I. The textile industry Inditex is a textile group, which owns the famous brand Zara. It has published its last figures testifying of its growing share value on the market. The group is leader in the European textile market and owns more than 4000 stores around the world and generates more than 85 000 jobs. Its headquarters are located in Arteixo in the North of Spain where most of the production is done. The group owns 8 brands: Zara, Bershka, Massimo Dutti, Pull & Bear, Stradivarius, Oysho, Zara Home and Uterque.
For each of these brands the group designs and produces most of the collections, and the clothes are shipped twice a week in the stores. One of the key factors of success of Zara is its adaptability to the market. Indeed the strategy developed by its creator Amancio Ortega wants the shelves to be renewed once every two weeks, that is why controlling the supply chain is very important for the group. 1. The unique context and characteristics of textile industry Textile industry is highly competitive. Competition has hardened with globalisation trend.
Thus, outsourcing became recurrent question in the eighties especially when it came to cost management issues. In addition to that, fashion industry has to come up with solutions regarding its own characteristics: oscillating and erratic demand, complex forecast process, fluctuating customer’s expectations, short lifecycle of items, complexity to manage portfolio. These are not impossible to handle, but fashion industry has to manage its own issues and monitor a flexible structure to be efficient, profitable and be able to respond to customers demand in a very short time.
Indeed what matters when it comes to supply chain management is to use all resources to satisfy customers’ demand: delivering in quantity, matching quality standards required by customers, reducing lead time between batches in stores, offering a reasonable price. Still the fashion industry is not different from others in a sense that it has to remain viable, able to compete and grow on the market. Thus, whoever wants to survive in the fashion market industry has to innovate, whether with product innovation or with strategic innovation processes. The textile industry embodies more than 70 producers. Therefore there is plenty of choice for companies willing to produce at a very low cost, which leads to an outsourcing trend, especially as such a production doesn’t need skilled workers. The textile industry is so competitive that it has been protected from the 1st January 1995 by what we call “the Agreement on Textiles and Clothing”. The ATC are quotas limiting importation in Europe, Canada and the United States on textile from the rest of the world. This agreement was abolished in 2005, and Europe started to fear the consequences of the rising importation of Chinese textile.
In addition to that China has entered WTO in 2001 and is currently issuing 30% of the European importation on textile products. At a worldwide level Inditex is leader on the market. To remain best in class manage to adapt to theses threats, producing not only in China, but also by selling on this growing market. Indeed the group has opened more than 20 Zara stores and 4 Massimo Dutti stores. 2. The textile industry affected by the crisis Spain remains the first market for Zara. Nevertheless Spain is currently hit by the crisis.
Indeed Spain economy has been decreasing for more than 2 years now and could predict difficulties for the company on its country market. In France activities forecast are not good either. The recession in the textile industry is happening in France as well. The sector forecasts show a decrease of 9% on the total volume of sales in the textile industry. This figure is mainly due to the massive movements of outsourcing to the low cost producing countries. Though, worldwide Zara and its main competitors as Gap and H to quote but them manage to back off.
They chose a low price segment and are already on growing markets such as China and India for instance. That is why Zara decided recently to create a joint venture with the Indian Giant Tata. Inditex has opened its first stores in India in the first quarter of 2010. These growing markets are indeed much less affected by the crisis than European countries. The Spanish fashion retailer has grown so fast it has become the largest fashion retailer in world. It has overtaken GAP, its main American competitor in the market. American customers seem to be more reluctant to Zara’s concept even if one can notice he notable decrease of Gap due to problems linked to the American market itself. Thus in the US, whereas on the old continent, market is highly concentrate. Entering and stay on the market is quite challenging. Another main point of the competition context in the textile industry is the fact that new ‘low cost’ competitors have arrived on the market such as Primark. In 2006, the brand has established in Spain, main market of Zara and in November 2008 its leaders announced store openings in Germany and in Netherlands. Primark was created in Dublin in 1969 and is producing in India.
The bran has already 200 stores. The turnover is growing on a regular basis of 4%, even during the crisis. Prices are much lower than what Zara or H&M can offer. So much so that customers do not consider the price as a decision maker. This could be considered a snag for Zara. 3. How come the specificities of the textile industry influence the strategy of Zara? When understanding its context and specific characteristics, but also considering cost and productivity risks, one can easily understand why monitoring the supply chain process is at stake for textile industry’s actors.
