Zara case study The ZARA Case Study in Economics and The Organisation of Economic Activity

Aalborg University BSc Economics and Business Administration 2012 October 24 Mini Project The ZARA Case Study in Economics and The Organisation of Economic Activity Contents Introduction 4 Describe th. From Transaction Costs Economics view, discuss if it makes sense to outsource work to “captive” suppliers. What would be the alternatives, and how do you evaluate them?

Aalborg University BSc Economics and Business Administration

2012 October 24

Mini Project The ZARA Case Study in Economics and The Organisation of Economic Activity

Introduction 4 Describe the Value Chain of Inditex 5 From Agency Theory view, describe the incentives structure for the store managers 10 From Transaction Costs Economics view, discuss if it makes sense to outsource work to

“captive” suppliers What would be the alternatives, and how do you evaluate them? 12

In relation to the fashion sector in Europe, does Inditex posses a competitive advantage? Use the VRIO framework as the basis of your discussion 16 List of sources 19

Inditex is an eight-brand group of the world’s largest fashion retailers with its headquarters located in La Coruna, in Spain Founder and majority owner of the company is Amancio Ortega, famous Spanish entrepreneur Chairman and CEO of the company is Pablo Isla Alvarez de Tejera Inditex’s corporate culture is based on close communication between the customers and the employees. Today company has more than 100.000 employees worldwide The largest brand of Inditex is Zara, which runs three independent product lines for women, men and children where most of the accent is stressed on women’s garment Each of the lines is managed by separate team which consists of Diression de Tiendas (DTs) DT’s collaborate with commercials, country managers, HR managers and headquarters We can freely say that Zara is

a pioneer in fast fashion industry The customer is at the heart of their unique business model, which includes design, production, distribution and sales through their extensive retail network The Zara case study is an interesting example on how one company can be successful on the market The dynamics of the company and its adapting ability show how important is the right thing regarding market’s needs Zara is an apparel chain that works differently from traditional retailers The main characteristic is the vertically integrated model Instead of relying fully on outside partners, the company manages all design, warehousing, distribution, and logistics itself The products are distributed in small batches Due to the stylish garment and affordable prices, consumers visit Zara’s stores very often

Describe the Value Chain of Inditex

Value Chain Inditex

Primary Value Chain Activities

 Inbound Logistics

Inditex Group is a vertically integrated group, which controls most of its supply chain About 50 % of its products are manufactured in Spain, 25% comes from Europe, and the remaining fraction is produced in locations in Asia and Africa1 After that, the whole production is received and warehoused in the logistics centers in Spain before being sent

to the stores It does not matter where they have been produced, the main categorization

is happening in Spain Materials and fabrics are kept in warehouses without exact colors

or prints, due to be able to react quickly to market changes If it turns out that the demand is higher for the particular product, the company is able to react quickly and produce additional items with a particular design or color2 Sometimes, transportation of merchandise is by plane; for example: clothes, which are produced in Asia, have to be transported in logistics centres in Spain, there categorized and again transported to the Asia Furthermore, many countries have small warehouses where they keep extra or returned goods3

 Operations

Inditex country offices represent headquarters at the country level, supervising and coordinating the operations of the various Inditex brands4 Zara's headquarter in Spain consists of three spacious halls for each of these centers There designers work together with market specialists and planners for procurement and production Also, here designers can quickly check initial drafts with their colleagues and discuss about new styles Therefore, prototypes can be examined on site That kind of teams can work very efficiently; discuss about new fashion trends and take decisions within a few hours Market specialists are intermediaries between designers and store managers, who can

1 Notes on Zara case

2 Notes on Zara case

3 Zara: managing stores for fast fashion

4 Zara: managing stores for fast fashion

quickly provide feedback to their colleagues in design and procurement.5 What differs Zara from competitors is more capital intensive industry

Each brand from Inditex Group has his own autonomy They can quickly react to market requirements, act in a flexible way by making changes without asking permission of third parties For example, Zara has power on operations, such as dying, labeling and packaging, all other manufacturing processes are made by Inditex employees

Zara has three product lines: one for children, women and men All product lines go parallel with each other, but in an operational different way Procurement, sales, design and marketing operations exist for each of these lines; just they are different and separated

 Outbound Logistics

At the beginning of each season, the whole merchandise is being distributed to the stores,

in the quantities decided by the commercials However, when the production reaches the stores, managers are responsible for the order replenishments It is their responsibility to decide how many units of each item to order and to do that, they are taking into consideration various data (forecasts of customer demand, how many of that product the store had and already sold and etc.)

