Operations Management of Inditex and its Retail Zara

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Operations Management of Inditex and its Retail Zara

Academic Subject: Operations Management

Word Count: 3400

Submitted by: Student

Introduction

Increased globalisation and advancement of technology has led to greater competition within the global marketplace placing pressure on business organisation to find new ways to create and deliver value to consumers. According to Voss et al. (2002) market developed in combination with new channels of globalisation competition has resulted in the over-capacity of various industries which has placed an increased pressure on price which is generally considered the most competitive critical competition variable. The increased pressure on price has resulted in the requirement of businesses needing to be more effective and efficient from within.

Due to these new emerging conditions the use of supply chain management has emerged as the focal point of any business’s operations management and a key factor to success (Everett, et al., 1989). Operations management includes the management of all operations within a business responsible for creating goods and services that businesses then pass on to their consumers. According to Voss et al.  (2002) this function is considered the heart of the business as it is able to give the firm the tools and methods needed to achieve their mission and objectives. Activities within operational management includes managing purchases, inventory control, quality control, storage and logistics (Voss, et al., 2002).

A successful operational strategy within the fashion retailed industry is seen implemented by Inditex (Indsutria de Diseno Textil), the world’s largest clothing and apparel group by sales. Inditex owns labels such as Zara, Pull&Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home, and Uterque (Inditex 2015a). Zara is the basis of Inditex’s success and their first retail format established in 1975 and the brand is the generator of about two-thirds of the entire group’s sales by offering fashion products that are trendy and affordable (Hansen, 2012). The operational strategies that have made Inditex successful from its competitors will be examined in the current study. This will include specifically focusing on Zara and its business operations to comprehend the strategies that Inditex has employed to separate it from its competitors in the fast fashion industry.

Overview of Inditex

Indsutria de Diseno Textil or Inditex is a Spanish multinational company with headquarters in Arteixo, Galicia. The Group is composed of hundreds of companies that deal in activities associated with textile design, production, and distribution. Inditex was founded by Amanico Ortega in 1963 as dress maker and eventually opened their first flagship store in 1975 (Inditex, 2015a). According to Hansen (2012) and Inditex (2015b) the company is the largest fashion group in the world with operations in over 6,600 stores worldwide. Inditex (2015b) asserts that it designs and manufactures almost everything by itself with new designs being dispatched twice a week to Zara stores.

The group conducts is manufacturing in countries which labour costs are considered extremely low such as Turkey, China, Morocco, India, and Bangladesh. It was through the development of Zara flagship brand that the group developed the form of fast fashion. According to Hines and Bruce (2001)fast fashion is a term used by fashion retailers to express that the designs they encompass have moved quickly from the catwalk to capture the current fashion trends. Fast fashion has become associated with disposable fashion as it is able to deliver designed products to the mass market at subsequently low prices (Lamson-Hall, 2013). Fast fashion clothing collections are based on the recent fashion trends that are presented by designed at Fashion Week in the spring and autumn of every year. The primary aim of fast fashion is to quickly produce an apparel product in a cost-efficient manner to respond to changing trends and tastes of consumer in what can be considered as real-time as possible (Barnes & Lea-Greenwood, 2006; Blanchard, 2015). This efficiency is made successful if the retailer is able to understand that target market’s demands and desires which is a high fashion looking piece of clothing at a price which is at the lower end of the clothing sector. Fast fashion has come under criticism for contributing to poor working conditions in developing countries such as Bangladesh.

Overview of Zara

Zara is considered the prized jewel of Inditex. Louis Vuitton’s Fashion Director Daniel Piette is noted with stating that Zara is “possible the most innovative and devastating retailer in the world” (Hume, 2011). Zara had begun its international expansion in 1988 through Porto, Portugal later entering the United States in 1989 (Kwan, 2011). By 2007, the brand has encompassed products for men’s wear and women’s wear which is categorised as lower garments, upper garments, shoes, cosmetics, and complements.