Indeed, the main issue is to coordinate each and every component of the chain, as well as enable a flexible response to customers’ demand. Quick response is a business strategy, which seems to match the constraints of fashion business in terms of flexibility, ability to supply, reactivity and inventory costs. Thanks to the implementation of information systems performance, the reduction of all kinds of waste throughout the chain, QR monitors the key success factor and conciliates complexity and effectiveness. To that extend QR is especially signi? ant for fashion industry supply chains with high demand volatility and short lifecycle products. Hence, QR enables to manage sourcing regarding the “fashion level” of each item family. QR can be seen as a strategy in which collaboration between actors of the chain is improved. It increases flexibility, monitors an accurate level of stock and brings transparency at a corporate level. Thanks to its supply chain unique model Zara has come up with innovative solutions to respond to customers’ demand. Having the control on the production process using integration of the suppliers Zara holds its major key factor of success.
The other key factor of success of Zara is its corporate commitment. In the hierarchy, each and every employee is directly improving the system. The top management is involved as a real entrepreneur and impulses this philosophy throughout the pyramid. For example in the stores, employees are responsible of the customers’ feedback directly to manufacturing and replenishment departments. This decisional structure creates a real commitment from the employees, who feels responsible for the well being of the company.
The supply chain functioning will be detailed in the following part of the report. II. Inditex: Competitive advantages through an efficient & unique Supply Chain Strategy in Textile 1. Inditex’s recipe of success: a. A “Best in Class” Lead Time: Inditex chose a strategy of owning capital-intensive manufacturing facilities in Spain. In fact, it is a vertically integrated group, with up-to-date equipment for fabric dyeing and processing, cutting and garment finishing. The integrated production strategy is one of the key factors of Inditex success.
Indeed, while the main goal of its competitors is pushing down production costs and outsourcing as much as possible, the Spanish group’s priority is time. Its model is based on the Just in time, and a production lead time of two weeks. That enables the company to adapt its offer to its customers in a very short time, to have a good quality thanks to its local production, and gives it its main factors of success which are flexibility, reactivity and rarity. Lead Time of the creation of…ZARACompetitors A new Product5 weeks6 months An existing Product2 weeks3 months . Small production batches: The responsiveness of Zara can be explained by its policy of under supplying its warehouses and stores, only producing small and limited batches of its products and renewing its collections very often. Not only that enables the group to cut the potential costs of storage but above all it creates a notion of rarity for the customers, and encourages them to maximize their visits to the store. For instance, Zara has seventeen visits of its customers per year while the average of the industry is of three or four visits per year.
Also, the company’s strategy and the limited models production enable the group to avoid the fashion “Faux Pas” compared to its pears. The average rate of “Faux Pas” in the industry is of 10% while Inditex is under 1%, which leads the group to clear less than 18% of its production while its competitors need to clear the double. c. Ownership and Control of Production & Distribution Zara follows a structure that is more closely controlled than most other retailers, and pays further by having the various business elements in close proximity to each other, around its headquarters in Spain.
Indeed, the responsiveness and flexibility of the Zara’s model are achievable thanks to the vertical integration of the production & distribution system. Brand products are manufactured up to 85% internally. Internal production focuses primarily on the most popular items sold and those incorporating a greater creative component. These lasts are the most exposed products and illustrate the image of the Group. The group’s distribution strategy is consistent with its production one. Both are based on a centralization strategy, in Spain area.
Once the production done, the products are despatched in close distribution centers, depending on their future destination. Below a map with the different logistics hubs: 2. A highly efficient Product Development & information flow a. Product development: Thanks to its flexible business model, Inditex is capable of designing any models that respond to customer desires. A team of 300 designers, all brands combined, is mobilized to create the group’s products. The group refers to “trend hunters” whose job is to identify the latest trends.
