Discuss about the Business Model for Supply Chain Management.
Supply chain management is considered an important aspect of an organization as it analyses the steps that are involved the transportation and distribution chain of the firm. It involves coordination and integration of the flow of goods and services of the organization from the supplier to the wholesaler to retailer and to the consumer. The ultimate goal of any supply chain management group of the organization aims at reducing the inventories of the organization. The logistics management approaches that are undertaken by an organization must be efficient enough thereby allowing the organization to fulfil their targets (Fawcett et al., 2014).
Supply chain management flows must follow three flows, namely product flow, information flow and finances flow. The product flow consists of the movements of goods from the suppliers to the customers as well as from the customer returns or service needs. Information flow involves the transmittal of orders and update of the delivery status. On the other hand, financial flow consists of the financial terms of credit, payments and consignment along with title ownership arrangements. For a supply chain management in the organization to be quite successful in nature, there are seven principles of supply chain management that acts as key actions that need to be undertaken (Wisner et al., 2014). These seven principles of supply chain management helps in framing the correct from of framework for the organization that would be accurate enough to perform its responsibilities and adhere to the objectives of the firm.
In this report, the supply chain management of Zara has been undertaken. The report aims at analysing the supply chain of the company and infers valuable information as of how the organization has been able to maintain its well equipped logistic chain framework. The achievements of the firm have been addressed based on the seven principles of supply chain management. The issues that have been found in the case of Zara have been highlighted in this study where some recommendations have been framed to uplift the framework. This study would provide the scope of accessing the valuable information and ways in which the Supply Chain Management structure could be framed for an organization.
The founder of Zara is Amancio Ortega, in 1975. The country started its first store in Spain and had undertaken the world market for fashion merchandise since then. The company changes its designs for clothing in every two weeks on an average. It carries about 11000 distinct items per year. The stores of the organization have been spread across worldwide and carry 2000 to 4000 items per year in their stores (Cortez et al., 2014). The supply chain has a direct effect on the productivity of the company. It has one of the most efficient and accurate form of logistic chain.
The company maintains an automated Supply Chain Distribution Centre, which deals with the generation of various facilities. This highly automated distribution centre is known as “the cube”. Zara is well equipped with all the facilities and technological up gradation. This efficiency in the company provides them with the opportunity of improving their productivity and providing them with the comparative advantage. The company has 12 inventories, which improves their storage area and makes short-term run forecasts making it much more accurate than its competitors do (Fernie & Sparks, 2014). The annual sales of the company at the end of the year 2015 have been accounted for $15.9 billion across more than 2100 stores. The organization uses a flexible business model where the stores could be owned, franchised and co-owned with the partners. in order to analyse the supply chain management followed by the organization in a broader perspective, it is very important to take the seven principles of the logistic system into consideration.
Suppliers: The Company mostly follows vertically integrated supply chain in order to exercise total control over the suppliers. As a result, the demand is easily met and the manufacturing is easily accomplished.
Production Philosophy: Zara is more focused to introduce innovative designs and as a result, they launch new commodities rapidly. The Company is also enthusiastic to introduce innovative design as well as it launches new goods rapidly. The Company believes more styles are equivalent to more choices. Zara launches its items in restricted showrooms in which stores receive few pieces of the new commodity (Nenni et al., 2013). This approach of making the product unique sold out the collection rapidly also creates interest in customer about their next commence, making the next product unique and challenging. The approach of lower quantity is equivalent to restricted supply that is in turn equivalent to compulsion acquisition.
Storage: Zara has several warehouses in order to store their garments and as a result, they circulate the goods effectually.
Distribution: The goods of Zara are distributed and shipped from the manufacturing site via Zara Logistica. Zara immediately stops the production of a particular product that is not sold in the market. In other words, the Company does not allow the piling up of stocks. As a result, the Company gets rid of unnecessary stocking of unsold commodities.
Principle 1: Segmenting customers focusing on the needs of services of diversified groups and adapting the supply chain to dish up segments in a profitable manner
According to supply chain management’s first principle, it is quite essential for the company to segment their customer based on their service needs. Thereby it would help them to incur the services to the customers accordingly and retain their loyalty towards the organization. Zara has segmented the market along with the lines of demography and lifestyle lines. The brand itself is considered as fashion industry’s leader thereby offering money value to its consumers (Qrunfleh & Tarafdar, 2014). Zara segments its customers based on various characteristics. Their products are well suited with the segmentation done based on demographic, geographical and seasonal aspects. The demand for the products is famous worldwide. A vast group of consumers all over the world demands it. In order to ascertain the products demanded by the consumers to their respective places, various stores have been made by the firm all over the world. The supply system that is followed by the organization is quite effective in delivering the products with utmost care and efficiency. One of the main objectives of the supply chain management of Zara is to provide the people with their respective products without causing any delay. They are more focussed on strategic supply chain management of occupational development and accomplishment.
