ZARA: Fast Fashion About one-half of the fabric purchased was"gray"(undyed)to facilitate in-season updating with maximum flexibility. Much of this volume was funneled through Comditel, a 100%-owned subsidiary of Inditex, that dealt with more than 200 external suppliers of fabric and other raw materials. Comditel managed the dyeing, patterning, and finishing of gray fabric for all of Inditex's hains, not just Zara, and supplied finished fabric to external as well as in-house manufacturers. This process, reminiscent of Benetton,'s, meant that it took only one week to finish fabric Further down the value chain, about 40% of finished garments were manufactured internally, and of the remainder, approximately two-thirds of the items were sourced from Europe and North Africa and one-third from asia. The most fashionable items tended to be the riskiest and therefore were the ones that were produced in small lots internally or under contract by suppliers who were located close by, and reordered if they sold well. More basic items that were more price-sensitive than time- sensitive were particularly likely to be outsourced to Asia, since production in Europe was typically 15%-20%more expensive for Zara. About 20 suppliers accounted for 70% of all external purchases While Zara had long-term ties with many of these suppliers, it minimized formal contractual commitments to them Internal manufacture was the primary responsibility of 20 fully owned factories, 18 of them located in and around Zara's headquarters in Arteixo. Room for growth was provided by vacant lots around the principal manufacturing complex and also north of La Coruna and in Barcelona. Zara's factories were heavily automated, specialized by garment type, and focused on the capital-intensive parts of the production process-pattern design and cutting-as well as on final finishing and inspection. Vertical integration into manufacturing had begun in 1980, and starting in 1990, significant investments had been made in installing a just-in-time system in these factories in cooperation with Toyota-one of the first experiments of its kind in Europe. As a result, employees had had to learn how to use new machines and work in multifunctional teams Even for the garments that were manufactured in-house, cut garments were sent out to about 450 workshops, located primarily in Galicia and across the border in northern Portugal, that performed the labor-intensive, scale-insensitive activity of sewing. These workshops were generally small operations, averaging about 20-30 employees, although a few employed more than 100 people apiece, that specialized by product type. As subcontractors, they generally had long-term relations with Zara, which accounted for most if not all of their production, provided them with technology, logistics, and financial support, and paid them prearranged rates per finished garment, carried out inspections onsite, and insisted that they comply with local tax and labor legislation 8. The sewn garments were sent back from the workshops to Zaras manufacturing complex, where Q ey were inspected, ironed, folded, bagged, and ticketed before being sent on to the adjoining istribution center Distribution Like each of Inditex's chains, Zara had its own centralized distribution system. Zaras system consisted of an approximately 400,000 square meter facility located in Arteixo and much smaller satellite centers in Argentina, Brazil, and Mexico that consolidated shipments from Arteixo All of Zara's merchandise, from internal and external suppliers, passed through the distribution enter in Arteixo, which operated on a dual-shift basis and featured a mobile tracking system that docked hanging garments in the appropriate barcoded area and carrousels capable of handling 45,000 folded garments per hour. As orders were received from hand-held computers in the stores(twice a week during regular periods, and thrice weekly during the sales season), they were checked in the
ZARA: Fast Fashion 703-497 11 About one-half of the fabric purchased was “gray” (undyed) to facilitate in-season updating with maximum flexibility. Much of this volume was funneled through Comditel, a 100%-owned subsidiary of Inditex, that dealt with more than 200 external suppliers of fabric and other raw materials. Comditel managed the dyeing, patterning, and finishing of gray fabric for all of Inditex’s chains, not just Zara, and supplied finished fabric to external as well as in-house manufacturers. This process, reminiscent of Benetton’s, meant that it took only one week to finish fabric. Further down the value chain, about 40% of finished garments were manufactured internally, and of the remainder, approximately two-thirds of the items were sourced from Europe and North Africa and one-third from Asia. The most fashionable items tended to be the riskiest and therefore were the ones that were produced in small lots internally or under contract by suppliers who were located close by, and reordered if they sold well. More basic items that were more price-sensitive than timesensitive were particularly likely to be outsourced to Asia, since production in Europe was typically 15%-20% more expensive for Zara. About 20 suppliers accounted for 70% of all external purchases. While Zara had long-term ties with many of these suppliers, it minimized formal contractual