The share of Creation at ZARA is minimal since the concept of launching the brand is selling copies of high fashion models but at low prices. Its sources of inspiration are the fashion experts but also information collected daily from various points of sale. There is a significant interaction between designers and the retail stores of the group that collect and trace all the remarks, wishes and complaints of customers through a reporting system. Inditex then tries to offer superior range of products meeting the desires of its customers. b. An efficient Information Technology Integration:
Information and communication technologies are at the heart of Zara’s business. Four critical information-related areas give Zara its speed: -Collecting information on consumer needs: trend into information flows daily, and is fed into a database at head office. Designers check the database for these dispatches as well as daily sales numbers, using the information to create new lines and modify existing ones thus, designers have access to real-time information when deciding with the commercial team on the fabric, cut, and price points of a new garment . Standardization of product information different or incomplete specifications and varying product information availability typically add several weeks to a typical retailer’s product design and approval process, but Zara “warehouses” the product information with common definitions, allowing it to quickly and accurately prepare designs, with clear cut manufacturing instructions. Product information and inventory management enable to manage thousands of fabric and trim specifications, design specifications as well as their physical inventory, and gives Zara’s team the capability to design a garment with available stocks, rather than having to order and wait for the material to come in. -Distribution management: its State-of-the-art distribution facility functions with minimal human intervention. Optical reading devices sort out and distribute more than 60,000 items of clothing an hour. Zara’s merchandise does not waste time waiting for human sorting. 3. Keeping the costs down:
Advertising costs: Further, in terms of marketing costs, Zara relies more on having prime retail locations than on advertising for attracting customers to its stores. It spends only 0. 3 per cent of sales on advertising compared to an average of 3. 5 per cent of competitors according to the company, choosing highly visible locations for its stores renders advertising unnecessary. Low inventory costs: Apart from designing to the fashion-of-the-day, Zara’s strategy of producing low volumes per style and changing products quickly in its stores enables it to cut down on the discounts as well.
Only about 18 percent of Zara clothing doesn’t work with its customers and must be discounted. That’s half the industry average of 35 percent. Zara also has two clearly time- limited sales a year rather than constant markdowns. Furthermore, Zara has a true just-in-time system. Most JIT system (even Toyota’s) focus on manufacturing but Zara managed to master it: • From customer to design, production and fabric manufacturing • Customer’s pull not designer’s push drives the system This helps Zara to have an edge over most of its competitor’s strategy by having very low Inventory to Sales Ratio.
Mass customization: Zara has actually developed its structure in such a way that it supports the methodology of Mass Customization (an in between situation of Mass Production and Customization). This Mass Customization is a combination of Job Shop and Continuous Flow of Production System with high efficiency and low volume, a scenario rare to find in real world. Labor costs: Even while manufacturing in Europe, Zara manages to keep its costs down.
None of its assembly workshops are owned by the company. Most of the informal economy workers the workshops employ are mothers, grandmothers and teenage girls looking to add to their household incomes in the small towns and villages where they live. III. Inditex’s global expansion strategy As the ready-to-wear retail market is becoming more and more competitive, the best way for Inditex to maintain its sustainable growth is to seek new opportunities on the global apparel market.
In 2010 the Spanish apparel retailer opened 437 new stores in 45 countries and entered into three new markets (India, Kazakhstan and Bulgaria) bringing the Group’s store network in January 2011 to 5,044 establishments in 77 countries. The company is expanding its store network in all areas of the world. One of the Inditex’s challenges is the expansion on the Asian apparel market. Indeed the Growth of the Inditex Group’s retail presence in Asia in the next years is one of the cornerstones of its expansion strategy. 1. Target markets & expansion strategy a.
The expansion on the Asian market: After a very positive 32 percent growth in 2010, the global retailer has confirmed that he will target the emerging markets like China and India in order to maintain its growth. In total, around 500 Inditex outlets will open. Half of them will be Zara stores located in Asia. Sales by geographic area: Europe represents the largest share of Group sales, 45% in 2010. However we can also underline a significant increase in sales in Asia, which in 2010 accounted for 15% of total sales, vs. 12% the previous year. 20102009 Europe ex-Spain45%46%
Spain28%32% Asia15%12% America12%10% Indeed Asia saw one of the most rapid expansions in 2010. Openings there totalized 160, bringing the Group’s retail presence in Asia to 645 stores. In China, the Group opened 75 stores, expanding its stores map to 30 cities. It is expected to increase to 42 by January 2012, with all of its fashion brands represented there. The strong expansion in the country should also continue beyond 2012. Indeed Consumer spending is on the rise, their buying power is steadily growing and the Chinese Youth has an especially acute interest in fashion.
This expansion is also founded on the growth of the Group’s brands in the region. In addition to Zara, consumers in Asia can find Pull and Bear, Massimo Dutti, Bershka and Stradivarius stores. As regard to the Indian apparel market, Zara made its first appearance in 2010. It received an extraordinary welcome from customers. Zara’s arrival in India, the world’s second most populous country, with 1. 1 billion inhabitants, represents a new milestone in the Inditex Group’s expansion in Asia. For its expansion into India, Inditex has formed a joint venture with the Tata Group, one of the country’s top industrial conglomerates.