European stores are receiving their deliveries within 24 hours; in Asia and America receiving deliveries take 40 hours6 Usually deliveries are done by trucks or planes Each week, stores are receiving about 12,000 units However, sometimes it happens that they did not receive the whole order, because inventory at the logistics centers are limited.7

Also, there were some improvements in time saving process In the beginning when the new merchandise was delivered, employees had to put tags on the products before they could reach store shelves, now tags are put by manufactory workers This improvement puts some value on faster delivery of the production to the customer

 Marketing& Sales

5 Notes on Zara case

6 Zara: managing stores for fast fashion

7 Zara: managing stores for fast fashion

Zara is using very unique marketing strategy Due to the fact, that they are not outsourcing their manufacturing, company can quickly respond to the customers demand

in fashion trends Zara’s unique selling proposition is to produce the latest trend products within very short time (few weeks) and at affordable prices Moreover, products are on the store shelves no longer than one month People are more or less forced to buy the product, which they like due to the fear that next week it can be sold out Products, which are not sold out are afterwards discounted Zara has approximately eighteen percent of unsold merchandise, which is one of the lowest in the industry

Comparing with other similar companies, Zara does not spend much money on promotion However, it does not mean that the company is doing nothing Zara thinks that the store windows and the content is the most necessary advertising for them

Last, but not least interesting thing about Zara is that it owns the majority of its stores, but also does joint venturing and franchising in markets which are high risk and culturally distant

 Service

Zara’s customers are young people, who are usually in a hurry; want to buy quickly something what they like without being bothered Due to this fact, sales associates are required to help, when they see that customers need help or ask directly for help Therefore, company is putting more effort in managing products than customers Also, it

is very important to make sure that customers do not wait in long queues Zara respects customers complain and try to respond as soon as possible

Support Activities

 Procurement

Zara sources fabric, other inputs and finished products from external suppliers who are usually in low cost source markets After certain designs are chosen for production, material is drawn from stock, cut, manufactured and delivered to company stores around

the world Zara also owns 20 other factories for internal manufacturing that apply just in time.8

Inditex is purchasing raw materials through the company’s regional offices in the UK, China, Holland and other offices based in Europe, Asia and Australia.9

 Technology Development

Company puts the value on information transfer The whole Zara’s supply chain is connected through the constant flow of information Zara developed way how to transfer information easier than before They invested a lot in IT in the 1990’s before major phase

of international expansion They developed quick response systems in the industry Company is using PDA (Personal Digital Assistance) in stores, which ensures a quick information flow within the company and creates value for the customers.10 Also, this system helps for the company to find out about new market trends as fast as possible and possibility to react quickly

 Human Resource Management

All brands of Inditex Group have HR directors, who are supporting the stores on all HR issues, which are not linked to the operations and are organized by the geographical area

HR department is well developed in this company Company puts a lot of emphasize on training of their employees, so usually sales associates before starting to work have at least one week training Zara’s product development teams are responsible for attending high fashion fairs and exhibitions to translate the latest trends of the season into their designs In this type of company hierarchy exists similar to one like the pyramid model Although thing that is interesting is that store managers have in their work autonomy The idea is that make them understand the value of freedom and to motivate them and give an opportunity to feel like the owners of their own store For the Zara Company’s CEO it is very important that there will not be disconnection between the store and headquarters CEO thinks that the feeling in the store can be transmitted and can make

8 http://www.slideshare.net/binotrisha/zara-procurement-strategy

9 Notes on Zara case

10 Notes on Zara case

huge damage for the entire company, so it is important to make sure that employees are satisfied and motivated to work efficiently.11