Principle 2: Customization of logistic network in accordance to the requirements of service and customer segments’ profitability
The SCM of Zara follows the information flow where the supply chain is divided into four categories. The people design and order administration, source and manufacture, maintain distribution and in the end is the category of retailing. Zara manufactures 50% of its products in its own store. Following the system of vertical integration of supply management, it makes around 40% of the fabric and purses rest of the dyes from its own subsidiary. The World Retail Congress recently introduced Inditex as the International Retailer of the Year because of the best practice that is implemented by the Company in international retailing. It also acknowledged stock market index’s utmost score because of its social responsible investment. These awards indicate the tendency of Zara for continuous improvement as well as development. The quest for invention is another reason that led to competitive advantage of Zara in the current customer-driven market. The new commodities development and innovation of Zara is attributed globally and its leadership in service. Zara maintains a strong relationship with its suppliers due to alliance and clarity in its supply chain. Persistent enhancement, innovation and teamwork contribute largely to the concept of learning organization. The learning organization of Zara is mostly holistic, impudence as well as related to certainty. The customer-oriented approach of Zara is mostly subjective to the establishment of Zara as well as distinguishing the collaboration between producer and retailer. This in turn represents an exposed and approachable attitude.
According to Arrigo (2016), the training, sense of understanding and supportive culture are the traits of Zara. It is also recognized that both learning and core aptitude are the foundation of competitive advantage. Value chain analysis envisaged the core proficiency of Zara. In the present global market, both brand credit and fidelity holds comparatively less control. Brand value is also considered as the source of competitive advantage and on the other hand, value chain analysis is considered as the brand value of Zara. According to one of the online sources, Zara has been placed as number 219 among top 500 international brands. Zara is placed at par with M&S and Dove and it also shifts in advance of Sanyo as well as Hyundai and Colgate. The overall business operation of Zara includes design procedure, production procedure as well as distribution procedure that are all sophisticated and helps Zara to emerge as forefront in the market. This is mostly due to the fact that the Company is mostly associated with the responsiveness of the customers. Zara is considered as the only brand that the aptitude to manufacture the most recent design that are demanded by the customers. Zara will also be the first one to place a certain design in the store and as a result, the customers have the tendency to make Zara their first choice while browsing as well as shopping for clothes. The excellent operation of business along with responsiveness of customers leads to customer loyalty and also leads to cycle of growth (Deshmukh & Mohan, 2016).
Principle 3: Adhering to market indication and aligning planning of demand accordingly with the supply chain, making certain dependable forecasts and most favourable allocation of resources
Zara is considered as the initiate in fast fashion, with its supply to the stores twice a week with innovative fashion items. This is the way by which Zara reacts immediately to changes in demand and even if a product is not salable. The innovative products in the store attract more individuals to come daily to purchase their products and also to find new goods to purchase. As a result, it helps to maintain a fresh store as well as reduce the danger of incorrect forecasting. The Company has also shown growth in its product mix while lessening life cycle of products. The items that are sold by Zara are not advertised, as the Company do not desire a brand image. The target of the Company is to meet the expectation of the customers. Mostly the customers regularly stroll to check the new arrivals as items are limited (Kong, 2015). Some clothes are largely demanding in some areas while other clothes in other areas. In other words, in India summer clothes are highly demanded whereas; in Europe woollen clothes are highly demanded.
Principle 4: Product differentiation closer to customer and conversion of speed across supply chain
Zara is already a part of Inditex that is considered as the second largest clothing retailer of the world. The group enhanced its position based on the implausible business model that is based on innovation and differentiation. The differentiation of product is the procedure by which Zara distinguishes its products from others. The Company plays an imperative role with the availability of the product. The differentiation is mostly due to perceiving a divergence (García-Álvarez, 2015). Zara follows a completely different supply chain strategy where the key players are designing, sourcing, developing and supply to outlets. Zara follows a vertically integrated supply chain. As a result, the demand of the customers is easily met as well as its manufacturing is easily accomplished. Zara mostly believes in time-based competition in which automation acts as the key to augment the speed as well as accuracy of the operation.
