Strategic Operation Management of Zara - Essay Example

The Stevensons Case The major reason why Stevenson’s retail s moved offshore was because prior to 2001, the company was a part of the Coats Viyella group, which was involved in garment manufacturing and was a major supplier to many of the high street retailers. But after 2001, when CV dropped out of garment manufacturing and sold off its interests in knitwear, the retailers lost the CV supply chain and began to deal with other intermediate suppliers and then directly with the offshore suppliers themselves. One of the conditions on which overseas suppliers contracted to provide the garments was the need to specify the dyeing colors earlier, because they used dyed yarn to knit the garments rather than dyeing the garments after the knitting process was complete. (Stevensons:4). As a result, much of the dyeing business that Stevensons once carried out was shifted offshore, as a part of the overall garment manufacturing process. 2. Consequences for retailers: The positive consequences of off-shoring the garment production is the reduction in costs that was achieved. The average cost of dyeing and assembly of a garment by overseas suppliers was 35 pence less than the garment dyeing process. (Stevensons:6). This produced cost savings for the retailers. Moreover, the savings of 2 and a half pounds which the retailer could purportedly save of the 2 pounds and eighty five cents charged by Stevensons, required verification and working on with the ecru garment supplier, therefore the cost savings could not be verified. The problem of whether to assemble the knitted garment before or after dyeing was also eliminated by sending the garments to the offshore suppliers because the yarn itself was dyed before knitting the garment. Hence retailers were no longer subjected to the pressures of allocation of costs between the knitting factory and the finishing factory, and dealing with the uneven demand profile that was created by the need to assemble the garment before the dyeing process. One of the negative consequences for retailers was in the timing of the coloring decisions. Due to the variability in customer demand factors, retailers gained an advantage from being able to delay the coloring decision as long as possible, up to 4-5 weeks before actual sale and CV’s policy of completing the dyeing after the garment was assembled was helpful in making flexible color selections to respond appropriately to peaks in demand. . In order to be responsive to changing customer tastes, especially in the fashion and retail industries, the entire supply chain needs to be responsive (Pine 1993, Goldman et al, 1995), and it is also important to integrate suppliers, manufacturers and customers.(Clinton and Closs, 1997). The choice of color being made closer to the sale point was advantageous to the retailers from the point of view of increased sales, since the color more closely matched customer preferences as revealed through demand factors. As a result, unsold stocks were much less, while with offshore dyeing, unsold stock supplies were higher. Projections made on forecasting of 30% of the stock keeping units demonstrated over 25% of errors due to the longer period over which the forecasts were made. (Stevensons:6). However, shifting the dyeing offshore resulted in the retailers having to make the color choices 18 to 20 weeks before the delivery period, since offshore suppliers utilized yarn dyed materials for the knitwear products. Moreover, the yarn dyeing process also meant that changes in fashion colors could not be accommodated easily but necessitated tight schedules during peak manufacturing periods, with less scope for providing buffer stocks to weather uncertainties of demand. Yarn dyeing also resulted in higher wastage percentages of dyed yarn which could not be utilized effectively, which accounted for about 15 pence of losses per garment in terms of variable costs. Additional costs which the retailers had to incur in getting their garments from overseas suppliers was import duties and transport costs per garment which amounted to 20 pence and added to the variable costs. 3. Trade off choices: The advantage gained by shifting production overseas was in terms of reduction in costs, because an individual garment could be produced at 35 pence less than the garment dyeing option. In terms of variable costs, this option introduced some wastage in dyed yarn, however despite this, on an overall basis; there was a reduction in cost. The supply chain in this case was leaner with the overseas option because the lean enterprise advocated by Womack and Jones (1996) aims to eliminate waste from the system and gaining savings in costs is one of the most important required to enhance profits and make the supply chain function effectively for a Company’s benefit. However, it must also be noted that there are some negative consequences of this supply chain, because it creates wastes in the form of wasted dyed yarn and increased inventories of unsold products due to imbalances in supply. On an overall basis, the more market responsive supply chain which existed before and was focused on flexibility, which is particularly relevant in the fashion industry, has been traded off to gain the benefits in terms of reduced fixed and variable costs. However, this option has also produced the risks of increases in inventory in terms of unsold stocks and created increasing uncertainty in forecasting stock keeping units. 