 Firm Infrastructure

Zara developed business model where speed and decentralized decision making was essential This business practice, in turn, led to shorter lead times and introduction of more fashion styles The implementation of the information and communications technology helped augment the business processes at Zara At the heart of infrastructure

is the IT technology The organizational structure supports IT technology The company’s CEO is Isla A.de T., the “head” of the company Next to the CEO there are headquarters, which are responsible for coordinating the brands, HR, IT, transportation and real estate Below the headquarters are “commercials”, which are organized into teams to analyze and interpret the sales figures for around 40 stores in a geographical area Next to “commercials” are HR directors who are supporting the stores on all HR issues that were not linked to operations and who are organized by geographical area Each Inditex brand has regional networks of DT, equivalent to regional managers and known internally as DTs, who are responsible for the operations and performance of 15 stores and have to evaluate how those stores are performing

Country managers are also expected to be proactive in social issues Beside the central management above, each Inditex brand is managing independently, with its own network

of stores, logistic centers and production facilities 12

11 Zara: managing stores for fast fashion

12 Zara: managing stores for fast fashion

From Agency Theory view, describe the incentives structure for the store managers

In today’s world each company is trying to attract the best employees from the market that will give their best to achieve a company’s goals The most common problem that can occur is the possibility that your employees can have lack of motivation to contribute enough Where employer’s goals reach employees incentives? How the employer can motivate his employees in order to achieve best results? There are plenty of methods that people invented to monitor the work of others and constantly control the process It could be by direct supervision, cameras or it could be also by reports regarding financial performance Is it the best way to monitor the work

of your employees all the time to insure yourself that the job is done? Many managers today decide that besides the salary, the workers should receive also a percentage of the sales or the whole salary could be depending on their contribution in the company Each individual has different way to measure his own contribution and the contribution of the people around him If

we look at Zara’s store managers what will be their motive to work hard instead of shrinking? For Zara’s shareholders, CEO and etc, their goal is to increase the sales and profits Working hard raises the probability of making more sales, but the increased effort cost the store managers

or salesperson from the other side In order to provide that effort they have to receive something for return which can be some kind of reward Zara puts a lot of emphasize on its employees Approximately 87% of them are at the stores and thanks to great communication they are interrelated with the company’s headquarters, commercials and DT’s Interesting thing is that people from bottom (sales associates) can be promoted to store managers, and we can see also this on other levels as well

Let first start with the role of store managers At each store, three product lines are managed by three independent section managers, each with a team of sales people and cashiers Each manager is in charge for women’s, men’s and children’s section Woman’s manager is also the overall manager of the store Main characteristic that these managers have is autonomy They feel like entrepreneurs of the store as they have impact on orders for the store and this helps Zara

to deal with different culture issues in various countries as they know local values This autonomy is in fact a bonding, as store managers can govern the store Zara’s philosophy isn’t just monitoring employees to perform well, but also to have them satisfied with their job So, sometimes we can see the situations when employees aren’t satisfied with the atmosphere and then they have the possibility to be transferred to another store (bonding) In our case we treated store managers as agents and commercials and DT’s as principals due to the fact that store managers should meet the principal’s goals To increase the productivity of the store and

increase sales the store manager has to increase the productivity of the all employees working at the store To manage all this responsibilities, the manger has to develop specific skills that will meet the requirements Store managers receive competitive salary and a bonus based on how well they meet target sales In order to perform well they need also to coordinate sales associates

As they are organized in teams there is an opportunity for shrinking, because of huge number of employees in an average store One of the sale manager’s task is to monitor sales associates and ensure work efficiency In one way we see that incentives are aligned because of monitoring which occurs at each level: sales associates are monitored by store managers, store managers by DT’s and commercial and DT’s and commercials by headquarters All their bonuses are affected

by overall sales, so all of them should have an incentive to put more effort Another interesting factor that we found is the risk that store managers face when they are ordering replenishments They need to use their previous experience together with their ability to forecast new orders We see the risk due to the fact that store managers aren’t aware how many units will be sold, what will be the bestseller and how many units are available in warehouse For this reason Zara created incentive-intense payment model for store managers to motivate them to seek better results in their performance