UNIVERSITY OF TEXAS AT SAN ANTONIO

Supply Chain Management MS 4543

Final Project
Analyzing logistics process and suggesting improvement of ZARA

Csar Chvez
JXU186
Edsel Mndez
JTI252
Albert Hernndez
RRO034
Professor: Minghe Sun
April 21, 2016
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Index
I.
Abstract
II.
Introduction
III.
Literature Review
- ZARAs current process
- ZARAs business strategy
- Time and flexibility
- Inventories and production
- ZARAs process capabilities
IV.
Methodology
- Problems and Weaknesses
- American plant
- Current network
V.
Results
- Implementation
VI.
Conclusions
VII.
References

I.

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Abstract

Our team
Our team emerged in a search for new logistic solutions and possible
opportunities in various companies that are known world-wide. Our main objective of
this research is to show how our work has by itself a new point of view of the current
way of shipping products around the world and innovative ways of improve the
known and often used ones.
To find the best choice for an enterprise to work with, we searched for an
organization that could provide us a large amount of data or in the worst case
scenario, the faculty to calculate and analyze it because of its fame and success.
This is the reason why we chose the company ZARA, a world-wide famous
organization that is in charge of delivering clothes and fashion accessories across
the world not only constantly but changing the product itself, SKUs, suppliers and

other important matters for the faculty of deliver them at the same time in every
country they appear on.
Besides the known fact that ZARA has new trending fashion collections some
times every month, and new accessories and parts of the collection weekly, we have
found that ZARA has opportunity areas where we can suggest new solutions to
improve their service quality, logistic management costs and diminish their labor
work or ameliorate the current one.

II.

Introduction

The Fashion Industry today

The current way the world sees fashion has changed almost completely
compared with how it was done no more than twenty years ago. Fast fashion is a
trending way for the clothing industry to present new collections brought from the
fashion week in spring and autumn but in a fast delivery using cheap quality textiles
and quickly design, taking almost all of the production processes in developing
countries like Vietnam, China, India, Mexico, etc.
The suggestions that we will propose are divided in three types: Strategic,
Tactical and Operational. This differentiation is very important to analyze before
starting the planning stage and even more when the solutions want to be applied.
The strategic decisions are characterized for implicate investment on plants
and capacities; introducing new products and creating logistics networks. This
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decision making level shows a timeline of implementation of three to ten years,

based on historic data. Tactical decisions are recognized for changes on inventory
policies; implementation of procurement policies and adoption of transportation
strategies. The implementation timeline of this kind of decisions are from three to two
years to complete. The operational decisions show immediate results and are
relatively easy to implement, we want to make at least an operational decision
making suggestion. This decisions could be: Scheduling of resources; routing of raw
materials and finished products; solicitation of bids and quotations. The
implementation timeline of operational strategies is more or less than one day. This
tells us the importance of this little changes in processes that impact the
competences of a company in a long term planning.

III.

Literature review

ZARAs current process

This being said, we continue to discuss the position of ZARA in the market on
the current timeline. The mayor comparable competitors of ZARA are Benetton, H&M
and Gap. This three as well as ZARA have a vertical scope and include men,
children and women clothes in their collections.
In comparison with Gap and H&M, which own most of their stores but
outsource all production, ZARA owns much of its production and most of its stores.
Benetton in other hand, has invested in production on a relatively high quantity, but
its stores are ran by licensees. They compete in the same market but have
differences that make them kind of unique, for example the fashion level of ZARA is
higher than the other three but its prices are lower than Benetton and Gap. H&M

show a relatively good fashion level (still lower than ZARA) but its prices are
considerably lower than ZARAs.
ZARA is the largest and most established chain of Inditex in the world. Inditex
is one of the largest fashion retailers in the world, including eight stores: Pull and
bear, Massimo Dutti, Stradivarius, Bershka, Oysho, ZARA home, Uterqu and of
course ZARA. The design and production unit of ZARA is located in La Corua,
Spain, where a large amount of outsourced operations are made in more than a
thousand firms. ZARA is updated with the fashion week at a very precise level with a
creative team of more than 200 designers, offering like this a designer line of clothes
for everybody at any age at an attainable price. One invisible cost is payed thought,
the textile quality of their clothes wont last more than a few seasons if used with
moderation.
ZARA is established in seventy four countries with a network of 1,395 stores
located in the largest cities of the most developed countries. Inditex is owned by
Amancio Ortega Gaona who started his career in 1963 as a clothing manufacturer,
has managed to grow in a stable line over the time until he owned several factories
that will distribute their merchandise to the other European countries. One of the
succes ideas that made Inditex and thus, ZARA the companies that they are today,
came from Amancio, like to copy the fashion designs of very expensive clothes and
kind of replicate them with cheaper textiles and in a big volume. Today Inditex counts
with 4,607 stores in seventy four countries and one hundred companies operating in
textile design, manufacturing and distribution.
An ideal country for ZARA to enter has always followed similar characteristics.
A remarkable resemblance with the Spanish market is fundamental, as well as a
minimum economic development. Macroeconomic studios are made, where the
variables of local markets in each nation in proportion to a wide world economy is
probed in terms of how much will those variables affect the business at the country in
mind. This variables include tariffs, legal costs, property prices or rents, taxes and
salaries. Then a microanalysis is done inside the country after the parameters of the
macroeconomic studio were checked and accepted. This studio is performed in a
more local way, gathering data like demand, distribution channels, local competitors
and available store locations.

