REPORT

SUPPLY CHAIN MANAGEMENT OF ZARA

Course: Principles of Logistics and Supply Chain Management

Submit to Mr. Duong Vo Nhi Anh

Group members: Lê Phạm Nguyệt Thương BTBTIU15052

Hồ Gia Khánh IELSIU17009

Hoàng Vũ Cẩm Tú IELSIU17092

Nguyễn Minh Tiến IELSIU17004

Nguyễn Thị Hải Vân IELSIU17067

Hà Thị Lưu Ly IELSIU17102

Nguyễn Như Ý IELSIU17049

I. Overview of ZARA brand
1. What is ZARA?

ZARA is a Spanish clothes and accessories brand, which is the flagship brand of
the Inditex group. ZARA is one of the few clothing brands keep up with the latest
fashion, are of high quality and yet, affordable. It is probably the amalgamation of
all these qualities that made ZARA, the Spanish clothing brand become the go-to
fashion brand for all. Currently, there are Zara stores in over 88 countries, with
just over 6500 outlets.

World map of Zara’s stores in 2018

 2. Success of ZARA in fast fashion industry
The secret to ZARA’s success largely was
because of the way it kept up with street
fashion with the changing times. The brand
takes a look at how fashion is changing
every day. It makes new designs and puts
them into stores in a week or two. Most
other fashion brands would take a whole
six months to get their new designs into
the market.

ZARA’s well-constructed supply chain management strategy helps it to be to stand-

out from all other fashion competitors. It makes Inditex became the top 2 successful
supply chain in 2018.

II. ZARA’s strategies in supply chain management

1. Vertical Integrated Operation
a. What is Vertical Integrated Operation
The process in which several steps in the production and/or distribution of a
product or service are controlled by a single company, in order to increase that
company’s power in the market place

RAW FINAL
PRIMARY WHOLE
MATERIALS PRODUCT RETAILING
MANUFACTURING SALING
EXTRACTION MANUFACTURING

b. ZARA’s Vertical Integrated Operation

ZARA manages design, production, shipment, display, promotion, sales, and feedback
itself, relying only diminutively on outsourcing.

This is very much in contrast to the traditional high-volume fast-fashion companies,

which outsource most of their manufacturing to contract manufacturers.

The advantages in ZARA’s Vertical Integrated Operation strategy:

This vertical integration approach gives ZARA a lot of control over how it
operates. In turn, ZARA leverages this control into precise data acquisition and
forecasting, seamless modifications, and reliable quality in its products. Being
vertically integrated also enables more fluid communications between stages of the
ZARA product cycle. Being a sort of subset of the control advantage, ZARA has a
distinct advantage in its ability to create efficient supply chains.
2. Just in Time production
a. What is Just in Time system?

The just-in-time inventory system is a management strategy that aligns raw-material

orders from suppliers directly with production schedules. Companies use this
inventory strategy to increase efficiency and decrease waste by receiving goods only
as they need them for the production process, which reduces inventory costs.
b. Just in Time strategy in ZARA
This is how ZARA efficiently apply the Just in Time strategy into its supply chain:
 General design phase: Customer feedback and opinions are collected by the
store’s managers or staffs and that market analysis, global trends and demand
forecasting data are instantly funneled back to ZARA’s designers every night.
Zara’s prototyping phase:
+ Developing initial sketch
+ Selecting fabrics and other complements
+ Setting selling price
+ Preparing samples
Zara’s execution phase
+ Identifying production requirements
+ Setting a product timeline
Advantages
→ Figuring out what are customer needs and what are their main concerns
→ Reducing the customers concern
→ Producing right products

 ZARA’s manufacturing process:

+ Specifications are sent to cloth-cutting machine in ZARA factories mainly in
Spain.
+ The internal manufacturing plants of ZARA are located in or around ZARA’s
headquarters.
+ The cut fabric is stitched and assemble in Spain, Morocco , Turkey,….
+ The trendiest items are manufactured closest to Spain, so that total production
time can be usually at 2-3 weeks.
Advantages
→ Short time cycle: It takes around 6 weeks for a new product from design to
shelve instead of 6 months cycle of normal companies.
→ Reducing the working capital intensity and facilitates continuous
manufacturing of new merchandise
 → Easy in product design and approval, which lead to accelerating production
faster

