Zara's Competitive Advantage: A Supply Chain Management Case Study

This report offers a detailed analysis of Zara's supply chain management, exploring its competitive advantages within the fast-fashion industry. It examines Zara's supply chain, including the use of both in-house and outsourced manufacturing, and how these choices support the company's responsive strategies. The report investigates Zara's approach to managing uncertain and predictable demand, and the advantages gained through frequent store replenishments. Furthermore, it assesses the impact of technology and evaluates the company's infrastructure in relation to retail and online sales. The analysis highlights Zara's ability to quickly adapt to market trends and maintain a competitive edge through its efficient and flexible supply chain.

Running head: ZARA 0
Supply Chain Management
Case Study: Zara
Table of Content

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s
Introduction................................................................................................................................2
Task 1.........................................................................................................................................3
Zara’s Supply Chain Management.........................................................................................3
Porter’s Five Force.................................................................................................................3
Zara’s Competitive Advantage..............................................................................................5
Task 2.........................................................................................................................................6
In-House Manufacturing........................................................................................................6
Outsource Manufacturing.......................................................................................................6
Zara’s Manufacturing Process................................................................................................6
Task 3.........................................................................................................................................8
Uncertain Demand.................................................................................................................8
Predictable Demand...............................................................................................................8
Task 4.......................................................................................................................................10
Importance and Advantage Zara Gain by Replenishing its Stores......................................10
Technology Used by Zara....................................................................................................10
Task 5.......................................................................................................................................12
Retail Sales vs. Online Sales................................................................................................12
Conclusion................................................................................................................................14
References................................................................................................................................15
List of Figures
Figure 1: Zara's Logo.................................................................................................................2
Figure 2: Zara's Supply Chain....................................................................................................3
Figure 3: Zara's Distribution Centre.........................................................................................11
Figure 4: Zara's Online Store...................................................................................................13
Figure 5: Zara's Retail Store.....................................................................................................13

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Introduction
The aim of this report is to analyse the case study of Zara and critically assess the advantages
gained by the company due to its responsive supply chain. Zara is a Spanish fast fashion
retailing company which was founded in 1975; the corporation is a subsidiary of Inditex
group. The firm offers its services in 96 markets and 46 online markets (Inditex, 2018a). This
report will discuss why Inditex has chosen both in-house and outsourced manufacturing for
production. This report will analyse why Zara decided to source product with predictable
demand from Asian manufacturers and products with uncertain demand from local
manufacturers. This report will evaluate the advantages Zara gained by replenishing its stores
for multiple times a week and analyse whether its infrastructure is best suited for retail or
online sales.
Figure 1: Zara's Logo
(Source: Zara, 2018)

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Task 1
Zara’s Supply Chain Management
Supply chain management (SCM) is referred to the management of the flow of goods and
services in a company. It involves processes relating to movement and storage of raw
materials for manufacturing, work-in-progress inventory, and finished goods till they are
ready to be consumed by the customers (Christopher, 2016). Due to effective supply chain
management, Zara has generated a competitive advantage over its competitors in the clothing
retail industry. Effective supply chain management allows Zara to introduce new designs for
its customers every week and change more than 75 percent of their merchandise display in
every 3 to 4 weeks. Responsive supply chain is referred to a network of firms that are capable
of generating wealth for business while operating in a competitive environment by reacting
quickly and cost-effectively to the rapidly changing market requirements (Kim and Lee,
2010). Responsive supply chain is important for Zara because it enables them to offer latest
products and sell more products at full price.
Figure 2: Zara's Supply Chain
(Source: ARCH, 2018)
Porter’s Five Force
The five forces model was given by Michael Porter which assist in analysing the competitive
environment in which a firm or product works (Huggins and Izushi, 2011).
Threat of New Entry (Low)

