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Significance of Supply Chain Management on Zara

Prepare a 2300 - 2500 word report ( executive summary, table of contents body, conclusions and recommendations) analysing the issues in the case, and identify logistics management strategies that enable Zara (page 70 in the text) to become so successfuI.

In your report you need to consider :

  • The Fundamental reasons for success, with a comparison to another successful and an unsuccessful company?
  • How can Zara maintain its competitive advantage, here the concept of sustainability may be introduced?


ZARA

Based in La Coruna in North Western SpainZara is one of thfastest growing apparel companies ithe world. Its supply chain is key to its success, iparticular itenns of speed and lower inventory levelsthan its peers. As a result it is not hindered by product obsolescencea key difficulty for many apparel manufacturers wharc often stucwitfashiolines that the market does not want and which they cannot gerid of. Zara's designers stay close to the latest fashion trends andesign and manufacture new products within short time frame. All of this is done within the same facility tminimise delays and ensure maximum interaction among colleagues. Industry observers describe the Zara model as 'fast fashionwhere buyers don't have to wait months for the latesfashions. After manufacture, product is shipped to Zara's various stores according to fixed distribution schedule. Mosstormanagers use handhelelectronic devices to post real-timorderfrom the distribution centrewhich organises twice weekly deliverieaccording to a fixed schedule. Products contain multi-coun try labels so if line is not selling, thstormanager simply puts it back on the truck and it iredistributed to another store via Zara's hub and spoke networwhere it mafare better. From the stormanagers with their handhelordering devices all the way back upstream to the single design and manufacturing site, Zara has full visibility of its supplchain. Another key feature of Zara's supply chain is that it has spare capacity on hand (in tenns of truckswarehousing and production not always being fullanit cafacilitate fast response wheneeded Professor Kasra Ferdows of Georgetown University and co-writers labelled this 'rapid fire fulfilment'. 16 Many othecompanies in the retail sector have closely examined Zara so see where they themselves can apply some of its key success factors.

TH E SEVE ' PRINCIPLES OF SUPPLY CHA I N MANAGEMEN T

I2007 the journal Supply ChaiManagement Review republished its most requestearticle in the preceding years since the journal's first edition appeared in 1997. That article, 'The Seven Principles of SupplChain Management' 1outlined sevekey actions for successful SCM which arc still valid today:

I . Segmencustomers based on the service needs of distincgroupand adapt the supply chain to servthese segmentprofitably.

  1. Customise the logistics network to the service requirementand profitability of customer  segments.
  2. Listen to market  signals and align demand  planning accordinglacross the supplchainensuring consistent forecastand optimal resource allocation.
  3. Differentiatproduct closer tthe customer and speeconversioacross the supply chain.
  4. Manage sources of supply strategically treduce the total cost of owning materials and services.
  5. Develop supply chain-wide technology strategy that supportmultipllevels of decision making and gives a clear view of the flow of products, services and information.
  6. Adopchannel-spanning performance measures to gauge collective success in reachinthe end-useeffectively and efficiently.

Answer

Logistics Management

Executive Summary

Zara is a Spanish company that deals in product and services related to clothing and accessories. This company was started in 1975 and has become one of the most prominent clothing business organizations in the world over the period of time competing with some of the most prominent companies in this market such as Louis Vuitton, Gucci and H&M. This report has identified various factors that are contributing towards fast growth of Zara in this market. In addition to that comparison is also made with a financially strong organization and financially weak organization. For this purpose, Louis Vuitton and H&M are used respectively. Recommendations made to maintain the competitive advantage in this industry include market segmentation, diversification into budgeted clothing industry and continuing the concept of fast fashion. Purpose of this report is to evaluate the significance of supply chain management on a particular business organization.  


Introduction

Supply chain management can be defined as the flow of product and services in particular business organizations. It includes conversion of raw material to finished goods and distribution to a retail store or to direct customers. The main purpose of this report is to evaluate the supply chain management used my one of the most successful apparel company in the world i.e. Zara. Zara is a business organization working in the apparel industry and this company was the first established in north western Spain. This company is becoming one of the fastest growing apparel company in the world and a substantial amount of its success is contributed to its supply chain management and logistics management. Zara is becoming one of the most successful organizations in this industry and computing successfully with more established organizations in the world. This report will evaluate the fundamental reason that contributed to the success of Zara. For this purpose, this report will conduct a comparative analysis of Zara with one successful organization and one unsuccessful organization. This will help in evaluating the position of the company in the current market (Christopher, 2016). This report will also identify whether current operations of the company will be able to maintain a competitive advantage in the industry and what are the current issues that should be improved upon by Zara.

