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Zara: Apparel Manufacturing and Retail
Zara is a chain of fashion stores owned by Inditex, Spain’s largest apparel manufacturer and retailer. In 2009, Inditex reported sales of about 11 billion euros from more than 4,700 retail outlets in about 76 countries. In an industry in which customer demand is fickle, Zara has grown rapidly with a strategy to be highly responsive to changing trends with affordable prices. Whereas design-to-sales cycle times in the apparel industry have traditionally averaged more than six months, Zara has achieved cycle times of four to six weeks. This speed allows Zara to introduce new designs every week and to change 75 percent of its merchandise display every three to four weeks. Thus, Zara’s products on display match customer preferences much more closely than the competition. The result is that Zara sells most of its products at full price and has about half the markdowns in its stores compared to the competition.
Zara manufactures its apparel using a combination of flexible and quick sources in Europe (mostly Portugal and Spain) and low-cost sources in Asia. This contrasts with most apparel manufacturers, who have moved most of their manufacturing to Asia. About 40 percent of the manufacturing capacity is owned by Inditex, with the rest outsourced. Products with highly uncertain demand are sourced out of Europe, whereas products that are more predictable are sourced from its Asian locations. More than 40 percent of its finished-goods purchases and most of its in-house production occur after the sales season starts. This compares with less than 20 percent production after the start of a sales season fora typical retailer. This responsiveness and the postponement of decisions until after trends are known allow Zara to reduce inventories and forecast error. Zara has also invested heavily in information technology to ensure that the latest sales data are available to drive replenishment and production decisions.
In 2009, Inditex distributed to stores all over the world from eight distribution centers located in Spain. The group claimed an average delivery time of 24 hours for European stores and up to a maximum of 48 hours for stores in America or Asia from the time the order was received in the distribution center (DC) to the time it was delivered to the stores. Shipments from the DCs to stores were made several times a week. This allowed store inventory to closely match customer demand.
The following questions raise supply chain issues that are central to Zara’s strategy and success:
What advantage does Zara gain against the competition by having a very responsive supply chain?
Why has Inditex chosen to have both in-house manufacturing and outsourced manufacturing? Why has Inditex maintained manufacturing capacity in Europe even though manufacturing in Asia is much cheaper?
Why does Zara source products with uncertain demand from local manufacturers and products with predictable demand from Asian manufacturers?
What advantage does Zara gain from replenishing its stores multiple times a week compared to a less frequent schedule? How does the frequency of replenishment affect the design of its distribution system?
Do you think Zara’s responsive replenishment infrastructure is better suited for online sales or retail sales?
Amazon: Online Sales
Amazon sells books, music, and many other items over the Internet and is one of the pioneers of online consumer sales. Amazon, based in Seattle, Washington, started by filling all orders using books purchased from a distributor in response to customer orders. As it grew, the company added warehouses, allowing it to react more quickly to customer orders. In 2009, Amazon had about 20 warehouses in the United States and another 30 in the rest of the world. It uses the U.S. Postal Service and other package carriers such as UPS and FedEx to send products to customers. Outbound shipping-related costs at Amazon in 2009 were almost $2 billion.
With the Kindle, Amazon has worked hard to increase sales of digital books. As of 2009, Amazon offered more than 460,000 books in digital form. The company has also added a significant amount of audio and video content for sale in digital form. Amazon has continued to expand the set of products that it sells online. Besides books and music, Amazon has added many product categories such as toys, apparel, electronics, jewelry, and shoes. In 2009, one of its largest acquisitions was Zappos, a leader in online shoe sales. This acquisition added a lot of product variety.
According to the Amazon annual report, this required creating 121,000 product descriptions and uploading more than 2.2 million images to the Web site! In 2010, another interesting acquisition by Amazon was diapers.com. Unlike Zappos, this acquisition added little variety but considerable shipping volumes.