commitments to them. Internal manufacture was the primary responsibility of 20 fully owned factories, 18 of them located in and around Zara’s headquarters in Arteixo. Room for growth was provided by vacant lots around the principal manufacturing complex and also north of La Coruña and in Barcelona. Zara’s factories were heavily automated, specialized by garment type, and focused on the capital-intensive parts of the production process—pattern design and cutting—as well as on final finishing and inspection. Vertical integration into manufacturing had begun in 1980, and starting in 1990, significant investments had been made in installing a just-in-time system in these factories in cooperation with Toyota—one of the first experiments of its kind in Europe. As a result, employees had had to learn how to use new machines and work in multifunctional teams. Even for the garments that were manufactured in-house, cut garments were sent out to about 450 workshops, located primarily in Galicia and across the border in northern Portugal, that performed the labor-intensive, scale-insensitive activity of sewing. These workshops were generally small operations, averaging about 20-30 employees, although a few employed more than 100 people apiece, that specialized by product type. As subcontractors, they generally had long-term relations with Zara, which accounted for most if not all of their production, provided them with technology, logistics, and financial support, and paid them prearranged rates per finished garment, carried out inspections onsite, and insisted that they comply with local tax and labor legislation. The sewn garments were sent back from the workshops to Zara’s manufacturing complex, where they were inspected, ironed, folded, bagged, and ticketed before being sent on to the adjoining distribution center. Distribution Like each of Inditex’s chains, Zara had its own centralized distribution system. Zara’s system consisted of an approximately 400,000 square meter facility located in Arteixo and much smaller satellite centers in Argentina, Brazil, and Mexico that consolidated shipments from Arteixo. All of Zara’s merchandise, from internal and external suppliers, passed through the distribution center in Arteixo, which operated on a dual-shift basis and featured a mobile tracking system that docked hanging garments in the appropriate barcoded area and carrousels capable of handling 45,000 folded garments per hour. As orders were received from hand-held computers in the stores (twice a week during regular periods, and thrice weekly during the sales season), they were checked in the
703-497 ZARA: Fast Fashi distribution center and, if a particular item was in short supply, allocation decisions were made on the basis of historical sales levels and other considerations. Once an order had been approved, the warehouse issued the lists that were used to organize deliveries Lorena Alba, Inditex's director of logistics, regarded the warehouse as a place to move merchandise rather than to store it. According to her, The vast majority of clothes are in here only a few hours, " and none ever stayed at the distribution center for more than three days. Of course, the rapidly expanding store network demanded constant adjustment to the sequencing and size of deliveries as well as their routing. The most recent revamp had been in January 2002, when Zara had started to schedule shipments by time zone. In the early morning while European store managers were still stocktaking, the distribution center packed and shipped orders to the Americas, the Middle East, and Asia; in the afternoon, it focused on the European stores. The distribution center generally ran at half its rated capacity but surges in demand, particularly during the start of the two selling seasons in January and July, boosted utilization rates and required the hiring of several hundred temporary workers to complement close to 1,000 permanent employees the other. Approximately 75% of Zara's merchandise by weight was shipped by truck by a third- party delivery service to stores in Spain, Portugal, France, Belgium, the United Kingdom, and parts of Germany. The remaining 25% was shipped mainly by air via KLM and DHL from airports in Santiago de Compostela(a major pilgrimage center in Galicia)and Porto in Portugal. Products were typically delivered within 24-36 hours to stores located in Europe and within 24-48 hours to stores located outside Europe. Air shipment was more expensive, but not prohibitively so. Thus,one industry participant suggested that air freight from Spain to the Middle East might cost 3%-5% of FOB Price(compared with 1.5% for sea freight)and, along with a 1.5% landing charge, a 1% finance charge, miscellaneous expenses and (generally)a 4% customs duty, bring the landed markup on FOB price to 12% or so. In the case of the United States, a 20%-25% landed markup seemed a better approximation because of tariffs of up to 12% as well as other added cost elements Despite Zara's historical success at scaling up its distribution system, observers speculated that the centralized logistics model might ultimately be subject to diseconomies of scale--that what worked well with 1,000 stores might not work with 2,000 stores. In an attempt to increase capacity Zara was beginning construction of a second distribution center, at