Zara’s Core Competencies

1. Zara’s core competencies

Core strategy: quick inventory turnover and lead time, and remaining low volume of inventory in each style.

• Due to large proportion, flexible in-house production, Zara can immediate adapt to customer demand. In-house production factories in Spain and Europe (short distance) minimize the time when design is started to when products are delivered to stores within only 2 weeks. The in-house factories basically use pull model in which in-season production adapts to current customer demand with an appropriate amount.
• They remain a small quantity of new style inventory with a fast pace to create a sense of urgency for customers to buy fast or the items may disappear very soon.
• Furthermore, small quantity of inventory reduces markdown. If customers don’t buy new style, Zara can stop the in-house production of that style and only hold a small inventory. Due to flexibility of distribution center, Zara may reallocate that inventory to other stores to sell without markdown => cut loss fast and change to other trends quickly.
• The centralized distribution increases accuracy and speed of delivery to each store within less than 2 days using trucks or airplanes.

Zara has a higher performance feature than competitors in term of a variety of styles in Design department, about 11 thousand styles each year – perhaps 5 times as many as a comparable retailer would typically produce. This advantage is supported by the coordination of designers, store specialists, and store managers. The specialists collect data and expecting fashion trend from the store managers and feeding back to the designers so the designs are more accurate and respond quickly to customers’ tastes.

Store’s layout and location: They refer choosing store locations in prime high street with wide space (1200 square meters). The good store design and display make it more like upscale, luxury stores and products. Mix arrangement of goods stimulate customers buy more mix-products.

Price Tags: They put all different prices by country into price tags so Zara stores in other country do not need to re-tag, so it can reduce the tagging cost and time.

1. Figure out the considerable issues of Zara

1. Only one Distribution center (DC):

One of the issues that Zara will face in the future is its high centralization of distribution. The company implements distribution center (DC) only in Spain, Arteixo, and Zaragoza in future, without any local DCs and warehouses. Because of their globally future expansion, there are two concerns raised: transportation & administrative expenses and production.

About the costs for shipments to stores both inside and outside Europe, they will become significant as their “freshness” strategies to create exciting anticipation from customers. Zara also has a very competitive advantage in production and delivery time so that “almost no inventory at the stores.” As shipments were made twice a week from the DC, stores could receive new inventory in a short time and in small volumes only. As a result, numbers of times they ship products were much more plenty compared to other retailers. This imposes both benefits and challenges for the firm. Although they can create excitement for customers to visit their stores more frequently, transportation costs as well as administrative expenses would increase dramatically. Especially to stores outside the Europe, using air freight in such high frequency would be a matter of not only high costs but also many potential risks during transporting process.

On the other hand, people said that “Do not put all eggs in one basket.” The whole retail system or production process would face a serious or even a fatal if Arteixo DC unfortunately damage or stuck to problems. As professor Lee mentioned that sustainability and supply chain risks should be considered in any supply chain. The company already planned to have second distribution center in Zaragoza which is also a city in Spain for the increase volume in the future. However, what if natural disasters, labor issues or politics problems suddenly happen in Spain? No matter how fast and flexible ability the business could react to uncertainty, their stores in worldwide system would face serious troubles because of their “freshness” strategies.

We recommend that Zara should operate more distribution centers not only in Spain or Europe region but also in other target areas of the firm. This will accelerate or avoid these two problems as well as support their targets which are taking advantage of low labor cost in other nations.

1. Considered problems in purchasing and sourcing

Zara has used the sourcing mix which was working well for its operation. With its core competencies as they were previously mentioned, Zara produced more in-house, especially in design, and response quickly to the change of the market through the way Zara’s designers work closely to the store specialists who work intensively to store managers. In term of subcontracts, Zara has a network of 400 different suppliers within Galicia and northern Portugal. This would bring about ability of those suppliers in quick response to Zara’s orders due to small distance. Actually, strategy of combination of in-house production and multiple suppliers within and around Spain of Zara allowed them take advantage in quality control and reaction to customers’ demand.

However, from the case, we know that in order to lower wage costs, Castellano had considered that Zara would shift more production offshore, probably to Asia for lower labor cost. In fact, according to the figure in 2000, the trends of production movement were increasing the proportion of external manufacturers, and the highest percentage of origin of production in Asia. Actually, the labor costs of the countries in Asia are really lower than in Europe, Spain, and USA. For example, the hourly labor cost in Portugal is USD 3.7 which is higher than that cost in India and China more than three times. In addition, because of possible pricing pressure as the Euro took hold in Europe, with the same purpose, they want to increase the proportion of outsourced manufacture, initially 60 percent, and principally in China. It would create some significant issues that Zara has to consider carefully before deciding to get into Asia.

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