CASE STUDY ON ZARA

SUBMITTED TO: SUBMITTED BY:Prof. Subir Guha Kangna Sood

Neha ChauhanAkanksha ChaudharyAnkit IsraniAzizul Rub

INTRODUCTION

• Jose Maria Castellano Rios was the Chief Executive Officer of

the Spanish apparel company Inditex.

• On January 15, 2002 he stepped to the podium to receive the

International Retailer of the Year award from the National

Retail Federation.

• This year had been a down year for retailers. Retail

consolidations and bankruptcies were occurring at the fast

pace. But Inditex and its flagship company Zara managed to

show impressive growth and strong profitability.

• 2001 had been a landmark year for Inditex, for the founder

Amancio Ortega Gaona and for Castellano.

HISTORY OF ZARA

• Mr. Gaona was a native of Galicia and he had worked as a clerk

at a ladies apparel retailer before starting his own housecoat

manufacturing business in 1963.

• He opened the first Zara store in La Coruna in 1975.

• By 1989, there were 82 Zara stores in Spain. Then he began

international expansion with Zara stores in Portugal, Paris and

New York.

• Zara’s parent company Inditex took on 4 other formats: Pull

and Bear, Massimo Dutti, Bershka and Stradivarius.

• Oysho was launched in 2001. This was an intimate apparel

and swimwear brand.

SELECTED FINANCIAL INFORMATION FOR INDITEX

Fiscal Year

(Euro in millions) 1996 1997 1998 1999 2000

Income Statement Data

Net Sales € 1,008.50 € 1,217.40 € 1,614.70 € 2,035.10 € 2,614.70

Growth 16.80% 20.70% 32.60% 26.00% 28.50%

Gross Profit 487.5 599.1 814.8 1046.7 1337.7

Gross Margin 48.30% 49.20% 50.50% 51.40% 51.20%

Operating Income 152.4 192.8 242.1 299.6 390.3

Operating Margin 15.10% 15.80% 15.00% 14.70% 14.90%

Net Income 72.7 117.4 153.1 204.7 259.2

Balance Sheet Data

Total Assets 820.3 977.2 1326.3 1772.9 2107.6

Total L & SE 820.3 977.2 1326.3 1772.9 2107.6

Financial Statistics

Days Inventory (fye) 35.6 33.8 34.2

Net Working Capital -123.4 -133.7 -204.9 -234.3 -273.9

Operating Statistics

Total Retail Sales (millions) € 1,525.50 € 1,998.80 € 2,606.50

Average Sales per Store (millions) € 2.04 € 2.17 € 2.41

Total Retail Stores 748 922 1080

Average Sales per Sq. Meter € 4,752.34 € 4,534.69 € 4,853.82

Total Selling Sq. Meters 321000 441000 537000

Same Store Sales 11% 5% 9%

Inditex-Net Sales & EBIT by concept

Net Sales

(Euro in millions) 1998 1999 2000

Zara € 1,304.20 € 1,603.40 € 2,044.70

Pull & Bear 131.9 143.8 172.6

Massimo Dutti 120.5 144.2 184

Bershka 22.3 82.1 134.9

Stradivarius N/A 26.3 72.5

EBIT

(Euro in millions) 1998 1999 2000

Zara € 213.0 € 248.40 € 327.9

Pull & Bear 15.00 17.1 24.1

Massimo Dutti 14.2 17.4 20.3

Bershka -3.7 7.1 8.4

Stradivarius N/A 1.7 -3.2

• By 2000, over half of Inditex sales were outside Spain.

• During 2000-01, Inditex received widespread favourable

press and analyst coverage which resulted in Inditex’s

success and attributing it to Zara’s unique integrated

business model.

• Due the success of Zara, it was being described as “possibly

the most innovative and devastating retailer in the world”.

• Inditex made an initial public offering of stock in May 2001

and was world’s third largest clothing retailer at time.

