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Framework for Structuring Drivers

Consider this framework using Wal-Mart as an example. Wal-MarLs compeLlLlve sLraLegy ls Lo be a

reliable, low-cost retailer for a wide variety of mass-consumption goods. This strategy dictates that the
ideal supply chain will emphasize efficiency but also maintain an adequate level of responsiveness. Wal-
Mart uses the three logistical and three cross-functional drivers effectively to achieve this type of supply
chain performance. With the inventory driver, Wal-Mart maintains an efficient supply chain by keeping
low levels of inventory. For instance, Wal-Mart pioneered cross-docking, a system in which inventory is
not stocked in a warehouse but rather is shipped to stores from the manufacturer. These shipments
make only brief stops at distribution centers (DCs), where they are transferred to trucks that make
deliveries to stores. This significantly lowers inventory because products are stocked only at stores, not
at both stores and warehouses. With respect to inventory, Wal-Mart favors efficiency over
responsiveness. On the transportation front, Wal-Mart runs its own fleet, to keep responsiveness high.
This increases transportation cost, but the benefits in terms of reduced inventory and improved product
availability justify this cost in Wal-MarLs case. ln Lhe case of faclllLles, Wal-Mart uses centrally located
DCs within its network of stores to decrease the number of facilities and increase efficiency at each DC.
Wal-Mart builds retail stores only where the demand is sufficient to justify having several of them
supported by a DC, thereby increasing efficiency of its transportation assets. To utilize information in the
supply chain, Wal-Mart has invested significantly more than its competitors in information technology.
As a result, Wal-Mart is a leader in its use of the information driver to improve responsiveness and
decrease inventory investment. Wal-Mart feeds demand information across the supply chain to
suppliers who manufacture only what is being demanded. The supply chalns ability to share demand
information has required large investments, but the result is an improved supply chain in terms of both
responsiveness and efficiency. With regard to the sourcing driver, Wal-Mart identifies efficient sources
for each product it sells. Wal-Mart feeds them large orders, allowing them to be efficient by exploiting
economies of scale. Finally, for the pricing driver, Wal-MarL pracLlces every day low prlclng" (LuL) for
its products. This ensures that customer demand stays steady and does not fluctuate with price
variations. The entire supply chain then focuses on meeting this demand in an efficient manner. Wal-
Mart uses all the supply chain drivers to achieve the right balance between responsiveness and
efficiency so that its competitive strategy and supply chain strategy are in harmony.

Understanding the supply chain

ZARA: Apparel Manufacturing and Retail
Zara is a chain of fashion stores owned by Inditex, Spains largesL apparel manufacLurer and
retailer. In 2004, Inditex reported sales of 13 billion euros from more than 2,200 retail outlets in 56
countries. The company opened a new store for each day in 2004. In an industry in which customer
demand is fickle, Zara has grown rapidly with a strategy to be highly responsive to changing trends with
affordable prices. Whereas design-to-sales cycle times in the apparel industry have traditionally
averaged more than six months, Zara has achieved cycle times of five to six weeks. This speed allows
Zara to introduce new designs every week and to change 75 percent of its merchandise display every
Lhree Lo four weeks. 1hus, Zaras producLs on dlsplay maLch cusLomer preferences much more closely
than the competition. The result is that Zara sells most of its products at full price and has about half the
markdowns in its stores compared to the competition.
Zara manufactures its apparel using a combination of flexible and quick sources in Europe
(mostly Portugal and Spain) and low-cost sources in Asia. This contrasts with most apparel
manufacturers, who have moved most of their manufacturing to Asia. About 40 percent of the
manufacturing capacity is owned by Inditex, with the rest out-sourced. Products with highly uncertain
demand are sourced out of Europe, whereas products that are more predictable are sourced from its
Asian locations. More than 40 percent of its finished-goods purchases and most of its in-house
production occur after the sales season starts. This compares with less than 20 percent production after
the start of a sales season for a typical retailer. This responsiveness and the postponement of decisions
until after trends are known allow Zara to reduce inventories and forecast errors. Zara has also invested
heavily in information technology to ensure that the latest sales data are available to drive
replenishment and production decisions.
Until 2002, Zara centralized all its European distribution and some of its global distribution
through a single distribution center (DC) in Spain. It also had some smaller satellite DCs in Latin
American countries. Shipments from the DCs to stores were made twice a week. This allowed store
inventory to closely match customer demand. As Zara has grown, it has built another distribution center
in Spain.