UNIVERSITI KUALA LUMPUR-MITEC JLD 30302

PURCHASING AND INVENTORY

PENSYARAH: PN ZUHRA JUNAIDA BT MOHD HUSNY HAMID NORHANISAH BINTI MAT SHAH DIPLOMA IN INDUSTRIAL LOGISTICS NO MATRIK: 57175209025 IC: 910402015890 N0 TEL: 0177166269 E-mail: ayusmile_91@yahoo.com TARIKH: 4 JULAI 2011

CONTENT

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Introduction

What i Zaras formula?

How special do the distinctive features of Zara business model affect its operating economics? What distinguish Zara from other clothing-line company? Do comparison with another famous fashion company of your choice.

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Can Zaras formula be apply in Malaysia?

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Conclusion & References

INTRODUCTION

Zara is a chain of stores belonging to the Spanish fashion group INDITEX founded by Amancio Ortega Gaona. Zaras boutique is a global specialty retailer that designs, manufactures, and sells apparel, footwear, and accessories for women, men and children through its chains around the world.

Zaras has opened his first store in 1975 in La Coruna in Spain. But now it was become the central headquarters for Zara. By the end of January 2006, Zaras has across 62 countries worldwide such as Europe, America, Asia and Africa. And during 2006 also it has opened 560 stores across the group. And By August 2008, sales edged ahead of Gap, making Inditex the worlds largest fashion retailer. Starting with a single store, today Zara has as many as 1,520 outlets bringing exclusive fashion to all over the world and churning out annul turnovers of 6,824 million Euros. Most important of which is to note that 75% of these total earnings are a part of the international sales. Besides Zara the Inditex group also owns brands such as Massimo Dutti, Pull and Bear, Oysho, Uterqe, Stradivarius and Bershka. Zaras is known for its fast, affordable fashion and retail chain. It also has built up a multibillion dollar brand through listening and reacting quickly to its customers. Zaras firm goal is to convince the consumer to buy their clothes. They propose and deliver all fashion style at the moment and they dont want to make marketing for old or past fashion collections.

1. What is Zaras formula? The core concept of Zara's business model is they sell "medium quality fashion clothing at affordable prices", and vertical integration and quick-response is key to Zara's business model. There are the formulas used by Zaras: 1.1 Production & manufacturing Most of the production is based on what the client is demanding at any time, virtually on demand manufacturing of a shop (pull strategy). The key to this model is the ability to adapt the offer to customer desires in the shortest time possible. For Zara, time is the main factor to be considered, above and beyond production costs. Zaras are able to design and finish good in stored within 4 to 5 weeks. This production model can reduce inventory costs, lower margins by working with the most competitive offer and eliminates the need to resort to traditional sales in the sector to provide an outlet for surplus production. Zaras also are able to launch a new trends, design and variation of product. Its also produces smaller quantities per style and so that it can produce many more style during a year. Zaras team of designers, made up of more than 200 professionals, continuously assessing the customers preferences, wishes and demands offering each year comprised some 12,000 different models for sale in its stores. Individual bonuses are tied to the success of the team, and teams are regularly rotated to cross-pollinate experience and encourage innovation. The Zaras business model is unique, comprising each and every stage of the fashion retail business: design, manufacture, distribution and sale of fashion in own-operated stores. The sourcing and manufacturing process is also the key to the business model. Zara has purchases offices in the fashionable cities of Barcelona and Hong Kong which allow for the purchases to also serve as trend-spotters. Zara uses an Inditex subsidiary, Comditel, for its purchasing of fabric. Approximately half the fabric is purchased in grey to allow for flexibility in manufacturing a variety of colors and patterns. This is a key component of the business cycle as the fabric is finished in just one week. The particular distinction of Zara's manufacturing is that they manufactured its most fashion-sensitive products internally and produce in small batches for the most time-sensitive ones.

1.2 Marketing Zaras key is not to sell clothes, but fashion. They have a high component of differentiation in the design, its helps the company to sell so much faster. Also, through the production of small series and putting satisfy all demand of some products; Zara has managed to deceive consumers into buying. The client has learned to immediately buy a product you like, because what you do not buy today, may not be available tomorrow. This opportunity cost has tripled the percentage of consumers who buy on entering a Zara store (30%) versus the industry average (10%). Perhaps most significantly, the Zara model from the point of view of production is the local production of garments to be able to supply the stores in the shortest possible time. By local, we understand the rapid response workshops, geographically close to the central (Galicia, northern Portugal and Morocco) and has excellent links with this. However, this strategy has had to adapt to the new size of the company. Zara turns to outsourcing (outsourcing of production) for commodities not subject to the prevailing fashion and fashion only products usually occur at home.

1.3 Logistics and distribution. All production, regardless of its origin, is received at the logistical centers for the brand, from where it is distributed simultaneously to all the stores worldwide on a highly frequent and constant basis. In the case of Zara, distribution takes place twice a week and each delivery always includes new models, so that the stores are constantly refreshing their offer. The logistics system used based on software designed by the companys own teams, means that the time between receiving an order at the distribution centre to the delivery of the goods in the store is on average 24 hours for European stores and a maximum of 48 hours for American or Asian stores.

