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Dynamic Supply Chain Design

The ZARA Case Study

Prof. Ludo Van der HeydenINSEAD

Industry Forum ConferenceLondon - Oct 18th, 2001

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Leveraging Business Process Design: ZARA

Waste & the impossibility of perfect forecastsZARA business conceptZARA customer experienceZARA process life cyclePerformance ??? (nobody knows exactly …)Contrast with GAP & DELL business modelsZARA positioning: Product/Process matrixIndustrialisation – step 2: introducing flexibilityRedefining the diagonal & classic trade-offsLink with the S-curve: disruptive techn change

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Why is profitability in textile so low, when margins are so high?

Excess stock:Value loss due to discount saleswhen actual demand is lowerthan expected

Excess demand:Value loss due to unrealised sales

when actual demand is higher

than expected

Perfect forecast:Does not exist

in real life!

Actual Demand

ExpectedDemand

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Classic textile Business Process:12 month lead time

DesignPurchase Raw Mat Mfg Dist Sell Discount

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Classic textile Design Process:

Creative

Design

Preliminary

Designs

FinalProductDesign

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Zara Business Concept“Integrated” fashion delivery:

Fashion at low cost

Get it approximately right Eliminate creative designDefine a fast-response

process incl design Finalise design knowing

material supply constraintOptimise the processManage follow-up (next

batch) and customer flows

Low cost Fashion

Store experienceCopy fashion Involve the

customers and his group/cohortCreate a

network/brand

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Zara Customer Experience

“Fresh/Fast” “Quality” Cost

Raw material: mediumKnit: poor

Look: grand!Customer satisfaction:

fashion at low price!

Fast copying Of leading styles

Fast delivery in own stores

Limited editions

Low monetary cost

Low time cost: “the Zara experience”

Flexibility

Limited customer variety:only what is on display –

and in limited choicesBut every customer is participating

in the process: helps determine the next batch

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Step 2: Simplify« hits » &

produce library of designs

Step 1: Scan fashionshows

Purchase Raw Mat

Step 3: Final Design

of nextbatch

Mfg

Shopping experience

Dist

ZARA Business Process:5 day lead time!!!

Step 3: Designers « pull » next RM batch

Step 2: Shoppers (and store mgers) « pull » next design

(shape) & designers « adapt »

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Why is profitability at Zara so high, when margins are so low?

Excess stock and unmet demand are avoided by stopping production when market saturates

Zara as a “Lean

Enterprise”

Actual Demand

ExpectedDemandSmall

batches

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Simplify & design new

product offer

Step 1: Dell scans market & current offer

Sell Pick Comps

« Mfg »

(Assembly)Dist

CompsSupply

Comparing with Dell Business Supply Chain: 2 day lead time!

Step 3: Customers« pull » RM resupply

CustomersSelectStep 2: Customers

« pull » product & supply chain adapts

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ZARA positioning:Industrialisation–Step 1: standardiz!

Process

ProductHigh

standardisationHigh

customisationSome

customisation

Mass merchants(Carrefour)

Brand Retailers (M&S)

High fashion(Chanel)

Manualshop

Batch flow

Continous Lineflow

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ZARA positioning:Industrialisation–Step 2: add customisation!

Process

ProductHigh

standardisationHigh

customisationSome

customisation

Mass merchants

M&SZARA

High fashion(Dior,

Chanel, …)

Manualshop

Batch flow

Rigid Lineflow

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Industrialisation: Step 2 –Strategic value gained from positioning

Process

Product High customisationLow volumeHigh unit marginHigh quality

High standardisationHigh volume

Low unit marginLow quality

M&S:Out of Fashion!

ZARA

High fashion:Out of price!Flexible

Process

Rigid Process

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ZARA: Industrial Process Life Cycle

Phase 1: Result of many years of experienceLEARNING and PROBING with an innovative formula

Phase 2: DEFINING the Zara process &IMPROVING process performance

Phase 3: Process improvement becomes moredifficult & LIMITS TO IMPROVEMENT APPEAR

Phase 4: Innovation then continues at theINTERFACES (shopping experience, internet, …)

Phase 5: Process eventually OVERTAKEN (but when?)

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Disruptive technological change 1: setup

Time

Performance:M&S quality(RM, cut, fit, variety … )

ZARA quality: as perceived by

M&S or « 50+ » ?

« 16/24 » ?

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Disruptive technological change 2: disruptionPerformance:ZARA quality (« freshness »)

M&S

ZARA

M&S is overtakenby a technology they consider « inferior » to

theirs!!!

Time

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Industrialisation–Step 2:redefinition of classic industry trade-offs

Process

Product High

customisationMedium

customisationLow

customisation

Manualshop

Mass merchants

M&SZARA

Chanel

???

Batch flow

Line Rigidflow

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Auto Industry Evolution:in the beginning …

Process

ProductHigh custom

High unit marginLow volume

Low customLow unit margin

High volume

All mfgers at the beginning

1

Flexible shop

Line Rigidflow

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Auto Industry Evolution:process & customisation!!!

Process

ProductHigh custom

High unit marginLow volume

Low customLow unit margin

High volume

Ford Model TBaton Rouge

plant 2

All mfgers at the beginning

1

Flexibleshop

Line Rigidflow

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Auto Industry Evolution:process & customisation!!!

Process

ProductHigh custom

High unit marginLow volume

Low customLow unit margin

High volume

Ford Model TBaton Rouge

plant 2

GM Multi-brand

strategy 3

All mfgers at the beginning

1

Flexibleshop

Line Rigidflow

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Auto Industry Evolution:process & customisation!!!

Process

ProductHigh custom

High unit marginLow volume

Low customLow unit margin

High volume

Ford Model TBaton Rouge

plant 2

ToyotaJust-in-time

5

GM Multi-brand

strategy 3

All mfgers at the beginning

1

Flexibleshop

Line Rigidflow

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Auto Industry Evolution:the long road to mass customisation!!!Product

High customHigh unit margin

Low volume

Low customLow unit margin

High volumeProcess

Ford Model TBaton Rouge

plant 2

Toyota Just-in-time

5

Renault, Toyota, GM … « New dist »

6

GM Multi-brand

strategy 3

All mfgers at the beginning

1

Flexible shop

Line Rigidflow