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The uniqueness and high profitability attract a large number of investors to the retailing
industry; however, there are high barriers to entry. It requires high fix costs and investments
from the corporations because it involves high selling, administrative and general costs.
Customers also value brand equity, therefore, the threat of new entry for Zara is low
(Gremme, 2014).
Supplier Power (Low)
The supplier power is high when companies face high costs while switching to a new
supplier. For Zara, the supplier power is moderate because the firm has entered into legal
contracts with its suppliers which make it difficult for them to raise prices or manipulate the
designs. Furthermore, Zara maintains a positive relationship with its customers which avoid
any disputes between them.
Buyer Power (Moderate-high)
The customers of Zara are ranged between middle to upper-class individuals who possess a
high purchasing power because they have more income at their disposal. Zara has a positive
brand image because it focuses on satisfying customers’ demands. Buyers have moderate
power because most of them are loyal towards Zara because the company offer diverse and
newly designed products every week (Trehan and Mehta, 2014).
Threat of New Substitutes (Moderate low)
Zara operates in the fashion industry which is very unpredictable with a large number of
competitors operating in the sector. Through Zara has differentiated itself from its main
competitors, which include GAP, H&M and Marks & Spencer, due to constant innovations,
creative designs and effective supply chain due to which only 10 percent of its stock remain
unsold.
Competition Rivalry (Moderate-high)
Zara faces very fierce competition in local, European and international markets from its
competitors such as GAP, H&M and MANGO. However, Zara has gained a competitive
advantage over its competitors due to effective supply chain management. GAP offers less
affordable products, H&M offer less quality and MANGO is based on franchising system,
whereas, Zara is able to deliver high-quality designer clothes at affordable prices to its
customers (Mann and Byun, 2011).

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Zara’s Competitive Advantage
The core advantage of Zara is its rapid supply chain model which provides its three
advantages which include customer satisfaction, effective control in operations, and
economic profits. In the industry, customer demand is unpredictable, and Zara’s responsive
supply chain enables it to deliver 5 to 6 weeks cycle time and change around 75 percent of its
merchandise display in every three to four weeks. Effective control enables Zara to correctly
forecast updates regarding its supply chain which ensure little quantity and frequent delivery
(Lopez and Fan, 2009). Furthermore, responsive supply chain enables Zara to reduce its
inventories and wastage of raw material and it also reduces forecast errors which increase
economic profits of the firm.

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Task 2
Inditex is a Spanish multinational clothing corporation which was founded in 1963. It is the
world’s largest fashion retailer with more than 7,475 stores situated in 96 markets worldwide;
the head office of the firm is situated in Arteixo, Galicia. The corporation has hired more than
171,839 employees across the globe. Zara uses both in-house and outsourced manufacturing
(Inditex, 2018b).
In-House Manufacturing
In this model, manufacturing operations are conducted by a company using internal
“technical” resources by using own employees and time for the production process. This
model’s advantages include effective control from beginning to end, improved quality,
tracking of manufacturing costs, faster information exchange, and protection of confidential
information (Tao et al., 2011). The key disadvantage of the in-house process is high costs to
keep up with changing government regulations, technological advancements and market
trends.
Outsource Manufacturing
In outsourced manufacturing, companies transfer portions of their manufacturing work to
different outside companies rather than completing them internally. The advantages of
outsourced manufacturing include the requirement of fewer staff members, less investment in
capital needed, no pressure at operations, increased company’s productivity, lower costs,
skilled workforce, more focus on core competencies. The key disadvantage is a higher risk of
miscommunication which might result in lowering products quality, longer time to process,
and missed sales which reduce company’s profits (Dong et al., 2016).
Zara’s Manufacturing Process
Zara uses both in-house manufacturing and outsourced manufacturing model for producing
its products and quickly deliver them to the market. Around 50 percent of Zara’s products are
manufactured in in-house facilities. 26 percent of the products are manufactured in other
countries in Europe and 24 percent in Asian countries. Zara manufactures most of the trendy,
high-quality clothes in firm-owned factories situated in Spain whereas it outsourced basic
clothes to factories in Asian countries (Crofton and Dopico, 2012). In order to response and
change as per fashion industry, Inditex has opted for both manufacturing model. It uses

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outsourced manufacturing for the productions of products which have predictable demand
and basic quality. On the other hand, in-house manufacturing facilities are used by the
company for the production of products which have uncertain demand and require high
quality. Furthermore, putting production facility near headquarters improves communication
For Zara, responsiveness and speed are more crucial than costs. Based on the disadvantages
of outsourced production, it may lead to missed sales, decrease in quality, slow processes,
and customer dissatisfaction. According to Fisher matrix approach, a firm should align its
supply chain with product characteristics in order to become successful. Zara offers
innovative products (fashion wear) that require responsive and efficient supply chain and it
also offers functional products (casual wear) which require a stable supply chain (Hausman
and Thorbeck, 2010). Therefore, manufacturing innovative products through the in-house
process and functional products through outsourcing process is suitable for Zara, and it
provides the company a competitive advantage.

