Zara: An Industry-Leader in Managing Supply Chain Inventory

There is no doubt that Zara has disrupted both the brick-and-mortar and online fashion industries with its lightning-fast production times, constantly changing and evolving styles, and on-trend products. Zara has set an industry-wide standard for using their supply chain as a competitive advantage in competing in fast fashion. Zara has succeeded by minimizing their operational inventories, inventories that are classified by how they are created. Operational inventory takes four forms: cycle inventory, safety stock inventory, anticipation inventory, and pipeline inventory. Due to their effective inventory management, Zara has among the lowest safety stock of fashion retailers as well as very low levels of anticipation inventory.

Zara’s Safety Stock Inventory Management

Safety stock inventory is surplus inventory that a company holds to protect against uncertainties in demand, lead time, and supply changes. In order to reduce safety stock inventory, Zara implements two strategies. First, Zara improves demand forecasts so that fewer surprises come from customers and they design mechanisms to increase collaboration with customers to get advanced warnings for changes in demand levels. According to Business of Fashion’s article “Fast Fashion Slow to E-Commerce,” the store has always been integral to Zara’s pull-model, “where feedback from on-the-floor staff is used to drive the fashion decisions it makes. Daily feedback from store managers is fed to the 700-strong design team” in turn increasing collaboration with customers and cutting down safety stock.

Second, Zara cuts the lead time of purchased or produced items to reduce demand uncertainty. According to “Zara Uses Supply Chain to Win Again,” “Zara’s fast fashion operation obliges its in-house design and production teams to work with a limited set of pre-selected fabrics and materials. This may limit creative freedom, but it also eliminates months of lead time and tiers of supplier hand-offs from the network.” In addition, Zara introduced the use of radio-frequency identification (RFID) technology in its stores in 2014. This technology allows Zara to quickly take inventory by detecting radio signals from the RFID tags and when an item is sold, the stockroom is immediately notified so that the item can be replaced.

Zara’s Anticipation Inventory Management

In addition to minimizing safety stock inventory, Zara also has very little anticipation inventory. Anticipation inventory is inventory used to absorb uneven rates of demand or supply, typically around seasonal demand. In order to reduce anticipation inventory, Zara adds new products with different demand cycles so that a peak in the demand for one product compensates for the seasonal low of another.

Zara’s “centralized inventory, developed to make store delivery faster, also works to make it easier to fulfill online orders. The majority of its products are sourced close to its headquarters in Spain, Portugal, Turkey, and Morocco, and its ten logistic centers (all based in Spain) can deliver anywhere in the world within 48 hours; new styles land in store twice a week, with new products typically taking just three weeks from drawing board to store.” The products that are released on Tuesdays and Thursdays all have different demand cycles in order to manage and minimize anticipation inventory.

References

https://www.businessoffashion.com/articles/intelligence/fast-fashion-slow-to-e-commerce

https://www.forbes.com/sites/kevinomarah/2016/03/09/zara-uses-supply-chain-to-win-again/2/#6d4019007df0

9 thoughts on “Zara: An Industry-Leader in Managing Supply Chain Inventory

  • March 29, 2018 at 7:57 am
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    Lily,

    Zara’s business model is always an interesting one to talk about because of its uniqueness. Zara has achieved a lot of success with “almost zero advertising” according to the video. Shipments arrive twice a week and because of this, consumers feel the need to “turnover” their wardrobe. Customers head back to Zara for more clothing and once there, they realize all of the items in stock are new, which creates a mentality of needing to buy new clothes more often. Nothing remains warehoused for longer than 72 hours. Most of the production is in-house and nothing is outsourced which makes Zara able to effectively monitor quality and as well as react to changes in demand. The global distribution center moves 2.5 million items per week which is due to the fact that Zara has “104 seasons”. What is very interesting is how well the limitation of safety stock and the forecasting of demand work hand in hand. It is almost as if they are intertwined. Zara’s works very closely with customers which helps them design clothing to meet the needs and demands of the consumer. And because of this, Zara is able to limit their stock and pump out fresh clothes frequently.

  • March 28, 2018 at 10:48 pm
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    Zara’s business model is extremely interesting and is always a topic of discussion in business courses. We touched on it earlier when we talked about Zara’s competitive priority Time strategy. They want to constantly rotate product lines and make sure they are always keeping up with the fashion trends. They create their clothing in small batch processes as well. By using these small batches Zara can be very efficient with their production line. As Lilly has stated Zara uses relatively similar materials for designs, but constantly is creating new designs. This enables them to not have a lot of unused materials. Since they are constantly having different options in their stores for customers they are able to not use a ton of inventory. This leads them to not have a ton of excess and unsold inventory as well and helps to highlight the efficiency of their business model. However, Zara is thinking of changing their business model slightly, in order to keep up with current trends. More and more of their customers are ordering their clothing online and picking them up in store. Zara’s previous business model did not account greatly for this, and customers often were waiting in lines to see where to pick up their orders. They are planning on changing this strategy and plan to have a “robot” find the customers package and deliver this package in a dropbox (http://www.scdigest.com/ontarget/18-03-12-1.php?cid=13870). This shows that even a company that is very sound and efficient in its supply chain can always make improvements. Zara needed to change an aspect of their business model in order to keep up with the trends that are taking over the economy.

