Zara – a Masterclass in Supplier Relationships and Supply Chain ManagementSupplier Management
Zara has not been immune to the effects of Covid-19 but the company has said that it’s flexible business model and approach to supplier relationships have been pivotal in helping it to navigate the pandemic. Although Zara is not a customer of Ivalua, we have many customers who operate in ways which have meant they have been able to continue to operate during this period with little disruption.
How agile Supply Chain Management & Supplier Relationships drive a sustainable competitive advantage
As companies work to build supply chain resilience and agility in their supply chains in light of the Covid-19 pandemic as well as growing pressure to improve sustainability, some lessons can be learned by taking a look back. On September 7th 2016, a relatively unknown person became the richest man on the planet during two days before Bill Gates reclaimed his title (recently overtaken by Jeff Bezos). The man is called Amancio Ortega, and journalists were surprised to find out he is the founder of the retail store Zara.
What is striking in Zara’s success is that the brand keeps defying the rules and conventions of the fashion industry. They do not give many interviews and do not invest much money in advertising or public relations. It also has always taken a non-traditional approach to supplier relationships and supplier collaboration, which offers good lessons for today’s supply chain leaders.
Zara & fast-fashion
Zara’s success is driven in no small measure on a very rapid time-to-market, truly “Fast-fashion”. Fast-fashion is the process of bringing new trends to the market as quickly and cheaply as possible. While Zara is also an outlier in many other domains, it is really its agile Supply Chain that enabled it to become one of the most profitable fashion brands in the world and sustain rapid growth year after year. More significantly, Zara’s approach to establishing an agile Supply Chain is quite interesting.
Zara’s Supply Chain Approach
The key to Zara’s ability to establish an agile Supply Chain rests on the following unique approaches:
- Procurement Methodology: Zara’s Procurement team doesn’t work on the number of finished clothes but on the quantity of raw materials needed to manufacture the clothes. This helps reduce waste, as you can re-use fabric but not resell a piece of clothing that didn’t meet the expectations. A great example of how sustainability can be improved in parallel to cost reduction.
- Deep Collaboration: Supplier relationships are key and suppliers are all close to Zara factories and collaborate tightly, so Zara can order on an everyday-need basis.
- Production Feedback: Everyday, store managers give customer feedback to the market specialists, who then pass the information along to production & design teams. This rapid feedback loop enables a quick and agile response to the market.
- Local Manufacturing: Zara presents a drastically different approach than its competitors. Instead of outsourcing all of its production to Asia or Eastern Europe, it decided to manufacture its products in Galicia for items with a more instable deman. While lower cost production could be achieved in other regions, the faster time to market, reduced transportation costs and low exposure to changing tariffs and politics outweigh that one factor. This reduces overall supply risk, with a more narrow set of risks than posed by more extended, global supply chains. This also helps reduce the overall carbon footprint through significant reduction in transportation.
- Spare Capacity. Zara voluntarily keeps up to 85% of its plants idle, in order to optimize the response to demand changes all around the world. Another interesting approach, quite different to competitors that try to maximize utilization.
- Demand Forecasting: Zara reaps the benefits of very efficient inventory management models that help them determine the exact quantity of items needed for every store. They ship very small batches twice a week. As a result, it creates a sense of scarcity, very few items are unsold, and if the experiment fails there is much time (thanks to their very responsive Supply Chain) to try other different styles. This eventually helps Zara find the right product almost every time.
Zara’s approach is certainly untraditional and has served it well. Supply Chain leaders should assess whether specific aspects are as suitable to their business as to Zara. With the growing pressure for more agile, stable and sustainable Supply Chains, Zara certainly offers interesting lessons to consider. How organizations work with their supply chain and manage supplier relationships is going to be key to getting businesses back to growth in the post-pandemic world.