Figure 1. Regional Sales

ZARAs business strategy
ZARA strategy is based on being as flexible as possible to satisfy customer
changing needs in a low cost mass fashion market. This objective is achieved by
being the most vertically possible. ZARA is involved in every part of their process.
Most of the fabrics are bought undyed, to facilitate flexibility in every seasonal
change. ZARA makes 40% of their own fabrics and 60% of their own products.

Figure 2. Supply of Fabrics and ZARAs Products

Being the owner of the process allows ZARA his constant flexibility. Most of
providers cannot be as flexible, since they are not involved in fashion tendencies. A
ZARAs customer visits the store 17 times a year, while competition only receives 3
visits.
Their pricing strategy depends on the zone. While in Europe and USA the
markets are bigger due to their incomes (80% of Europe can afford ZARA), in
Mexico it is more focused to upper and upper middle classes.
Time and flexibility
ZARA business model covers every aspect of the business, from design and
manufacture to distribution and retail. This implies that flexibility is not as difficult as
when external providers are involved. It only takes 15 days from designing process
to the retail store. Low batches are produced and tested directly with customers. If
the product goes well they increase production, otherwise they take it off the market.
As we can see, responsiveness is vital for ZARAs strategy. A very effective logistic
system should be implemented to satisfy all this changing customers needs. Part of
changing so quickly the inventory inside the stores (70% to 90%) creates scarcity of
the products. This means that products become more desirable.
Customers know that if they don't buy the product in that moment, they
probably won't find it next time they go to the store. ZARA offers a lot of variety. They
deliver into their stores twice a week. You can find almost a new store every 3 to 4
days.
A regular fashion process takes 6 months, they have managed to reduce it to
6 weeks.

Figure 3. Fashion Process

Time and flexibility are vital metrics but still costs need to be maintain low to
arrive to big markets. They don't have advertising, instead they invest on the best
locations in cities to be positioned as a top brand.
Inventories and production
Throughout the expansion of ZARA this company has remained focused on its
fashion philosophy that creativity and quality design together with a quickly response
to market demands will get profitable results. To have this results they developed a
business model that incorporate the three following goals: develop a system that
require short lead times, decrease quantities produced to decrease inventory risk,
and increase the number of available styles and choice. This goals helped to
combine moderate prices with the ability to offer new clothing styles faster than its
competitors.
In terms of information and communication protocols, ZARA spend less than
0.5% of total revenue on IT and IT employees account for only 0.5% of ZARAs total
workforce. ZARA utilizes human intelligence and information technology in order to
have a hybrid model for information flow from stores to headquarters. This type of
intelligence assisted IT solutions results in well-managed inventories, linkages
between demand and supply, and reduced costs from obsolete merchandise
ZARA, unlike his competitors, do not use Asian outsourcing. Eighty percent of
his clothes are made in Europe and 50 % made in ZARA controlled facilities in the
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Galicia region near headquarters. Also the local strategic partnerships that ZARA
maintains with manufacturers allow for a product throughput time of 3 or 4 weeks
from conception to distribution. Store inventory changes frequently, about 75% of the
merchandise is changed three to four weeks so they need to buy it on the spot. His
inventory models are based mainly in determining the quantity that should be
delivered to every single one of its retail stores so the stock delivered is strictly
limited making sure that each store only receive what they need. Also the quick inreason turnaround allows ZARA to ship more often and in smaller batches.
ZARA has a centralized distribution system that gives the chain a competitive
advantage by minimizing the lead-time of their goods.

