Blue Ocean Strategy - Logistics Management Employed by Zara - Case Study Example

Running header: The Blue Ocean Strategy Student’s name: Instructor’s name: Subject code: Date of submission: Logistics management employed by Zara Executive summary Logistics management entails the management of all the organization’s activities that it is involved in its creating the goods and services that it offers its customers. Every organization is involved in some form of logistics management as a means of its achieving its goals and objectives. Logistics management activities rage from such activities as logistics, purchases management, quality control, inventory control as well as storage. These should be properly handled in a bid to ensure effectiveness and efficiency in all of the company’s operations. As such, this paper discusses the strategy applied by Zara in ensuring success in its area of operation. Having started as a single shop in La Coruna, the retail chain has rapidly spread to become the world’s leading apparel company. The paper will establish that throughout its systems of operation including sourcing, designing, manufacturing, distribution and retailing, the company has observed a number of key success factors which include short cycle time, extensive product variety each season, small batches of products as well as extensive application of information technology in its operations. In analyzing the company’s fundamental reasons for success, the company will be compared to Dell Company which is equally successful and Gap Company which operates in the same industry with Zara but has not been as successful. The paper will also focus on how Zara can maintain its competitive advantage through sustainability. Finally, the paper compares Zara, Dell and Myers success formula and concludes that they could be suitable for other companies owing to the fact that these companies have been able to withstand growing competition even when the operating environment is not conducive. Contents Table of Contents Executive summary 2 Contents 3 Table of Contents 3 Introduction 4 Zara’s success factors in comparison with Dell and Gap 4 The strength of Zara’s supply chain management 4 Zara’s Just in Time Production (Design and Production) 5 Procurement 5 Employment of Information Technology 5 Inventory management 6 Centralized logistics and distribution 6 Low advertising and marketing costs 6 Zara’s success factors 7 How Zara can maintain its competitive advantage 7 Whether there are similarities between Zara Dells and Myers formula for success and whether this could be suitable for other companies 9 Conclusion, 10 References: 11 Introduction Zara is a flagship brand of Inditex a Spanish retail giant based in La Coruna. The company was founded in 1975 and has grown to become a superheated performer in soft retail fashion market recently. The company is mainly involved in the design, manufacture and distribution of apparel and currently operated over 1500 stores. Its primary area of operation is Europe with its headquarters branch in La Coruna making about 80% of its sales. While its competitors like Gap and Marks and Spencer have been recording declining profitability, Zara’s profitability has been on an upward trend and has one of the highest profitability in the industry. But what makes Zara succeed while its competitors are declining? Zara’s success could be attributed to its operation strategy as will be discussed below. Zara’s success factors in comparison with Dell and Gap As stated above, Zara’s operation strategy seen in its supply chain is key to its success especially as far as speed and inventory management is concerned. This eliminates obsolescence hence ensuring that the company only supplies what the market wants. The company’s key success factors are discussed below; The strength of Zara’s supply chain management According to (Bonin, 2002 )an effective supply chain management should integrate all operations of a company concerned with bidirectional flow of materials, finance and information thus providing an organized, managed and coherent processes that provides end to end management and control . This has been the idea behind Zara’s success (Somaiya, 2012). The company’s efficient logistics management strategy is analyzed in terms of inventory management, product design, suppliers and vendors, logistics management, time scheduling, information systems and material management which contribute to its ability to offer high quality fashions at prices that are affordable. It is worth noting that the company has a strong distribution network which enables it deliver goods where they are needed within 24 hours after the order is received from within Europe and 40 hours in its Asia and US outlets. The company has a strong logistics department employing over 5,000 people and had distributed over 697 million garments in 2008. Such a competitive distribution network which compares very well with that of Dell serves to enhance its operational efficiency which ensures that customer satisfaction is improved. Zara’s Just in Time Production (Design and Production) Zara is able to deliver trendy and fashionable apparel that address all tastes through its controlled design and integrated process just like Dell which manufactures computers tailored according to the customer’s taste. This is unlike Gap which has been running out of business because of keeping items that customers no longer needs or that are obsolete. This just in time processing eliminates waste in production while ensuring customers’ needs are met (Economists, 2006). The company unlike Gap designs its products in a product design process that involve its entire commercial team, market specialists, designers, procurement team and store managers who give continuous feedback in a bid to ensure that Zara’s products reach the customer in the right form just in time. Procurement Zara Company manufactures 60 percent of its products which means it controls its production and is thus able to achieve flexibility in