Monday, December 03, 2007
Zara's supply chain innovation
The Spanish chain Zara is doing more than just selling clothes: it's changing the face of retail. From the shopper's perspective, it's similar to Forever 21 or H&M, but just a little more sophisticated, and a little more expensive.Viewed from a business perspective, though, Zara is remarkable more than just their low prices. Zara's success is built on their incredibly innovative supply chain. Like other fast fashion retailers, their ability to get product on shelf in with breakneck speed is one of their most powerful competitive advantages. We took a few minutes to put together a short overview.
First, The Economist's excellent survey of supply chain management in their June 15, 2006 issue gets the ball rolling (emphasis mine):
Yet supply-chain management is not just about wringing costs out of a business. It can also be used to increase revenue and boost profits without necessarily lowering costs. Indeed, some companies have re-engineered their supply chains to gain a huge competitive advantage. What has put Wal-Mart ahead of Sears in retailing, Dell in front of Hewlett-Packard in the personal-computer business and Zara ahead of Marks & Spencer in fashion? The market leaders all have supply chains that are more responsive to customer demand, according to Yossi Sheffi, director of the Massachusetts Institute of Technology's Centre for Transportation and Logistics.Second, Strategy+Business has a fantastic article on the dynamics of Zara's cost structure. This graphic tells the highlights of the story, but to get the full picture, check out the whole article. Click to view the image full size so you can resolve all the details- note their comparatively small reliance on markdowns.
Third, Harvard Business Review explains how Zara's dual-channel supply chain raises their cost of goods, but enables them to bring the right clothes to market faster than their competitors:
Finally, this Slideshare deck is a little on the dry side, but does a good job of summarizing a lot of what makes Zara so competitive.For example, Zara, a Spanish fashion-oriented retailer, utilizes dual sourcing. Picture the demand for a product over time as looking like waves on the ocean. Staple products have small waves, and fashion products have large, erratic waves. Zara sources the "waves" from local vendors with higher cost and fast response time, and the "ocean" from Eastern European vendors with lower cost but poor response time. That way, Zara gets the best of both worlds.
The economics are compelling. Think about this: One major retailer has structured a supply chain with a 48-hour response time on fashion products sourced in the Far East. If you buy a fashion garment from one of its stores in your local mall, the data is transmitted to a factory in the Far East. The factory keeps semi-finished "greige goods" products in stock, and that day it cuts and tailors a replacement for the one you bought. The garment is flown to the United States on an air freighter, cleared through dedicated customs, and driven through the night to the store in your local mall to replace the one you bought.
Does this sound expensive? It is. This expedited supply chain adds about three dollars to the cost of the garment. But the garment's margin is over twenty dollars, and the sale otherwise would have been lost, so it makes sense.
RSS readers click here to view the Slideshare
Like the Strategy+Business article says, the next generation of retail will look a lot more like Zara and a lot less like the supermarkets and big box stores we're used to seeing today. Right now it's playing out in fast fashion stores at the mall, but it's pretty likely that you'll see something very similar to Zara at the supermarket very soon.
Labels: innovation
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