ZARASupply Chain and Value-Creation

Emily Pan, Stephanie Pan, Casey Chen, Jing ya Chen

(PC)2

Purpose To analyze ZARA's success due to its supply

chain How it correlates with value-creation for the

company Look at the supply chain from a global

perspective and try to apply it to China

Agenda

ZARA: Company Profile ZARA: The Supply Chain

Vertically Integrated ZARA: Competitors

Landscape Challenges in China Future Suggestions for

ZARA

• ZARA is the flagship chain store of Inditex Group owned by Spanish tycoon Amancio Ortega

• HQ in Coruna, Spain, where the first ZARA store opened in 1975.

Company Profile

Inditex: 2009 Global Sales Breakdown

International Sale of $7 Billion US

ZARA in China

“Inditex has strong potential to continue growing in a profitable way over the coming years and, in this regard, our priority is to focus on expansion in Europe and Asia”

– 2009 Inditex Annual Report

ZARA in China

“In other words: Right Working Conditions (Compliance), Right Health and Safety, Right Quality, Right Delivery Time and, finally Right Price”

–2009 Inditex Annual Report

ZARA: Across the World

How is ZARA Involved in Asia?

12

ZARA's Milestone in China

ZARA's Milestone in China

First store opened in Shanghai Grand Opening Day = 800,000 RMB Objective: Move to secondary cities

Market Environment in China

The Industry Environment

Chinese Economy

• GNP per capita $5890• GDP growth of 10.7%• Industry/service economy

Social Structure• Country of two speeds:

Urban VS. Rural• ‘New’ middle class with

purchasing power• Cultural shift in urban

areas

The Natural Environment

• Free access to natural resources for

textile clothing

Technology• Easy access• Financial

benefits

Demographic Structure

• 1.7 billion people• 85.2% literacy rate• Skilled labor

available

Government & Politics

• Deregulation of most sectors• New textile

policy• Stable communist

country

• 15 days from designs to products VS. industry• Average of 6-9

months

• 12 inventory turnovers/year VS. industry average 3-4 times (0.8~1.2 times in China)

• 40,000 designs/year, 20,000 selected for production VS. 3,000~4,000 for its competitors apparel retailers

Statistics on ZARA's Supply Chain

• 30,000 Stock-Keeping Units (SKUs)/year

• Unsold items account for 10% of stock VS. industry average 17%~20%

• Commits 50%~60% of production in advance of the season VS. 80%~90% for other

“The vertical integration of our production system allows us to place a garment in any store around the world in a period between two to three weeks.”

The Key to ZARA's Success

• Vertically integrated supply chain where design, production, distribution, and retailing were integrated.

ZARA Empire. Logistic distribution center of the ZARA company

Three Channels:• Women’s Line• Men’s Line• Kid’s Line

ZARA: Vertically Integrated Supply Chain

ZARA: Production Sites

ZARA: Vertically Integrated Supply Chain

ZARA: Vertically Integrated Supply Chain

ZARA: Vertically Integrated Supply Chain

Cost & Speed

• Local sourcing of raw material – Cutting cost because they do not outsource any channel • Fast time-to-customer –

Cutting time, faster, effective, and efficient • Mass customization• Low process costs• Avoid conflicts emerge

from different channels

Why Vertical?

Information Technology (IT)

- Collecting vital information

• POS (Point of Sale Terminals)

• “H” structure – information from each store is independent and parallel to the headquarter in Spain

• PDA – order from the headquarter in Spain by the manager of each store

Why Vertical? (Continued)

