than the sum of its parts.

Comment
The review is based on: How Heinz keeps out of the soup by Jeff Anderson, Rapid-re fulllment by Kasra Ferdows, Michael A. Lewis and Jose A. D. Machucha, and Digital disaster by Liam OBrien. Andersons article examines Heinzs National Distribution Center in the UK. It describes the automated functions at the depot and how the workforce and technology combine to help the company meet changes in demand. It also discusses ways in which the company is able to reduce its costs. This relatively short article provides a useful insight into the issues it covers. Ferdows et al. describe how effective supply chain management is crucial to the success of Zara. It emphasizes the importance of control throughout the system and points out how the unconventional approach of the Spanish clothing company differs from industry norms. This article provides a useful and interesting read to any practitioner, as many of its implications can be readily adopted within a diverse range of elds. The nal article details the experience of UK supermarket Sainsburys to illustrate the impact of supply chain problems. The author details the company attempt to automate its supply chain and why the move failed miserably. Another more than useful article that also provides invaluable lessons to all.

Keywords: Supply chain management, Retailing, Automation, Supermarkets

References
Anderson, J. (2005), How Heinz keeps out of the soup, Logistics and Transport Focus, Vol. 7 No. 3, April, pp. 22-5, ISSN: 1466-836X. Ferdows, K., Lewis, M.A. and Machucha, J.A.D. (2004), Rapid-re fulllment, Harvard Business Review, Vol. 82 No. 11, November, pp. 104-10. OBrien, L. (2004), Digital disaster, Supply Management, Vol. 9 No. 24, 2 December, pp. 23-6.

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