Chapter 3: Zara: Fast Fashion from Savvy Systems

Excess _____________ is disastrous for retail apparel industry as you are forced to mark down items, killing profits

Inventory; In order to be successful have to accurately guess far in advance what customers will want

Zara Limitations

-Because facilities located in just two locations (both in Spain), they could be susceptible to weather, natural disaster, labor strife, political unrest, etc.... which could shut down operations with no fallback -Financial vulnerability (when euro strengthens relative to foreign currency/dollar, Zara's cost would rise at higher rate than competitors) -Rising Transportation Costs (if fuel costs rise, twice weekly delivery will become very expensive)

Greige

Goods to be further customized based on designer/manager collaboration

Return on Investment (ROI)

The amount earned on an expenditure

Difference between PDA and POS

PDA tells firm what customers want to see on shelves at a given location, while POS tells firm what is selling

PDAs

Personal Digital Assistants; an early name for handheld computing devices

Benefits of Limited Production Run

-Each Zara store stocked items tailored to local clientele (product line changes so frequently it's like you walk into a new store every two weeks; no store the exact same) -Encourages customers to buy right away, at full price (if you see something, and don't buy it, it will most definitely be gone) (85% of products sold without discount) -Encourages customers to visit often (average Zara customer visits 17 times a year with no advertising) -Reduces to a minimum risk of mistake in collections (number of unsold items is less than 10% of inventory)

Decline of Gap

-For many years Gap sold most of its inventory (CEO Mickey Drexler spot on taste about classic style what would sell in the 90s) -In following decade, sales declined and Drexler left incorrectly guessing how to revitalize brand (chased youth market that never came while normal customers left because brand changed classic style) -Gap's same store sales declined for 29 months straight -Paul Pressler (Disney exec who ran parks and rescued retail stores) brought in as new CEO but Gap's struggles continued (same store sales declined in 18 of 24 months) -Under third CEO in a decade and closure of hundreds of stores, Gap profits have returned even though still struggles

Rivals

-H&M increasing frequency of new items and shifted eyes to European rather than Asian markets -Forever 21/Uniqlo gets new product in 6 weeks -Fast online European retailers growing (ASOS/Boohoo) -Apps allow customers to take picture of item and search for similar styles creating showrooming pressure

Fair Factories ClearingHouse

-Managers often choose suppliers with unacceptable/poor practices even if it is unintentional (some partners hide practices from auditors/truck products in unmonitored offsite locations) -Nike facing years of negative repercussions after sweatshop allegations -Reebok has VP of human rights and cares deeply about human dignity (invested in making in-house info system to track audits of suppliers in terms of labor, safety, and environmental practices) -Reebok donated the data and provided backing to create nonprofit Fair Factories ClearingHouse which provides systems where apparel and industries can share audit info on contract manufacturers -Holds suppliers accountable

Zara Opportunities

-Raising prices overseas (when euro strong Zara items can cost 40% more than they do in Spain) -Regional center in China (second largest market for Zara after Spain); If Zara could replicate Spain facility in China then they could have more global flexibility and decrease cost -Facility in Mexico could better serve US markets (serve expansion throughout western hemisphere) -Challenges to US expansion (american sizes different cut)

Zara is ________ faster than Gap even though it offers _________ more unique products

12;10

The average time for a Zara concept to go from an idea to appearance in store is ____________ days

15 -Zara excels at getting designs quickly into store -Rivals get new styles once/twice a season -smaller tweaks to items can be in stores within 10 days

Zara distribution centers move _________ million items every week with no item staying house more than 72 hours

17

Zara is expanding one of fastest global expansions in fashion world opening one store per day and in _______ markets worldwide

93

Logistics

Coordinating and enabling the flow of goods, people, information, and other resources among locations (execution of plan/strategy) -Zara going green by using renewable energy systems at logistics centers and biodiesel for trucks

Founder of Zara

Amancio Ortega (second wealthiest person in world) -Zara's technology has allowed it dominate fashion industry -Zara is largest pure-play fashion retailer on planet -Zara is biggest brand of Inditex -Headquarters ("The Cube") are located in La Coruna -Counterintuitive strategy such as not advertising, rarely running sales, and vertical integration (production process largely in house) has helped Zara beat competition

Omnichannel

An approach to retail that offers consumers an integrated and complementary set of shop, sales, and return experiences (ie. retail store, online, and sometimes phone/catalog) -Fluidly/seamlessly blends offline and online sales -2/3 of online shopping returns done in store, 1/3 of orders are in store pickup -Customers often want to exchange item for another size and if item not available in current location, online orders can be placed by staff in store to satisfy customer -9% of overall revenue comes from ecommerce

Information System (IS)

An integrated solution that combines five components: 1.Hardware 2.Software 3.Data 4.Procedures 5.People (who interact/impacted by system)

"Fashion Street"

Basement staging area in The Cube where storefronts mimic those of real life stores -Workers test window displays, layout, and even determine store soundtrack -Every two weeks store layout sent to managers at each location

Zara designs follow __________________

Customer Demand -Data of what sells/what customers want to see goes to the Cube where designers produce 30,000 items a year (H&M - 3rd fashion retailer - and Gap only produce 2000 to 4000 a year) -No celebrity designers; team members accept feedback and improve; individual bonuses tied to success of team, teams regularly rotated to encourage innovation -Design staff in constant communication with store managers

How does Zara assess what inventory to carry?

