Zara Uses Supply Chain To Win Again

Kevin O'Marah , CONTRIBUTOR

I cover supply chain management, technology, and global trade
Opinions expressed by Forbes Contributors are their own.
https://www.forbes.com/sites/kevinomarah/2016/03/09/zara-uses-supply-chain-to-win-again/#1324d2fc1256

Nearly all supply chain leaders we talk to these days want to get on top of the digitization wave
that is sweeping our economy and world. I’ve argued in the past that there are three broad
buckets of performance improvement enabled by digital: sense, decide and respond. New data
from a survey still in the field shows just how far we have to go on the first of these. Sensing of
both demand and supply are poorly linked to decide and respond, despite a clear desire to
leverage such awareness for better business results.

The Value Of Awareness

This week, supply chain legend Zara once again posted excellent results, with 2015 sales and
profits both up by 15% over 2014. These strong numbers are happening at a scale any business
leader would admire: 7,013 stores (of which 330 were newly opened last year) with an
employee base of 153,000. The contrast of Zara’s performance is especially stark when cast
against a decidedly slumping European home market and a worldwide crisis of retail
confidence in the face of the still advancing e-commerce revolution.

For students of supply chain Zara is an icon, relying on a contrarian strategy of vertical
integration in retail apparel to introduce dramatically more new items each year. The virtuous
circle this approach sustains includes more frequent shopper visits to stores, fewer sales on
markdown and faster cash conversion cycles.

Fundamental to this money machine is a massively superior ability to sense both demand and
supply. On the demand-sensing side, Zara was a pioneer in using technology, including PDAs
(personal digital assistants) to capture real-time consumer data not only on transactions, but
also on preferences underlying perceptions of value. Stores are also directly linked backwards
to internally-controlled production and fulfillment systems, which means demand data flows
unimpeded to the supply chain.
From a supply sense perspective, Zara’s fast fashion operation obliges its in-house design and
production teams to work with a limited set of pre-selected fabrics and materials. This may
limit creative freedom, but it also eliminates months of lead time and tiers of supplier hand-
offs from the network. Awareness of capacity, cost, availability and lead time is therefore far
better than for competitors, who rely on distant supply bases in Asia or Latin America.

In contrast to Zara’s situation, our newly collected data shows that most supply chain
organizations are finding it difficult, if not impossible, to see and understand demand and to
know what problems lie in wait upstream in the supply chain. Customer centricity strategies,
for instance, depend on information about business customers, consumers and, above all else,
end user value. 72% of respondents say data on value and willingness to pay in particular is
valuable, but hard to get.

On the supply side, high-value, real-time data is available for only 24% of all respondents at
the Tier 1 level, and virtually not at all for Tier 2 and beyond. One-week lag times on Tier 1
supplier data improve the share that gets some value from supply awareness to 46%, but
almost no-one gets valuable data beyond this level. Too many, it seems, are operating in the
dark.
Digitization To The Rescue
Lest anyone lament the impossibility of replicating Zara’s model, digitization promises a
retrofit approach to supply chain awareness. In terms of demand sensing, advanced analytics
brought to bear on POS data, social media feeds and website clickstreams offer new levels of
awareness about what the market wants. Internet-of-things (IoT) technologies may also help
with detailed monitoring of equipment, buildings and fixtures, or even wearables and
implanted devices.
On the supply-sensing side, IoT, GPS and cloud computing platforms offer new ways to know
what is happening upstream. As with demand sensing, the role of advanced analytics is critical
if supply chain leaders want to digest all this data for better decision making.

Digitization should deliver much greater awareness to supply chain leaders. The lesson from
Zara, however, is all about making use of this sensory information. After all, sense without
decide and respond is a bit like being in a straightjacket. Not too pleasant.

TERMS:
Tier # – supplier level (from Company and backwards; e.g. Tier 3 is the supplier of my Tier 2 which
supplies to a Tier 1 and them, to my company)
POS – Point of Sale

QUESTIONS

1. Describe which tools Zara presented in order to fulfill market awareness (link them to
Product-Service flow and the 4Ps)?

2. How does, in this case, Logistics create Strategy? What are the elements that you
consider that differentiate Zara from their competitors?

3. How does the 3 approaches that Zara has in its virtuous circle improve Customer
Value in the Supply Chain?

4. Does Zara’s limited set of pre-selected fabrics and materials affect in any way their
Value Proposal? How does it is related to its Logistic Chain?

5. According to the three buckets of performance that the author mentions, how are
they related to the Market-share flow in logistics?

6. Does the internet of things (IoT) technologies can help and what is it possible to track
with it? How does it achieve information-flow?

7. How did Zara started measuring the demand of its clients and why it was so
important to the supply chain?

8. Why does real time data is so valuable to Zara?

9. What kind of information from customers is harder to get and how did Zara solve it?

10. What happens to forecasts if you go further down your Supply Chain?