Question

Company Business Model

Agents for the company are always scouting out new fashion trends at clubs and social gatherings. When they see inspiring examples they  quickly send design sketches to the garment designers at the Cube.

New  items  can  be  designed  and  out  to  the  stores  in  4-6 weeks, and existing items can be modified in 2 weeks.

The company’s core market is women 24 – 35 years old. They reach this market by locating their stores in town centres and places with high concentrations of women in this age range.Short  production  runs  create  scarcity  of  given  designs  and  that  generates a sense  of urgency and reason to buy while supplies last.

As a consequence, Zara does not have lots of excess inventory, nor does it need to do big mark-downs on its clothing items.Zara  has  12  inventory  turns  per  year compared to 3-4  per year for competitors.Stores place orders twice a week and this drives factory scheduling. Such short term focused order cycles make forecasts very accurate, much more accurate than competitors who may order every two weeks or every month.

Clothing items are priced based on market demand, not on cost of manufacture. The short lead times for delivery of unique fashion items combined with short production runs enable.Zara to offer customers more styles and choices, and yet still create a sense of urgency to buy  because  items  often  sell  out  quickly.  And  that  particular  item  or  style  may  not  be available again after it sells out. Zara sells 85 percent of its items at full price compared to the  industry  average  of  selling  only  60  percent  of  items  at  full  price.  Annually  there  is  10 percent of inventory unsold compared to industry averages of 17 – 20 percent.

In Spain customers visit Zara stores 17 times per year on average compared to 3 times per year for competitors. Because their clothing designs change often, it is harder for people to see  them  clearly  on  the  Internet  and  thus  they are encouraged to come into the stores instead and try on the unique fashions that Zara offers. Zara spends its money on opening new stores instead of spending a lot on ad campaigns.

Estimates  vary  on  the  number  of  Zara  stores  worldwide.  An  article  in  the New  York  Times Magazine , placed the store count at around 5,900. An article in Forbes simply states there are“more nearly 3,000 stores”.Annual sales for 2018  were estimated  by Forbes to  be $21.3  billion.

The  holding  company,  Inditex  SA,  is  a  public  company  and Inditex  provides annual statements,  but  it  does  not  break  out  Zara  sales  from  sales  of  the  other  brands owned by Inditex (Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe). Zara also uses a flexible business model where its stores can be owned,franchised or co-owned with partners. So it is not always possible to find exact numbers for Zara’s business operations and finances.Manufacturing and Supply Chain Operations Make Zara Unique Zara buys large quantities of only a few types of fabric (just four or five types, but they can change from year to year), and does the garment design and related cutting and dyeing in-house.

This way fabric manufacturers can make quick deliveries of bulk quantities of fabric directly  to  the  Zara  DC –  the  Cube.  The  company  purchases raw  fabric  from  suppliers  in Italy, Spain, Portugal and Greece. And those suppliers deliver within 5 days of orders being placed. Inbound logistics from suppliers are mostly by truck. The  Cube  is  464,500  square  meters  (5  million  square  feet),  and  highly  automated  with underground  monorail  links  to  11  Zara-owned  clothing  factories  within  a  16  km  (10  mile) radius  of  the  Cube. 

All  raw  materials  pass  through  the  Cube  on  their  way  to  the  clothing factories, and all finished goods also pass through on their way out to the stores.  Zara’s factories can quickly increase and decrease production rates, so there is less inventory  in  the  supply  chain  and  less  need  to  finance  that  inventory  with  working  capital. They do only 50 – 60 percent of their manufacturing in advance versus the 80 – 90 percent done by competitors. Zara does not need to place big bets on yearly fashion trends.

They can make many smaller bets on short term trends that are easier to call correctly. The  Zara  factories  are  connected  to  the  Cube  by  underground  tunnels  with  high  speed monorails (about 200 kilometers or 124 miles of rails) to move cut fabric to these factories for  dyeing  and  assembly  into  clothing  items.The monorail system then returns finished products  to  the  Cube  for  shipment  to  stores.  Here  are  some  facts  about  the  company’s manufacturing operations:

1 Zara competes on flexibility  and  agility  instead  of  low  cost  and  cheap  labour. They employ about 3,000 workers in manufacturing       perations in Spain at an average cost of 8.00 euros per hour compared to average labour cost in Asia of about 0.40 euros per hour.

2 Zara factories in  Spain  use  flexible  manufacturing  systems  for  quick  change  over operations.

3 50% of all items are manufactured in Spain.

4 26% in the rest of Europe.5 24% in Asia and Africa.

Manufacturing is centred in northwestern Spain where company headquarters and the Cube are  located  (see  screenshot  below).  But  for  their  main  distribution  and  logistics  hub  they chose a more centrally located facility.

That facility is located in Zaragoza in a large logistics hub  developed  by  the  Spanish  government.  Raw  material  is  sent  by  suppliers  to  Zara’s manufacturing  centre.  Then  finished  garments leave  the  Cube  and  are  transported  to  the Zara logistics hub in Zaragoza. And from there they are delivered to stores around the world by truck and by plane.A Lean and Agile Supply ChainStores take deliveries twice per week, and they can get ordered inventory often within two days  after  placing  their  orders.

Items  are  shipped  and  arrive  at  stores  already  on  hangers and  with  tags  and  prices  on  them.  So  items  come  off  delivery  trucks  and  go  directly onto the sales floor. This makes it possible for store managers to order and receive the products customers want when they want them, week by week. Zara stores respond practically in real-time as styles and customer preferences evolve.

It is a great business model for success in the high-change and hard to predict fashion industry. It means about half of the clothing the company sells, which includes most of its high margin and unique fashion items (but not its lower margin basic items), is manufactured based on highly  accurate,  short-term  (2  –  6  week)  demand  forecasts. 

Because  this  business model tracks so closely to real customer demand from one month to the next, it frees the company to  a  large  degree  from  getting  caught  in  cyclical  market  ups  and  downs  that  ensnare  its competitors. Turbulence in the global economy since 2008 has hurt sales at many competing fashion retailers, but Zara has seen steady, profitable growth during this time.Zara has spent more than 30 years building its unique real-time supply chain and training its people. 

So  competitors  have  a  lot  of  learning  to  do  to  create  the  mental  models,  and  roll out the operating procedures needed to do what Zara does