Zara Case
Case # 4 – Zara
Zara is the flagship company of Inditex, an international clothing retailer. Zara began its business as a small retail store in Spain founded by Amancio Ortega Gaona in 1975. In the following decades Zara has grown to nearly 450 store location in 29 countries by the year 2000. Zara consistently accounts for more than 80% of Inditex’s net sales as indicated by Figure 1; linking the success of Inditex to the success of the strategies of Zara.
Figure 1 Inditex Net Sales by Concept
The success of Zara is linked to its vertical integration strategy with local sourcing that differentiates it from other international clothing retailers.
Sourcing Strategy
Zara uses a combination strategy when sourcing their production. It uses most of outsourcing to produce basic items and initial fashion collection. It outsources about half of its production to third party; about 60% come from Europe, 30% come from Asia and rest come from other parts of world. Outsourcing decision depends on number of considerations such as raw materials quality, expertise, relative cost, time sensitivity, transportation costs, political and foreign exchange risk and social responsibility concerns. By using outsourced suppliers for its initial annual inventory Zara is able to produce at lower costs, therefore increasing its margins. At the beginning of each season Zara commits almost 50-60% of season inventory; about one fourth of season’s production is made available at start of season. The percentage outsourced, however, is much lower than their competitors. This strategy gives Zara more flexibility to use in-house production in manufacturing apparels that follows current fashion trend. In-season production offers Zara a competitive advantage of responding to current fashion trend; this creates a risk profile for Zara which differentiates it from other apparel retailers. Zara is doing this on purpose as a way to better meet consumer demand once numbers are
Zara is the flagship company of Inditex, an international clothing retailer. Zara began its business as a small retail store in Spain founded by Amancio Ortega Gaona in 1975. In the following decades Zara has grown to nearly 450 store location in 29 countries by the year 2000. Zara consistently accounts for more than 80% of Inditex’s net sales as indicated by Figure 1; linking the success of Inditex to the success of the strategies of Zara.
Figure 1 Inditex Net Sales by Concept
The success of Zara is linked to its vertical integration strategy with local sourcing that differentiates it from other international clothing retailers.
Sourcing Strategy
Zara uses a combination strategy when sourcing their production. It uses most of outsourcing to produce basic items and initial fashion collection. It outsources about half of its production to third party; about 60% come from Europe, 30% come from Asia and rest come from other parts of world. Outsourcing decision depends on number of considerations such as raw materials quality, expertise, relative cost, time sensitivity, transportation costs, political and foreign exchange risk and social responsibility concerns. By using outsourced suppliers for its initial annual inventory Zara is able to produce at lower costs, therefore increasing its margins. At the beginning of each season Zara commits almost 50-60% of season inventory; about one fourth of season’s production is made available at start of season. The percentage outsourced, however, is much lower than their competitors. This strategy gives Zara more flexibility to use in-house production in manufacturing apparels that follows current fashion trend. In-season production offers Zara a competitive advantage of responding to current fashion trend; this creates a risk profile for Zara which differentiates it from other apparel retailers. Zara is doing this on purpose as a way to better meet consumer demand once numbers are
Bibliography: Simchi-Levi, David, Philip Kaminsky, and Edith Simchi-Levi. Designing and Managing the Supply Chain: Concepts, Strategies, and Case Studies. Boston: McGraw-Hill/Irwin, 2003 Page: 43 to 90. Financial Metrics All financial metrics were calculated using the equations below. ReturnonEquityROE=NetIncomeEquity=AssetsEquity×SalesAssets×NetIncome+InterestSales×NetincomeNetIncome+Interest ReturnonAssetsROA=NetIncome+InterestTotalAssets=SalesTotalAssets×NetIncome+InterestSales ReturnonCapitalROC=NetIncome+InterestLongTermDebt+Equity OperatingProfitMargin=(NetIncome+Interest)Sales LongTermDebtRatio=LongTermDebtLongTermDebt+Equity LongTermDebtEquityRatio=LongTermDebtEquity TotalDebtRatio=TotalLiabilitiesTotalAssests