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Spanish clothier Zara turns
the rules of supply chain
management on their head
...


Rapid-Fire Fulfillment
by Kasra Ferdows, Michael A
...
D
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ALL RIGHTS RESERVED
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But today it is also vital to
the work of chief financial officers, chief
information officers, operations and
customer service executives, and certainly chief executives
...
In our
increasingly interconnected and interdependent global economy, the process of delivering supplies and finished
goods (and information and other
business services) from one place to
another is accomplished by means of
mind-boggling technological innovations, clever new applications of old
ideas, seemingly magical mathematics,
powerful software, and old-fashioned
concrete, steel, and muscle
...
With this
special series of articles, Harvard Business
Review examines how corporations’
strategies and structures are changing
and how those changes are manifest in
their supply chains
...
Lee
October 2004
The best supply chains aren’t just fast and cost-effective
...

Reprint R0410F; OnPoint 8096

Leading a Supply Chain Turnaround
by Reuben E
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” Now, Whirlpool excels at getting the right product to the right place at the right
time—while keeping inventory low
...
G
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Reprint R0411F; OnPoint 8363

Rapid-Fire Fulfillment
by Kasra Ferdows, Michael A
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D
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The result?
A superresponsive network and profit margins that are the envy of the industry
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Liker and Thomas Y
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What are Toyota and Honda doing right that their American
counterparts are missing?
Reprint R0412G

We’re in This Together
by Douglas M
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Michael Knemeyer
December 2004
If your latest supply chain partnership failed to live up to expectations, as so many do, it’s
probably because you never stated your expectations in the first place
...
The result? A superresponsive network and profit margins
that are the envy of the industry
...
ALL RIGHTS RESERVED
...
Lewis,
and Jose A
...
Machuca

When a German wholesaler suddenly canceled a big lingerie order in 1975, Amancio Ortega thought his fledgling clothing company
might go bankrupt
...
There were no other buyers
...
He called
the shop Zara
...
The clothing company he founded,
called Inditex, has been growing ever since he
opened that first Zara shop
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6 billion, and net profits ballooned
14-fold from €31 million to €447 million
...
3 billion
...

The lesson Ortega learned from his early
scare was this: To be successful, “you need to
have five fingers touching the factory and five
touching the customer
...
In adhering to this philosophy,
Zara has developed a superresponsive supply
chain
...
Such a
pace is unheard-of in the fashion business,
where designers typically spend months planning for the next season
...

As a result, it achieves a higher net margin on
sales than its competitors; in 2001, for example,
when Inditex’s net margin was 10
...
5%, and Gap’s

page 1

Rapid-Fire Fulfillment

Kasra Ferdows (ferdowsk@
georgetown
...
Michael A
...

Jose A
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Machuca is a professor of
operations management at the University of Seville in Spain
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Zara defies most of the current conventional wisdom about how supply chains should
be run
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Unlike so many of its
peers in retail clothing that rush to outsource,
Zara keeps almost half of its production inhouse
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Rather than chase economies of scale, Zara manufactures and distributes products in small batches
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Even many of its day-today operational procedures differ from the
norm
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It
puts price tags on items before they’re shipped,
rather than at each store
...
And it tolerates, even encourages, occasional stock-outs
...
We conducted a series
of interviews with senior managers at Inditex
and examined company documents and a wide
range of other sources
...
We didn’t find
any
...
Zara’s
supply chain is organized to transfer both hard
data and anecdotal information quickly and
easily from shoppers to designers and production staff
...
The
goal is to close the information loop between
the end users and the upstream operations of
design, procurement, production, and distribution as quickly and directly as possible
...

At Zara, rapid timing and synchronicity are paramount
...
” It spends money
on anything that helps to increase and enforce
the speed and responsiveness of the chain as a
whole
...
Zara has made major

harvard business review • november 2004

capital investments in production and distribution facilities and uses them to increase the supply chain’s responsiveness to new and fluctuating demands
...

