Zara Operational Performance

8 August 2016

Zara is Spanish clothing and accessories retailer part of the holding group Inditex which is one of the world’s largest fashion groups. At the close of 2012, Zara had 1,925 stores in its eight sales formats in 86 markets in five continents with turnover 10. 541 million euros (FY 2012 Annual Reports). Ultimate success of the company lies in the unique business model that is to provide fast and affordable fashionable clothing lines. According to Amencio Ortega founder of Indetix, the key to success is simple, to offer the latest fashion in medium quantities at affordable prices.

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He though that consumer would regard clothes as a perishable commodity in and they are to be consumed rather quickly than stocked in the cupboard, hence company’s strategy is about stocking very little and updating collections often. In this context this paperwork aims to examine how 5 operational performance objectives contribute to the global success of Zara corporate strategy. ZARA CORPORATE STRATGEY Strategy is one of the most common words in the business vocabulary, yet there have been many different interpretations of the concept and entire books have been given over to considering the nature of the strategy.

A strategy is regarded as ‘the direction and scope of an organisation over the long-term, which achieves advantage in changing environment through its configuration of resources with the aim of fulfilling stakeholders expectations’, this widely accepted definition is offered by Johnson et al. (2005). Operations Management is in principal connected with managing of the organisational resources, it implements, drives and supports business strategy. Zara created unique recipe for the success, Amenciano Ortega quoted ‘This business is all about reducing response time.

In fashion stock is like a food, it goes bad quick’, source: Dutta 2002. The key aspects which provided for the ultimate success of the company are strong emphasis on vertical integration control system and highly advanced supply chain. It covers all phases of the fashion process: design, manufacture, logistics and distribution to its own managed stores. OPERATIONS PERFORMANCE OBJECTIVES THAT SUPPORT ZARA STRATEGY Operations performance is vital for any organisation and its efficiency directly linked to the ultimate business profits. For most businesses, operations represent the majority of its assets and the majority of its people.

Company which has robust and highly sophisticated operations develop unique set of capabilities and enable to respond to customers demand more effectively than market competitor’s ability to respond to customers demand and by developing the capabilities that will keep it in advance of the opponents, Slack et al (2010). It is worth mentioning at this point that operations performance objectives are multidimensional and they are not mutually exclusive, essentially all of them: quality, speed, dependability, flexibility are directly related with cost.

It has been recognised that the all operations performance objectives trade off with one another and it is difficult to obtain these all at once. Managers strive to find the ways of pushing operational frontiers by enhancing performance and developing capabilities in order to mitigate the impact of trade off over the time, Nelly (2007). Additionally there are internal and external reasons as to why company should excel in all 5 operations performance objectives. QUALITY Quality have got a several meaning, it can be deemed as a specification of product or service, as well as the conformance with the product or service offered.

Therefore in simple terms products should be made to the certain specifications and free of error, hence it will fundamentally influence customer’s satisfaction, Nigel S. at al (2010). Quality does not only influence external environment, it directly impact operations and creates an opportunity for potential cost saving when operational errors, hence time wastage is mitigated by high quality and stable process. When considering potential impact of quality on the operations it is reasonable to link factors which influence underlying cost associated with the quality preservation.

Campanella and Corcoran (1983) focused on the issues such as number of defects produced and the cost of maintenance of a quality. Prevention cost which is concerned with preventing any inconsistencies in production line, it involves emphasis on quality of planning, supplier survey and training programs. Appraisal cost is associated with the process of control and inspection of the products. Finally last but not least is the failure cost is associated with additional pre-delivery cost like rework and scrap material as well as post-delivery cost which are returns, refunds and warranties.

Zara controls more of its manufacturing than do most retailers and about half its clothes are made in Spain or nearby countries. Robust operations along with the sophisticated supply chain underpin the company success. Clothes production starts its journey in 14 highly automated factories in Spain, where robots work around the clock cutting and dyeing fabrics and creating unfinished “grey goods”. Those act as a foundation for the final products and are transformed into final goods in more than 300 small shops in Portugal and Galacia, Badia (2009).

Given the external context, quality is the last word on the company’s reputation and the main drive of customers demand for the products. It is not only quality of the products that meets customers demand but ambience of the Zara shops where quality of the customer service and other variables like music, temperature and layout are tailored in the way which is appealing for the customers, Geatano et al (2008). The secret of Zara’s appeal was that, although shopping at Zara was relatively inexpensive, it did not ‘feel cheap’.

Zara stores were ‘large, swish and centrally located’, the clothes as well as customers were given ‘room to breathe and garments were presented as if they were upscale ‘(Tungate, 2005, 50; International Herald Tribune, 2005). Latest developments of Zara’s two new stores in New York and London are recognised as eco-efficient stores fallowed by the same concept in Paris and Munich, (FY 2012 – Annual Reports). In general if the customers are happy with the quality of the product they are likely to come back and bring more business.

High quality underpins good reputation, inspires customer’s loyalty, builds perception of greater value, induce sense of affirmation and distinguished shared values when purchase particular brand, Healey (2008). SPEED & DEPENDABLITIY ‘Speed means the elapsed time between customers requesting products or services and receiving them’, Slack. et al (2010:42). It is necessary for the company to provide goods and services to the customers when they were promised as being late with delivery of goods and services cause significant frustration to clients.

Speed is closely related with another operations performance factor which is dependability. If customer’s expectations are not meet in terms of providing products on time, sooner or later customers may want to look for alternative providers in the market. Ability to respond relatively quickly to the customers demand is gauged internally by effective and fast decision making and advanced operational process. In order to develop the speed advantage capability business has to refer to the internal value chain in order to reduce the system lag.