Directly asks customers what they would like to see -Staff carry mobile devices (initially PDAs), talk to customers about what they would like to see in store, and record and send responses back to headquarters -Managers motivated to accurately use these systems because 70% of their salary comes from sales performance (with 10% of firms profit inc spread to employees across firm) Also analyze what items were sold and which weren't -Look through items customers tried and didn't buy to find patterns/preferences after stores close -Information on what's selling tallied via stores POS system

True or False: Zara's IT expenditure is more than the fashion industry average

False - 1/4th less than fashion industry average (makes sure every dollar spent on tech pays off)

Part of the reason Zara is so successful is because they order inventory based on _____________________ rather than guesswork

Feedback

Financial Implications

Financial performance impacted by broader econ condition (when economy down, consumers may switch to lower cost stores) -European market accounts for 2/3 of Zara sales so tightly linked to conditions of European economy -Global expansion would help endure econ downturn/dependence in singular region

_______________ is the world's largest fashion retailer and ____________ is the biggest brand out of the 8 that the company supports (accounts for 2/3 sales)

Inditex; Zara

Contract Manufacturing (outsourcing)

Outsourcing production to third party firms. Firms that use contract manufacturers don't own the plants or directly employ the workers who produce the requested goods.

Prada Tech Fail

Prada had efforts to fill Manhattan location with super cool tech (RFID tags for items, glass dressing rooms that could turn opaque into mirror/display, dressing room recognition of item and recommendations, check inventory, PDAs, etc....) Tech implementation failed miserably - customers didn't understand complicated dressing room foot pedals, customers undressed thinking dressing room opaque when not, doors broke, inventory database inaccurate, etc....) Critical lesson that IS made up of more than hardware and software - requires data and procedures and people that interact with system

Pros/Cons of Contract Manufacturing

Pros: By outsourcing production to cheap contract manufacturing in developing countries, the cost of goods are kept low. This means firms can lower prices and sell more product or maintain higher profit margins Cons: Contract firms compete in cost cutting measures which often compromise safety, ignore environmental concerns, employ child labor, and utilize other unethical labor practices -Apparel industry has faced hundreds of sweatshops accusations -Spring 2013 Bangladesh Rana Plaza Incident: Collapse of illegally constructed 8 story building with garment factories that killed 1100 people (Walmart, Children's Place, Benetton all purchased clothing from here) -Gap singled out because although not implicated in incident one of largest importers from Bangladesh and refused to sign safety accord signed by H&M and Zara Firms who don't ensure their suppliers are conducting ethical practices risk brand damaging backlash, lower sales, repel new employees and leave current employee morale low

RFID (Radio Frequency Identification)

Small chip based tags that wirelessly emit a unique identifying code for the item that they are attached to (next gen barcode) -As item moves around Zara distribution center or store, hand held scanners can track product and take inventory to know where products are (if customer asks for another size, staff can immediately tell them if nearby) -Because of vertical integration, entire supply chain under Zara control (two warehouses) so Zara attaches tags to all products before sending them out, and when product sold, stores then send the tags back to Zara warehouse for reuse (reuse system cost effective) -Allow Zara to take inventory four times as often as without RFID

Operations

The organizational activities that are required to produce goods or services. Operations activities can involve the development, execution, control, maintenance, and improvement of an organization's service and manufacturing procedures.

For Zara, ____________ is what beats manufacturing costs and drives profit

Speed

Showrooming

The concept where customers browse at physical retailers, but purchase products from lower cost online rivals (Zalando retailer App)

Point of Sale (POS) system

Transaction processing systems that capture customer purchases; Cash registers and store checkout systems are examples of point of sale systems. These systems are critical for capturing sales data and are usually linked to inventory systems to subtract out any sold items

True or False: Zara's clothes are ironed in advance and packed with hangers, security, and price tags meaning that employees can simply move items from shipping boxes to racks and focus on assisting customers

True

True or False: Trucks serve stores that can be reached overnight and cargo flights serve destinations within 48 hours

True -Return leg of flight filled with raw materials and half finished clothes from outside Spain

True or False: Vertical integration and technology coordination allow Zara to speed complex tasks, lower cycle time, and reduce error - all key elements to the speed and efficiency with which Zara produces its inventory

True -60% of merchandise produced in house -Inventory optimization models help firm determine how much/which size of item should be delivered to each store twice a week -Fabric cut and dyed by robots in 23 automated factories -Owns 40% of own fabric and purchases dyes from own subsidiary -Half of cloth arrives undyed so firm can adjust to shifting trends -Local suppliers provide partially finished greige goods -Items stitched together by network of local cooperatives -Contract manufacturers it does use are close by (Portugal, Morocco, Turkey) -For items with a longer shelf life (jeans/tee shirts) Zara uses contractors from farther away (Asia/Latin America) -All items end up in huge distribution center in La Coruna or Zaragoza -Ceiling mounted racks/sorting machines move items from factories to staging areas for each store

True or False: Zara's focus on pieces that look like high fashion but are comparatively inexpensive have given it a huge fanbase

True (average price is $27) -Fans await Z-day: twice a week inventory delivery to Zara's -Kate Middleton fan of Zara

True or False: Software used to schedule staff based on store's sales volume (more staff at peak times)

True - cut down staff work hours by 2%

Vertical Integration

When a single firm owns several layers in its value chain