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Proposal of Improvement in Supply Chain Management: A Research of Zara’s SCM

Present a Case Study Analysis for Improvement in Zara's Supply Chain Management

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Abstract

The object of this manuscript is to analyze and record the key aspects in Zara's success by discovering current gaps and provide guidelines for future research works. Zara's case studies and writings published were appraised and interviews were conducted with employees of Zara and its suppliers. The evaluation summarizes the noteworthy aspects of Zara’s SCM, many of which were partially addressed in preceding research. However, endeavor is not a comprehensive evaluation of the research published on Zara. This assessment does not take into account unpublished document. It’s a useful reserve for supply-chain researchers engrossed in agile supply-chain and retailers intending to understand the key aspects with special focus on supplier relationship. This paper makes use of the discoveries of other researchers as an account of Zara’s SCM in academic theory. The disparities discovered regarding relationship with suppliers and challenges made will act as a basis on which forthcoming researchers can develop.


1.Introduction

An organization is an indispensable part of supply chain that connects certain processes such as procuring raw materials, designing, assembly, and supply to the end consumers. A company success in competing does not only depend on performance within it, but also on performance of partners associated with it. Being able to create business relationships with customers, vendors and other partners are said to be based on confidence, and long-term commitment that turns out to be a crucial competitive factor, according to Mattson. Increased integration obliges better coordination of resources and activities, which in turn leads to better management and control. In the current competitive market, supply chains are thus becoming essential (Vrijhoef, 2011). There is acute competition between supply chains and companies. Supply Chain Management (SCM) is a concept of managing different factors of supply chains. Effective SCM is considered as one of the key factors to succeed in an international market. SCM’s drawbacks are often the results of issues that crop up within the company such as absence of consistent SCM strategies and poor communication (Wilson, 2013). Such issues are subsequently seen to negatively influence relationships between organizations, disturbing efficient project work, and reducing profits. Zara intends to strengthen its market position through reducing costs and lead time in operation and reliable deliveries. Zara had faced many challenges in the association with their suppliers, but these challenges had not been analyzed deeply or documented properly. Thus, the objective of this research, which is provided through the project title and description, was to scrutinize these challenges and recommend ways to improve in ZARA’ Supply Chain Management as far as supplier handling is concerned. The following areas were identified to improve ZARA’s SCM:

1.         Determine the main weaknesses of ZARA’ SCM (in particular supplier handling)

2.         Propose solutions and a path forward.

2. Literature review

Zara is one of the biggest fashion retailer in the world that provides imitates of high end brands at affordable cost. In last two decades, Zara tripled its in short span of time. Zara is known as fashion interpreter rather than fashion creator because designers don’t innovated designs. They reorganize elements of fashion to create new design. Zara balance in house as well outsourcing activities in supply chain. Heavy labor task like sewing are outsources while designing, prototyping are done in-house. After returning from sewing factories and clothes are assembled and sent to stores.

Supply Chain Management was first pioneered by two management consultants - Allen and Hamilton (Oliver and Webber, 1982) who are part of Booz Allen Hamilton Inc., an American management-consulting firm, headquartered in Tysons Corner, Virginia. SCM is a wide management concept seeking to help a business get an overview of and manage cooperation in the supply chain. As organizations indulge in cooperating networks, the control of supply chains corresponds to an inter-organizational rapport management, aiming at increasing profitability of the events (Halldorson, Kotzab et al. 2004). The upstream (supplier) as well as downstream (customer) factors are important things to be kept in mind deliver greater customer value at affordable cost. Effective SCM can offer a competitive edge by achieving and maintaining the status that offers supremacy over competitors pertaining to customer preference. (Christopher 2005). Effective process management as the foundation of competitive edge is backed by the norms of Michael Porter’s value-chain (Porter 1985). The value chain events are classified into primary activities such as logistics, operation, marketing, and sales and service and support activities such as infrastructure, manpower management, technology development and purchase (Cousins, Lawson, and Squire, 2006). Thus, in Porter’s perspective, competitive advantage is the fruit of isolated activities undertaken in design, production, marketing, delivering, and product support. These discrete activities serve as the foundation for differentiation, leading to cost and/or value benefit. The value chain thinking helps the company see existing and potential sources of differentiation, thereby focusing on applicable activities (Christopher 2005). However, there is difference between Porter’s value chain management and the basis of supply chain management. Porter centers on the processes within the company considering it as the source of competitive advantage. Alternatively, SCM introduces a more holistic viewpoint including the companies in the whole supply chain, asserting that competitive advantage is attained though effective management of the supply chain. According to the creators of the book “Designing and Managing Supply Chains: Theoretical Foundation and Application (Halldorson, Kotzab et al. 2004),” one needs to adopt many theoretical techniques collectively so as to understand and elucidate management practices in supply chains. Understanding how the members of the supply chain behave and the process of setting up rules and contracts between them is important in the quest for enhancing relationship with supply chains. There are three different standpoints, which can explain the existence and management of supply chains: 