• Zara offered clothing for women (about 58% of sales), men

(about 22%) and Children (about 20%).

• In its offering document, Inditex described Zara in the

following way:

Zara is a high-fashion concept offering apparel, footwear

and accessories for women, men and children from

newborns to adults aged 45.

Zara stores offer a compelling blend of fashion, quality and

price offered in attractive stores in prime locations on

premier commercial streets and in upscale shopping

centers.

Our in-house design and production capabilities enable us

to offer fresh designs at our stores twice a week

throughout the year.

• At the end year 2001, Inditex was operating over 1200

stores in over 35 countries around the world.

• Analysts projected that Inditex stores would easily number

2000 within 5 years.

• Zara’s vertically integrated model depended to a great extent

on local Spanish sourcing for a large proportion of garment

manufacture. But Castellano had considered that Zara would

shift more production offshore (abroad), probably to Asia, to

take advantage of the lower wage costs.

CRITICAL ISSUES FACED BY INDITEX:

• How much of a shift was necessary to support Zara’s

expansion and to meet possible pricing pressures.

• How much of a shift could be made without undermining

Zara’s success.

INDITEX’S PRODUCT POSITIONING

+ Price

Next

Benetton

Cortefiel

Gap

Massimo Dutti

- Fashion Vogele Zara Mango + Fashion Stradivarius

H & M

Fast Bershka

Pull and Bear

Matalan

- Price

+ Causal

Bershka

Gap

Stradivarius

Pull and Bear

H & M

Next

- Young Mango Zara + Young

Benetton

Cortefiel

Massimo Dutti

+ Formal

THE TEXTILE AND APPAREL INDUSTRY

• In 1999, the global textile and apparel industry accounted for

5.7% of the production value of the world manufacturing

output and more than 14% of the world employment.

• The clothing market in the major countries was estimated at

about $580 billion, with US accounting for about $180 billion

and Western Europe about $225 billion, Eastern Europe about

$14 billion, Latin America about $45 billion and some parts of

Asia represented areas for potential market growth as income

levels rose and markets matured out of a highly fragmented

stage dominated by independent retailers.

• The production of textile is capital intensive. Textile

manufacture tend to be highly specialized, depending on

the raw materials (natural or synthetic or blend), whether

the cloth is woven, knitted, matted or fused, the dying or

painting, treatment and finishing and the overall

performance characteristics desired for the end product

such as how well it accepts and hold dye, how well it

insulates and machine wash ability.

• Apparel production involves the procurement of fabric, the

preparation of designs including samples and patterns, the

cutting of fabric and the sewing and finishing of garments. For

knitwear, the production process is modified to incorporate

the procurement of yarn and the knitting process.

• In terms of production, the apparel industry could be

roughly broken down into three tiers of quality:

a high quality segment – items that incorporate fashion

elements and emphasize quality of material and

workmanship such as ladies suits

a medium quality segment – quality of material and

workmanship had to be acceptable but where there was

little differentiation among producers and relatively little in

terms of a time-sensitive fashion component (cardigans,

khakis)

a low quality segment – product competed on price

• Low wage countries had grown their production volume in

medium and low quality segment. They were also

increasing their share of high quality production.

• In apparel industry, meeting high quality demand was more

important for profitability.

• The more mechanized parts of production – fabric

production, including knitting by machine and cutting –

setup time was not significant.

• Except for commodity like garments, the ability to manage small

batch production to meet the ever-changing tastes of consumers

placed a premium on flexibility and responsiveness of the

production system.

• Sewing and finishing was done manually and so was labour

intensive.

• Women who were working in apparel production as workers were

receiving low wages.

• Significant drivers of production sourcing were wage levels, raw

material quality and availability, skills requirement and workers

productivity, transportation time and cost, political and foreign

exchange risk and social responsibility concerns.

• Quotas and tariffs were also an important consideration.