The reason of success for Zara 

Significant contribution can be given to logistics management and supply chain management for the success of the company. Following are some of the most important factors that are contributed to the success of the company

Use of just in time production

Management of the company uses the just-in-time method for production of clothing items. It is one of the most efficient methods of production process because it helps in reducing the cost of inventory and keeping the inventory up to date according to the market. One of the most essential factors that contribute to the success of any business organization operating in the clothing industry is the relevance of their product and services to the current trends prevailing in the market. Majority of production in this organization is conducted in-house and it maintains a reserve of 85% operational capacity for adjustment in the in-season period (Reid, 2016). This high level of Reserve capacity helps management of the company to increase and decrease their production level according to demand prevailing in the market.

Just in time production method helps in ordering raw material according to needs and requirements of the production process. This method helps in reducing the overall cost of inventory that is lying unsold in the organization. This also helps management to order raw materials according to current trends prevailing in the market which is the main value proposition of the company. Management of the company maintains speedy production process and lower inventory levels as compared to other organizations operating in this market. In addition to the management of the company does not take a substantial amount of work in advance before the starting of the season. Majority of business organizations maintenance strategy in order to fulfill the total demand in the season but it can increase the level of unsold inventories due to changing preferences of the customer. 

Lean inventory management

It is already discussed that inventory management of the company has been contributing factors towards aged past success and growth. Inventory optimization models are used by management of the company in order to determine the number of clothes that will be required to fulfill demand in every retail outlet across the world. Deliveries are made to these retail outlets twice a week to make sure that total demand is equal to total material supplied by the organization (Elking et.al, 2017). Lack of unsold stock is very significant in reducing the overall cost of inventory management. 

Another successful strategy used by the organization is to supply the products to retail stores in small batches. Orders for a product from a particular retail store is taken after evaluating the response of customer towards product and services delivered previously. There is also an option for the retail stores to send back the products delivered previously to another retail store nearby where the demand of such product is higher as compared to them. Strategy to send clothing and other products in smaller batches also helps the manufacturer to experiment too with the current trends in the clothing market. If a particular line of product is not accepted positively by the customers then such product line can be closed immediately and there will be in the minimum level of unsold stock.

Centralized order fulfilment

Another property of Zara's Logistic and supply chain management is centralized order fulfilment strategy. It is instructed to all the outlets of Zara to order products to time every week. All the product and services are dispatched from a single manufacturing unit in Spain and time of delivery is dependent on the location of the retail store. These timings are managed properly in order to make sure that there is no shortfall of any kind of demand for product and services of Zara in any of the retail stores. Due to the implementation of centralized order fulfillment strategy management of the company has been able to clearly define and rhythm to each and every employee involved in the supply chain management process including procurement production distribution and retail. Therefore it can be said that this strategy has helped management of the company to smoothly run the inventory management system. 

Centralized order fulfilment also helps employees at the manufacturing and distribution units to make predictions in relation to demand that will be required by each and every retail store all across the world (Özlen and Handukic, 2013). These predictions can be made by management with the help of a conducting a trend analysis on previous orders in made by the company. This time for forecasting of demand and requirements is very essential for the long-term development of any company.

Effective distribution network

The distribution network of Zara is very quick, smooth, and strong. Management of the company has estimated that distribution and manufacturing units located in Spain can send their orders to European countries within a period of 24 hours and this time period increased to 40 hours in case of American and Asian market. According to these data it can be said that the delivery process is very quick and effective (Turker and Altuntas, 2014). The total number of deliveries made to each and every stores in the world is 2 per week to reduce the unsold inventory. 

Zara has established an effective and broad distribution network all across the world in order to maintain the effective time of delivery is mentioned above. This distribution network helps retail stores to keep their stocks updated according to the latest trends in clothing market which is one of the most important value proposition of the company. It is estimated that the total time required for Zara to produce a new item of cloth from the initial step of Designing to the final step of distributing to retail stores takes only 15 days (Fernie and Sparks, 2014). This distribution network is clearly giving a strong competitive advantage to the company as compared to other business organizations operating in this industry. 

Comparison with Louis Vuitton (Successful companies)

Louis Vuitton and Zara, both of these organizations are very successful in the luxury and retail apparel industry across the world, especially in the European market. Louis Vuitton is operating a longer period of time as compared to Zara but the growth of success in case of Zara is much higher as compared to Louis Vuitton. One of the most important contributed towards the superiority of Zara as compared to Louis Vuitton is its value proposition and value delivery system. Transportation network established by Zara overall across the world is substantially broader as compared to Louis Vuitton. Total time taken by delivery from the headquarters to individual stores in Europe is 24 hours maximum which increases the regular updating of stock at different retail stores. Total time taken by Louis Vuitton from the step of designing the closer to delivering any product to different stores is around 3 month with substantially higher as compared to Zara i.e. 15 days.