4. One of the strengths of Stevensons’ offer to the retailers is in addressing the stock imbalances resulting from off shore supplies. These supplies in stores showed an excessive supply of one color, resulting in the need for markdowns in price, while there were shortages in other colors. Imbalances were also created through late arrival of stocks. Moreover, the longer lead times required in terms of specifying colors in advance also resulted in an inability to respond to customer changes in demand. This weakness was addressed in Stevensons’ offer of garment dyeing because it allows the retailer to specify the colors with a much shorter lead time of 5 to 10 days between the color choice to the distribution depot, to provide the ability to respond quickly to customer volatility in demand. Another of the strengths of the Stevensons offer is the provision of savings to the retailers in taking up the dyed garment route. They could eliminate many costs associated with off shore supplies, such as import costs at 20 pence per garment and yarn wastage at 15 pence and transport costs at 15 pence. Moreover, in the yarn dyed option, there is a need to specify colors in advance, as a result because of the late release of colors, there is a tight schedule during the peak manufacturing period and inventories cannot be properly buffered. It also causes extra expenses in air transport to transport stocks quickly during the sale seasons. The Stevensons option allows this seasonal load to be smoothed out and allows savings in all these costs. The weaknesses of the offer however lie in the increased costs to the retailer in using the dyed garments option. Despite the savings obtained against import and transport costs and prevention of wastage, the option is still the more expensive one for the retailer. The projected savings are also difficult to verify. Another weakness in the offer is the lack of knowledge on the part of the retailer about garment dyeing capability. The garment dyeing option is also a more involved one and in some instances any quality issues are likely to become apparent after the garment is finally dyed. The Stevensons offer however helps to address the imbalances created in the off shore supply chain. By providing an option for refurbishing of the garments, the dyeing unit at Stevensons can help in last minute color changes, or in dyeing garments with color fast dyes for example. In this way, it helps to address the potential problems of unsold stocks and the inaccuracies in the forecasting of stock keeping units and provides for a better balance of inventory. The retailers are able to retain the cost savings that accrue from off shore suppliers, while addressing the problems of balancing of the seasonal load. It also helps to address the deficiencies in off shore supplies, including improper dyeing and in refurbishing the garments arriving from off shore suppliers by pressing them and getting them ready for display in the shops. 5. The Stevensons offer can be utilized especially to develop the markets in Europe, since it allows for a fast response in terms of dyeing time and allows for a more market responsive supply chain. Since the dyeing facility is located within Europe, it eliminates many of the transport and import costs associated with the offshore options. Additionally, this offer can also be applied to reach the American markets, since it allows for a reduction in the deficiencies in the dyeing, and eliminates yarn wastage, producing a higher quality product that may be appreciated by the more discerning customers in these markets. 6. The choice of the retailer to use off shore suppliers has hindered the supply chain because the elimination of wastes in the supply chain also involves the achievement of a schedule with maximum efficiency (Abernathy et al, 2000). In this aspect the off shoring alternative is not efficient in the long run, because it does not allow for integration between the supplier, manufacturer and customer, which has been repeatedly shown to be vital in maintaining a dynamic and responsive supply chain (Clinton and Closs, 1997). The supply chain is also not responsive to fluctuating customer demand, because to enable a fast response, it needs to be managed in such a way that it enables a fast response (Sabath, 1998). But the off shore supply chain requires too great a lead time in terms of color choices, hence it reduces the degree of flexibility that is possible in terms of responding to volatility in customer demand. The introduction of the Stevensons offer however reduces the element of uncertainty by allowing for an adjustment in the colors and refurbishment of the garments received from off shore suppliers, in order to make it more market responsive. The Zara case: 1. The Zara Business Model: Spanish clothier Zara has achieved considerable success in the fashion industry through the use of its business model, where the key element is the flexibility and ability to adapt to rapidly changing customer demand patterns. In a similar manner to large clothing retailers, Zara offers a new collection at the beginning of each season; however it differs from the retailers in continuously changing, modifying and adapting its colors, cuts and fabrics by interacting closely with customers and studying their choices to assess not only what the customers are buying but what they wish to purchase.(McAfee, 2004.) Hence, the distinctive aspect of Zara’s business model is that it is based on rapid fire fulfillment, or the generation of a super responsive supply chain, which is geared towards producing garments in small batches; designing, producing and delivering the garments at any of its stores worldwide in only 15 days.