An economic perspective, corresponding to the “Transaction Cost Economics and the Principal-Agent (P-A) Theory”

A socio-economic standpoint as described by the “Network Approach.”

A strategic perspective, depicted by the company’s "Resource Based View.”

These theories are stir-up two questions, compelling answers for them. They are: 

How to organize a supply chain when it is received as a combination of institutions? 

What is necessary to control a particular structure? 

It depicted that the “Principal-Agent” and “Transaction Cost” theories can serve as basis for deciding how to organize a supply chain (Halldorson, Kotzab et al. 2004),”. As a structure is determined, the “Network Based” and “Resource Based” theories can facilitate in managing this structure. Based on a set of requisites – process management (customer-oriented transformation capacities), structure (setting the responsibilities), and component management (goal-oriented directives), costs can be reduced by eliminating inefficiencies, synchronization of processes, and increased customer satisfaction.

The Principal-Agent Theory View

The Principal-Agent theory is based on an association where one party (customer) hands over work to another (supplier). The interests of the two parties potentially don’t see eye-to-eye, and thus conflicts may occur if the interests of both the parties are not protected. From the standpoint of “Transaction Cost Theory,” the cost of doing business is central as far as suppliers are concerned. Such costs comprise of managing the suppliers, requiring extra inspection, redundant suppliers, choosing new suppliers, developing existing suppliers, imparting knowledge, and the cost of the management of day-to-day delivery and quality. When purchased from a supplier, such costs are under no circumstance covered in the price of the product. By being acquainted with the actual costs of suppliers through precise costing systems like activity-based costing methods, such costs can be envisaged and included in the selling price (Ross and Hendren, 1997). In addition, including this cost in the supplier analysis will help companies’ decide on the basis of lifetime costs of supplier relationships, on the whole. This may also facilitate long-term strategic decisions.

Description: Image result for The Principal-Agent Theory View

Principle Agent theory

The Network Based Theory Perspective 

The Network Based theory perspective is devised considering the general belief that economic actions are impacted by social context and that behavior is based on the position of actors in social networks (Nagurney, 2006). This can be noticed with respect to the Transaction Cost (TC) theory perspective, which adopts either market-based or hierarchic approach to customer-supplier relationships. The Network Based (NB) perspective initiates a network-inclined form of relationship between market and hierarchy, which is not a part of the TC perspective. Market-based connections are every so often marked by short-term interactions while network-inclined relationships are marked by confidence and long-term dedication by independent actors. Thus, the NB perspective follows aspects important to the enhancement of customer-supplier relationships.

Therefore, scholars offer different theories to gain competitive advantage through SCM. To understand the issues in supply chain management, RCA is combined with latest ideas and experience on implementation. The basis for RCA is the knowledge that handling symptoms and creating quick fixes without going into to the root causes of issues and failures leads organizations into creating operating, manufacturing, and service atmosphere that accepts loss as a normal factor of operation (Okes, 2009). This is observed as a very costly attitude. Thus, the objective of RCA is to curb the losses by doing root cause analysis of these problems and failures and consequently implementing effective permanent solutions and cutting costs.

