Zara’s current sourcing strategy
Zara Company makes its sourcing process in advance (about six months) before the season begins. About sixty percent of its outsourced productions come from Europe while thirty percent from Asia. These considerations include cost and time. Zara outsources basics (synthetic and fashion fabrics) and knits while producing garments that require fashion styling in-house. After cutting garments into the required designs, they are marked before being bundled and shipped for sewing. The sewing process is outsourced from a network of four hundred smaller firms situated in Galicia and northern Portugal (Sheridan para. 3).
The company sources between 15-25% of its season’s inventory; which comprise the most basic items. By the time a season begins, approximately 60% of its outsourced processes are complete or in the process of being completed subject to the firm’s specifications. This makes it possible for the company to receive about quarter of its season’s collection by the time a season commences. The inventory comprises basic items and initial fashion collections received from the subcontracted firms.
This sourcing strategy adds to the company’s competitive advantage by enhancing its efficiency. By committing approximately twenty five percent of its inventory in advance, the company is able to ensure that the outsourced companies provide it with finished goods on time. This helps the company take advantage of competing companies availing their products in the market late to exploit the market. The strategy helps the company have uninterrupted production of its products and supply to market. Outsourcing some of the production processes to other firms helps the company reduce its production costs. Low cost of production is extended to customers by reduced prices. Since the company outsources its processes based on cost and expertise, it gets the most relevant expertise thus high quality of its products (Columbia Business School, p. 273).
Challenges resulting from rapid inventory turnover
High inventory turnover in the company has led to its distribution center being unable to hold the required amount of inventory to ensure that it regularly supply its sales stores with products. It has become impossible for the company to centrally manage its inventory. As sales trend is heavily regulated in Europe, high inventory turnover within the company has led to the management trying to minimize inventory volumes sold during the end of the season. This is in bid to avoid cases of facing markdown sales on its products. The company has experienced approximately 20% reduction in merchandise sales during the end of the selling season. The company has been forced to face the overhead of having to reallocate some of the unsold products. High rate of inventory turnover has required the company to look for ways of increasing their production rate. It has been a challenge for products whose fabrics are not easily available to be produced based on their turnover rate. This is due to time required before the fabrics are ready.
Depending on market demand, the company has managed to effectively alter its in-house portion of in-season production. The company commits 50-60% of its in-season production prior to the beginning of the season. The rest is manufactured dynamically as the season progresses based on demand. For in-season products with low inventory turnover, the company has reduced the rate of their production while increasing units of products with high inventory turnover. It has been possible to manage in-season replenishment as it does not require the company to meet higher costs at the last minute or increase their capacity. Rather, the ability of the company to produce in-season products when they are close to their sales time has helped it reallocate its resources without disrupting normal processes. The company coffers its in-house manufacturing capacity hence making it available whenever needed.
Importance of the company’s sourcing strategy as the company grows
As the company continues growing there is a need for it to ensure that it continues enhancing its efficiency with respect to merchandise production and distribution. The labor and costs associated with garments production calls for more investment. To reduce this cost, Zara will have to continue using its current strategy. Most of its current target market is price and quality sensitive. Subcontracting some of the production processes helps the company sell its quality products at relatively low prices.
To improve on the quality of its products, current strategy will be maintained. The strategy helps it exploit expertise from varied firms thus guaranteeing the quality of its products. The company does not require training all its staffs as it easily makes use of other skilled personnel from the contracted firms. As a company expands, it requires more workforces to cater for increased workload. Failure to increase its workforce may lead to the available workforce being overwhelmed by the workload, consequently, compromising company’s efficiency.
Despite the strategy helping the company increase its inventory turnover, there are some changes that need to be effected as the company experiences rapid growth. These changes will help in mitigate adverse effects resulting from growth. Expansion implies high production. The company will be required to increase the number of outsourced processes as well as deal with a high number of subcontracted firms. Currently, tagging and pressing is conducted with the company after garments are delivered. As the company grows, more time will be required for this process. To manage this, more workers will be needed. This may be costly to the company. If Zara outsources the pressing and tagging processes, it will only have to take care of garment inspection. This saves operation costs. Fabric cutting ought to be outsourced. Once done, the designs can then be shipped to the company that supplies fabrics or a different company for fabrics to be cut into those designs.
These changes in sourcing strategy will help the company enhance its operations and at the same time reduce operations cost. However, there are risks associated with the new strategy. Transferring most of the production process to other companies will compromise the quality of the products offered by the company. if the company performs most of its operations, it will gain new ideas on how to improve operations and quality of its products. Sourcing most of the processes from other companies would discourage innovation. This means that the company will not be in a position to dynamically change its operations techniques to cater for changing consumer preference. This may make its products fail to gain competitive advantage in the market due to stiff competition from other garment manufacturers (Sheridan para.6). The company’s efficiency will also be affected. Coordination will be very hard to ensure that every firm completes its process on time. Incidences of deadlocks within production will occasionally be experienced making it hard for Zara Company to suppply its products into the market on time. Clients maybe disappointed hence loosing market share.
Relevance of the case study with respect to what has been covered in class
Group member 1
The case study gives a clear guideline of the stages involved in operations management. By outlining the operations experienced in the company, one is able to effectively understand some of the elements that make up a general model of operations management. Some of these elements include regular examinations of processes within the operations to ensure that they are correct and regularly improve them. Operations management involves frequent replenishment of resources. This is evidenced by the act of Zara Company regularly replenishing its in-season production process. The case study gives the best method of enhancing quality of operations management. This is by monitoring operations and modifying them based on what the operations are intended for.
Group member 2
The case study gives an insight to considerations made when selecting the most suitable vendor to source from. Zara Company makes several considerations before deciding to source from a specific firm. These include consideration of their expertise level and cost associated with sourcing from them. One also learns the benefits of logistics management. These include helping the company gain competitive advantage through reduced operations cost and improved quality in product or service provision. Through viable outsourcing, Zara provides it customers with quality products thus gaining competitive advantage in the market.
Group member 3
The case offers an insight to how organization’s strategies affect their supply chain decisions. Supply chain management in this case stands for raw material procurement, their refinement into finished goods and shipment of goods to the final consumer. For instance, the strategy used by Zara Company in bid to ensure that customers respond positively to its products leads to the company making sourcing decisions based on quality, expertise and cost attributed to the sourcing decision. Companies opt to source from organizations that guarantee the quality of their products and reduced operation cost.
Group member 4
From class lectures, we have studied that there are numerous distribution systems applied by companies. Each distribution system is considered based on the amount of goods being distributed, the distance involved and nature of the product. For products being distributed locally, organizations use roads and railways. Railway is most preferred if goods are bulky and are to be transported for a long distance. Products being distributed internationally are shipped by air. This is reflected in the case study where Zara Company uses tracks to ship its products from distribution center to different sales stores within Europe. For products being shipped out of Europe, the company uses air. These distribution systems ensure that sales stores receive their products on time. Prices of products differ based on the distribution system used and the distance covered. This is because various distribution systems charge different amounts of money for the services. Products shipped locally through roads are sold at lower prices than those shipped internationally through air.
Columbia Business School. “ZARA.” 2002. Web.
Sheridan, Andrew. “Business process outsourcing: a new test of management competence.” Career Development International 3.4 (1998): 136-152.