• China had entered WTO so it increased its production but

also resulted in the reduction of trade barriers affecting

imports of goods from the European Union into Latin

American countries.

• The regional reduction of trade barriers had fostered

(promoted) increased manufacture in Eastern Europe,

Turkey and Northern Africa in support of European markets

and Mexican, Caribbean and Central American

manufacture in support of the US market.

THE TEXTILE AND APPAREL INDUSTRY IN THE E.U. AND IN SPAIN

• The textile and apparel industry in the E.U. employed

about 2 million people in 1999. This generated a turnover

of 178 billion euros.

• Italy had the largest percentage of the E.U. textile and

apparel business at 31%, UK at 15%, Germany at 14%,

France at 13%, Spain at 9% and Portugal at 6%.

• E.U. countries were leaders in the development of high-

tech fibers and related technologies.

• This industry was known for subcontracting within regional

clusters of small and independent but collaborative firms.

• Inditex was tapping or managing into the subcontracting

networks to run manufacturing on a larger scale.

• The textile and apparel industry in E.U. run on low

overhead.

• In apparel, E.U.’s special strength was design driven

manufacturing. There was close relationship between

clothing and textile companies.

• There was a significant volume of outsourcing of labour

intensive operations to Eastern European and

Mediterranean rim countries which were near enough to

provide rapid turnaround and could be relatively easily

monitored for quality control.

• Spanish textile and apparel industry was comprised of

small firms and traditionally was not strong in R&D or

technological innovation.

• In 1990’s Spain experienced greater prosperity with rising

wage levels and its domestic customer base had become

more sophisticated.

• Spanish people cared about fashion and quality while

purchasing clothes. They don’t consider price.

• Ortega’s home province of Galicia is in the rainy northwestern

corner of Spain. Its economy had been rooted in farming, fishing

and mining. Galicia had been poorer and there was high level of

unemployment. Due to this many people in early 20th century

emigrated from Galicia to Argentina, Uruguay and Cuba.

• This helped in reducing unemployment and improving skill levels

had been the priorities of the Galician regional government and

labour organizations.

• Through Galicia had not been known as a center of textile and

clothing manufacture on an industrial level, in 1980’s the

region began an aggressive push to evolve traditional

dressmaking skills and participate in the sector by promoting

a concept of “Galician fashion.”

• By 1998, 29 thousand people (most of them women) worked

for about 760 firms in Galicia who were involved in textile and

apparel business.

• 75% of production consisted of the assembly line production

of garments and 16% of knitwear production.

• There were large firms headquarters in Galicia – Adolfo

Domingues, Caramelo, Mafecco and Zara.

• Galicia’s share of national production in the textile and

clothing sector increased from 7% to 14% from 1991 to

1997.

• Employment generated by Galician clothing firms

represented 10.5% of the total jobs created by this sector

in Spain for this period.

• Exports from the region increased ten fold from 1991 to

1998.

ZARA MODEL

Zara Planning and Design Cycle

• There are two seasons, spring/summer collection arrive in

stores in January/February and the Fall/winter collection

arrive in August/September (reversed for the Southern

hemisphere).

• About a year in advance designers began to work to define

dominant themes and colors, and then to put together an

initial collection.

• Zara had 200 designers. Designers were catwalk-influenced

and expected to adapt haute couture style for the mass

market.

• Zara produces about 11 thousand styles each year, and all in

relatively small batches to begin with. This encourage them to

experiment.

• Designers work in large open spaces at Zara’s headquarters,

with one design center for each of the women’s, men’s and

children’s lines.

• Sketches are prepared by hand but worked on a CAD system.

• Design centers were light and modern, with pop music playing

in the background.

• The store specialists work in same rooms, review daily

detailed printouts of store sales and gather the feedback from

store managers. Each store specialist is responsible for a

group of stores by region and visit them periodically.