3.Research Methodology 

3.1 Research questions

How does Zara manage the handling of suppliers? (After analyzing the established process of procurement)

Where are the main weaknesses in Zara' supplier handling (Determined through experimental analysis)?

What are the suitable methods to improve ZARA's supplier handling (Answered on the basis of empirical investigation and analysis and its connection with theoretical foundation)?

What are the actions of SCM improvement project for ZARA?

3.2 Research Type 

The type of study applicable for research can be referred to as descriptive research as it involves the collection of information to answer questions related to the current status of the subjects of study (in this case, the connection between Zara and their suppliers). Research questions (as described in issues to be addressed) are used and data collection interviews were performed 

3.3 Sampling 

Chosen sampling method is judgmental sampling, which is type of non-random sample. In judgmental sampling, sample is chose based on opinion of expert or researcher. Interviewees, exclusively ZARA staffs and suppliers, were selected based on their relevance.

The question Zara employees were asked was “What are the top ten weaknesses or improvement areas in the as far as association between ZARA and its suppliers?”, Likewise, the suppliers were asked “What are the top ten weaknesses and improvement areas as far as connection between your company and ZARA?” Interviewees were thus requested to mention the top ten areas of improvement, prioritize based on criticality, and assess each improvement area for estimated budget for required modifications and implementation.

3.4 Limitation 

Research is based on non-random sampling which is subject to biasness. Beside it, interviewee might hesitant to express their true opinions. Interviewee might look at the question from different point of view that can cause biasness in results. Furthermore, we cannot ignore interference of known and unknown extraneous variables in data collection.

3.5 Data Analysis

Issues or improvement proposals during interviews were rated on the basis of the interviewees or professionals, subject to the criticality of a particular issue. Furthermore, each problem was assessed through estimated cost and difficulty of implementing desired changes. 

Identifying Possible Roots

Probable causes were recognized by brainstorming with both Zara’s staffs and suppliers, using Cause and Effect (Fishbone) diagram. Cause-effect relationship with respect to chief enhancement areas was discussed with staffs and suppliers, with the object of addressing the issues in the research. 

Description: Image result for fishbone diagram for cause and effect

 

The Zara staffs were fuelled with the objective of collecting different angles of the problems and determining the approaches to solve them. Members of different departments such as designing, tactical and strategic procurement, and store staff took part in both the sessions. Minutes of meeting (MoM) of each session were noted. 

Determining Solution

Potential actions for certain serious improvement areas were identified through brainstorming sessions having Zara’s employees and suppliers. Literature and theories that are suitable for Zara were used to back the recommendations from the sessions.

RCA (Root Cause Analysis) for Empirical Analysis

RCA is considered as a scientifically acceptable method for gathering and analyzing data so as to un-wrap the causes of some events or phenomena.

The following steps were performed: 

1. The link between cause and effect (potential root causes) were recognized through brainstorming and following fishbone diagram. 

2. Potential root causes were during the session, systematized and listed for ordering. 

3. Participants were motivated to assess and rate top three most critical likely root causes. This was done to prioritize and cut down the number of root causes to focus on those considered extremely critical. 

4. Thus, top 2-3 likely root causes were hand-picked for solution development, with an object of obtaining suggestions for effective actions or improvement proposals.

This first stage of the RCA is targeted at clearly and scrupulously recognizing the issue – the disparity between the ideal and the real case. The need for enhancement in SCM as far as supplier handling is concerned indicated problems in this area. Furthermore, by performing interviews with ZARA and chosen suppliers, the current issues, their origin and related descriptions were recognized in detail.

4. Finding and recommendation

ZARA does not manufacture the complete products in its facility. Instead, it assembles elements of product from suppliers, gives it a finish, and sells these to the end customer. This implies that Zara and suppliers are managed by the principles of industrial sub-contract and these relationships are affected by factors characteristic to this kind of organizations LOGISTICS MANAGEMENT OF ZARA – A CASE STUDY, 2015). This is an example seen in with respect to single and especially individual source suppliers, having commanding positions in the relationship with Zara as Zara is intensely dependent on these deliveries. The company makes an effort to setup better relationships with such suppliers, and maintain these relationships with frame or partnering agreements. 

