EXCELLENCE IN EUROPEAN APPAREL SUPPLY CHAINS: ZARA

EXCELLENCE IN EUROPEAN APPAREL SUPPLY CHAINS: ZARAByPhyllis P ChuBachelor of Science, Management ScienceSubmitted to the Zaragoza Logistics Center in Partial Fulfillment of the Requirements for theDegree ofMaster of Engineering in Logistics and Supply Chain ManagementIn theMIT-Zaragoza International Logistics ProgramAt theZaragoza Logistics Center,A Research Institute Associated with the University of ZaragozaMay 2005 2005 All rights reservedThe Author hereby grants to MIT and to the Zaragoza Logistics Center permission to reproduce andto distribute publicly paper and electronic copies of this thesis document in whole or part.Signature of AuthorMIT-Zaragoza International Logistics ProgramZaragoza Logistics CenterMay 17, 2005Certified byDr. Paul ThompsonProfessor, Zaragoza Logistics CenterThesis SupervisorAcceptedMaria Jesus SaenzAcademic Director, Zaragoza Logistics CenterPhyllis ChuPage 15/17/2005

EXCELLENCE IN EUROPEAN APPAREL SUPPLY CHAINS: ZARAByPhyllis P ChuSubmitted to the Zaragoza Logistics Center in Partial Fulfillment of the Requirements for theDegree ofMaster of Engineering in Logistics and Supply Chain ManagementIn theMIT-Zaragoza International Logistics ProgramAt theZaragoza Logistics Center,A Research Institute Associated with the University of ZaragozaABSTRACTThe apparel industry is characterized by short product life cycles and labor intensiveproduction processes. The industry is driven by product proliferation, increasingly shorter productlife cycles and brand image. Excellence in fashion apparel supply chains is distinguished by the abilityto react to changes in customer demand and fashion trends quickly and accurately. Zara, the SpanishSpecialty Apparel Retailer, is a company that has set the standard for excellence in supply chainpractices by its ability to achieve response times of 10 to 14 days. This case study on Zara analyses itssupply chain practices. Just in time, quick response, postponement, local sourcing and production aresome of Zara’s supply chain practices that help it achieve excellence in supply chain. Zara’s supplychain operations support its strategy and philosophy of providing fashion that accurately reflectscustomer demand as quickly as possible at affordable prices.Phyllis ChuPage 25/17/2005

TABLE OF CONTENTSList of Figures. 5Acknowledgements. 71 Introduction. 82 Literature Review. 103 European Apparel Industry. 123.1 Europe. 123.1.1 European Economic Status. 133.2 Apparel Industry Overview. 163.2.1 Apparel Industry in Europe . 173.2.2 Imports and Exports . 183.2.3 Customer Segments and Sales Channels. 203.2.4 Apparel Industry Characteristics . 213.3 Evolution of leading apparel companies. 213.3.1 adidas-Solomon . 213.3.2 Inditex. 223.3.3 Gap, Inc . 233.3.4 H & M . 233.3.5 Benetton. 243.4 Apparel Industry Analysis. 253.4.1 Apparel Supply Chain. 253.4.2 Trends and Industry Drivers. 273.4.3 Challenges and Opportunities. 284 Inditex. 304.1 Inditex Overview. 304.1.1 Business Units . 304.1.2 Financials. 324.1.3 Business System . 354.1.4 Business Strategy. 354.1.5 Sales Channels and Customer Segments. 394.2 Competitor Analysis. 404.2.1 Competitor Analysis. 404.2.2 Inditex’s Position Among its Competitors . 42Phyllis ChuPage 35/17/2005

5 Zara’s Supply Chain . 465.1 Zara Overview . 465.1.1 Zara’s Products . 465.1.2 Zara’s Top Competitors and Positioning . 475.2. Operating Model and Supply Chain Network. 495.2.1 Logistics Operating Model . 505.3 Supply Side Business Process. 525.3.1 Outsourced Finished Goods. 535.3.1 Internally Manufactured Goods . 545.3.1.1 Production. 555.4 Inside Business Process. 565.4.1 Product Portfolio Management . 565.4.2 Facility and Capacity Management. 575.4.3 Inventory Management . 585.4.4 Production Management. 595.4.5 Transportation Management . 595.4.6 Logistics Center Management. 605.5 Customer Side Business Process: Store Operations. 615.5.1 Distribution Channel Management. 615.5.2 Demand Planning and Forecasting. 615.5.3 Channel and Sales Management . 625.5.4 Markdown Management . 625.5.5 Order Fulfillment. 625.5.6 Returns Management . 636 Zara’s Specific Supply Chain Framework . 646.1 Strategy . 646.2 Operating Model. 656.3 Operational Objectives. 676.4 Tailored Business Processes . 687 Conclusions. 71Bibliography . 72Phyllis ChuPage 45/17/2005

LIST OF FIGURESSection-NumberPage3-1Map of the European Union Member States and Candidates . 133-2EU25’s GDP as a percentage of GWP (Gross World Product) . .143-3European Union Member States’ and Candidates’ Populationsand GNP’s per capita . .153-4The Fashion Pyramid .173-5Size and Growth of Western European Apparel Market-TotalApparel Spending by Country .183-6Textiles and Clothing Share in Total Extra-EU industrial Exports in 2002.193-7Average Extra-EU Export Prices in 2002 . .203-8The Apparel Supply Chain . 263-9Sourcing Model for European Apparel Retailers 274-1Inditex Store Sales .314-2Inditex Sales by Chain 2003 .324-3Inditex Sales by Square Meter of Store Space .334-4Inditex EBIT .344-5Inditex Return on Capital Expenditure . .344-6Comparison Between Inditex’s Own Stores and Franchises .364-7Percentage of International Store Sales by Inditex Chains 2002/2003 374-8Breakdown of Inditex Sales by Region 2003 .374-9Inditex Strategy .394-10Comparison of Store Sales Among the Competition .434-11Comparison of Number of Retail Stores Among the Competition .444-12Comparison of Number of Employees Among the Competition . 445-1Zara’s Product Positioning 485-2Zara’s Product Flow .50Phyllis ChuPage 55/17/2005

