European Business School International University Schloss Reichartshausen

Group Case Study of Zara

To obtain the academic degree Bachelor of Commerce

Fast Fashion Lessons

Donald Sull and Stefano Turconi London Business School

Professor Benjamin Bental March 1, 2010

Ji Hae (Caroline) Lee Corentin Adam Melis Kesgin RosaCastells Sala Warren (Sid) Tetz Group 12

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Introduction

Over the past 13 years Zara has revolutionized the fashion retailing through something called fast fashion. Fast fashion is a competitive advantage created by the efficient functioning and coordination of many operational areas. Zara can produce, market, and sell high fashion looka-likes at extremely reasonable prices faster than any traditional retailer. Through this paper we will break down the strategic decisions that Zara has made to create this revolutionary competitive advantage within the fashion industry.

Strategic decision in Supply Chain

Zara favours local production; as a matter of fact, labour intensive operations are outsourced to local subcontractors. Fifty percent of Zaras products are manufactured in Spain by 22 factories and subcontractors which are located in Galicia. Despite cheaper labour costs, Zara avoids sourcing production in Asian countries to avoid waiting long lead times1 for products they need produced. It is noted, that seventy percent of Zaras production is in Europe to help minimize lead times.

Other areas of operative production are vertically integrated within Zara. Large investments in computer guided cutting equipment ensure efficiency. With some areas of production being sourced and other areas, such as computer guided fabric cutting, being done in-house Zara maintains a steady stream of information sharing. Almost all areas inside and outside the firm receive information simultaneously. (Exhibit 1)

To facilitate this great supply/production chain, Zara also has a great advantage in logistical power. Products that pass through the logistic platform of La Corogne represent 1 million products a week. There are more than 200 kilometres of cable and a surface of around 400000

The time from productions initiation process until completion

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m in this entirely automatic distribution centre. Even more impressive, two times a week the centre is emptied and new turnover replenishes the old inventory.

Due to the high volume of products and information that needs to be shared between all areas of the firm, Zara retains ninety percent ownership to avoid conflict between corporate decisions and franchises. Due to the span of corporate hierarchy, Zara pays particularly close attention to teamwork. Zara tries to break the corporate structure and appears as more of a socialistic firm. Ever person is equal in the eyes of the firm and this helps to enable work to be done in an efficient way with the most information sharing as possible. Furthermore, this also reduces the expenditures on fancy corporate offices and helps further reinforce the corporate culture.

Continuing with efficiency and low costs, Zara avoids extravagant and flashy advertising. Instore and point-of-sales promotion is the only advertising that Zara utilizes. Not only is this a strategic decision to lower costs but also to keep consistency with their overall strategy of fast fashion. The high turnover of inventory within the store does not give Zara many opportunities to advertise their in-store selections in catalogues, brochures, or other traditional Medias.

Zaras Core Competency: Shared situation awareness

Shared situation is the foundation for Zaras success to respond quickly to changes in demand. This system is built on three main pillars: raw data collection, hypothesis building, and testing.

The first pillar is managing huge amounts of raw data and incentivising managers to collect accurate as well as useful data. Managers are required to collect data that enables those working in Zara headquarters to find patterns and forecast future trends. The raw data that

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managers collect consists of everything from what is on the racks to what has been tried on and left behind.

With the successful collection of raw data, headquarters can analyse, manipulate, and add environmental2 data to the series allowing for the formulation of hypothesises to anticipate trends. Zaras open concept corporate culture is important here to facilitate brainstorming during the development of hypothesises. This allows for many different hypothesis to be created without fear that it will not be considered for the next step.

The next step is testing the chosen hypothesises. This is the final pillar in Zaras shared situation awareness. Based on the hypothesis, prototypes are created. These prototypes are then exhibited in a 24,000 m design hall. It is called Fashion Street and it resembles fashion streets of Milan or London. The prototypes are designed in house so that they can be produced quickly allowing decisions of whether to keep the prototype or cull it, to be made quickly. Approximately 25,000 prototypes are made but about sixty percent are culled. This is due to their failure to fit among the existing collection or bad results, in terms of data collection, in the first few weeks of testing.

Competitive advantage

Zaras competitive advantage is developed through their ability to collect data and respond quickly to fast-changing market trends based on their situation awareness strategy. Observing environmental factors and collecting copious amounts of data, Zara can anticipate the new trends in the fashion market. This is vastly different from the typical designer push-pull retailing model. (Exhibit 2) Furthermore, fifty percent of Zaras products are introduced on ongoing basis. This is much more frequently than the typical fashion retailer which typically introduces new products based on the four seasons. The reason that Zara can change turnover their inventory so rapidly is due to a very small lead time created by an extremely efficient
2

Data relating not strictly to Zara and their products ie. world events, news, etc.

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supply/production chain; which can put products into retail outlets in 15 days. (Exhibit 3) Further benefits of Zaras efficiency are realized when we consider their average mark down ratio and profit margin. Traditional fashion retailers mark down approximately fifty p ercent of their products where as Zara only marks down about fifteen percent of their products (Exhibit 4); and realizes a profit margin of sixteen percent compared to the seven percent of traditional retailers. Overall, Zara has strategically built their competitive advantage on situation awareness and have been successfully created something now called fast fashion retailing.

Conclusion

To conclude Zara is a company that can respond quickly to changing demand. They have succeeded in developing a competitive advantage through strategic planning of operations management, Human Resources, marketing, and their financial structures. The finally most important strategic key to their success is the process of situation awareness. Zara benefits from scale production and economies of scope within their corporate hierarchy saving costs wherever possible. Furthermore, Zara has integrated technologies well to help with the management of raw data as well as computerized cutting processes. The combination of inhouse production and local sourcing has proved to be a great success for Zara. We would expect to see steady growth of this strategically well thought out firm.

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Appendices
Exhibit 1

Exhibit 2

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Exhibit 3 Zara has a very small lead time: 15 days. The first day, a stylist designs the pattern he looks at customer needs and luxurious clothes. The third day, materials are computer guided cutting. The eleventh day, clothes are make in a local subcontractor, and then they come in parent factory for the coating. The thirteenth day, products are freighted forward by trucks in Europe and by aircraft in Asai or USA. Finally, the fifteenth day, products are sold in the stores over the world.

Exhibit 4