Time is related directly with a source of competitive advantage and the principal measure of operations performance, Stalk (1988). Fast fashion commands that retailers have ‘five fingers touching the factory and five fingers touching the customer’ (the founder of Zara cited in Ferdows et al. , 2004). For Zara strong merchandising strategy allows not only for a high number of stile fashions but it facilitates shorter lead time to get the products offer on the shop shelves in favour of all competitors in the market.

Fine design, efficient operations and distribution processes enable Zara to respond quickly to shifts in consumer demands. Jose Maria Castellano, the CEO of Inditex stated that ‘the fashion world is in constant flux and is driven not by supply but by customer demand. We need to give consumers what they want, and if I go to South America or Asia to make clothes, I simply can’t move fast enough’ Badia (2009). It emphasise just how important the speed factor and quick response time are to Zara’s operations and overall business strategy.

Zara is vertically integrated retailer who closely controls the entire production process, from design to sale. By the early nineties in co-operation with Toyota Zara invested heavily in production development and ‘just-in-time system’ in order to mitigate delivery of goods to early or to late which was deemed as wasteful, (Moden, 1996) . The most high-fashion clothes are made by Zara in firm-owned factories in Spain, while low-cost basic clothes are outsourced from Asian countries, Badia (2009). Goods form internal and external suppliers are consolidated in the huge distribution centre in Arteixo.

Work load is managed on dual – shift basis where highly sophisticated mobile tracking system that docks hanging garments in the appropriate barcoded area on carousels is capable of handling 45,000 folded garments per hour. Lorena Alba who is Inditex’s director of logistics regarded the warehouse as a place to move merchandise rather than to store it. Subsequently Zara has developed the system which does not required goods to be stored at warehouse more than three days, this diminishes cost of keeping inventories.

Zara’s shipment from the warehouse is done twice a week. 75% of the products are shipped by trucks to the European countries with typical delivery time of 24-36 hours to the stores, remaining 25% of the merchandise is delivered by air via KLM and DHL within 24-48 hours to the stores located outside of the Europe. Vertical integration helped reduce the “bullwhip effect”—the tendency for fluctuations in final demand to get amplified as they were transmitted back up the supply chain.

Even more importantly, Zara was able to originate a design and have finished goods in stores within four to five weeks in the case of entirely new designs, and two weeks for modifications (or restocking) of existing products, versus an industry average of 9 months, Ghemawat P, Nuenoz J (2006). Zara has developed unique and exceptional production process which enables the company to respond quickly to shifts in consumer demands. On the other hand dependability factor is one that needs further consideration.

Zara offers reasonable but not excessive quantity of high fashion content like garments and accessories for relatively low prices, in customer’s appealing designed stores in highly visible locations. This deliberate undersupply of particular fashion lines aims to create a sense of scarcity and opportunity to attract quick turnover and allow for more collection range in the season, Badia (2009) FLEXIBILITY In order to fully satisfy customer expectations it is necessary to blend in ability to produce wide range of different product, adopt relevant quantities and alter the time of deliveries.

Flexibility is the ability to be diverse in function, in the operation context it means literally ‘being able to change in some way’, Slack. et al (2010:46). Zara’s designers continuously track customer preferences. To thrive in the market place it is necessary to be able to tailor customer’s demand through comprehensive design operations, procurement and distribution. ‘Styles, colours, fabrics—we don’t guess any of these things. We are a business catering to demand, and we’ve never made any secret of that.

But we need to know what the trends are, so we follow them through magazines, fashion shows, movies and city streets. We use trend trackers and forecasting companies. We keep our eyes open’ (a press officer of Inditex cited in Tungate, 2005, 52). Trend analysis, vast information infrastructure combined with highly responsive communication, enabled designers to placed orders with internal and external suppliers and develop the right seasonal products to meet customer’s expectations, Luciano et al (2002).

Savings made by its rivals on labour cost while heavily outsourcing products from the countries like China are substituted by maintaining high flexibility in changing orders based on current trends and allow contribute to operational efficiencies i. e. reducing waste and minimising the need to clear unsold inventories. In addition, Zara is gradually expanding e-commerce to all of the markets in which the company operates, business provides the online offer in 21 countries, (source: FY 2012 annual report).

By owning and mastering its in-house production, Zara is able to be flexible in variety, amount of frequency of the new styles they produce. Zara offer encompasses almost 30,000 designs each year, approx. 11,000 distinct items in five to six colours and 5-7 sizes, this translated into 12-16 collections. When comparing this astonishing results to the broad market, Zara’s main competitors like H&M, Gap introduce 2000-4000 items each year. COST

Even though that Zara’s cannot be regarded as the company which compete directly on price, in principle every euro saved through the operational efficiency will boost the profits, hence the objective of the low cost is ‘universally attractive’, Slack. et al (2010:46). It turns out that all operational objectives contribute and are directly linked to the cost which is reduced by internal operations effectiveness. Zara’s average cost to produce cloths in Portugal and Spain is on average 15% higher in comparance to the main rivals who outsource from China and other Asian countries.

This extra cost is offset by lesser amount of money spend on advertising and reduced inventory obsolescence. Additional savings come from shorter lead time which not only reduces forecasting error but primarily enable Zara to deliver new collections to the store twice a week which is a spectacular achievement in fashion retailing, Ferdows et al. , 2004. CONCLUSION Zara developed set of unique operational capabilities, the business is a worldwide a major international clothing retailer and pioneer in ‘fast Fashion’ industry.

Core operational performance objectives discussed in this paper underpin Zara’s strategy focused to provide quality garments in the shops shelves in timely efficient manner, additionally there is feeling of scarcity and opportunity crated to attract the customers demand. Zara is able to be flexible in variety, style, amount and the frequency of the new styles. The business success therefore is perfectly correlated with the operational performance objectives which provide for an ultimate business success.

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