Zara procurement

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Zara By, Group 11 Vaishvik Kale (17) Venkata Ashok (44) Vicky Kumar (45)

Transcript of Zara procurement

Page 1: Zara procurement

ZaraBy, Group 11

Vaishvik Kale (17)Venkata Ashok (44)

Vicky Kumar (45)

Page 2: Zara procurement

History of ZARA

• First ZARA store in LA Coruna in 1975 by Amancio Ortega Gaona

• International Expansion began in 1989• ZARA is Flagship

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Case Facts

• Two seasons:- Spring/Summer and the Fall/Winter Collection

• 200 designers • 11000 styles each year • In house manufacturing was reverse for more

current ( season) production• ZARA do External sourcing for synthetics and

more fashion fabrics

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Cont..• ZARA owned a sourcing company “Comditel” in

Barcelona, manage 40% of fabric procurement• Sewing subcontracted with 400 smaller firms

within Galacia and northern Portugal• Overall turnover time for sewing for 1-2 weeks• 50-60% production in advance and remaining will

based on demand rolling• Centralise distribution for both outsource and in-

house manufactured garments

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Outsourcing Risks and Benefits

• Economies of scale– Aggregation of multiple orders reduces costs, both in

purchasing and in manufacturing

• Risk pooling– Demand uncertainty transferred to the suppliers– Suppliers reduce uncertainty through the risk-pooling

effect

• Reduce capital investment– Capital investment transferred to suppliers. – Suppliers’ higher investment shared between customers.

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• Focus on core competency– Buyer can focus on its core strength– Allows buyer to differentiate from its competitors

• Increased flexibility– The ability to better react to changes in customer demand– The ability to use the supplier’s technical knowledge to

accelerate product development cycle time– The ability to gain access to new technologies and

innovation. – Critical in certain industries:

• Fashion where products have a short life cycle• High tech where technologies change very frequently

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Loss of Competitive Knowledge

• Outsourcing critical components to suppliers may open up opportunities for competitors

• Outsourcing implies that companies lose their ability to introduce new designs based on their own agenda rather than the supplier’s agenda

• 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

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Conflicting Objectives• Demand Issues

– In a good economy• Demand is high• Conflict can be addressed by buyers who are willing to make

long-term commitments to purchase minimum quantities specified by a contract

– In a slow economy• Significant decline in demand• Long-term commitments entail huge financial risks for the

buyers

• Product design issues – Buyers insist on flexibility

• would like to solve design problems as fast as possible– Suppliers focus on cost reduction

• implies slow responsiveness to design changes.

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Outsourcing and Procurement Roles

• Dependency on capacity– Firm has the knowledge and the skills required to

produce the component • Dependency on knowledge– Firm does not have the people, skills, and

knowledge required to produce the component – Outsources in order to have access to these

capabilities.

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Production Sourcing

• About half of total garment production is sourced to third party

• Orders for production are given six months prior to store delivery

• Out of the total outsourced production, 60% comes from Europe and 30% from Asia

• Huge scope of sourcing to (low cost) Asian countries• Fashionable and stylish manufacturing is done in

house• Basics and knits are outsourced

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Drawbacks of outsourcing:• Existing standardized production line• Going away with 'Zara Model' - in time &

customizable delivery

Benefits of outsourcing:• Huge reduction in cost• Capacity expansion

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Production Allocation

1998 1999 2000 2001(expected figures)

In house 53% 50% 44% 40%

External 47% 50% 56% 60%

• Zara commits 50% to 60% of its production in advance of season• Remaining 40% to 50% production is done on rolling basis throughout the season as per demand

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4 P’s

• Product - High Quality, fashion trend• Price – Based on comparables within target

market• Place – Premier commercial streets and

upscale shopping centres• Promotion – WOM, News paper ads (0.3% of

sales)

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Procurement Cost

2000 1999 1998

net sales 2044.7 1603.4 1304.2

EBIT 327.9 248.4 213

net profit margin 0.160366 0.154921 0.163319

To decreae procurement cost by 1% required increase in revenue

6.24% 6.45% 6.12%

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Modular for make/buy decisionsProduct Dependency on

Knowledge and Capacity

Independent for knowledge, dependent for capacity

Independent for knowledge and capacity

Modular Risky opportunity opportunity

Integral Very risky An option Not an option

Zara is independent for knowledge and dependent for capacity to some extent. Most of its products are modular and hence Zara should outsource to reduce cost

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Apparel Industry

• Tier 1 : Fashion elements , quality of material and workmanship Ex: Ladies Suits

• Tier 2 : Little differentiation among producers and little time sensitive fashion Ex: Khakis

• Tier 3: Low quality segment. Products are like commodities Ex: Men’s underwear

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Component level outsourcing (Tier 1)

Criteria Fabric Procurement Garment assembly and Finishing

Customer Importance High High

Component clockspeed High High

Competitive position High High

Capable suppliers Low Low

Architecture Little Integral Highly integral

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Component level outsourcing (Tier 2)

Criteria Fabric Procurement Garment assembly and Finishing

Customer Importance Medium High

Component clockspeed Medium High

Competitive position High High

Capable suppliers High Low

Architecture Highly High

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Component level outsourcing (Tier 3)

Criteria Fabric Procurement Garment assembly and Finishing

Customer Importance Low Low

Component clockspeed Low Low

Competitive position Low High

Capable suppliers High High

Architecture(Modular or Integral)

Highly modular Highly Modular

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Kraljic’s matrix

Bottle neck items

(Ensure Supply)

Strategic Items(Form

Partnerships)

Non Critical Items(Simplify and

automate)

Leverage Items(Exploit purchasing

power and minimize cost)

Supp

ly R

isk

Profit Impact

High

LowLow High

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• Fabric procurement – Leverage Items• Garment assembly – Bottle neck item• Finishing –

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Conclusion & recommendations

• Maximum of 60% production which Zara produces in advance of season can be outsourced

• Remaining 40% of the production can be done in house throughout the year as per demand fluctuations

• Thus Zara will be able to meet demand fluctuations without need of maintaining excess inventory

• Zara will be able to benefit from low production costs by outsourcing to Asian countries

• At the same time, Zara will be able to meet customizable demands thereby preserving Zara's fashion forward image