• Each store manager should have retailing experience and is

chosen for her commercial design sense and feel for market

trends, because it is the job of the store manager to feed

market information from the stores back in to the design and

production decision making.

Pattern and Samples

• In some cases, designs were sent out to third part suppliers

for them to prepare sample or the sample pattern and then a

sample garment were prepared in-house.

• Patterns once finalized could be made available to the

computers that would guide the cutting tools.

• Based on the samples, the initial collection for the season was

finalized and shown within Zara.

Production Sourcing and Scheduling

• Once the initial collection had been approved, the related

fabric procurement and production planning started.

• Where garments were third party sourced, commitments

were made 6 months prior to the scheduled store delivery,

while garments for in-house production were scheduled for

manufacture so that they are ready in time.

• Of the outsourced production, about 60 percent came from

Europe and 30 percent from Asia, with the balance from rest

of the world.

• Decision to source or to manufacture in-house was based on

a number of considerations, including expertise, relative cost

and, especially, time sensitivity.

• There are 21 Zara factories, each managed separately.

• Garments with fashion styling tended to manufacture in-

house while basics and knits tended to be outsourced.

• Zara committed about 15-25 percent of its season inventory

six months in advance of the season. By the beginning of the

season about 50-60 percent of its season inventory had been

committed.

• About a quarter of the season’s collection was made available

at the start of the season.

• In-house production was weighted 85 percent to in-season

production and 15 percent to the next season’s production.

In-house Manufacture

• Two basic steps:

− Fabric procurement

− Garment assembly and finishing

• Inditex owned a fabric sourcing company in Barcelona

(Comditel), several textile production companies and a share

in a fabric finishing company, Fibracolor.

• Comditel managed about 40 percent of fabric procurement.

• Set up time for dying or printing was about 4 or 5 days, whole

process taking about a week.

• Zara relied on external sourcing for synthetics and more fashion

fabrics.

• Based on styles and sizes, the Zara factories cut the fabric.

• Fabric was cut by machine based on a computer layout or pattern

pieces.

• The layout was arranged by people working at computer terminals

who specialized in appropriate layout with minimum waste.

• The cut fabric pieces were marked and bundle for sewing.

• Sewing was subcontracted to a network of 400 smaller firms, the

areas where wages were low and unemployment high.

• Zara enabled many women to work, including on a part-time

basis.

• Deliveries between the Zara factories and the subcontractors

occurred many times in a week.

• Overall turnaround time for sewing ran a week or two.

• Pressing, tagging and final inspection occurred in Zara

factories.

• It takes around 10 days to finish a style production.

In-Season Production

• Zara committed only 50-60 percent of production in advance

of the season, the remainder manufactured on a rolling basis

during the season.

• The in-house portion of the in-season production could be

easily modified in response to the market demand.

• According to Miguel Diaz Miranda, VP of Manufacturing –

The size of production run-scale is not an issue. They cover

the cost on the garments through markup. It is the product

that drives the customer.

For an expected very strong demand, they take higher risk on

the fabric purchasing decision. Sometimes they take a

decision that from a economic point of view might not seem

sound. For example, if an item was selling well, but if they

think that they are saturating the market with one look they

stop manufacturing it and create unsatisfied demand on

purpose.

• It was the ability to respond in-season that gave Zara a

different fashion risk profile.

• Zara respond with alternative offerings when the initial

collection items perform poorly.

Distribution

• Distribution of both outsourced and in-house manufactured

garments was centralized at Zara’s 50,000 square meter

distribution center in Arteixo.

• Centrally located among fourteen manufacturing plants.

• Garments move along 211 km of track from the cluster of

factories.

• Hanging garments were arranged on coded bars that sorted

automatically by style within the distribution center; stock

picking was done manually.

• Folded garments were sorted on a carousel, with each

garment dropped down a chute toward a box for its

destination store based on its bar code.

• About 2.5 million garments move through the distribution

center each week.