  • March 28, 2018 at 8:49 pm
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    http://wwd.com/business-news/business-features/l2-report-fast-fashion-success-zara-10725214/

    I found this article on Zara that is interesting because it incorporates everything Lily talked about in regards to S&OP and inventory management with concepts we recently talked about in class, such as just in time production. One thing I think is interesting is how the article states that Zara differs from other retailers in that it doesn’t pay as much attention to consumer demand. Instead it purposefully keeps inventory below expected demand so it is sure to sell out. This works well because it means Zara is not left holding on to leftover inventory, and it encourages consumers to buy quickly because there is no guarantee that the product they like will still be there later. The lack of concern with demand is a little different than we’ve talked about in class, but it proves that there are many strategies that can be equally successful.

  • March 28, 2018 at 8:18 pm
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    Lily,

    As discussed in class and in your analysis of Zara, it is important to have a smaller safety stock. However, having no safety stock can be detrimental to a business. It may seem like a good goal in order to save money on inventory, but according to SupplyChain247.com, setting safety stock to zero leads to their inventory decreasing. “They believe that they can reduce inventory if they set their safety stock to zero and in most cases their inventory level did go down but so did their service level.” The company’s original intention to decrease safety stock actually costs them much more than the cost of the extra inventory.

    Interestingly, there is actually a company I found in my research that can help companies find the right amount of safety stock for them to mitigate stock outs, called Promontory Point Partners, LLC. This is a great opportunity for smaller businesses who may not have the knowledge or equipment to find the right safety stock point on their own.

    References:
    http://promontorypointpartners.com/inventory/
    https://www.supplychain247.com/article/inventory_management_four_common_pitfalls_of_safety_stock

  • March 28, 2018 at 2:59 pm
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    Wow Lily!
    This is a very interesting article. As mentioned in the article, Zara is a company which is best known for revolutionizing “fast fashion”. They have unmatched production speeds and an aggressive design process which allows them to advance an idea from the drawing board to production lines in a matter of weeks. This allows them to create more seasons within the year and create demand for their product.
    This product strategy works well in conjunction with the inventory management goal of keeping safety stock and anticipation inventory low. By keeping a diverse portfolio of products, a lull in demand for one product is offset by a rise in demand for another. This strategy helps to absorb spikes in demand and lower the need for anticipation inventory. By keeping their inventory on hand low Zara is able to minimize their holding costs while maintaining a high rate of inventory turnover.
    It is clear that best practices in production processes and inventory management contribute to Zara’s strong position in the fashion industry. Keeping on top of their process management allows Zara to minimize waste and unnecessary costs while increasing profits. Clearly they are a company which employs innovative practices and is worth watching.

    • March 28, 2018 at 6:26 pm
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      Matt,

      Your comment on Lily’s discussion of Zara’s inventory management is very interesting. Zara is very smart to keep both safety stock and anticipation inventory low. Zara has created a new kind of demand for clothing products. Because Zara takes less than two weeks to design, produce, and distribute new products, a dip in demand for one product can instantly be offset by a newly introduced product. Additionally, Zara keeps their safety stock low by cutting overall lead time. In doing so, Zara decreases demand uncertainty, which allows it to better manage its inventory.

  • March 27, 2018 at 12:01 pm
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    Lily,

    Great post on Zara, their supply chain, and their inventory management. I find it fascinating how much Zara diverges from the pack with respect to their supply chain management. As the video pointed out, most stores operate based on four seasons, designing and releasing new waves of clothing every three months. Meanwhile, Zara redefined the industry by designing new unique and fashionable clothes every two weeks.

    It seems like Zara’s inventory management fits right together with their business model. Zara’s key to success is to create demand by having a limited and short-term supply of each item. If a customer wants Zara’s unique style of clothes, they only have two weeks or less to grab it off the shelves before it is gone. Because Zara wants demand to be high and they operate with such high inventory turnover, shortages are not a concern. Zara has no need to worry about safety stocks and anticipation stocks because by the time they sell out, the next batch of new clothes is already on the way.

    In addition to all the benefits you listed, they are also saving thousands on inventory costs. By making so much of their inventory in-house, they cut out a solid chunk of ordering costs. Further, by minimizing safety stock and removing the need for anticipation stock, holding costs are kept at a minimum. Even when they have an unsuccessful cycle of clothes and they don’t meet sales goals, it only does minimal damage since they committed few resources and only produced for two weeks. In today’s retail world, keeping up with style while cutting corners on cost is key. Zara utilizes their supply chain and inventory management to achieve these things.

    • March 28, 2018 at 2:51 pm
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      Joe,

      You are correct with your insight into Zara’s inventory system. Zara’s unique niche is that it keeps up with the current trends while remaining affordable. Their inventory system is interesting and competitive because it prompts the consumer to continuously visit the store and/or website. The consumer knows that it is fast fashion and they are constantly releasing new styles. Furthermore, as both you and Lily mentioned, with only a limited supply of inventory a customer risks missing the new styles that they want. If they see something they want, they need to act and make a purchase or it will sell out. I know I personally have waited to purchase something and then it was gone when I went back. What’s great for Zara is that once this happens to a customer they are more likely to make a fast purchase so that it does not sell out. This will increase their revenue and bottom line, which is already seeing the benefits from reduced inventory costs and safety stocks. It is the perfect win-win situation for Zara.

      • March 29, 2018 at 8:38 am
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        Great point Caroline! I will be interested to see how Zara’s bottom line compares to its competitors and its market share. I will also be looking to see if other retailers try similar short-term supply chain strategies in the changing consumer climate. I think the “four-season” model is on its way out, and I wonder how quickly the biggest retailers will adjust their strategy. I think we could see some big names being pushed out of their market share in the years ahead as they fail to quickly adapt their supply chain and inventory strategy to changing times.

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