In addition to that designed provided by Zara is more diversified as compared to designs sold by Louis Vuitton. Products offered by Zara are tomorrow oriented designs which are more popular among the larger portion of the population (Nagurney and Yu, 2012). This definitely helps in increasing the overall revenue generated by the company. Marketing strategies used by Zara in the Asian market is also one of the significant factors contributing towards the success as the Asian market has significant potential which is not properly explored by Louis Vuitton.

Comparison with H&M

H&M is another successful organization operating in this Industry all across the world but over the period of time, its success has decreased. Total brand value of Zara is substantially higher as compared to H&M in a current business scenario. A significant reason behind this decline of brand value for H&M over the period of time is that management of the companies not been able to keep up with the current trends. Any business organization operating in this industry is required to change their product and services according to current trends in the market. The main reason for changing trends is that preferences of customers in this market to change is significantly over the period of time.

Zara, there has been a constant increase in total revenue generated by the company. The holding company of Zara i.e. Inditex has reported a growth of 7% in total revenue generated by the company at the end of the year 2017. On the other hand, operating profits of H&M has decreased by 62% in the first quarter of 2018 (Crofton and Dopico, 2012). The main reason of success for Zara is that it brings the production services in lower volume but the product and services are according to the current trends in the market. On the other hand, H&M produces goods and services in abundance and it increases the overall cost of unsold stock at the end of the financial year. Selling old stock in this industry is very hard which ultimately results in operating profits for the company.

How Zara can maintain its competitive advantage?  

Currently, Zara is considered as one of the fastest growing apparel organization but it is important for the management of the company to maintain its competitive advantage for growth and development in the long-term market. Following are some of the strategies that can be helpful in maintaining this competitive advantage-

Separation of European market from American and Asian market 

Currently, management of the company is using centralized order fulfilment system in which all the orders from different parts of the world arrive at headquarters of the company in Spain and manufactured products are delivered to these markets. On the one hand, where the total time required to distribute product and services to the European market is 24 hours, on the other hand, this time increases to 40 hours in case of American and Asian market (Joy et.al, 2012). Separation of Asian and American market from the European market can be a very successful strategy to reduce the time of delivery. It is it correct that 40 hours is not that significant and company can still gain a substantial amount of profit through this distribution channel but Asian and American market is growing substantially and for long-term purposes establishing a manufacturing unit in these markets can also be significantly profitable.

The concept of fast fashion

Management of the company is currently operating in fast fashion wear total time required from the designing process to delivering stock to retail stores is 15 days. Management should continue to operate on this concept. The overall cost of this concept can be higher as compared to other organizations due to the employment of highly skilled employees for designing and other processes (Choi et.al, 2014). The overall cost of implementing this concept can be compensated effectively with the help of keeping the product and services of the company in line with current trends. Fast fashion concept is helpful in the production of goods and services in small allot which reduces the amount of unsold inventory. Execution of this concept is significantly supported by effective and efficient transportation and logistics systems of the company.

Expansion in the budgeted clothing market

Currently, Zara is operating prominently in the luxury clothing industry and performance of the company in this industry is very positive. It is also recommended that Zara should also introduce product and services and budgeted clothing market. This market should be entered by the company with the help of establishing a sub-brand of Zara which will specifically operate in this market only (Jang et.al, 2012). This will help in maintaining the luxurious status of Zara and also explore the budgeted clothing market and increase the overall revenue of the company. 

Recommendation 

Two recommendations that can be very successful for increasing the overall profitability of the company and maintaining the significant growth rate are entering in the budgeted market and separating American and Asian market from the European market. A detailed aspect of these recommendations is also explained in the above section of the report. In addition to that, it is also recommended that the management of the company should continue with the supply chain management and transportation network used in the current business scenario. Supply chain management of the company is very effective and contributing significantly towards its success and it is important that the basic the purpose of the supply chain management system is continued by the organization. In addition to that completed all to analyze the behavior of the market and make changes in SCM accordingly but the basic concept and practices should remain the same.

Conclusion 

It can be concluded that supply chain management is very essential for any business organization and it is contributed significantly towards fast growth model of Zara. This report has identified various aspects of supply chain management in Zara to evaluate the factors that are contributing towards the success of the organization. This report has evaluated four important factors that are contributing to the success. Comparison of Zara is also conducted with Louis Vuitton and H&M. Strategies are also recommended in this report to maintain the competitive advantage by Zara in the market. It can be said that Zara will continue to be a very successful Organization in this industry over the period of time and diversify its business in different parts of the world.  

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