Zaragoza, northeast of Madrid This second major distribution facility, to be started up in summer 2003, would add 120,000 square meters of warehouse space at a cost of E88 million close to the local airport and with direct access the railway and road network as well. Retailing Zara aimed to offer fresh assortments of designer-style garments and accessories-shoes, bags, scarves,jewelry and, more recently, toiletries and cosmetics-for relatively low prices in sophisticated stores in prime locations in order to draw masses of fashion-conscious repeat customers. Despite its tapered integration into manufacturing, Zara placed more emphasis on using backward vertical integration to be a very quick fashion follower than to achieve manufacturing efficiencies by building up significant forward order books for the upstream operations. Production runs were limited and inventories strictly controlled even if that meant leaving demand unsatisfied Both Zaras merchandising and store operations helped reinforce these upstream policies Merchandising Zara's product merchandising policies, emphasized broad, rapidly chan product lines, relatively high fashion content, and reasonable but not excessive physical qua
703-497 ZARA: Fast Fashion 12 distribution center and, if a particular item was in short supply, allocation decisions were made on the basis of historical sales levels and other considerations. Once an order had been approved, the warehouse issued the lists that were used to organize deliveries. Lorena Alba, Inditex’s director of logistics, regarded the warehouse as a place to move merchandise rather than to store it. According to her, “The vast majority of clothes are in here only a few hours,” and none ever stayed at the distribution center for more than three days. Of course, the rapidly expanding store network demanded constant adjustment to the sequencing and size of deliveries as well as their routing. The most recent revamp had been in January 2002, when Zara had started to schedule shipments by time zone. In the early morning while European store managers were still stocktaking, the distribution center packed and shipped orders to the Americas, the Middle East, and Asia; in the afternoon, it focused on the European stores. The distribution center generally ran at half its rated capacity but surges in demand, particularly during the start of the two selling seasons in January and July, boosted utilization rates and required the hiring of several hundred temporary workers to complement close to 1,000 permanent employees. Shipments from the warehouse were made twice a week to each store via third-party delivery services, with shipments two days a week to one part of the store network and two days a week to the other. Approximately 75% of Zara’s merchandise by weight was shipped by truck by a thirdparty delivery service to stores in Spain, Portugal, France, Belgium, the United Kingdom, and parts of Germany. The remaining 25% was shipped mainly by air via KLM and DHL from airports in Santiago de Compostela (a major pilgrimage center in Galicia) and Porto in Portugal. Products were typically delivered within 24-36 hours to stores located in Europe and within 24-48 hours to stores located outside Europe. Air shipment was more expensive, but not prohibitively so. Thus, one industry participant suggested that air freight from Spain to the Middle East might cost 3%-5% of FOB price (compared with 1.5% for sea freight) and, along with a 1.5% landing charge, a 1% finance charge, miscellaneous expenses and (generally) a 4% customs duty, bring the landed markup on FOB price to 12% or so. In the case of the United States, a 20%-25% landed markup seemed a better approximation because of tariffs of up to 12% as well as other added cost elements. Despite Zara’s historical success at scaling up its distribution system, observers speculated that the centralized logistics model might ultimately be subject to diseconomies of scale—that what worked well with 1,000 stores might not work with 2,000 stores. In an attempt to increase capacity, Zara was beginning construction of a second distribution center, at Zaragoza, northeast of Madrid. This second major distribution facility, to be started up in summer 2003, would add 120,000 square meters of warehouse space at a cost of €88 million close to the local airport and with direct access to the railway and road network as well. Retailing Zara aimed to offer fresh assortments of designer-style garments and accessories—shoes, bags, scarves, jewelry and, more recently, toiletries and cosmetics—for relatively low prices in sophisticated stores in prime locations in order to draw masses of fashion-conscious repeat customers. Despite its tapered integration into manufacturing, Zara placed more emphasis on using backward vertical integration to be a very quick fashion follower than to achieve manufacturing efficiencies by building up significant forward order books for the upstream operations. Production runs were limited and inventories strictly controlled even if that meant leaving demand unsatisfied. Both Zara’s merchandising and store operations helped reinforce these upstream policies. Merchandising Zara’s product merchandising policies, emphasized broad, rapidly changing product lines, relatively high fashion content, and reasonable but not excessive physical quality: