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Copy of zara supply chain

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by

Rapeepan Chotisorayuth

on 28 February 2014

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Transcript of Copy of zara supply chain

More
Decentralised
(in 2012: 21 production offices around the world)

Results
In 2001, Zara has 450 stores in 33 countries
In 2013, 1,808 stores
All stores are uniform and upscale high-street
Tries to sell the products to "value" marketers within a high-end experience
ZARA
Zara
Founded by Amancio Ortega Gaona in 1963
Zara's Operation
A Sourcing Dilemma
Zara's growth strategy
Outward growth strategy from Spain.
New Store locations are chosen selectively in area that could be supported within the Zara model
Textile & Apparel Industry
Textile Industry
Relatively capital intensive (labour cost = 40% COGS)
Highly Specialized
Apparel Industry
Labour cost = 60% COGS
Sewing and finishing are still done manually
Relative wage levels became the main driver of production sourcing
Many segment of apparel industry do not benefit from economies of scale
Maintaining high quality is more important to firm's profit

Zara, Spanish clothes retailer, offers high-fashion concept clothing for
women (58%)
men (22%)
children (20%)
Planning & Design
For initial collection, plan a year in advance
11,000 styles per year
Designers and store specialist worked in the same room at headquarters
Patterns and Samples
Designs are sent to either third-party or in-house production facilities to produce sample
Production sourcing & Scheduling
Manufacturing
Comditel (ZARA's owned fabric sourcing company) procure ~ 40% of fabric.
ZARA factories cut the fabric by using a computerised machine to minimise waste.
Subcontracted with network of 400 small firms to sew
To take advantage of a lower wage costs to provide cushion in the margins in response to pricing pressure
Outsource 60%
Outsourcing may negatively impact Zara's fashion forward image, and its competitive advantage that drove its margin
Zara's pricing strategy
ZARA supply chain model
Vertical Integration
Procurement &
Manufacturing
Distribution
Retail
Retailing
Final allocation of inventory are made centrally taking into account the local managers order
Shipments are made twice a week
Zara experience sales mark down of only 15-20% compared to its competitor of 30-40% markdown sale
Distribution
Both outsourced and in-house manufactured garments are sent to 500,000 sq ft distribution center in Arteixo near ZARA's HQ.
Utilize only 50%
Automatic sorting according to style
iron before sending to store


OFFSHORE OUTSOURCING
Strengths
Scenario 1
Scenario 2
WEAKNESSES
CHINA
INDIA
THAILAND
VIETNAM
STRENGTHS
WEAKNESSES
Responsiveness is preserved as production is near Spain

May NOT fully maximise benefit of offshore outsourcing - lower cost



Keep most outsourcing in Europe

HOW TO BEST MAXIMISE BENEFIT OF OFFSHORE OUTSOURCING AND RETAIN ZARA'S COMPETITIVE ADVANTAGE
Outsource to several countries in a region i.e. Asia (China, India, Vietnam) depending on the skills required

Scenario 2!

Scenario 1 -
large short-term cost benefit but in the longer term this may not be sustained also face significant country-specific risk. The responsiveness is also likely to be damaged.
Criteria
dispersion of outsourcing
- how scattered the outsourced firms are

low labour cost - maximise gross margin

retain a centralized distribution center

minimal disruption to current Zara model


risk and uncertainty as in Q2

transportation issues - cost & time


DISTRIBUTION CENTER IN SPAIN/NORTHERN PORTUGAL
OUTSOURCE MOST OF ITS PRODUCTS INTO A LOW LABOUR COST COUNTRY
DEISGN DONE IN THE SPAIN HEADQUARTER
Set up a regional distribution center
Employ an Asian design team
Lower country specific risk and uncertainty
better serve the regional customers
Scenario 3
STRENGTHS
additional cost due to multiple design team and distribution system
inconsistency in product offering
Retain 1 design team & current distribution method
little or no currency and other regulatory risk due to harmonised EU laws
WEAKNESSES
In- season production
Design procedure/location
current Zara distribution arrangement
- how many distribution center
Size and scale of outsourced firms
Scenario 2 is more balanced in terms of short term/ long term horizon and achieves cost benefit from offshore outsourcing while maintaining the much needed responsiveness.
Scenario 3
may not achieve significant cost benefit but will retain the responsiveness of Zara as its competitive advantage.
Outsourced - commitment are made 6 months prior to scheduled store delivery (60% Europe, 30% Asia)
Basics and knits
In-house scheduling is done to ensure timely delivery to store
fashion styling

ZARA Outsourced Manufacture Strategy
ZARA Headquarter
Location 3
Outsourcing from China Mainly
ZARA was planning to increase the proportion of outsourced manufacture mainly to China in order
to take advantage of lower wage.
RISK
Benefits
Low labour cost
Sufficient labour force & skilled worker
Abundant and cheap raw material
Lead time
BUT
any
Wage Level
Quality Control
Ethical Issues

Higher cost of capital investment

Focus on time, variety, and customer responsiveness

Focus on time, quality, and cost

Lower cost of capital investment

Higher variety

Aggregate demand = lower demand volatility
Lower variety

Shortest lead time: 10 days

Shortest lead-time: 3 weeks

Shorter manufacturing lead-time

Longer manufacturing lead-time

Higher labour cost

Lower labour cost

50% outsourced

100% outsourced

More risk of supply chain disruption

Less risk of supply chain disruption

Short lead time to deliver clothes to DC

Long lead time to deliver clothes to DC

More fluid coordination

More Difficult coordination

Lower inventory carried

Higher inventory carried

More
Centralised
(in 2012: 14 highly automated factories in Spain)

Pull Strategy
Low cost transport
Higher cost transport
Cost plus & target margin
Arteixo Spain
Macro
Nature disaster
Political and regulatory issues
Cultural gaps and differences



Wage level
Exchange rate
Lead time
Quality Control
Ethical issues
Nature Disaster
Micro
low wage,
low cost!
New Strategy
Think Carefully!
Thank you!
Any questions?

Only 15-25% of inventory produced before season start
High flexibility
Highly responsive
Centralisation
Centralised Stock Replenishment
"Observers witnessed large, modern Chinese factories outsourcing work to smaller, grittier, facilities even though this meant forgoing the production benefits from economies of scale."
Working conditions
Eco-friendly production
short of supplying for 6 weeks
Full transcript