Principle 5: Managing supply sources tactically to lessen the total cost of holding services and materials
According to Madadipouya (2015), Zara has an advantage over its rivals mostly due to low cost of advertising. The advertising expenditure of Zara ranges between 0-.3 percent in comparison to other traditional retailers whose investment expenditure ranges between 3-4 percent. The decrease in advertisement cost reduces the total cost of Zara that in turn makes the Company more economical. This also illustrates that the Company depends mostly on its stores to project their image. As a result, Zara has a department that exclusively works to acquire comprehensive prime real estate location. The department that is responsible for the frequent renovating of layouts of stores display the global stores of Zara. Zara mostly expends its money to open new stores rather than on advertisement campaign (Shah, 2014). The annual sale of Zara in the year 2015 was $15.9 billion. As Zara is not a privately owned company, it is not requisite to reveal information routinely that is released by public companies. The Company mostly makes the use of flexible trade model where the stores of the Company can be owned as well as franchised. The parent company of Zara also followed lowest inventory as a percentage of yearly sales that is compared to the nearest international competitors (Ortiz Cuadrado, 2016).
Principle 6: Developing a broader technology strategy in supply chain, supporting numerous decision-making levels and providing a clear opinion of the products flow along with services and information
The Company mostly makes the use of Hybrid Model information, in which data from stores to headquarters depends from joint human intelligence input as well as from information technology. The technology that is used also helps to increase the supply value chain and as a result, lowers the time of manufacturing. At present, Zara is also trying to make use of eco-friendly technology throughout its global operation. Zara also follows a decentralized decision-making structure throughout its organization. Decision-making also plays an imperative role in the model of Zara (Oshima Lee & Emanuel, 2013). Individual store managers are provided with the authority to conclude when products go on sale and which are the products in their store to place orders for. The Company mostly centralizes its designers, purchasers and planners with the similar location at its headquarter. This facilitates for the commodity team to make rapid changes in a coordinated way: designers can make adjustments to store goods, purchasers can order more of the products whereas; the planners are able to conclude how to distribute everything across stores (Viardot & Nylund, 2017).
Principle 7: Adopting channel straddling and measuring performance to measure collective success in reaching the end-user competently and successfully
The designers who are associated with Zara collect data on sales and inventory from each of its stores on a day-to-day basis and makes use of this to reflect their view of the circumstance. The performance measures that are used to gauge collective success mostly come from quantitative and qualitative approaches. The stores managers examine both sales and replenishment reports on an hourly basis. On the other hand, store managers orders items themselves instead of depending on what has being sent from the headquarters (Brownlow et al., 2015). Qualitative data mostly deals with direct feedback of the customer that are provided to shop assistants on a daily basis. In order to make sure that the goods reaches the end user effectively and efficiently, the store managers and assistants turn to a team of recovery and they try to recall what happened during the entire day. The collected raw data is examined in the headquarter of Zara where design group, fast prototyping group, market experts and purchasers sit jointly in strongly coupled teams. On the basis of the feedback, innovative designs are made as well as prototyped and rated (Azevedo & Sanchez, 2015).
Conclusion:
It is recommended that Zara should also make use of upgraded precise information systems that are used by its competitors such as GAP and H&M. As a result, it is requisite for Zara to upgrade its systems in order to yield a positive result, which will include more effectual management of high demand as well as automation of distribution centres. Zara should also use a balanced scorecard that will effectually operate with Inditex. The Company should also open more shops in Northern America as it will facilitate Zara to get access to intense fashion trade world that will in turn diminish the shipping cost. This will help Zara to manage sources of supply strategically as it will help to reduce the cost of operation such as management cost of resources as well as the costs related to supply chain and logistics.
It can be concluded that the supply chain works in favour of Zara and the supply chain analysis of the Company provides an in depth knowledge of internal value chain. The Company is successful as it makes the use of customer-centric services, logistics, vertical integration as well as economies of scale that is grasped from its parent Company, Inditex. Supply Chain Management of the Company deals with the fact that value addition to customer service is imperative for Zara gaining competitive advantage. The supply chain is not an isolated agile procedure for Zara as with the case of Dell. The customer-oriented approach of Zara is mostly subjective to the establishment of Zara as well as distinguishing the collaboration between producer and retailer. In order to adhere to market signals and align demand planning accordingly across the supply chain, the Company has developed an effectual agile supply chain that comprises all designers, buyer specialists as well as management in a single place. It can also be concluded that Zara keeps away from sourcing of low-cost country however; it makes an investment in the manufacturing as far as possible. The success of Zara from the perspective of speed is that various advantages such as enhanced customer approval, improved market prospect, condensed overall risks as well as decreased total costs can be simultaneously accomplished through being fast. The supply chain of Zara is regarded as a very good example due to strategic alignment that supports time-based strategy perfectly.
References
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