As of November of last year, Forbes values international clothier Zara’s brand at $9.4 billion and cites Zara’s “ability to develop a new product and get it to stores within two weeks, while other retailers take six months.”
How does Zara do it? How do they take the trends of the runway and put them in the closets of fashionistas around the world in just a matter of weeks? Their success lies primarily in operations strategy and supply chain management.
Georgetown McDonough Professor Kasra Ferdows has studied Zara’s innovative operations strategy closely. First publishing on the topic in 2003, Ferdows and his colleagues are now working on an updated case study for 2014.
Ferdows says there are many reasons for Zara’s success, ranging from how it collects rich information from its stores in 86 countries to its unique set up for using this information to design, produce, and distribute its products. For example, Zara designers, market and sales specialists, and production and procurement planners sit in the same room. “They aren’t separated by different buildings – or countries – and are empowered to make decisions quickly,” explains Ferdows.
Furthermore, unlike many its peers, Zara makes half of what it sells in its own factories. Many of these factories are located close to its headquarters in La Coruna, Spain. This set up allows it to produce the time-sensitive items rapidly and in small batches. Zara can react fast to market trends and take risks with new designs, because if a new design doesn’t work, Zara is not left with a large quantity that would have to be discounted. “Zara usually makes about 85% of initial selling price when its peers make 60-75%.,” says Ferdows.
The management model used by Zara offers many lessons for other industries. One of the most important ones is the importance of leaving sufficient “buffer capacity” in almost every step of the supply chain. Zara does not seem to push hard for maximizing capacity utilization of its factories or sophisticated (and expensive) distribution centers. “The focus is more on speed and reliability than on ‘sweating’ the assets,” says Ferdows.
Applying Zara’s model would call for a change of mindset in many companies. As Ferdows explained to Bloomberg Businessweek, “Most companies are riddled with penny-wise, pound-foolish decisions to reduce cost. Zara understands that if they don’t have to discount as much they can spend money on other things. They can see the benefit of this certainty and rhythm in the supply chain.”
Kasra Ferdows is the Heisley Family Chair of Global Manufacturing at the McDonough School of Business. His publications are in the area of managing international operations, particularly in charting strategies for global production and supply networks.