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Task 3
Uncertain Demand
Uncertain demand means companies are facing difficulty in accurately projecting customers
demand in the future. It has a negatively impact on the supply chain of corporations because
it makes it hard for companies to control and manage inventory. Demand uncertainty makes
it difficult for companies to maintain a minimum stock which results in increased expenses
because of holding excess inventory. In order to meet uncertain demand, Zara requires to
response as per rapidly changing market, or it will miss business opportunities (Nenni,
Giustiniano and Pirolo, 2013).
In order to address this issue, Zara has a formed a team of specialised fashion hunters who
visit a variety of fashion shows to collect information regarding new fashion trends and
provide continual feedback to the headquarters so that they are able to speed up the clothes
designing process. The corporation keeps all type of materials in the warehouse which
ensures that they spent a short time on pattern making and it assists designers in taking
decisions quickly. On the other hand, most of GAP’s factories are situated in China, and it is
difficult for them to send materials to China. It takes around 2 to 3 months for GAP’s
designers to analyse and design product plans which are twice more than Zara (Hansen,
2012). Furthermore, Zara use local suppliers for logistic distribution and material supplying
which makes the process substantially faster. Although the cost of managing an in-house
manufacturing facility is relatively higher, the comprehensive profits are must higher than
compared to outsourced manufacturing.
Predictable Demand
Predictable demand means the ability of a corporation to forecast and accurately project
customers demand for the future. The companies are able to reduce their supply chain costs
by effective predicting the demand of customers (Jin et al., 2012). For Zara, predictable
demand means casual wears which did not need high responsiveness to the market.
Zara can easily predict the demand for casual wears, and they did not have high
responsiveness from the customers in the markets. Most of the customers prefer to shop at
Zara because they offer trendy products quickly than compared to their customers. Only a
small segment of people choose Zara to purchase casual clothes. Therefore, the company has

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outsourced its casual wears manufacturing in Asian countries which assist them in reducing
their production costs and focus on quickly supply trendy clothes to its customers (Caro,
2012). Conclusively, Zara uses both in-house manufacturing and outsourced manufacturing
facility for production. The main competitive advantage of the company is its responsive
supply chain which enables it to offer new designer clothes even with uncertain demand to its
customers, four times faster than its competitors. On the other hand, Zara uses outsourced
manufacturing for products with predictable demand and use Asian manufactures because
outsourcing is much cheaper and it requires lower costs.

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Task 4
Supply chain strategy is defined as the combination and connection of functions and practices
throughout a value chain which focus on fulfilling customers’ demand in a marketplace (Van
Weele, 2010). Flexible supply chain is defined as the ability of a business process to manage
and react to new changes without hindering cost, quality, time or performance of the firm
(Gattorna, 2015). Flexible supply chain provides a competitive advantage to companies, for
example, H&M’s supply chain strategy focuses on cost efficiency in the production of goods,
reduction of lead time and continuous search for promising markets. The company use a team
of 100 designers who work on creating new product plans which allow them to offer chic,
trendy styles cloths with rapid turnarounds which provide them a competitive advantage (Lu,
2014).
Importance and Advantage Zara Gain by Replenishing its Stores
 Replenishing the stores ensure that the inventory is up-to-date with new designs and
latest trends; it keeps the products fresh. The speed of producing new products faster
than its competitors provide a competitive advantage to Zara.
 The frequent delivery ensures that products can be put on shelves when they are in
trend. It also encourages customers to purchase more clothes since they feel that if
they did not buy the clothes now, they would not be able to repurchase them (Caro et
al., 2010).
 It meets customers’ personal and diversified demands because it is hard for clothing
retailers to predict customers demand because it changes rapidly in the fashion
industry.
 It raises the stock turnover and reduces the inventory for Zara. Zara’s Cargo
distribution centre operates efficiently and rapidly to ensure that the firm is able to
deliver new designs quickly to customers. Instead of keeping the clothes in
warehouses, the company is able to display them in stores for customers directly.
Technology Used by Zara
The frequency of replenishment affects the logistics systems of Zara; the company use
different technologies for increasing the responsiveness of its supply chain management. The
main function of Zara’s automated distribution centre (DC) called ‘The Cube’ which is
situated in Spain is to increase the turnover of products rather than storing them. The