Zara: Super Quick Response Value Chain System
A
Zara - What did we learn?
The case examines Zara, or its parent Inditex, that has established a super quick response value chain system. Traditional apparel value chains take months before a fashion season begins, but Zara is able to observe what is hot (and what is not selling) and responds quickly on the up-to-date fashion trends. As a result of Zara’s outstanding results, Inditex has expanded into 40 countries by 2001.
• A quick comparison (see Class PowerPoints for financial comparison) between Inditex and its other main competitors in the world indicates the following: o excellent operating margin o excellent working capital efficiency o high fixed capital intensity
• Note: The large drop in net margin from operating margin is mainly due to tax and depreciation. The main reason, therefore, for the big drop in Inditex’s net margin is depreciation expense, reflecting its high PPE/sales. This is an issue we should analyze (its potential concern). Another issue is its low working capital/sales (reminder: working capital=current assets-current liabilities). As an analyst, we also should analyze (its potential advantage). Understanding these issues will help understand the strategy of Inditex.
• Zara’s value chain is a classic example of a downstream (buyer) driven value chain, instead of an upstream (production) driven value chain. It is much less concerned with production efficiency than with customer responsiveness. By fully, tightly integrating its upstream and downstream value chains, Zara pushes “quick response” to the maximum. We can safely conclude that Zara’s core competence is “fast” response. This should be understood as respond fast and respond correctly.
• By analyzing Zara’s value chain, we can see that its use of fixed capital in upstream value chain, though increasing its PPE and hence depreciation, drives down substantially its working capital (plus lower markdown, advertising, lower inventory,
Zara - What did we learn?
The case examines Zara, or its parent Inditex, that has established a super quick response value chain system. Traditional apparel value chains take months before a fashion season begins, but Zara is able to observe what is hot (and what is not selling) and responds quickly on the up-to-date fashion trends. As a result of Zara’s outstanding results, Inditex has expanded into 40 countries by 2001.
• A quick comparison (see Class PowerPoints for financial comparison) between Inditex and its other main competitors in the world indicates the following: o excellent operating margin o excellent working capital efficiency o high fixed capital intensity
• Note: The large drop in net margin from operating margin is mainly due to tax and depreciation. The main reason, therefore, for the big drop in Inditex’s net margin is depreciation expense, reflecting its high PPE/sales. This is an issue we should analyze (its potential concern). Another issue is its low working capital/sales (reminder: working capital=current assets-current liabilities). As an analyst, we also should analyze (its potential advantage). Understanding these issues will help understand the strategy of Inditex.
• Zara’s value chain is a classic example of a downstream (buyer) driven value chain, instead of an upstream (production) driven value chain. It is much less concerned with production efficiency than with customer responsiveness. By fully, tightly integrating its upstream and downstream value chains, Zara pushes “quick response” to the maximum. We can safely conclude that Zara’s core competence is “fast” response. This should be understood as respond fast and respond correctly.
• By analyzing Zara’s value chain, we can see that its use of fixed capital in upstream value chain, though increasing its PPE and hence depreciation, drives down substantially its working capital (plus lower markdown, advertising, lower inventory,