India’s economy has grown quickly in recent years, and the country has a large population of shoppers who are, like Chinese people, keen on fashion and up to date on international trends. The country has a dozen cities whose populations exceed three million people in each city, and the Indian market promises substantial growth potential for Zara’s fashion offering. Other launches are planned for 2011 in Delhi, Mumbai, Bangalore and other Indian cities. Retail markets in China and India are Inditex’s priority targets for expansion in Asia because when we combined them, these countries represent the world’s No. market by population. In addition to its focus on the Asian market Inditex is also targeting the American apparel market. b. The expansion on the American market Zara has had difficulties entering the American clothing market. This might have been a consequence due to the Americans tastes that differ from the European ones. Moreover Zara has failed to develop a strong supply chain strategy in the U. S. like they have in Europe. Their European strategy includes having a strong production and distribution facility in their home country in order to have short production and lead times.
Zara has not invested in distribution facilities in the Americas yet, which is a threat to their U. S. selling abilities since the U. S represent 29% of the total apparel market. This may make them subject to diseconomies of scale which means that though they are aware of how quickly supply 1000 stores; they may not be able to supply more retail location due to their centralized logistics model. However with changing consumer behaviors as a result of globalization, there are growth options available for specialty retailers like Inditex.
Inditex has the opportunity to be one of the trendiest and low prices retailers Group that America has recently seen. Zara should most likely develop a second central distribution center in the Americas to decrease logistics in order to deliver fashionable goods in a faster way. Their second central distribution facility should be an expansion of one of their smaller distribution centers located in Argentina, Brazil or Mexico. The close proximity of the distribution center to the American market would allow them to effectively understand the particular American fashion.
The distribution center would also allow them to have additional funds to spend in other areas of business such as advertisement: a necessary element to break through the American market. c. New market entries planned for 2011 : The company will also move into new markets such as Australia and South Africa this year, and is supposed to open stores in Sydney and Melbourne in April 2011. Australia is emerging as a popular target for international expansion. Indeed Inditex’s rivals are also looking to enter the market. Gap plans to open an Australian branch in 2011, while Forever 21 of the US has lso stated its intentions to enter Australia. Inditex will therefore find itself in closer competition with other international retailers as well as domestic players such as Witchery and Country Road. Retailers are attracted to the Australian market due to its similarities to the US and the UK markets, in terms of consumer tastes and the absence of language barriers. The clothing market in Australia is less developed than the US and the UK with a distinct lack of variety when it comes to fast fashion. Furthermore, the Australian clothing and footwear market is expected to grow.
It has been forecasted that the market would worth $18. 78m by 2013. These factors, combined with high levels of consumer awareness about Inditex brands create a strong business case for expansion in this country. South Africa, the other focus for Inditex’s expansion plans, has been by now relatively untouched by European retailers. However, companies are starting to see its potential and are attracted by its expected growth rates. The South African clothing and footwear market grew 8. 1% from 2004 to 2008. This growth is projected to continue until 2013.
Inditex will be able to gain insight into the market by looking at the performance of the few previous entrants, such as Monsoon Accessorize and Mango. Inditex’s rapid expansion has successfully allowed it to stay one of the world’s largest clothing and footwear retailers. But it still remains threat to Inditex’s expansion. Another market opportunity for Inditex is to invest in Internet retailing especially directed toward the U. S and Japanese market. 2. The development on the E-tailing Market : E-tailing refers to retailing over the Internet. Since 2000 online retail sales have been growing considerably.
However the online fashion shopping still constitutes a small part of the total online retail sales and doesn’t weigh a lot in the total revenue of the fashion sector yet. Indeed people are still reluctant to buy fashion goods because of the risk of purchasing unfitted items. Currently the most successful online channels are those which involve the purchase of “functional goods” such as travel and vacation packages or theatre and concert tickets. Despite the fact that the fashion online market doesn’t constitute today a huge market it is expected to boom in the future.
Inditex started selling Zara clothing online in late 2010. The giant Inditex didn’t see before 2010 the point to enter the online market as its revenues were steadily increasing each year. Now that the online market is experiencing a massive growth Zara couldn’t avoid anymore this potential high benefits market. The Spanish retail concept depends on the regular creation and rapid replenishment of small batches of new goods. Zara’s designers create approximately 20 000 new designs annually. Two new collections are launched each week in all its stores worldwide located.