2. How special do the distinctive features of Zara business model affect its operating economics? Specifically, compare Zara with an average retailer with similar posted prices. In convenient to assume that on average, retail selling prices are about twice as high as manufacturers' selling prices. Zara gets a competitive advantage by offering the customer fashionable clothes to affordable prices. This is not a pure differentiation since zara does not charge a premium price for the product. Nor either is it a pure cost leadership since the objective is not to become the lowest-cost producer in the industry. Zara has rather developed a combination of differentiation and cost leadership, and ended up with a successful formula. A short lead-time is important for Zara to be able to offer the latest fashion in store at all time. The reduction in transportation time by having the whole production close to the market give Zara a big lead-time advantage compared to its competitors, which more commonly keep their production in the Far East. The geographical close network by keeping the production close to the headquarters in Europe and keeping the whole team working in the same building might also lead to reduction of the lead-time. Making collaborating and meeting less time taking. In addition, they have carefully integrated a good IT- structure. Further, by owning a big part of the facilities they are able to have better control of the production and are always able to reschedule each factories production plan to concentrate on that part of the collection that is most important at that moment. In the fashion industry the customer's demand changes rapidly, and what the customers finds fashionable today might be impossible to sell tomorrow. Therefore, to base the future revenue on always offering fashionable clothes depends on good predictions of customers future preferences. The chance for a miss prediction is quite big and knowing that there is a chance of ending up selling the whole collection on discount, or not be able to sell it at all, the prediction of the next fashion has to be prepared carefully. Zara's short lead-time gives a higher chance for a more accurate predicting the next fashion. This makes them able to meet the customers demand and offer a higher level of fashionable clothes in their stores. It also makes it possible for Zara to have a higher turnover and continuously refresh its stores with new fashion twice a week, this comparing to many of the competitors that refresh their store once a session.

Knowing that there will always be new designs in a Zara store, customer will visit the store more frequently leading to more sales. The reduction in lead-time does more than improving the forecasting. It also decreases the level of inventory, which conduct to release of capital locked up in stock, reduce the cost of holding it and the risk of stock going out of date.

3. What distinguish Zara from other clothing-line company?, Do comparison with another famous fashion company of your choice. It is most interesting to compare Inditex with its largest competitor-Gap- as Gap have the highest market capitalization of all Inditex competitors, the highest operating revenues and largest no. of store locations worldwide. So when comparing the financial results of Inditex with Gap we find out that: Although The Gap has much higher revenues than Inditex (almost five times Inditex), it incurred a net loss, as opposed to Inditex, which achieved a 23%, return in investment. This is due to the extremely high costs of goods sold for The Gap. This could be caused -at least partially- by the complete outsourcing of the production. They do not have enough control over the production costs. Although The Gap has larger market share than Inditex and has equity almost double that of Inditex.

Gap Vs Zara: Gap had achieved stellar growth and profitability in the last ten years; it was one of the largest specialist apparel retailers in the world ahead of Inditex. It owned most of their stores but outsourced all production in contrast with Inditex. Nevertheless it ends with a massive a decline in its stock prices and the departure of Its CEO in 2002.

Although Gap and Zara follow the same business model, Zara's business model improved over time, through the incorporation of technology as they have developed about 95% of the software it uses, Zara fast response to market changes gave them a competitive advantage in creating fashion and satisfying customers plus the fact that the company is getting larger and more global than it has been.

For instance, Zara did not face the two basic barriers for going globally which are: Costs: that Zara did not incur when entering a new market, as the company does not have extraordinary advertising expenses to create brand recognition. Logistics: which involve being ahead of the curve, volume, SKUs, and delivery points; all are the same in every store which allows the company to take better advantage of real estate opportunities regardless of the market the company is in. The higher price compared to its competitors could be justified because of the relatively limited number of pieces which are produced of one garment. This makes Zaras clothes unique when comparing with H&Ms, which are produced en-masse and thus sold for a longer period.

4. Can Zara formula be applied by Malaysian industry? In my opinion, Zaras formula is the best formula should be applied by Malaysian industry in order to have a competitive advantage like Zaras company had. The competitive advantages that can we had such as fast production, product variation, marketing benefit and others. First competitive advantages are fast production. This production model can reduce inventory costs, lower margins by working with the most competitive offer and eliminates the need to resort to traditional sales in the sector to provide an outlet for surplus production. Another formula that can be applied by Malaysian industry is by produce limited product. With limited production, if a product does not sell, the problem is very limited and the discounts needed to sell what remains may be small and for a short time. The limited production enables retailers to change their offer quickly, driven by managers who are compensated up to 70% of their salaries based on sales at stores. In distribution, distribution takes place twice a week and each delivery always includes new models, so that the stores are constantly refreshing their offer. The logistics system used based on software designed by the companys own teams, means that the time between receiving an order at the distribution centre to the delivery of the goods in the store is on average 24 hours for European stores and a maximum of 48 hours for American or Asian stores.

CONCLUSION

Although it might seem that Zara is less efficient than its competitors, it has the most efficient business model in the long run. As consumer tastes and demands are changing more rapidly, a responsive supply chain is required. This responsive supply chain is saving a lot of costs because of its adaptability to the market demands. Every dollar of investment in responsiveness of the supply chain, usually results in a decrease of more than a dollar in cost of stock outs, forced markdowns or excess inventory. (Operations Management for Competitive Advantage; R.B Chase et al) The more efficient point of view should be applied to the Casual wear department of the company, such as basic T-shirts and the like. Those may be outsourced and sold for a low price. The higher price compared to its competitors could be justified because of the relatively limited number of pieces which are produced of one garment. This makes Zaras clothes unique when comparing with H&Ms, which are produced en-masse and thus sold for a longer period. Expanding its business model in the US is a worthwhile consideration. It is a big market which will expand its customer base substantially. But Central or South East US should be put into consideration, rather than the Northern part, because of higher set-up and operating costs.

RFERRENCES Internet
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http://www.scribd.com/doc/44941143/Zara-Case-Study http://hbswk.hbs.edu/archive/4652.html

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HBS ZARA case study (IT for fast fashion) by Samuel BERHMANI. Retail @ the speed of fast fashion part II by DEVANDSHU Dutta.