(Ferdows et al, 2004). The underlying thrust of this model is to provide a variety of new designs and clothes for their customers, but to make them available in limited supplies. This makes a customer anxious to purchase the garment quickly while it is still available and in turn generates high profits for the retailer in terms of high volume of sales. Zara adopts a holistic approach to supply chain management, where the entire supply chain is optimized rather than select portions of it. The basis of this approach is to reap bottom line profits through an end to end control of the supply chain. As pointed out by Ferdows et al (2004), Zara employs unconventional methods that are completely contrary to traditional supply chain practices – for example, moving unsold items out of shops after only two weeks, keeping production in-house rather than outsourcing, running half empty trucks across Europe and focusing capital on the building of extra capacity so that it is able to produce and distribute goods in several small batches rather than a few big consignments. The entire focus of the supply chain is geared towards satisfying the volatility in customer demand and therefore it is a very flexible and responsive supply chain , especially in the fashion industry where such responsiveness is vital to ensure good profits. 2. The special features of Zara’s business model have impacted markedly on sales. It has brought about an increase in sales volume. The Zara stores are characterized by half empty racks because goods are produced in smaller quantities; however the lower inventories help to boost sales. If an item is out of stock, the customer purchases another product. Sales are also more brisk because the customers are anxious to buy products quickly before they are sold out. The percentage of unsold inventories in Zara stores is very low as compared to other stores. Part of the reason for this lies in the rapid turnover of stock, because Zara produces new designs and stocks according to a predetermined schedule, and customers are aware of the days when new stocks arrive in the stores. Zara’s supply chain results in a considerable increase in variable costs such as shipping costs and clearing away of unsold stocks. Fixed costs are also higher because the company focuses upon uses its capital to increase its capacity, which leads to higher levels of expense. Moreover, since the company maintains its production in house rather than outsourcing its operations, its supply chain is not geared towards achieving cost savings but rather produces increased costs. However, in terms of tradeoffs, the higher fixed and variable costs are offset through the resultant increases in sales. The production of inventories in small quantities at high cost is more than balanced by the high volume of sales, because the supply chain of the company is very responsive to the market and to the volatility in customer demand. Although the Zara model is not focused upon achieving savings, it is in fact more responsive to customer demand and thus achieves higher volumes of sales and lower levels of unsold inventories. Moreover, since the industry in this case is the fashion industry where innovation carries a premium, Zara’s supply chain which is focused upon transmitting customer tastes and requirements to its designers and ensuring a fast turn around in terms of new products results in high volumes of sales, because it is responsive to the rapidly changing customer tastes. 3. A truly agile supply chain requires a fast and appropriate response to fluctuating customer demand. Especially in the case of fashion oriented products, market responsive supply chains are focused on speed and flexibility, rather than on saving costs (Aitken et al, 2002). This may be noted in Zara’s supply chain, where the major thrust of the supply chain is on producing new designs speedily and allowing for flexibility in adapting to changing customer tastes. The focus of this supply chain is not centered on saving costs, as may be noted from the half empty trucks that take shipments across Europe, clearing away unsold stocks and incurring air transport costs in some cases to bring products to the customer quickly. The supply chain works to ensure that customer demands are correctly anticipated and accommodated, and that there is a fast response to such changing demand through the rapid fire fulfillment system, even if some losses are incurred in terms of increased fixed and variable costs. The supply chain which is responsive to customer demand needs to be one that provides for greater visibility throughout the supply chain, by fully exploiting information and technology through cooperation and collaboration between the various organizations within a corporation (Harrison and Hoek, 2002). In the case of Zara, such a system does exist, because the supply chain is geared to transfer hard data as well as other kinds of information quickly through the system from the shoppers to the designers and the production staff. It tracks materials and products throughout the system, notably through its customized, hand held PDAs which utilize the latest information technology to facilitate information exchanges. The computer aided design systems also help in fast generation of designs which can also be transmitted quickly to the cutting machines and production units. McAfee (2004) offers the view that the company has masterfully selected and leveraged its IT system without spending very much on it, because its system is focused on information flow and is geared towards the generation of high operating profits. It has a centralized design and production center at its Inditex headquarters, which are divided into three divisions – women’s, men’s and children’s clothing. Each clothing line has its own production and design staff and the organization of three separate channels, albeit more expensive, helps information to flow quickly through the channel without being affected by problems in other channels, thus making it more responsive. This also allows for information flow between the three channels when needed. These measures help to address the uncertainties in customer demand and allow for a fast and efficient response. They allow the Company to respond quickly to changes in demand. Moreover, the production of inventories in law quantities also eliminates the need to accurately forecast stock levels because most of the items get sold very quickly and left over inventories of unsold stock are low as compared to other companies. 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