It took Zara many years to develop its
highly responsive system, but your company
need not spend decades bringing its supply
chain up to speed
...
Some of Zara’s
practices may be directly applicable only in
high-tech or other industries where product
life cycles are very short
...
Zara shows managers
not only how to adjust to quixotic consumer
demands but also how to resist management
fads and ever-shifting industry practices
...
There
is a sense of tantalizing exclusivity, since only a
few items are on display even though stores
are spacious (the average size is around 1,000
square meters)
...
If I don’t buy it now, I’ll lose my chance
...
Zara’s designers create
approximately 40,000 new designs annually,
from which 10,000 are selected for production
...
But Zara often beats the high-fashion
houses to the market and offers almost the
same products, made with less expensive fabric, at much lower prices
...

This “fast fashion” system depends on a constant exchange of information throughout
every part of Zara’s supply chain—from customers to store managers, from store managers to market specialists and designers, from
designers to production staff, from buyers to
subcontractors, from warehouse managers to
distributors, and so on
...
But Zara’s

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Rapid-Fire Fulfillment

organization, operational procedures, performance measures, and even its office layouts are
all designed to make information transfer easy
...
It consists of three spacious
halls—one for women’s clothing lines, one for
men’s, and one for children’s
...
Accordingly, separate design, sales,
and procurement and production-planning
staffs are dedicated to each clothing line
...
Though it’s more expensive to operate
three channels, the information flow for each
channel is fast, direct, and unencumbered by
problems in other channels—making the overall supply chain more responsive
...
Unlike companies that sequester their design
staffs, Zara’s cadre of 200 designers sits right in
the midst of the production process
...

Large circular tables play host to impromptu
meetings
...
A small prototype shop has been set up in the corner of each
hall, which encourages everyone to comment
on new garments as they evolve
...
Designers can quickly and informally check initial
sketches with colleagues
...
Procurement and production planners
make preliminary, but crucial, estimates of
manufacturing costs and available capacity
...

Zara is careful about the way it deploys the
latest information technology tools to facilitate these informal exchanges
...
These
PDAs augment regular (often weekly) phone
conversations between the store managers and
the market specialists assigned to them
...

While any company can use PDAs to communicate, Zara’s flat organization ensures that important conversations don’t fall through the
bureaucratic cracks
...
If the
item is to be made in one of Zara’s factories,
they transmit the specs directly to the relevant
cutting machines and other systems in that factory
...

The constant flow of updated data mitigates
the so-called bullwhip effect—the tendency of
supply chains (and all open-loop information
systems) to amplify small disturbances
...
In an industry that traditionally allows retailers to change a maximum of 20% of their
orders once the season has started, Zara lets
them adjust 40% to 50%
...

The relentless introduction of new products in small quantities, ironically, reduces the
usual costs associated with running out of any
particular item
...
Empty racks don’t drive customers
to other stores because shoppers always have
new things to choose from
...
In fact,
Zara has an informal policy of moving unsold
items after two or three weeks
...

Furthermore, new merchandise displayed in
limited quantities and the short window of opportunity for purchasing items motivate people to visit Zara’s shops more frequently than
they might other stores
...
The
high traffic in the stores circumvents the need
for advertising: Zara devotes just 0
...


Stick to a Rhythm

Empty racks at Zara
don’t drive customers to
other stores
...


Zara relinquishes control over very little in its
supply chain—much less than its competitors
...
Even Benetton, long recognized as a pioneer in tight supply chain management, does
not extend its reach as far as Zara does
...

This level of control allows Zara to set the
pace at which products and information flow
...
By carefully timing the whole
chain, Zara avoids the usual problem of rushing through one step and waiting to take the
next
...
Store managers in Spain and southern
Europe place orders twice weekly, by 3:00 PM
Wednesday and 6:00 PM Saturday, and the rest
of the world places them by 3:00 PM Tuesday
and 6:00 PM Friday
...


harvard business review • november 2004

Order fulfillment follows the same strict
rhythm
...
Once loaded onto a truck, the boxes
and racks are either rushed to a nearby airport
or routed directly to the European stores
...
Shipments
reach most European stores in 24 hours, U
...

stores in 48 hours, and Japanese shops in 72
hours, so store managers know exactly when
the shipments will come in
...
Because all the items
have already been prepriced and tagged, and
most are shipped hung up on racks, store managers can put them on display the moment
they’re delivered, without having to iron them
...
9% accurate with
less than 0
...
Finally, because regular customers know exactly when the new deliveries come, they visit the stores more frequently on those days
...
It
guides daily decisions by managers, whose job
is to ensure that nothing hinders the responsiveness of the total system
...
It
validates the company policy of delivering two
shipments every week, though less frequent
shipment would reduce distribution costs
...
And it provides a rationale for shipping some garments on hangers, though folding them into boxes would reduce the air and
truck freight charges
...