 Zara’s strategy in the distribution of their products:

+ ZARA stores make orders twice weekly – before and after the weekend.
+ Items are shipped with the price labels tagged and most items hung in hangers
by third party.
Advantages
→ Minimize ZARA inventory and focus on customer requirements
→ Replenish stocks quickly

 ZARA’s retailing:
+ A store gets consignment twice a week. The new arrivals are put on display
before opening
+ Display on store changes every three to four weeks
+ Replacing unsold items within a week

Based on these factors on ZARA's supply chain in term of the applied Just in Time
strategy, we can draw the following conclusions: ZARA's business strategy allows the
company to sell more items at competitive prices because of the limited and
exclusive level of designs. ZARA's total cost is reduced thanks to a significant
minimizing in inventory compared to its competitors.

3. Lean Inventory Management

Any excess inventory or dead stock in a ZARA warehouse is hardly found.
Throughout the supply chain, lean is the word, all the way from raw materials to the
finished garments on the shelves.
 Inventory optimization models are put in place to help the company to determine
the quantity that should be delivered to every single one of its retail stores via
shipments. The stock delivered is strictly limited, ensuring that each store only
receives just want they need. This goes towards the brand image of being exclusive
while avoiding the build-up of unpopular stock.
From production facilities located close to ZARA’s distribution headquarters in
Spain, allows Zara to ship twice every week and in small batches. If the design
ZARA hastily creates in an attempt to chase the latest trend does not sell well, little
harm is done.
The batch is small, so there’s not a ton of unsold inventory to get rid of. And
because the failed experiment is over quickly, there’s still time to try a different
style, and then a different one after that.
Moreover, producing in small lot is the unique characteristics of lean
manufacturing. The logic behind this is that small lot creates the sense of
exclusivity. Customer need to make a quick decision otherwise the next day the
products they want will be gone. So, customer visits ZARA’s stores to see new
products more often and this creates the huge amount of traffic and revenue.

III. Problems in Supply Chain system that ZARA used to have in

the past, is having recently and the solutions for these.
Since ZARA owned all the channels of supply chain, it becomes difficult to expand to
far location as it is very expensive to distribute such products. ZARA has not been
able to develop a strong supply chain strategy in the U.S. like they have in Europe.
ZARA has not invested in distribution facilities in the Americas, which is a threat to
their U.S. selling abilities since the U.S. makes up 29% of the total apparel market.
This may make them “subject to diseconomies of scale”, which means that though are
aware of how to quickly supply 1,000 stores, they may not be able to supply more
retail locations due to their “centralized logistics model”. The solution has been
solved by ZARA: The development of a second central distribution center in the
Americas to decrease logistics in order to deliver fashionable goods in a faster
manner. Their second central distribution facility was suggested to be an expansion of
one of their smaller distribution centers located in Argentina, Brazil or Mexico. The
close proximity of the distribution center to the American market would allow them to
effectively interpret the particular American fashion and to obtain shorter lead time.

The one disadvantage that ZARA incurs is possibly a higher cost on materials and
labor by not sourcing globally to the cheapest source. This, however, is offset by the
cost savings of not having items shipped all over the world. It is also offset by
dramatically faster response time between each stage. Because ZARA’s competitive
advantage is the “fast” part of the fashion, this is much more important than the
minimal amount that ZARA could save by sourcing globally. Also, the basic clothes,
which can be used for most of the year should be outsourced in Asia, where the labor
cost is much cheaper than Europe

Another disadvantages that would likely to occur is that ZARA rely heavily on the
high capital-intensive investment. The high-tech information system that is claimed to
be an advent-guard could cost them high price in order to survive in the industry. It
was also difficult for them to expand to far location as ZARA’s warehouses are
centralized in La Coruna in Spain. Investment in building extra warehouses and push
sale are suggested to solve this problem.