Figure 4. Distribution System

ZARAs supply chain consists of four warehouses located in Spain which
periodically receive shipments of finished products from internal and external
suppliers, and ship replenishment inventory directly to every ZARA store. Each outlet
sends in two orders per week on specific days and timing, as well as trucks leave at
specific times and shipments.
In general this successful brand have cross-functional operations strategy,
enables mass production under push control, leading to well-managed inventories,
higher profitability, lower markdowns, and value creation for shareholders.
ZARAs process capabilities

ZARAs production and logistics processes can achieve something that was
unthinkable not so long ago. Now, with the automatization of every process, along
with a great communication through all the supply chain it's possible, but ZARA
hasnt achieve its best jet. A lot of opportunity areas have emerged while the
technology develops, especially when countries that were developing now have the
faculty to buy their products and the need to expand their brand is growing as well as
the competition does. ZARA is a powerful brand with a strong production
infrastructure and well established suppliers. Their supply chain has changed a lot
over the years, as the consumer saw value on their products and as well as their
suppliers, the behavior of their production, from manufacturing and wholesaler to
retailer and consumer has changed from a push system to a pull one. The inventory
for replenishment at the store was diminishing and the right amount of product
arrived to the customer all the way from the manufacturer.
ZARA sources finished goods, inputs and fabric from suppliers from other
regions by helping itself with the purchase of offices in Barcelona and Hong Kong
and the personnel sourcing at headquarters. Hong Kong and Asias market in
general is a well-established goal to ZARA as their demand has increased on a
significant percentage on the last six years.
In terms of productivity, about one half of to facilitate the in season updating
with maximum flexibility, about one half of the fabric purchased is undyed. Comditel,
a one hundred percent owned subsidiary of Inditex, funnels much of this volume.
This company dealt with more than two hundred external suppliers of fabric and
other raw materials. This same enterprise is in charge of the dyeing, finishing of
undyed and patterning fabric for all the chains owned by Inditex besides ZARA, and
work as supplier and outsource for many other companies for a forty five percent. All
the purchases of raw materials and prefabricated products are bought in a majority
on Europe with a 95%, Asia with 4% and only 1% in Latin America.

IV.

Methodology

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Problems and Weaknesses in the current process of ZARA

As it has been discussed, some of the keys to ZARAs success in the past
years have been the centralized distribution, vertical integration and fast inventory
turnaround. It results paradoxically however that these same concepts are the
biggest weaknesses that ZARA has to improve in the near future if it wants to keep
growing. As we will discuss in the following paragraphs, the current logistic system
that ZARA uses is effective for now, but with time, they will need to do significant
changes if they want to stay competitive especially in the Americas.
Even though ZARA has a great presence in most countries of Europe, just
recently it has gained market share in the Americas. Furthermore, ZARA is
particularly weak in the US. If we consider that the US represents 29% of the total
apparel market worldwide; (making it the single biggest market in the world and a
very profitable one) it is worrisome that there are only 53 ZARA stores in the US of a
total of over 6000 stores worldwide.
This indicates that ZARA is not able to compete in the US with other
companies such as GAP and H&M which have 2,551 and 407 stores respectively.
This lack of competitive power can be directly explained by ZARAs centralized
distribution and production; to better understand the issues we describe once again
these two aspects from ZARAs logistic system:
ZARA manufactures about 60% of their products in Spain. These products are
then sent to their respective markets and according to ZARAs business model, they
have to arrive to the store within 48 hours. For the American markets, products have
to be shipped using air transport, and then these planes bring raw materials back to
the factories from different countries in America such as Mexico and Brazil. The
increased cost of transportation, the higher wages of the European workers
compared to the Chinese workers make it impossible for ZARA to compete with price
in the Americas. Furthermore the prices in the US are 100% higher than in Central
Europe not precisely because of the increased costs but because of ZARA
capitalization strategy of wealthy markets (ZARA applies the same 100% premium
for Scandinavian stores). All of these factors, coupled with the lack of advertisement
and overall general interest from ZARA, have produced a very slow market
penetration in the US.

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It is clear that ZARAs current strategy does not contemplate increasing their
market share in the US and Latin America as a primary objective but rather just keep
a presence in such markets. Nonetheless, at some point in time ZARA must fully
incursion into the markets of America. When this moment arrives, the current
distribution setup would make it unfeasible to transport such large quantities of
finished product from Spain to the US while maintaining a 48 hour lead time and
compete with GAP and H&M.
It results logical, that one of the most important steps for the growth of ZARA
is to increase their market share in the US which is not only the largest one in the
world, but also one of the most profitable ones. We consider that in order to do so,
some changes to the current distribution methods would need to be implemented.
We have concluded that whenever ZARA decides to fully enter the US market a
production plant would need to be constructed somewhere in Latin America
American Plant
The following image represents the current store distribution network from
ZARA. As we can see, products come either from Spain (red lines) or from China
(yellow lines). As discussed the issue with this network is that shipments from Spain
to the US, Mexico or Brazil, have to be done using air freight compared to the truck
freight used for most of Europe, this signifies a much higher transportation cost.