Zara has shown that by maintaining a strict
rhythm, it can carry less inventory (about 10%
of sales, compared to 14% to 15% at Benetton,
H&M, and Gap); maintain a higher profit margin on sales; and grow its revenues
...
Zara subverts this logic
...
It buys 40% of its fabric from
another Inditex firm, Comditel (accounting
for almost 90% of Comditel’s total sales), and
it purchases its dyestuff from yet another Inditex company
...
But Zara’s managers reason
that investment in capital assets can actually
increase the organization’s overall flexibility
...
This relationship is well demonstrated by “queuing theory”—which
explains that as capacity utilization begins to increase
from low levels, waiting times increase gradually
...
As demand
becomes ever more variable, this acceleration starts at
lower and lower levels of capacity utilization
...
All rights reserved
...

The simpler products, like sweaters in classic colors, are outsourced to suppliers in Europe, North Africa, and Asia
...
When Zara produces a garment inhouse, it uses local subcontractors for simple
and labor-intensive steps of the production
process, like sewing
...

Zara can ramp up or down production of
specific garments quickly and conveniently because it normally operates many of its factories
for only a single shift
...
Specialized by garment type, Zara’s factories use sophisticated just-in-time systems, developed in
cooperation with Toyota, that allow the company to customize its processes and exploit innovations
...

All finished products pass through the fivestory, 500,000-square-meter distribution center in La Coruña, which ships approximately
2
...
There, the allocation of such resources as floor space, layout,
and equipment follows the same logic that
Zara applies to its factories
...
Operating hours
follow the weekly rhythm of the orders: In a
normal week, this facility functions around the
clock for four days but runs for only one or two
shifts on the remaining three days
...
But during peak seasons, the company
adds as many as 400 temporary staffers to
maintain lead times
...
Why is
Zara so generous with capacity? Zara’s senior

page 5

Rapid-Fire Fulfillment

Few managers can
imagine sending a halfempty truck across
Europe or running
factories for only one
shift
...

By tolerating lower capacity utilization in its
factories and distribution centers, Zara can
react to peak or unexpected demands faster
than its rivals
...
Thanks to the responsiveness of its factories and distribution centers,
Zara has dramatically reduced its need for
working capital
...

The cash thus freed up helps offset the investment in extra capacity
...
Each one alone could improve the responsiveness of any company’s
supply chain
...
When a company is organized for direct, quick, and rich communications among
those who manage its supply chain, it’s easier
to set a steady rhythm
...
And when the company focuses its own capital assets on responsiveness,
it becomes simpler to maintain this rhythm
...

Perhaps the deepest secret of Zara’s success
is its ability to sustain an environment that optimizes the entire supply chain rather than
each step
...
Few managers can
imagine sending a half-empty truck across Europe, paying for airfreight twice a week to ship
coats on hangers to Japan, or running factories
for only one shift
...
They have
stayed the course and resisted setting performance measures that would make their operating managers focus on local efficiency at the
expense of global responsiveness
...
Do everything possible to let one hand help the
other
...

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Further Reading
The Harvard Business Review
Paperback Series
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articles enhance the full-text article
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a selection of its company examples
to help you quickly absorb and apply
the concepts
...


Here are the landmark ideas—both
contemporary and classic—that have
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reading for businesspeople around the globe
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The
series includes over thirty titles, including the
following best-sellers:
Harvard Business Review on Brand
Management
Product no
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Harvard Business Review on Leadership
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Harvard Business Review on Measuring
Corporate Performance
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