The brand is considered a vertically integrated retailer and controls a majority of the major steps within its supply chain which includes processes of designing, manufacturing, and distribution of completed products. Zara’s vertical integration, smaller supply chain, and minimum inventory stock allow the company to be more responsive and avoid excessive risk. Since the fast fashion industry is highly competitive, product life cycle is extremely short and needs to differentiate from competitors in order to build a strong brand image. Many of the various business in the fast fashion sector compete on price, with competitions on this factor starting to strengthen as many companies began to use low cost outsourcing for manufacturing of their products. Thus, the competition in the sector has shifted and is very dependent on the quick response time that it is able to give to the market. Thus, the vertical integration of Zara and Inditex gives ti advantage over its competitors in implementing process that further shorten the production cycle of their products. Unlike its competitors, Inditex employs over 1,000 people in their central product department, owns 13 textile manufacturing subsidiaries in Spain, owns 11 logistic subsidiaries, 8 distribution centres, and 6,0009 retail stores (Inditex 2015b). Competitors within the industry are more dependent on third party negotiations making them weak and rigid in their response times.

Inditex Supply Chain Management

Inditex’s operations use a vertical supply chain which is considered a very different and unique strategy in the fashion industry. Since the company chooses to hand the process of design, production, and distribution all in-house its retail stores are then able to react much faster to the changing trends in fashion in comparison to their competitors. Due to the supply chain management strategy customers are suggested to visit the store four times more frequently than their competitors (Fynes, et al., 2005). It is through the combination of spontaneous design, Just-in-Tim production, and rapid turnover of products that lead to a higher level of fashionable clothes.

Inditex Design Process

Inditex has placed a great deal of emphasis on the importance of design in the market and has organised its designs functions in a different way from its competitors. The design input is channelled in from three separate functions which includes; designers, market specialists, and buyers who place order to suppliers. Particularly examining Zara, the design stage of the retailer is categorised into three products of men, women, and children. In each locality in which a store is hosted, the designers, market specialists and buyers are located in nearby offices that contain small workshops for experimenting on prototype designs. Market specialists that are positioned in design officers are in constant contact with the retailer to discuss important aspects of customer reaction to new designs. With this strategy, the retail stores are not at the end of the supply chain process but at the very beginning of it. Zara alone houses 300 designers who produce designs for about 40,000 items per year of only 10,000 go to production (Bonin, 2002).

Inditex’s Manufacturing Process

The fashion industry see product preference changing drastically with products going out of trends in a few months making it difficult to contract with manufactures, tool up production, and ship the products to designated warehouses and then into retail stores. However, Inditex changes up the game by receiving locally targeted designs into stores such as Zara extremely fast. The average production to shelf cycle of new concepts in Zara appear within store around 15 days compared to competitors that receive new styles of clothing once or twice in a season. Helft (2002) has asserted that Zara is twelve times faster than Gap a direct competitors, despite the fact that Gap offers ten times more unique products. Since the company is vertical integrated it is able to produce its own fabric and purchases a majority of its dye products from its own subsidiaries. A majority of the factories that are employed under Inditex work on single-shift system in order to maintain volume flexibility (Min, 2015).

Inditex’s Distribution Process

Inditex has invested a great deal in to its automated warehouses which remain close in distance to their production centres which are responsible for packing, storing, and assembling individual orders for their retail network. The automated warehouses represent a large investment for Inditex and it is seen that although the current invested automated warehouse use half its existing capacity the company still invested in a second. It is with the aid of the automated warehouse that Inditex is able to deliver new designs of clothing from design house to stores in one to two weeks allowing the company to respond rapidly to fast changing trends of customers that are mostly young and urban individuals (Hansen, 2012).

Inditex’s Retail Process

Particularly focusing on Zara, all the Zara stores are owned and ran by Inditex. The most remarkable characteristics that are found at Zara stores is that the products of apparel only stay within the stores for two weeks. Also, product designs are not repeated and are produced in relatively small quantities (Hansen, 2012). This allows the display of clothing at the flagship to change radically every two to three weeks which encourages customers to avoid delaying a purchase and visit or revisit the store on a more frequent basis.