Theoretical Aids to Consumer-Supplier Relationships

Out of the different theories, each theory applies to the aspects of customer-supplierrelationship, and strives to aid in optimizing the Zara’s SCM. The Transaction Cost theory helps determine what to produce and what to have suppliers deliver. The Principal Agent theory helps understand how Zara should streamline these relationships. The Network Based theory perspective stresses on the need for developing long-term connections with suppliers so as to access important information. This can be realized with respect to Kraljic’s portfolio technique, managing suppliers on the basis of their importance for the organization. This indicates the necessity for market-inclined relationships with certain suppliers and intimate network-based relationships with others. Zara’ supply chain management follows vertically integrated supply chain as we discussed earlier. Therefore, Zara keeps control over suppliers. Demands are easily met. However, Zara has number of suppliers; speed and accuracy is prime concern of Zara to decrease lead-time. There are risk involves in supply chain like uncertainty, insecurity, delay in delivery and shortage of raw material (Marieke, 2014). Zara’s 95% suppliers are located near to Zara’s factories.

The Procurement Procedure

ZARA has defined a process that explains how procurement and communication with suppliers are to be managed. This process is a component of the main business process used in Zara. Zara use vertically integrated supply chain, where different elements are integrated like design, production, distribution and retailing (How Zara fashions its supply chain, 2005).

Description: Image result for supply chain management of zara

4.1 Documentation 

Today’s wide-ranging requirements for product documentation are regarded as the most cardinal elements, since both Zara staffs and suppliers find it difficult to manage. Orders given by ZARA are every so often incomplete or issued too late contributing to difficulty for the vendors (suppliers) to deliver them on time. Dramatic changes and corrections are made, orders are not regularly updated but and feedback on clarifications is received late. This is not only an ZARA challenge but also the supplier’s. From this standpoint, the need for more contracts, illustrating the requirements and expectations and better contract assessment, becomes apparent. Challenges with respect to documentation are intimately attached to the absence of competence. As mentioned earlier, people will not be able to handle things in which they have little or no knowledge. A marginal percentage of interviewees stressed on the need for better training of suppliers as well as ZARA personnel. For instance, how to deal with documentation related requirements.

4.2 Co-operation 

Agents representing Zara and suppliers consider that intimate mutual aid and better co-operation as improvement areas. Mutual aid in this sense is primarily related to long-term dedication and contracts with key suppliers as well as enhanced cooperation with them prior to and during project execution. Improved use of supplier proficiency (technical clarifications) by supplier’s participation in design reviews is useful for Zara in seeking optimized products from supply-chain inclined perspective (Carmen de la Cruz Iglesias, 2013).

4.3 Communication

Effective communication is primarily concerned about consistent use of single point of contact towards suppliers and formal communication procedures (Wilson, 2013). This is to ensure that people receive all important information without fail. Today Zara appears not merely as a single organization, but as a conglomeration of numerous organizations, each with different perceptions. This, indeed, has not just been reported by suppliers, but also by approved Zara employees. The need for enhanced communication within the company is also seen through the stated presence of conflicts of interest about technical as well as commercial aspects. According to a Zara representative, extended focus on cross-sectional efforts in the possession stage is potentially an effective approach to these challenges. Thus, there is a necessity for explanation of role, responsibility, authority, and more usage of formal communication procedures (Within the organization, internally, as well as with suppliers, externally).

4.4 Progress Statement

Progress reporting is mainly concerned about either delay in sending reports or not being sent by suppliers. This is contemplated as a challenge as it turns out to be a difficult task to keep track of the status of deliveries, especially crucial in case of delays. The consequence of this is that the staffs of ZARA have to spend time, labor and facilities to get this information without depending on anyone.