Figure 5. Current Network

Current network
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As a quick example, we will calculate the shipment costs that ZARA incurs in
the Americas: let's assume ZARA has 6000 stores and that each store sells roughly
the same amount of garment; this would mean that from the 125 million clothing
produced in Spain each year, each store receives approximately 21,000 garments
(125,000,000/6,000). According to ZARA business model each store receives a
shipment each week, giving us a total of 420 garments shipped each week to each
store (21,000/50).If we set the average garment weight at 200 gr we get weekly
deliveries of 84 kg to each store. An estimation with FedEx resulted in a cost of
$2000 USD per shipment (from La Corua to Chicago); assuming ZARA obtains very
good rates, we will set the shipment cost at 1500 USD.
The following table shows the estimated total annual shipping costs to the
three biggest markets in the Americas:

Country

# of stores

Annual Shipping costs (USD)

Mexico

66

4,950,000

Brazil

56

4,200,000

US

50

3,750,000

Total

172

12,900,000

Country

# of stores

Rate(USD/trip)

Annual Shipping costs (USD)

Mexico

66

1500

4,950,000

Brazil

56

1500

4,200,000

US

50

1500

3,750,000

Total

172

V.

12,900,000

RESULTS

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These numbers do not take into consideration the pooling of shipments so we

will assume that the total annual shipping cost is of approximately 10 million USD.
If ZARA had a production plant in Mexico for example, air transport of 84 kg
packages to the US according to FedEx is $800 USD. This represents roughly a
50% reduction in shipping costs to the US, furthermore shipments within Mexico
would certainly be made by truck reducing cost by almost 80% and shipments to
Brazil would be reduced by 20% ($1500 from La Corua to Sao Paulo vs $1200 from
Tijuana to Sao Paulo). Overall shipping cost could potentially be reduced by 50%
which according to the 10 million USD annual shipping cost to the Americas
represents 5 million USD per year. Keep in mind that these savings were calculated
assuming air transport to all parts of the US when if shipping from Tijuana, most
places can be reached within 48 hours by truck
Finally, if we assume that ZARA had 400 stores in the US (same amount of
stores as his competitor H&M) the total shipping cost using the current network
would be as shown in the next table:

Country

# of stores

Rate(USD/trip)

Annual Shipping costs (USD)

Mexico

66

1500

4,950,000

Brazil

56

1500

4,200,000

US

400

1500

30,000,000

Total

172

39,150,000

Comparing these to the cost of shipping from Tijuana

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Country

# of stores

Rate(USD/trip)

Annual Shipping costs (USD)

Mexico

66

250

825,000

Brazil

56

1200

3,360,000

US

400

800*

16,000,000

Total

172

20,185,000

*Once again these assumes air transport to all US stores when most could be
reached with truck
Roughly a 20 million USD saved each year. We think that these savings,
make it very feasible to build a production plant somewhere in Mexico

Figure 6. Proposed network

If we analyze the current structure of the productions plants in Europe we can
see that the production plants are located in countries where the labor wages are
lower to other countries in the region (e.g. wages in Spain vs wages in Germany) but
the countries where the production plants are located are also big markets for the
products themselves (ZARA has over 400 stores in Spain). Our proposed distribution
network creates a replica of this network; Mexico has lower wages than the US or
Canada and at the same time is a strong market in the Americas.
Implementation

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These proposed changes depend greatly on the strategic objectives set by the
company. In order to justify a production plant in XXX, large efforts to penetrate the
US, Mexican and Brazilian markets would need to be made. This coupled with the
capital investments that a production plant would need would place a large financial
burden on the company, one that the company might not be willing to take in the
coming years.
It is also possible to maintain the current strategy and let the market penetration
of such countries occur at a slow rate, this strategy however would require at some
point in time to include a production plant in the mentioned country.
VI.

Conclusions

It results logical, that one of the most important steps for the growth of Zara is to
increase their market share in the US which is not only the largest one in the world,
but also one of the most profitable ones. We consider that in order to do so, some
changes to the current distribution methods would need to be implemented. We have
concluded that whenever Zara decides to fully enter the US market a production
plant would need to be built somewhere in Latin America.
VII.

References

Palladino, A. (2010). Zara and Benetton: Comparison of two business models

(1st ed., Vol. 1).
Dutta, D. (2002). Retail @ Speed Of Fashion (Vol. 1).
Zara. (n.d.). Retrieved from: http://www.inditex.com/en/brands/zara
Zara leads in fast fashion. (n.d). Retrieved from:
http://www.forbes.com/sites/walterloeb/2015/03/30/ZARA-leads-in-fast-fashion/

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