Factors of Inditex’s Supply Chain Management Success

Inditex has focused on producing the formula that works best for them. It is based on the following factors;

  • Short lead time which allow for more fashion forward clothing
  • Lower quantities which produce scarce supply
  • More styles allows customers to have more choice and chances of receiving what they prefer

Since the company has focused on a shorter response time, Inditex is able to ensure that all its retail stores are carrying products that are in demand by consumers at that specific time. For example, Zara is able to identify a specific trend and having that trendy garment within its store in 30 days (Hume, 2011). Through analysing customer preferences and current fashion trends Zara is able to move in step with its customers. This is achieved through constant research and has equipped tis factories with machinery that is able to react the trend changes which have been reported immediately and produce response to new styles of modification of them in 2-4 weeks.

The company is able to reduce the quantity of items manufactured in each style which also reduces the exposure of a single product and creates artificial scarcity. Common in almost all industries is the philosophy that the less a product is available the more desirable it becomes for the customer. There is also the added benefit of shielding the company from risk which may come about if the style does not work well with customers. Since there is a less quantity of it less is lost at the time of its disposal in a season end sale. This allows Zara to discount products up to 18 per cent of its production which is half the amount that competitors are able to do (Fynes, et al., 2005).

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Figure 1- Inditex Approach to Supply Chain Management (Min, 2015)

Lastly, Inditex runs by the policy of more styles per quantity instead of more quantities per style. Zara alone produces more styles about 12,000 a year. Even if a specific style ends up being sold out quickly there is always a new style that is waiting to take its place. For example, Inditex’s Zara is able to offer more choices to its customers based on current fashions than its competitors.

 Just in Time Production

Inditex is able to produce and deliver fashionable clothes that fit current trends by addressing all customer preferences through a controlled design and integration process termed as “Just in Time”. One of the pioneering companies that ventured into the development of quality management is Toyota. Such principles that were developed by Toyota have the origins of Total Quality Management (TQM), Just-In-Time Management or Lean Management (Feigenbaum and Feigenbaum, 2005).  Just-in-Time and Lean Management, these doctrines are now implemented in any production system being used in all industries across the globe. Toyota was able to outdo most of its competitors in the industry and became extremely profitable as a bulk automobile producer in the world within a short period of time of a few decades, Toyota managed to do so by convincing critics with the insistence of using its long-term strategies (Feigenbaum and Feigenbaum, 2005).

The second foremost aspect that catapults Inditex ahead of its competitors in the market is the Just-In-Time Production; this aids the company increase in efficiency and assists the detection of errors at an earlier stage (Feigenbaum and Feigenbaum, 2005). As a result of this approach in quality to business performance leads to increased financial performance. Inditex designs all its products its self and the strategy of the design is achieved through a product design process which involves the entire commercial team, designers, market specialist, procurement and constant feedback that is received from upfront store managers to make sure that the new products are able to reach the customer just in time.

Under the principles of the Just-in-Time philosophy that the company has integrated into its delivery and manufacturing principles, Inditex ships very frequently allowing for the lower inventories; that will be discussed in a later section, while serving the multinational market from one single distribution centre in Spain (Min, 2015). However, Min (2015) predicts that the rise fuel costs the air express delivery system strategy that the company currently employs may begin to fail. The strategy that Inditex uses may become more challenging as many of its retail products, such as those distributed to Zara are accompanied by multi-country labels and can be redistributed to another store in some other country where they are thought to sell better, If any specific product line is not selling accordingly well in a specific country (Min, 2015).

 Information Systems

Operations within Inditex are technology enabled making information systems a key driver to the company’s ability to quickly respond communication strategies to its retail stores. Inditex applies technology in areas that are able to quicken the past of complex tasks, lower cycle time and reduce the chance of error occurring. Inditex has used technology to help it in identifying and manufacturing clothing that is in demand by the customers, and get those products to the market as quick as possible (Bonin, 2002).