4.5 Lead time 

The effect on the supply-chain Agility is initiated as an answer to the dynamic and choppy markets and customer demand (Carmen de la Cruz Iglesias, 2013). It directly impacts the supply-chains and is one of the reasons models such as agile supply-chain and fast-fashion emerged. The need for shrinking lead times and promoting flexibility in fast fashion required the involvement of suppliers to achieve a higher level of customer satisfaction. Supply Chain Operation (SCO) controls three clear aspects: maximize use of resources, minimize inventory, reduce and lead times. These three factors are said to directly influence pricing, customer satisfaction, and by and large business values such as profit, turnover, and sales. Production ratio, in Zara, ought to be reserved as small as possible, setting aside the extra capacity in the products, which are predominantly necessary in manufacturing. It disputes that big orders, typically, will lead to inventory increase. On the other hand, with Zara stores greater than before in number, across the world, lead times cannot be kept very short. The two aspects of lead time, in a production environment include complexity and ambiguity. Zara is making fashion outfits, which have low complexity, but high uncertainty (Ray, 2009).

4.6 Pressure on supplier

Suppliers, under progressive pressure due to changing consumer needs reflect on the whole supply-chain (Carmen de la Cruz Iglesias, 2013). The contemporary fashion business continues to be acutely competitive with added pressure for fashion organizations to compete on price as well as their ability to deliver freshness While most of the retailers are stressed with this new scenario.

5. Recommendation

A possible solution that helps cut down the huge amount of required documentation is focus on standardization of products. More standardized products indicate more standardized processes, facilitating reuse of documentation. Products and processes have to be approved every time there is a change.

Many actions are recommended to enhance communication some of them include increased training in business processes, systems, and products, emphasizing on multidisciplinary and department specific aspects. The main goal of such training is to better the understanding of the well-known processes, in general, and to ensure that working and communication prototypes are aligned. Furthermore, educating on value-chain is targeted at offering insights on the dynamics of the value chain.

Timely and continuous interaction between the customer and supplier can enhance SCM. Also, if customers treat their suppliers well, they can be sure of a long-term association. These truths must be established by Zara and adopted in its day-to-day processes. Zara’s designers collect essential data on sales, inventory from all the stores every day, and use this to determine the situation.

The raw input is collected through quantitative and qualitative methods. Zara’s store managers should assess sales and renewal reports on an hourly basis. Alternatively ,the store managers should order materials instead of waiting for the information sent from the H. Q. The raw data should be discussed with suppliers, design team, fast modeling team, market experts, and purchasers. Feedback will enhance coordination among different component of SCM and reduce communication gap. 

6. Conclusion

The results of the experimental analysis of this master theory show that Zara has a potential of significant cost savings and better profits by focusing on controlling supply chain with respect to the dealings with suppliers. The suppliers are typically subcontractors who manufacture raw material (febric) in accordance with the requirements and specifications provided by Zara. Certain vendors supply standard fabric(uncolored) while some provide Zara with tailor made fabrics (How Zara fashions its supply chain, 2005). This stresses on the importance of unique supplier approaches based on febric and significance to be delivered to the end customers. The interactions with vendors are systematized through the procurement process, describing the way purchases are done, and how Zara works to enhance the existing supply chains and attract new supply chains (through activities in the strategic procurement department). Recognized improvement areas, as far as the association of Zara with their suppliers are majorly based on the necessity for rigorous training of the Zara staffs and suppliers, clarification of roles and responsibilities, inception and incorporation of distinct techniques with respect to supplier handling (including intimate cooperation with suppliers), and strategic approach to proactive supplier development (Wu and Blackhurst, 2009). This is associated with the streamlining of the supply base (identifying the market- or network-inclined methods) and interrelationship with vendors through the development of contracts. Furthermore, the recommended solutions are targeted at addressing the ongoing challenges in the association between Zara and their vendors. Zara’s customer oriented approach is foundation of strong relationship between Zara and suppliers, demanding more exposed and receptive attitude from organization. Zara has already gained competitive edge through focusing on other aspects of supply chain (Forbes welcome, 2016). With focus on relationship with suppliers, Zara can ensure long term benefits as well as stability.

8.Appendix: 

 SCM in Zara

 

Description: Image result for zara supply chain vertical

 

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