ZARA could also experience increasing cost in order to keep up with the latest trend
in the fashion industry. As ZARA frequently updated the clothing line in stores, they
need to change the techniques and equipment to design the garments accordingly.
Pushing sale and carefully control the break-even point would be expected that help to
improve this disadvantage, by doing these, all the prices and sale target would be
determined and strictly controlled in order to cover the high cost on investment and
manufacture.

IV. Application of ZARA’s supply chain management to improve

the supply chain condition of Viet Tien
1. Viet Tien’s Input

The key makes Viet Tien become the leading brand of Vietnamese garment
industry is its supply chain. On the one hand, Viet Tien prioritizes domestic raw
materials and regards Vinatex as the main supplier. The investment in developing
domestic raw materials will not only decrease the input cost but also increase the
localization rate. In addition, Viet Tien also imports raw materials in some
countries such as India, China, Pakistan, Central Africa... where there are large
and stable supply of quality. About machinery, Viet Tien is a joint venture with
Viet Thuan Company, which specializes in supplying garment equipment,
implementing sewing equipment warranty services, consulting technical solutions,
using safety equipment, improving the efficiency of using sewing equipment. In
the process of production.

On the other hand, Viet Tien has been applying and investing in Lean
Manufacturing technology. Viet Tien promotes thrift policy, improves
rationalization of lean production, applies advanced management processes and
enhances the added value of products. The company has 3 types of warehouses for
storage: raw material warehouse is used for production, raw material warehouse is
saving and raw materials warehouse customers. Viet Tien has also invested in
modern equipment in production such as sensory diagram system, fabric cover,
automatic cutting, automatic production line system and other modern specialized
machinery and equipment such as surgery automatic bag, hand scanner,
programming machine. As a result, productivity and quality are significantly
increased, satisfy the requirement of consumer market.

However, although quite dominant in Vietnamese market, Viet Tien’s input still
has some weaknesses in supply chain management that need overcome. The most
obvious one is not having achieved the localization rate of raw materials and
materials, it took a lot of time to search but poor quality was not enough for the
company. Domestic materials are often under pressure from imported supply,
pressure on prices of domestic supplies. Secondly, scarcity of garment industry
makes it difficult to expand production. Workers often have to work overtime and
work overtime while the average income is low. Besides, there is a serious
shortage of anxiety with professional skills. Finally, pressure from other input
suppliers such as power supply, machinery and service supply, etc. Power supply
is state-owned enterprises and power outages affect production productivity. of
the company. Machinery and equipment are equally important in ensuring
technical safety and special effects on product productivity.

In order to develop Viet Tien's garment supply chain, the first solution is to select
the appropriate supplier. The appropriate supplier here means that the supplier
meets the quantity and quality requirements set by the company. Also, raw
material prices must also be reasonable, and in addition, suppliers must have many
preferential policies for large volume orders. It can be said that selection of
suitable suppliers of input materials is considered to solve half of the supply chain
development problem of Viet Tien Garment Joint Stock Company. Providing
many remuneration policies for workers, continuous investment, improvement and
automation of production lines, the manufacturing house also has the largest plan
to invest in large-scale should also need to be seriously considered.
2. Viet Tien’s Output

Viet Tien was voted by consumers as high quality Vietnamese goods for 15
consecutive years from 1997-2012 whose production capacity reaches more than
15 million products per year with over 20,000 employees. The Corporation is
currently focusing on domestic production and tried to dominate the domestic
market, continue to upgrade stores and expand distribution channels. However,
although quite dominant in Vietnamese market, Viet Tien’s output still has some
weaknesses in supply chain management that need overcome. The most obvious
one is the lack of creativity or quick sensitivity in design leading to many designs
that could not keep up with the world's consumption trend whose colours and
textures not favoured by customers. The company even distracted the distributors
by forcing them to take slow-selling products.

To optimize its output in supply chain, Viet Tien should follow these possible
solutions:

- Reducing overtime workers

- Always considering customers the most important factor
- Flexibly applying science and modern technology into production
- Expanding production and market orientation

3. Distribution channel of Viet Tien

In terms of distribution, Viet Tien has had certain successes such as re-planning
the production capacity, comprehensively consolidating and applying lean
manufacturing technology at the affiliated units in order to boost labor
productivity, increase income for employees, continue to invest in depth with
specialized equipment, and improve product quality. Viet Tien not only identifies
the domestic market as a key market, but this brand takes bold steps in penetrating
the foreign garment market as well.