• The distribution center was utilized at 50 percent capacity at

the end of 2011, more distribution capacity needed to come

on-line, and the company was building a second distribution

center in Zaragoza, Spain.

• Shipments were made out of distribution center twice a week,

by truck to Europe and by airfreight to stores outside Europe.

• No inventory was held centrally, and there was almost no

inventory at the stores that was not on the selling floor.

Retailing

• Store mangers asked for items that they wanted in their store,

but the final allocation were made centrally, taking into

account current store sales and inventory information.

• Stores received new inventory several times a week.

• Freshness in assortment is very important.

• Items that were not sold could be returned for possible

reallocation to other stores or for other outlet sales.

• Only previously in stock could be marked down. Zara tried to

minimize the volume of merchandise moved at end-of-season

sale prices.

• Zara experienced 15-20 percent markdown sale of season

volume.

• Zara did not advertise, instead relied on word of mouth.

• Typical expenditure for retail advertising is 3-4 percent of

sales. At Inditex it ran at 0.3 percent, almost all of that for

simple newspaper notices of the sales period.

The Stores

• Zara stores were uniform, including as to lighting, fixtures and

window display, as well as the arrangement of garments, with

a targeted floor space of 1200 square meters.

• Store locations were upscale in prime high street areas and

the store design, displays and windows emphasized an

upscale, fashion forward message.

• The uncluttered arrangement of goods in uncrowded spaces

coordinated by color made the experience of shopping more

like that in high-end luxury stores.

Pricing Strategy

• Zara prices are based on comparables within the target

market.

• Before 2001, they had a single tag that showed all of its

different prices by country. This simplified the tagging

procedure and also permitted goods to be moved from store

to store without retagging and also permitted goods to be

transshipped between one country to another without

retagging.

• At the beginning of 2002, Zara switched to a system of local

price marking in the stores, using a device that read the bar

code and printed the appropriate local price.

Growth Strategy

• Most of the stores are company owned although in some

markets (e.g the Middle East) Zara had opened a small

number of stores through franchises and in some other

markets (e.g Japan) Zara had opened stored through

alliances.

• Zara did not establish local distribution centers and

warehouses when it entered a market or engage in store-

opening promotions.

• Zara had about 450 stores in 33 countries.

Company Owned Franchise Joint Venture Total

Spian 220 220

Portugal 32 32

Belgium 12 12

France 63 63

United Knigdom 7 7

Germany 6 6

Poland 2 2

Greece 15 15

Cyprus 2 2

Israel 9 9

Lebanon 2 2

Turkey 4 4

Japan 6 6

United States 6 6

Canada 3 3

Mexico 23 23

Argentina 8 8

Venezuela 4 4

Brazil 5 5

Chile 2 2

Uruguay 2 2

Kuwait 2 2

Dubai 2 2

Saudi Arabia 5 5

Bahrain 1 1

Qatar 1 1

Andorra 1 1

Austria 3 3

Denmark 1 1

Total 410 27 12 449

ZARA- STORE LOCATIONS : 2000

A SOURCING DILEMMA

• Zara was on the right track for a continuation of the measured

and organic growth off its business model and unique

positioning.

• Management had constantly revisited Zara’s strategy.

• One element of the strategy was production sourcing.

• Zara had announced that the proportion of outsourced

manufacture would grow, initially to 60 percent, to take

advantage of increased low cost production coming on-line.