terms of amount, frequency, and variety of new fashion products. Unlike Gap, Zara outsources less of its manufacturing. The company just like Dell owns its factories which it mostly runs in one shift which ensures it has extra capacity for quickly responding to seasonality as well as unforeseen demand (Cameron, 2011). On the other hand, Gap mostly relies on overseas suppliers without much flexibility since the suppliers at times could insist orders be placed a few months in advance. This serves to ensure that the company delivers according to customers’ tastes. Employment of Information Technology The company employs a quick response communication strategy by ensuring that its operations are technology enabled. This is done in a bid to speed complex tasks, reduce errors while lowering cycle time. In addition, the company applies technology in identifying and producing clothes that meet customers taste while ensuring that customers get them promptly. In addition, stores managers are able to communicate online to the head office regarding customer comments, selling trends and new orders. In addition, designing is technology enabled which ensures desired output quality with minimum fabric wastage. Inventory management The company has the lowest percentage of inventory to annual sales when compared to its closest competitors such as Gap. This is in line with its policy of avoiding inventory buildup in any part of its supply chain right from the raw materials to the end user. In this regard, it employs inventory optimization models in determining the amount of each items to deliver to the stores twice every week thus ensuring only what is needed is stocked in the stores. Unlike Gap, the company delivers 10,000 new models annually and replenishes each of its stores twice a week with strictly limited stock quantities. This serves to ensure its brand promise of exclusivity to its customers as well as design freshness is achieved. In addition, this helps Zara avoid storing large quantities of unpopular stocks unlike Gap. Centralized logistics and distribution Zara employs a centralized logistics and distribution system. Every store makes two orders on specific days and hours of every week and the shipments are equally made twice per week. This serves to not only inform every stage of the chain from design to procurement , production, distribution and retail of their activities but also to inform regular customers on when to visit the stores on shipment days for fresh designs thus serving to increase sales (Wordpress.com, 2010). In addition, the system is designed in such a way that it enables Zara to react on a weekly basis on demand fluctuations. This is unlike in Gap. As such, the company is able to get the product from when an idea is conceptualized to the store within just fifteen days. This is unlike the industry standard of six months. This efficient and harmonized production system ensures the company always provides the market with flesh deigns. This serves to increase sales and hence profitability. Low advertising and marketing costs Unlike Gap and other fashion retailers who spend approximately 3.5% of their revenue on advertising, Zara spends only 0.3% since it relies almost entirely on the word of mouth instead. Furthermore, it projects its image using its stores by changing its shops layouts every week. Zara’s success factors Based on the above analysis of Zara’s logistic management, a number of factors come out as being key to its success. They include; i) Flesh fashion and variety Unlike Gap, Zara has been successful in selling a variety of fashion and trendy clothes. The company’s designers constantly lookout for new ideas hence keeping the company’s product line fresh. While over 1000 new garments are introduced every year, they are only available for a few weeks before being replaced. Just like Dell, the company asks customers what they want and hence deliver it to them. In addition, these are sold at lower prices and hence its products are affordable to different consumer classes. ii) Speed and market responsiveness The company’s speed and responsiveness in providing freshly designed products to the market is its major competitive advantage over its rivals like Gap. Feedback regarding what customers like, what they look for and what they don’t like is gathered by the stores managers who channel it back to designers who begin designing according to customers’ tastes on the spot. This responsiveness has the effect of push customers to purchase promptly and visit frequently as new fashions are frequently designed (Economist, 2005). What results is an environment of opportunity and shortage in the stores hence increasing the regularity and promptness with which the customers visit the stores. This is because regular customers know when new products are introduced and that they may never be available the next day. This scarcity background enables Zara to sell its products at full price unlike Gap who have to struggle with old stock. This has the effect of lowering the company’s costs as it doesn’t have to mark down its products like Gap. How Zara can maintain its competitive advantage Based on the above analysis, Zara’s competitive advantage can be said to emanate from a number of factors including the high turnover of the product it sells, low level of inventory owing to its fast supply chain , its efficient distribution system, its flexible production system as well as its timely scanning of the fashion trends, market trends and meeting consumer tastes and demands through provision of fashionable and trendy clothes (Foreign policy, 2008). These factors are not easily imitable or substitutable and have hence helped the company to be ahead of the competition outdoing big companies like Gap. However, with increased innovation and competition, can Zara maintain its competitive advantage? The company’s ability to maintain its competitive advantage will depend on whether it remains focused to its current logistic management strategies as well as its ability