Several questions arise concerning how Amazon is structured and the product categories it continues to add:
Why is Amazon building more warehouses as it grows? How many warehouses should it have and where should they be located?
What advantages does selling books via the Internet provide over a traditional bookstore? Are there any disadvantages to selling via the Internet?
Should Amazon stock every product it sells?
What advantage can bricks-and-mortar players derive from setting up an online channel? How should they use the two channels to gain maximum advantage?
What advantages/disadvantages does the online channel enjoy in the sale of shoes /diapers relative to a retail store?
For what products does the online channel offer the greater advantage relative to retail stores? What characterizes these products?
Case Study III
The case discusses the global supply chain management practices of Hong Kong based Li & Fung Limited, a global consumer goods export trading giant.
It examines how Li & Fung has positioned itself as a global supply chain manager, describing its supply chain management strategy including the dispersed manufacturing technique and its global supplier network.
The case also describes how Li & Fung is using the Internet as a tool to make supply chains more transparent. In January 2014, Li & Fung Limited (Li & Fung), a Hong Kong based global consumer goods trading giant, announced that Li & Fung Trading (Shanghai), its wholly-owned subsidiary, had been granted an export company license by the Ministry of Commerce of the People’s Republic of China (China).
After receiving the license, Li & Fung Trading (Shanghai) became the first wholly owned foreign trading company to be offered direct export rights in China. The company was authorized to export China-sourced goods directly to customers worldwide and import raw materials for manufacturing in China. Li & Fung was until then dependent on its Chinese partners for exporting from China. According to William Fung (William), managing director, Li & Fung, the license freed the company from the many trading restrictions in China. It would enhance Li & Fung’s competitiveness and increase its share in the global market.
William said, “With the ability to directly export products from China to our customers worldwide, Li & Fung is now able to offer an even more complete supply chain service. “1 Analysts felt that Li & Fung stood to benefit significantly from its new license as it was one of the world’s leading textile export traders, and the largest to the US.
The company was well-placed to leverage China’s leadership position in textile manufacturing and exports, as that country was the company’s largest manufacturing hub, from where it sourced over US$ 12 bn worth products annually. Li & Fung had 16 offices in China, which it planned to increase it to 36 by 2017.
Li & Fung’s evolution into a supply chain manager took place in three stages, driven by significant changes in the global retailing industry, customer and retailer preferences and economic trends across Asia through the early 1970s.
In the first stage (during the 1970-78 period), Li & Fung acted as a regional sourcing agent. The company extended its geographic reach by establishing sourcing offices in Singapore, Korea and Taiwan. Li & Fung’s knowledge and reach in the Asian region held value for customers. This was because, many big buyers could manage their own sourcing if they needed to deal only in Hong-Kong…
Leveraging the Internet
With the emergence of the Internet as a major communication medium, industry observers felt it would make trading companies like Li & Fung redundant. Li & Fung opposed this view, stating that the key to its business was not hardware but information and its application to the management of client’s supply chains. The company believed that instead of being a threat, the Internet and e-commerce would offer more opportunities by helping it drive supply chain costs down and integrating management of supply chain via IT.
Analysts too felt that this was true. They said that the real value of Li & Fung’s business model lay not just in its ability to link suppliers and buyers, but in its power to influence suppliers and manufacturers, with whom the company had a strong relationship of trust…
In August 2013, Li & Fung finalized a licensing agreement with Levis, under which the former would design, manufacture and market clothing under the latter’s Levi Strauss Signature label. According to company sources, these products were started marketing in the US by late 2014…
Provide your understanding of Li & Fung’s SCM strategy.
What advantages does Li & Fung obtain by leveraging the power via the Internet provide over a traditional model ?
Are there any disadvantages to selling via the Internet? How should Li & Fung use the two channels to gain maximum advantage?
What advantages/disadvantages does the online channel enjoy in the sale of garments / accessories when compared to sale in a retail store?(Garments involve the customers wearing it for trial to check whether it fits for them).
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