Hourly Labor Cost (US $)

Textiles Clothing

India $0.60 $0.39

China 0.62 0.43

Tunisoa 1.76 NA

Morocco 1.89 1.36

Hungary 2.98 2.12

Portugal 4.51 3.7

Spain 8.49 6.79

USA 12.97 10.12

Italy 15.81 13.6

RELATIVE WAGE LEVELS

0

5

10

15

20

25

30

0 0.621.76 1.89

2.984.51

8.49

12.97

15.81

00.43

01.36

2.12

3.7

6.79

10.12

13.6

ho

url

y w

ages

($

)

Relative Wages Levels: Textiles & Clothing

Clothing

Textiles

Production Allocation

1998 1999 2000

In-house 53% 50% 44%

External 47% 50% 56%

100% 100% 100%

Origin of Production

1998 1999 2000

Spain 29% 25% 20%

Portugal 27% 24% 22%

European union 10% 9% 5%

Rest of Europe 8% 11% 15%

Asia 19% 23% 29%

Rest of World 7% 8% 9%

100% 100% 100%

PRODUCTION MOVEMENT

Some of the motivations for outsourcing are

• Economies of scale- an important objective in outsourcing is to

reduce manufacturing costs through the aggregation of orders

from many different buyers . Indeed the aggregation allows

suppliers to take advantage of economies of scale ,both in

purchasing and in manufacturing.

• Risk pooling- outsourcing allow buyers to transfer demand

uncertainty to the CEM.

OUTSOURCING BENEFITS AND RISKS

One advantages that CEMs have is that they aggregate

demand from many buying companies and thus reduce

uncertainty through the risk pooling effect. The CEMs can

thus reduce component inventory levels while maintaining or

even increasing service level.

• Reduce capital investment- another important objective in

outsourcing is to transfer not only demand uncertainty to the

CEM but also capital investment. Of course, the CEM can

make this investment shared between many of the CEMs

customers.

• Focus on core competency- by carefully choosing what to

outsource , the buyer is able to focus on its core strength, that is,

the specific talent , skills, and knowledge sets that differentiate the

company from its competitors and give it an advantage in the eye of

the customers. for instance, nike focus on innovation, marketing,

distribution, and sales , not on manufacturing.

• Increased flexibility- It refer 3 issues-

(i) the ability to better react to changes in customer demand.

(ii) The ability to use to suppliers knowledge to accelerate product

development cycle time.

(iii) The ability to gain access to new technologies and innovation.

These are the critical issues in industries where technologies change

very frequently, for eg: fashion products.

• Loss of competitive knowledge- outsourcing critical components

to suppliers may open up opportunities. Similarly outsourcing

implies that companies lose their ability to introduce new designs

based on their own agenda rather than the suppliers agenda.

Finally, outsourcing the manufacturing of various components to

different suppliers may prevent the development of new insights,

innovations and solutions that typically require cross functional

teamwork.

A FRAMEWORK FOR BUY/MAKE DECISIONS

To introduce the framework , we classify the reasons for

outsourcing into 2 major categories:

•Dependency on capacity:- the firm has the knowledge and the

skills required to produce the component but for various reasons

decides to outsource.

•Dependency on knowledge:- in this type of dependency the

company does not have the people, skills, and knowledge to

produce the component and outsource in order to have access

to these capabilities.

The Distinguish Between Integral And Modular Product

Modular Product

A modular product can be made by combining differentcomponents. A personal computer is the good example of amodular product in which the customers specify memory andhard drives sizes , monitor , software and so forth.

This implies:

• Components are independent of each other.

• Components are interchangeable.

• Standard interfaces are used.

• A component can be designed or upgraded with little or noregard to other components.

• Customer preferences determine the product configuration.

Integral Product

It a product which is made up from components whosefunctionalities are tightly related. Thus,

• Integral products are not made from off-the-shelfcomponents.

• Integral products are designed as a system by taking a top-down approach.

• Integral products are evaluated based on systemperformance.

• Components in this are performed multiple function.

A framework for make/buy decisions

product Dependency on knowledge and capacity

Independent for knowledge,dependent for capacity

Independent for knowledge and capacity

modular Outsourcing in risky

Outsourcing is an opportunity

Opportunity to reduce cost through outsourcing

integral Outsourcing is very risky

Outsourcing is an option

Keep production integral

PROCUREMENT STRATEGIES

• Early procurement related to little value addition to the

organization.