to undertake the following steps; i) Organizational transformation The contemporary marketing environment is uncertain and hence Zara is also prone to environmental changes that could dislodge it as a leading apparel retailer globally. As such, it would be prudent for the company to undertake strategic change as a critical antecedent to maintaining its competitive advantage in a world of significant environmental uncertainty. One of the changes it could undertake is to expand its markets beyond its traditional markets (Ghemawat, 2003). For instance, the company need not over depend on its European market. Note that both its stores and production sights are all located in Europe and could be vulnerable to disruptions in the region. Similarly, the company heavily relies on Europe for a significant part of its sales. As such, there is need to move beyond this traditional markets. The company also needs to differentiate between local stores in a bid to motivate customers to visit more stores hence creating traffic through offering different product lines in different stores. The company also needs to embrace Ecommerce especially in its bid to become relevant in the US market. This will lead to more sales through increased e-sales. ii) Being involved in business sustainability Ning, (2012) views sustainability as an engine to future growth. This implies that as organizations like Zara turn their sights to new areas of growth, sustainability will be a vital element in their strategy to increase their revenue while broadening their geographic coverage into emerging markets. Sustainability has continued to reshape the business context. in addition, resource scarcity as well as climate change and the ever pressing and urgent need for social economic development have altered supply and demand and hence the rules of the game both in industries that are traditionally associated with sustainability and the rest. This means that companies like Zara are expected to play a major role in enabling the transition towards a sustainable world. In fact, sustainability has become more and more integrated into all aspects of business. Furthermore, there has been significant growth in public awareness and concern on sustainability implying that companies that fail to involve themselves in sustainable practices may become irrelevant in the market while those that do are likely to make more and more business. As such, Zara need to take advantage of this if it is to maintain its competitive advantage in future. Whether there are similarities between Zara Dells and Myers formula for success and whether this could be suitable for other companies The above companies are very successful companies operating in different fields and hence markets. Though they sell different products and with different company structures, they have their strengths in their supply chain management strategies. These supply chain management strategies ensure the companies enjoy related competitive advantages including being able to quickly respond to demand. The companies are also effective in managing customers’ expectations and hence meeting their tastes (Part, 2014). In addition, the companies are able to produce their products in small batches depending on customers’ specification and the conditions in the market. This ensures that the companies make a lot of sales through only providing what the market needs. In addition, their centrally controlled supply chain enables them to cut down on wastes thus ensuring they maximize on their profitability. As can be seen above, the model employed above is desirable and can be recommended for any company to apply. This is because such a model leads to increased profitability through increased sales. In addition, the model ensures that wastage is minimized thus further increasing profitability. In addition, the model is sustainable since customers are always assured of their tastes and preferences being met promptly and hence they are likely to keep on making repeat purchases which is important for the company’s profitability. Conclusion, As stated above, Zara company has grown to become the world’s largest apparel retailer outpacing its major competitors such as Gap thanks to its sound supply chain management. As such, having a sound supply chain /logistics management is vital for a company’s success. This is because it has ensured the company succeeds through its critical success factors including short cycle time, extensive product variety each season, small batches of products as well as extensive application of information technology in its operations. As such, the success model applied by Zara could be recommended to any company that intends to succeed. However, in sustaining its competitive advantage, Zara also needs to engage in business sustainability since this is the new concept shaping business in the contemporary world. References: Bonin, R2002, The fashion industry in Galicia: Understanding the Zara Phenomenon, European Planning Studies, vol. 10, no. 4, pp. 519-527. Economists, 2006, Shining example, Economics, vol. 379, no. 8482, pp.4-6. Cameron, A2011, A sustainable workplace, Strategic direction, vol. 28, no.1, pp.3-5. Part, A2014, Comparison of Dell and Zara supply chain, Retrieved on 14th August 2014, from; http://www.scribd.com/doc/52789329/Comparison-of-Dell-and-Zara-supply-chain Ning, H2012, How to sustain sustainable competitive advantages, International Journal of Business Administration, vol. 3, no.5, pp1-7. Foreign policy, 2008, Fashion forward, Foreign policy, vol. 11, no. 169, pp. 28. Ghemawat, P2003, Zara: Fast fashion, HBS, vol. 9 -703-497, 1st April 2003. Economist, 2005, The future of fast fashion, Economists, vol. 375, pp. 8431, pp57-58. Wordpress.com, 2010, Zara’s logistics, Retrieved on 14th August 2014, from; http://logisticsmgeps.wordpress.com/2010/05/02/zaras-logistics/ Somaiya, M2012, Supply chain management, Retrieved on 14th August 2014, from; http://cmuscm.blogspot.com/2012/09/fashion-forward-zaras-supply-chain.html Read More