However, the process of expanding channels distribution of Viet Tien took place
too massively with the rapid increase of its stores and agents causing many
disadvantages. The competition among the Viet Tien agents becomes fierce due to
the significant density of stores in many big streets, which cause Viet Tien
difficult stores management and less customers. Moreover, distribution channels
in suburban and rural areas are still quite sparse while they are also potential
markets if properly exploited.

To contribute to the development Viet Tien's distribution channel, our group

would like to offer some solutions:

- The company needs to improve regulations on channel selection as well as

supervision regulations for the system of sales agents of the Company
nationwide. Based on each agent different depending on the region, VietTien
should set out the targets for the year and quarter to make that agent strive.
- Currently, while the distribution channels in the city are too large, the
distribution channels in suburban and rural areas are still quite sparse.
Meanwhile, this is also a potential market if properly exploited. Therefore, the
company should consider expanding agents in localities with potential for
economic development such as rural areas in the North, Central, Mekong
River Delta and Central Highlands in parallel with policy for each area.
- Organize training courses for sales staff - who directly contact with customers
to improve soft skills of employees and improve customer satisfaction
- Reorganizing the store concept, which suitable for local customers. Customer
behaviors in different locals must be studied carefully to have the most
suitable distribution strategies.
- The company should focus on regularly strengthening and developing
relationships with channel members, offering many attractive incentives
policies. All sale data should be sent back to the headquarter just like ZARA
did, this is a very important point to keep track the production and helps the
company to be flexible toward customers’ demand and fashion trend.

4. The inventory management of Viet Tien company

When there is an economic downturn, one of the first symptoms a company

experiences is a buildup in inventory. This buildup, the result of lower-than-
expected demand, draw management’s attention to its level of inventory. In order
to survive in such tough economic times, businesses must reduce their inventories
and improve business performance.

There are several ways to have lower inventory level for both short-term and long-
term goal.

- The most proper strategy to reduce inventory in short-term is mark down the
sale price. Marking product down may take a loss but it would be a bigger loss
for not moving any inventory at all and ultimately having to close the
business. Viettien had to sell items with markdowns of 40%, 50% and more.
The company also added some special incentives to purchases made with
multiple items such as buy one get one free, gift with purchase, …
- Besides, in order to stretch out debt and build up capital reserves, the company
traded its inventory with other stores that may be interested in Viettien
products or made products as a gift with purchase. To deal with the dead
stock, Viettien can give it to employees or donate it to charity. This way may
help control costs and keep product moving in and out of the store.
- Furthermore, the Just-In-Time (JIT) inventory model can help Viettien meet
their inventory challenges in long-term. Viettien might consider ordering more
frequently but in smaller quantities. This may result in slightly higher shipping
costs, but it reduces the risk of items that do not sell quickly and allows for a
better cash flow. By utilizing the JIT model, Viettien can speed inventory
 turnover and maximize use of the company’s liquid resource: cash. Properly
implemented, the JIT method can help increase the company’s net profit.

CONTRIBUTION
Name Task % Of Contribution
Lê Phạm Nguyệt Thương -Leader
(Leader) -Divide tasks for each member,
set the deadline and keep track
the working progress of the
group. 100
-Find, edit information and
resources
-Make presentation slides
-Summarize and make report
Hoàng Vũ Cẩm Tú -Presenter
(Presenter) -Find, edit information and
resources 100
-Make presentation script
-Make report
Hồ Gia Khánh -Presenter
(Presenter) -Find, edit information and
resources 100
-Make presentation script
-Make report
Nguyễn Minh Tiến -Presenter
(Presenter) -Find information and resources
100
-Make presentation script
-Make report
Nguyễn Thị Hải Vân -Find information and resources
-Make presentation slides 98
-Make report
Hà Thị Lưu Ly -Find information and resources
-Make presentation slides 98
-Make report
Nguyễn Như Ý -Find information and resources
-Make presentation slides 98
-Make report
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