Report on Zara Procurement Strategy

Zara’s History

Mr. Gaona from Galicia, and worked as a clerk at a ladies' apparel retailer before
starting his own housecoat manufacturing business in early 1963. The first Zara store
was open in La Coruna in 1975. There were 82 Zara stores in Spain in 1989. Then he
began worldwide expansion with Zara stores in Portugal, Paris, and New York. Zara’s
parent company Inditex took on four other formats: Pull and Bear, Massimo Dutti,
Bershka, and Stradivarius. Oysho, launched in 2001, was an intimate apparel and
swimwear brand. During 2000, over half of Inditex sales were outside Spain. During
2000-01, Inditex received widespread favorable press & analyst coverage, which
resulted in Inditex’s success and attributing it to Zara’s unique integrated business
model. Due to the success of Zara, it was “possibly the most innovative & devastating
retailer in the world.” Inditex made an IPO of stock in May 2001 and was the world’s
third-largest clothing retailer at the time. Zara offered clothing for women (58% of
sales), men (about 22%), and Children (about 20%). Zara stores provide a compelling
blend of fashion, quality, and price offered in attractive stores in prime locations on
premier commercial streets and upscale shopping centers. Zara’s in-house design and
production capabilities enable us to provide fresh designs at its stores two times a week
throughout the year. By 2001, Inditex was operating over 1200 stores in over 35
countries worldwide. Analysts projected that Inditex stores would easily exceed 2000
within five years. The vertically integrated model of Zara depended to a great extent on
local Spanish sourcing for a large proportion of garment clothing manufacturers. But
Castellano had considered that Zara would move more production offshore, probably to
Asia, to take advantage of the lower wage costs.

ZARA MODEL
Zara Planning and Design Cycle
There are two seasons: spring/summer collection arrives in stores in January-February & the
Fall/winter collection comes in August-September (Vice versa in Southern hemisphere). About a
year in advance, designers initiate to work to define dominant themes and colors and then to
put together the first collection. Zara had about 200 designers. Designers were catwalk-
influenced. Thus were expected to adapt haute couture style for the mass market. Zara
produces approximately 11 thousand styles each year, and all in relatively small batches, to
begin with, this encouraged them to experiment. The Designers work in large open spaces at
Zara’s headquarters, with one design center for each of the women’s, men’s, and children’s
lines. Design centers were light & modern, with pop music playing in the background. The store
specialists work in the same rooms, review daily detailed printouts of store sales, and gather
feedback from all store managers. Each store professional is responsible for a group of stores by
region and visits them at times. Each store manager should have retailing knowledge for the
commercial design sense and feel for market trends. As it is the occupation of the store
manager to feed market information from the stores back into the design and production
decision making.
Production Sourcing and Scheduling
Once the first collection was approved, the related fabric procurement and production planning
started. Where garments were the 3rd party sourced and commitments made six months
before the arranged store delivery. While garments for in-house production were planned for
manufacturing so that they are ready in time. Of the outsourced output, about 60 percent came
from Europe and 30 percent from Asia, with the balance from the rest of the world. The
decision to source or to manufacture in-house was on several considerations, including relative
cost, expertise, time sensitivity. There are 21 Zara factories, each managed separately.
Garments with fashion styling tended to manufacture in- house while basics and knits tended to
outsourced. Zara committed about 15-25% of its season inventory six months in advance of the
season. By the beginning of the season, commitment for 50-60 percent of its season inventory
given. Nearly a quarter of the season’s collection was made available at the beginning of the
season. In-house production was weighted 85% to in-season output and 15% to the next
season’s production.