Values Generated by Logistics

Revenue growth

Cost reduction

Fastertime to market/extending product life

Reducedproductdiscounting

Tailored productsto meet specificcustomer needs

Improvedproductavailability

Flexibility torespond to changesin consumer demand

Cost ofcapital/assets

Managementand admin

Cost of logistics

Cost of goods

Speed of gettingchange intothe market

Higher salesvolumes frombetter off-the-shelf availability

Higher salesfor meetingcustomer needs

Lower quantityof inventor to sellat reduced prices

Greatercertainty ofexecution

Increasedflexibility

Lowerbought-in costs

Reducedlabourcosts

Reducedtransportcosts

Reducedcost ofwrite-offs/errors

Reducedinventoryhold costs

Reducedsystemscosts

Reduced supply chain mgtcosts

Reduced transport processing costs

Lowerinventories

Off-balance sheetfinancing

Enhancedutilisation

Flexibility to matchoperational scale

Networkcoverage

Project managementof solution

Innovationof solution

Strategicstocklocations

Supplychainvisibility

Reducedlogisticslead times

e.g.Postponementservices

Managingsmallerlot sizes

Reducedlogisticslead times

Improveddeliveryreliability

e.g.In-storelogisticsservices Reduced

logisticslead times

Improveddelivery reliability

Reduced logisticslead times

Tighter controlof inventory

More competitiveglobal supplier base

Improved purchasingof low value items

Flexibility oflocation andlabour rates

Higher labourutilisation

Optimised assetutilisation

Optimisedunit cost

Fewererrors, losses and claims

Tighter controlof inventory

Flexibility oflocation andoverheads

Proven systemsat lower costs

Simplermanagementtasks

Leveragedoverheads

Strategicstocklocations

Reducedlogisticslead times

Special purposevehicles

Third partycapital providers

Shared useactivities

Increase Revenue

Faster time to the market/extending product life 4-5 weeks from conception to

distribution

Tailored products Produces 11,000 designs

annually Competitors only have 2,000 to

4,000 items

Improved product availability Stores Twice-weekly shipments

Reduced product discounting

Books 85% of the full ticket price for its merchandise, while the industry average is 60%

Flexibility to respond to change in consumer demands

Unsold items account for <10% of stock, as opposed to the industry average of 17-20%

Decrease Costs COGS

Outside the distribution center in La Coruña, ZARA has twenty-three highly automated factories.

Cost of logistics Since nearly 60 percent of ZARA's merchandise is

produced in-house, decreased transportation costs Management and administration

Plants use just-in-time systems developed in cooperation with logistics experts from Toyota Motor (TM)

Cost of capital/assets ZARA owns 40% of their production facilities in

Europe

Supply Chain

Suppliers are all close to their

factories so ZARA can order on a

need-basisZARA buys fabric in only 4 different colors;

designs and cuts its fabric

in-house

Clothes are ironed in advance and

packed on hangers, with

security and price tags affixed

Overnight trucks are used to deliver to European stores

and airfreight is used to ship to other countries

2010

ZARA's Competitor Landscape

Relative Number of Stores (2010)

ZARA

China 4 33 64 65

Worldwide 3,095 1,988 930 1,395

2007

ZARA: Challenges in China

“Of course, one size doesn't fit all. But there are ‘unifying themes’ and ‘variations’ on these themes…Some roll their eyes when I harp on about a Chinese ‘worldview’ that is fundamentally different from Westerners' basic motivations. But smirks be damned. In order to touch hearts, brands need to be brought into alignment with this worldview…

ZARA: Challenges in China

“A unifying "Confucian" conflict—between self-protection and status projection—that brands have a fundamental role in resolving.”

“Unlike practically any other country (Korea and Vietnam come closest), China is both boldly ambitious (ladders are meant to be climbed and meritocracy is a cherished value) and regimented, with hierarchical and procedural booby traps for anyone who hasn't mastered the system”

--Tom Doctoroff (JWT)

ZARA: Challenges in China

Tension between upward mobility and fear-based conformism shows up everywhere, in every business meetings, in every struggle with a mother-in-law, in every new generation release on the internet. Brands that help consumers simultaneously stand out and fit in have the greatest appeal

-Tom Doctoroff (CEO, Greater China of J. Thomson

Recommendation: E-Commerce

Improve

B2C

Internet Retailer® Top 500 Guide for Business-to-Consumer

Recommendation: E-Commerce

Improve B2C

Internet Retailer® Top 500 Guide for Business-to-Consumer

Suggestions for ZARA: E-Commerce

ZARA – Inditex 2008 Annual Report compared to Inditex 2009 Annual Report

26 million visits in 2008

33 million Inditex visitors are

going on ZARA's website

Recommendations: Branch out to China

New branch in China China’s business environment very

different from Europe’s Needs to adapt if it wants to continue

expanding Central distribution center in

Xiamen Already has foreign investors Located by ocean, great for shipping

Warehouse in many region to highly penetrate the market and to reduce the complexity of the process Faster, more effective and efficient in

distributing their products to the retailers

ZARA: Branch Out To China Outsource

Focus on creating connections Can still have flexibility and better

prices Achieve economy of scale Ex) HungJin Trading Co., Ltd

“Capital intensive” to “Labor intensive” Cost of labor in China still much

lower than Europe Chinese workers lack the skills to

properly operate and manage equipment

Sell Online Online sales have generated billions of dollars

in revenue Victoria Secret earned1.56 billion USD in 2010

Show no signs of stopping, only increasing L.L. Bean’s online sales increased by 29% in 2010

Could do the same for ZARA China has the world’s largest

online population

Green Supply Chain China develops quickly, but at expense of

environment ZARA should create a green supply chain

Create good reputation Be a leader for other companies in China

Thank You!

Q&A