• Zara recently adopted good procurement strategies which

will results in good competition and highly profitable company

from others.

• Survey of electronic companies identified 19% profit gap is

there between the least and the most successful companies.

• Lower cost of goods sold accounted for 13%

• This industry is having cost of purchased goods and services

as 60-70 percent of the cost of goods sold.

•2005 comparison shows that Pfizar Profit margin was about 24%,

Compared to Dell’s 5 % and boeing’s 2.8%.

• Reducing Procurement cost by exactly one % of revenue will

leads to the net profit.

•To achieve the good profit margin , Pfizer would need to increase

its revenue by 4.17 %, Dell by 20% , and Boeing by 35.7%

• Implication is that smaller the profit margins, the more focus is

on reducing procurement cost

• Zara formed structure of ensure good supply, Form partnerships,

Simplify and made operations automate , Focused on more

purchasing power with minimum cost and more revenue with

more profit impact.

SUPPLIER FOOTPRINT

• Many industries have changed their supply strategies in the

last three decades.

• In the 1980’s , American automotive manufacturing

companies focused on suppliers either in the U.S. or in

Germany.

• In 1990’s Suppliers shifted in Mexico, Spain, and Portugal.

• Finally in the last years supplier footprint have moved to

China.

• High – Tech industry has been observed with trends.

• In 1980’s Focus of U.S. high – tech companies was on sourcing

in the United States; in the 1990’s , on Singapore and

Malaysia, and recently on Taiwan and China.

• Challenge for the Zara is therefore to develop a framework

which will give a good supplier footprint.

• Zara should consider this strategy by keeping various factors

in mind and they are type of product or component

purchased, forecasting ability, Profit impact, Technology,

Product associated.

• For this Zara took the concept of functional and innovative

products and right supply chain of the products with the good

product strategies.

• Functional products are slow products with low profit

margins like Soup, milk e.t.c

• High – tech products associated with fast products with high

margins of innovative products like cosmetics, fashion items

• Supply chain strategy for both the products are different.

• Appropriate supply chain strategy for functional products is

push and supply chain strategy for innovative products is pull.

• For the retailer who procures functional products , the focus

should be on minimizing total landed cost ,i.e. from the cost

of purchasing to the delivering cost or final destination.

• Cost includes are

1. Unit cost

2. Transportation cost

3. Inventory holding cost

4. Handling cost

5. Duties and taxation

6. Cost of financing

On the other hand , When procurement is done from innovative

products , focusing on total landed cost is the wrong strategy .

Because of the high margins and higher forecast error

• Focus for the innovative products should be on reducing lead

times and on supply flexibility

• When a retailer procures functional products , Sourcing from

the low cost countries, for example , Taiwan e.t.c. Is

appropriate

• When sourcing is done from the innovative products , the

focus is on suppliers close to the market area , i.e., where the

products are being sold with small lead time

CHARACTERISTICS OF FUNCTIONAL VERSUS

INNOVATIVE PRODUCTS

DESCRIPTION FUNCTIONAL INNOVATIVE

Product clock speed Slow Fast

Demand character Predictable Unpredictable

Profit margin Low High

Product variety Low High

Average forecast error

At the time production

Is committed Low High

Average stock out rate Low High

• This representation mainly focus on the following

1. Component forecast accuracy

2. Component supply risk

3. Component financial impact

4. Component clock speed

• Component forecast accuracy is not necessarily the same as

the finished product forecast accuracy

• Criteria also belongs to the decision may be to focus source

CRITERIA

Strategy on minimizing total landed cost, lead time reduction , or

increasing flexibility

• When component forecast accuracy is high, Supply risk is low,

financial impact is high, and clock speed is slow, a cost based

sourcing strategy is appropriate and vice versa

• Focus should be on the minimizing of total landed cost should

be the main objective of the prime procurement strategy as

must consider for the overall portfolio of the strategies