In-house Manufacture
Two necessary steps: Garment assembly, and finishing; Fabric procurement.
Inditex owned a fabric sourcing corporation in Barcelona, several production companies of
textile, and a share in a fabric finishing company called Fibracolor. Comditel managed about
40% of fabric procurement. Set up a time for dying or printing was about 4 or 5 days, the whole
process taking about a week. Zara depended on external sourcing for synthetics & more fashion
fabrics. Based on the sizes and styles, the Zara factories cut the fabric. The machine cut fabric
based on a computer layout or pattern pieces. The design is set by people working at computer
terminals who specialized in inappropriate design with minimum waste. The cut fabric pieces
were marked and packet for sewing. Sewing was contracted out to a network of 400 smaller
firms, the areas where wages were low and unemployment high. Zara enabled many women to
work. Deliveries between the Zara owned factories and the subcontractors occurred many
times in a week. Overall, the turnaround time for sewing ran a week or two. Tagging, pressing,
and final inspection occurred in Zara factories. It takes around ten days to finish a style
production.
In-Season Production
Zara committed only 50-60 percentage of production in advance of the season, the remainder
manufactured on a rolling basis during the season. The in-house portion of in-season output
could be altered in response to the market demand. As per to Miguel Diaz Miranda, VP of
Manufacturing, The size of the production run-scale is not an issue. They cover the cost of the
garments through markup. It is always the product that drives the customer. For an expected
robust demand, they take a higher risk of the fabric purchasing decision. Sometimes they decide
that from an economic point of view might not seem ok. For example, if an item was retailing
well and if they think that they are saturating the market with one look. They will stop
manufacturing it and create unsatisfied demand on purpose. It was the ability to respond to in-
season that gave Zara a different fashion risk profile. Zara meets with alternative offerings when
the original collection items perform poorly.
Distribution
Distribution of both in-house and outsourced manufactured garments was centralizing at Zara’s
50,000 m2 distribution center in Arteixo. Centrally located among fourteen manufacturing
plants. Garments move along 210 km of track from the cluster of factories. Hanging garments is
arrange on coded bars that sorted automatically by style within the distribution center, stock-
picking is manually completed. Folded garments sorted on a carousel, with each garment
dropped down a chute in the direction of a box for its endpoint store based on its bar code.
About 2.6 million garments move through the distribution center every week. The distribution
center utilizes at 50 percent capacity at the end of 2011. And more distribution capacity needed
to come on-line, and the company was building a second distribution center in Zaragoza, Spain.
Shipments were made out of distribution center biweekly, by truck to Europe, and by airfreight
to stores outside Europe. No inventory held centrally, and there was almost no inventory at the
stores that were not on the selling floor.
Retailing
Store managers asked for items that they wanted in their store, but the final allocation made
centrally, taking into account inventory information and current store sales. Stores received a
new inventory several times a week. Freshness in the assortment is essential. Unsold items
could be returned for possible reallocation to other stores or for other outlet sales. Zara tried to
minimize the vol. of merchandise moved at end-of-season sale prices. Zara experienced a 15-
20% markdown sale of season volume. Zara did not advertise, instead relied on word of mouth.
Typical expenditure for retail advertising is 3-4 percent of sales. At Inditex, it ran at 0.3 percent,
almost all of that for simple newspaper notices of the sales period.
The Stores
Zara stores were uniform, including as to lighting, fixtures, and window display, as well as the
arrangement of garments, with a targeted floor space of 1200 square meters. Store locations
were upscale in prime high street areas, and the store design, displays and windows emphasized
an upscale, fashion-forward message. The organized arrangement of goods in uncrowded
spaces coordinated by color made the experience of shopping more like that in high-end luxury
stores.
Growth Strategy
Most of the stores are company-owned. Although in some markets (Example: Middle East),
Zara had opened a small number of stores through franchises. And in some other markets
(Example: Japan), Zara had opened stored over alliances. Zara did not establish warehouses and
local distribution centers when it entered a market or engage in-store- opening advertisings.
A SOURCING DILEMMA
Zara was on the right path for a continuance of the steady and organic growth of its business
model and unique positioning. Management had regularly revisited Zara’s strategy. One of the
elements of the strategy was production sourcing. Zara had announced that the percentage of
outsourced manufacture would grow, initially to 60 percent, to take advantage of increased
low-cost production coming on-line.

SUBCONTRACTING BENEFITS AND RISKS

Some of the motivations for subcontracting are Economies of scale- an essential objective
in subcontracting is to reduce manufacturing costs by the aggregation of orders from many
buyers. Certainly, the aggregation allows suppliers to take advantage of economies of
scale, both in manufacturing and in purchasing. Risk pooling- outsourcing will enable
buyers to transfer demand uncertainty to the CEM. One advantage that CEMs have is that
they aggregate demand from many buying companies and thus reduce uncertainty
through the risk-pooling effect. The CEMs can, therefore, minimize component inventory
levels while maintaining or even increasing service level. Reduce capital investment-
another critical objective in outsourcing is to transfer not only demand uncertainty to the
CEM but also a capital investment. Indeed, the CEM can make this investment shared
between many of the CEMs customers. With the right focus on core competency by
carefully choosing what to outsource, the buyer can focus on its core strength. The specific
skills, talent, and knowledge sets that differentiate the company from its rivals and give it
an advantage in the consumer's eyes. For instance, Nike focuses on innovation, marketing,
distribution, and sales, not on manufacturing. Increased flexibility- It refers to three issues-
the ability to better react to changes in customer demand. The ability to use the supplier's
knowledge to accelerate product development cycle time, the ability to gain access to
innovation and new technologies. These are the critical concerns in industries where
technologies change very frequently, e.g., fashion products. Loss of competitive
knowledge- essential components of outsourcing to suppliers may open up opportunities.
Likewise, outsourcing implies that companies lose their ability to introduce new designs
based on their agenda rather than the supplier’s agenda. Lastly, outsourcing the
manufacturing of various components to different suppliers may prevent the development
of new insights, innovations and solutions that typically require cross-functional teamwork.

Procurement Strategy:

Early procurement related to little value added to the organization. Zara recently adopted
the right procurement strategies, which will result in good competition and a highly
profitable company from others. The survey of electronic companies identified 19% profit
gap is there between the least and the most successful companies. The lower cost of
goods sold accounted for 13%. This industry is having the cost of purchased products and
services as 60-70 percent of the cost of goods sold. 2005 comparison shows that the Pfizer
Profit margin was 24%, compared to Dell’s was 5 %, and Boeing’s was 2.8%. Reducing
Procurement cost by precisely one percent of revenue will leads to the net profit. To
achieve an excellent profit margin, Pfizer would need to upturn its revenue by 4.17 %,
Boeing by 35.7%, and Dell by 20%. The implication is that the smaller the profit margins,
the more focus is on reducing procurement cost. Zara formed the structure of ensuring
good supply, form partnerships, Simplify, and made automated operations. Focused on
more purchasing power with minimum cost and more revenue with more profit impact.

Challenge for the Zara is, therefore to develop a framework that will give a suitable
supplier footprint. Zara should think through this strategy by keeping various factors in
mind. The type of product or component purchased, forecasting ability, Profit impact,
Technology, Product associated with this Zara took the concept of innovative and
functional products. The right supply chain of products with excellent product strategies.
Functional outcomes are slow products with low-profit margins like Soup, milk etc.
Hightech products associated with fast products with high margins of innovative products
like cosmetics, fashion items. The supply chain strategy for both products is different. An
appropriate supply chain strategy for functional products is push and supply chain strategy
for innovative products is pull. For the retailer who procures useful products, the focus
should be on minimalizing total landed cost.