Zara procurement
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Transcript of Zara procurement
ZaraBy, Group 11
Vaishvik Kale (17)Venkata Ashok (44)
Vicky Kumar (45)
History of ZARA
• First ZARA store in LA Coruna in 1975 by Amancio Ortega Gaona
• International Expansion began in 1989• ZARA is Flagship
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
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
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.
• 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
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
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.
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.
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
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
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
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)
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%
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
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
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
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
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
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
• Fabric procurement – Leverage Items• Garment assembly – Bottle neck item• Finishing –
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