Therefore the big issue for Inditex was being able to keep its offline fast fashion branding position and supply chain while implementing it to its online distribution channel. As said before, Zara’s online store went live in September 2010 and is now available to e-shoppers in 16 European countries. The other Inditex’s chains – Pull, Massimo Dutti, Bershka, Stradivarius, Oysho and Uterque – will begin online sales during the fall/winter 2011 campaign. Zara is also expected to expand Internet sales to the United States and Japan during the fall/winter 2011 season.
Americans like to be able to purchase all goods including apparel from the comfort from their own homes at any time they choose. That form of direct marketing could reach more consumers faster and easier. Though it may be difficult to display all of Zara’s fast fashions online, it might be to put online a limited quantity of trendy basic Zara pieces. 3. The global expansion of Inditex : the Threats a. Inditex’s direct competitors Inditex’s direct competitors may be its largest threat, especially when expanding into new geographic territory.
Almost any retailer can be a threat to Zara due to their wide range of merchandise categories. Zara offers clothing and accessories for men, women maternity, children and baby. Many other retailers also offer goods to one or all of these merchandise grouping. Gap is one of these competitors because it is also international and sells the same range of merchandise with a less trendy style. H is probably Zara’s most similar and threatening competitor. Gap has been able to internationalize its brand which allowed him to gain sales in areas outside its country of origin.
Also, H builds distribution centers in their international locations in order to cut down lead times and potential logistical costs. Another threat to Zara is that H carries trendy clothing choices that they have designs based on the mixing of international apparel tastes. In addition to that, H offers these styles at a cheaper rate than Zara. H also uses more advertising than Zara. Another threat to the Inditex expansion could paradoxically be its centralized logistic and its fast fashion model. b. The centralized logistic and fast fashion strategy
The centralized structure of Inditex constitute their core strategy: should they change it to better succeed in their global expansion? Indeed Zara’s strategy can also creates some weaknesses. Their vertical integration has admittedly more advantages than drawbacks but it is important to recognize its limitations. Vertical Integration often leads to the inability to acquire economies of scales, which means they cannot gain the advantages of producing large quantities of goods for a discounted rate. Higher costs are then incurred for the Inditex Corporation.
Inditex also has to support its own high capital investments for the chains. Zara’s speedy and recurrent introduction of new products generates increased costs as well. They have higher research and development costs. They have also elevated costs due to the constant exchange of production techniques to create their different clothing lines. That also means that employees must be trained in order to use the new manufacturing techniques, which again leads to increased costs. Traditional retailers do not experience higher costs in all of these areas. c. Cannibalization A final threat to Zara is the issue of cannibalization.
Zara’s extensive location strategy involves putting multiple Zara stores that carry the same merchandise in the same cities. That means Zara is trying to sell the same exact merchandise to the same people that reside in that city. For example, the 225 Zara stores in Spain can cannibalize sales from each other especially if multiples locations are within the same city. Also the other 544 Inditex stores located in Spain can cannibalize Zara’s sales since the majority of the chains have a similar target market to Zara. This is similar to the challenges faced by the Gap versus Old Navy: Gap’s sales were cannibalized by Old Navy’s lower prices.
In order to prevent Inditex from its cannibalization, it should offer specialized products for different geographic locations within the same city. Zara is to offer specialized products for different international preferences but more specialization will increase consumer demand and will motivate them to visit more Zara locations within their own region. In some cities the company is possibly experiencing cannibalization because there are too many Zara stores that carry the same product within one city. Zara could differentiate its products from location to location to increase shopper traffic.
This would work because shoppers would hear about different products that another Zara store is carrying across the city and they would be intrigued to pay a visit. That way sales wouldn’t be stolen from their own Zara stores, decreasing cannibalization for the chain. In conclusion, Inditex has the potential for sustainable growth due to its competitive advantages and its ability to face challenges of the apparel industry. Today many companies are looking to Inditex as the new industry standard for how to run a retail business, which shows that Inditex’s business model is becoming the wave of the future.
However the company must still continue to re-invent and innovate itself in order to stay fresh in the apparel industry. BIBLIOGRAPHY Article Zara is now bigger than Gap – By James Hall http://www. telegraph. co. uk/finance/newsbysector/retailandconsumer/2794912/Zara-is-now-bigger-than-Gap. htmll Academic article Supply chain management in the textile industry: a supplier selection model with the Analytical Hierarchy Process Book: Logistic concept for the future, chapter 9 QR in the textile-apparel industry – by Alexandre Boukria Legrand Web site http://www. inditex. com/en