Many of Inditex’s retailer flagships such as Zara, hold Casio computers that are able to send data/information online to its headquarters which includes information of selling trends, customer comments, enable it to place orders (Kwan, 2011). The same is conducted for designers in which technology is used by designers to send design suggestions to factories and distribution departments by scanning the design into a machine and electronically transmitting it to factory computers and computer controlled cutting machinery. There are also programs such as CAD which are used to input designs which automatically feed into cutting equipment in factories and making sure that required quality of output is used with minimum fabric waste which is a vital resource to the company (Kwan, 2011).

Inventory Management

Inditex has the lowest inventory by percentage of annual sales compared to many of its global competitors. The inventory system at Inditex is computerised with state of the art production and warehousing in addition to the short supply chain cut lead time of 10-15 days between designs and distribution than compared to the industry average of 5-6 months. Inditex’s business model is based on its refined methods of fast supply chain allow its retail formats to produce a high turnover of fashionable clothing and accessories are inexpensive prices and low quantities (Voss & Robinson, 1987). Using this process the company avoids stock piling large inventory and low reducing its risk.   Through the company’s inventory system stores are linked to factories which allows the company to avoid the risk of and capital overlay that is connected with maintaining a large inventory stock.

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Figure 2- Business Model of Inditex

The company holds the policy of inventory renewal every two weeks which minimised risk and also encouraged customers to return to its retailer more often and make purchases more quickly. Zara particularly produces trendy apparel to the masses through providing “in-fashion” designs within 2 weeks, avoids excessive inventory, and ships a small number of garments to its store (Hansen, 2012). This results in new designs entering stores more frequently without being available for a long cycle. Through this strategy that company is able to create an attitude of “buy now” with its customers and encourages customers to return more frequently to its stores as new items are available almost every 2-3 weeks. The cycle described results in customers of Zara visiting the store on an average of 17 times per year, compared with only three annual visits by customers to other competitors (Hansen, 2012).

Data and Communication in Real-Tim

The communication channel between Inditex, its product teams, and store staff is considered a strong connection that produces benefit for the overall operation management of the company. Each of Inditex’s retail stores’ head office houses product team of designers, merchandisers, and store liaison managers that work collaboratively to produce new products and analyse the current sales trends and data (Chopra & Sodhi, 2014). Designers of the various retail lines use numerous information about customer preference which including scouting runway shows in Milan and Paris as an aid tool to develop new products based on the current fashion trends of the season (Chopra & Sodhi, 2014). Furthermore, store employees of each of the retail brands are given the task of retrieving feedback from customers on what they would like to see more, what can be done differently, different colours that should be incorporated into apparel, styles of necklines, and other aspects of the garment. Through retrieval of this feedback, in addition to daily sales total, and detailed information about the items that have been sold categorised through colour and size is sent back to the home office twice a week.

Each of Inditex’s store managers place orders for products twice a week depending on what their opinion is of successful product line in their specific store which designers are tasked of reviewing both formal and informal feedback on the product line on a daily basis. Inditex is known to monitor its sales at the store level and then adjusts its strategy based on the information that they receive from the store level. Based on the information received from store managers there is a large chance that individual retail stores may end up selling different products by the end of the season as the store’s location and customer trends of the locality play into what may be sold at the store. Through this strategy Inditex is able to further reduce its inventory risk and incorporate customer decisions and ideas their focal point of the supply process. According to Voss and Robinson (1987) when companies are able to exactly match their supply based on the changing and varied customers demand a more democratic approach is stimulate through the business which highlights its success and strengthens its business model.

Conclusion

Inditex is a Spanish Group of companies that is focused on the textile and garment industry throughout the world.  The company has produced flagship success through Zara, one of its first retail operations. Through unique operation management techniques that company is able to be successful financially and has maintained status as one of the richest companies in the fashion industry based on sales. The company has pioneered the process of fast fashion and through its vertical integration is able to deliver products to customers at a rapid pace. It is through the use of information technology, inventory management, and supply chain management the company is able to produce high sales and interest in its customers.

References

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