5-3Inditex’s Production . .535-4The Exponential Increase in Wait Time as Demand Variability andCapacity Utilization Increase .585-5Zara Transportation .606-1Flexible Supply Chain . . .66Phyllis ChuPage 65/17/2005

ACKNOWLEDGMENTSI would like to acknowledge and express my gratitude to:Peter Akbar and Andre Claassen of SAP for their industry expertise.Paul Thompson and Larry Lapide for their guidance.Sumit Kumar for sharing his knowledge and for his support.Carolina Garcia, Dr. Maria-Jesus Saenz, Cristina Tabuenca, and Laura Soldevilla of the ZaragozaLogistics Center for constantly offering resources and help with my research.My mom for encouraging me throughout the program.Thank you all for helping me through this learning experience.PhyllisPhyllis ChuPage 75/17/2005

1INTRODUCTIONThis thesis examines the European apparel industry with a case study of the Spanishspecialty apparel chain, Zara, as an example of excellence in supply chain practices. This researchon the European apparel industry emphasizes the economic and supply chain aspects of Zara’soperation. The case study analyses the strategic, operational and supply chain processes that havecontributed to the success of Zara’s retail operation.Zara is an appropriate characterization of an excellent apparel supply chain in Europebecause it is the only apparel company with the ability to react to fashion trends and customerdemands within two weeks time. This extremely short lead time is a result of Zara’s excellence insupply chain practices. As a vertically integrated company, Zara is able to create a unique way ofachieving its quick response effectively and successfully. Some examples of the contributingfactors to Zara’s quick response are just in time production, planned capacity underutilization,local sourcing, and local production. Sections five and six explain and analyze these practices andhow they work to help Zara attain supply chain excellence.This is thesis is written as a contribution to the Supply Chain Excellence Research for theMIT Supply Chain 2020 initiative. The MIT Supply Chain 2020 Project is a two phase, multiyearresearch effort to identify and analyze the factors that are critical to the success of future supplychains for example in the year 2020.This thesis examines the European apparel industry as a contribution to Phase I of theSupply Chain 2020 project. The objectives of Phase I are to understand excellent supply chainsand the underlying strategies, practices, and macro forces that drive them. Phase I is a one-yeareffort to research the excellent supply chains in nine industries through case studies of variousfirms and organizations. This research will focus on understanding the evolving businessstrategies, operating models, practices and principles that improve performance and createcompetitive advantage. Phase II of the Supply Chain 2020 Project will use the research and insightPhyllis ChuPage 85/17/2005

from Phase I in order to project the future using scenario generation and planning methodologies.The work will highlight what actions organizations should take to help achieve supply chainexcellence.The remaining sections of this thesis will contribute to the characterization of excellentapparel supply chains in Europe and Zara’s supply chain practices. Section two is a literaturereview on the existing works about the strategy, the apparel industry, and Zara that gave the mostinsight into the research done for this paper. The third section follows with an overview of theapparel industry in Europe with emphasis on supply chain issues. Sections four, five, and six focuson the case study on Zara. An overview of Inditex, Zara’s parent company, is given in sectionfour. The next sections look at Zara followed by a further look at Zara’s specific supply chainpractices. Section seven closes the paper with some conclusions and final thoughts.Phyllis ChuPage 95/17/2005

2LITERATURE REVIEWThe relevant literature that applies to my research on excellent apparel supply chains usingZara as an example can be categorized into three categories; strategic forward looking readings,industry readings and company specific readings. This section characterizes the readings that weremost influential and informative for this thesis.Michael Porter’s “What is Strategy?” paper gives a solid foundation for defining strategyand the structure of a strategy1. He establishes a clear difference between strategy and operationalexcellence. In his paper, strategy that gives a company competitive advantage is viewed assomething that is very difficult or impossible to duplicate.The literature about the apparel industry in general can be found in EuropeanCommission Papers, A Stitch in Time by Abernathy el al, case studies on the major apparelretailers, among other resources for literature on the apparel industry.The EuropeanCommission Papers is a series of papers written about the dynamics about the European Appareland Textile industry with statistics on the industry for the EU and the candidate countries2. Thesepapers also address issues specific to the Apparel and Textile industry in Europe and the effect ofthe changing dynamics of the EU on the industry. A Stitch in Time was written in 1999 withconnections to the Harvard Center for Textile and Apparel Research.3 The issues addressed by1Porter, Micheal E. "What is Strategy?" Harvard Business Review OnPoint (November-December 1996): 59-79.2Economic Competitiveness analysis of the European textile and Clothing Sector in support of the Communication ' The future of the textiles andclothing sector in the enlarged Europe'. 21 Nov. 2003. Commission of the European Communities. 2 Dec. 2004Euro-Mediterranean Dialogue on the Future of the Textile and Apparel Industry. 16 Feb. 2005. European Commission. 25 Mar. 2005 ed/htm .Evolution of Trade in Textile and Clothing Worldwide-Trade Figures and Structural Data. 21 Nov. 2003. Commission of the EuropeanCommunities. 2 Dec. 20043Abernathy, Fredrick H., et al. A Stitch in Time. New York, Oxford: Oxford UP, 1999.Phyllis ChuPage 105/17/2005