1. What is Zaras formula?

Zara's New Products In Zara stores, customers can always find new products, the relentless introduction of new products in small quantities, ironically, reduces the usual costs associated with running out of any particular item. Indeed, Zara makes a virtue of stock-outs. Empty racks don't drive customers to other stores because shoppers always have new things to choose from. Being out of stock in one item helps sell another, since people are often happy to snatch what they can. In fact, Zara has an informal policy of moving unsold items after two or three weeks. This can be an expensive practice for a typical store, but since Zara stores receive. Zara's Limited Supply Only a few items are on display even though stores are spacious (the average size is around 1,000 square meters). A customer thinks, "This green shirt fits me, and there is one on the rack. If I don't buy it now, I'll lose my chance."

Zara's Cadre of 200 Designers Sits Right In The Midst Of the Production Process Unlike companies that sequester their design staffs, Zara's cadre of 200 designers sits right in the midst of the production process. Split among the three lines, these mostly twenty something designers. Hired because of their enthusiasm and talent, no prima donnas allowed. Work next to the market specialists and procurement and production planners. The constant flow of updated data mitigates the so-called bullwhip effect The tendency of supply chains to amplify small disturbances. A small change in retail orders, for example, can result in wide fluctuations in factory orders after it's transmitted through wholesalers and distributors. In an industry that traditionally allows retailers to change a maximum of 20 percent of their orders once the season has started, Zara lets them adjust 40 percent to 50 percent. In this way, Zara avoids costly overproduction and the subsequent sales and discounting prevalent in the industry.

Zara's Single, Centralized Design and Production Center

Is attached to Indicted Zara's company headquarters in SPANISH

It consists of three spacious halls; One for women's clothing lines, one for men's, and one for children's. Unlike most companies, which try to excise redundant labor to cut costs, Zara makes a point of running three parallel, but operationally distinct, product families. Accordingly, separate design, sales, and procurement and production-planning staffs are dedicated to each clothing line. A store may receive three different calls from in Spanish one week from a market specialist in each channel. A factory making shirts may deal simultaneously with two Zara managers, one for men's shirts and another for children's shirts. 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.

Zara's Beats the High-Fashion Houses To the Market Such a retail concept depends on the regular creation and rapid replenishment of small batches of new goods. Zara's designers create approximately 40,000 new designs annually, from which 10,000 are selected for production. Some of them resemble the latest couture creations. 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. Since most garments come in five to six colors and five to seven sizes, Zara's system has to deal with something in the realm of 300,000 new stockkeeping units, on average, every year.

Zara's Technology Zara is careful about the way it deploys the latest information technology tools to facilitate these informal exchanges. Customized handheld computers support the connection between the retail stores and headquarter. These PDAs augment regular (often weekly) phone conversations between the store managers and the market specialists assigned to them. Through the PDAs and telephone conversations, stores transmit all kinds of information to headquarter. Such hard data as orders and sales trends and such soft data as customer reactions and the "buzz" around a new style. While any company can use PDAs to communicate, Zara's flat organization ensures that important conversations don't fall through the bureaucratic cracks. Once the team selects a prototype for production, the designers refine colors and textures on a computer-aided design system. 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. Bar codes track the cut pieces as they are converted into garments through the various steps involved in production, distribution, and delivery to the stores, where the communication cycle began.

Zara's Supply Chain 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. Most companies insert layers of bureaucracy that can bog down communication between departments. But Zara's organization, operational procedures, performance measures, and even its office layouts are all designed to make information transfer easy. The physical and organizational proximity of the three groups increases both the speed and the quality of the design process. Designers can quickly and informally check initial sketches with colleagues. Market specialists, who are in constant touch with store managers (and many of whom have been store managers themselves), provide quick feedback about the look of the new designs (style, color, fabric, and so on) and suggest possible market price points.
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Procurement and production planners make preliminary, but crucial, estimates of manufacturing costs and available capacity. The cross-functional teams can examine prototypes in the hall, choose a design, and commit resources for its production and introduction in a few hours, if necessary. Small shipments and carry little inventory, the risks are small; unsold items account for less than 10 percent of stock, compared with the industry average of 17 percent to 20 percent. 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. Consumers in central London, for example, visit the average store four times annually, but Zara's customers visit its shops an average of 17 times a year. Another important aspect in its supply chain is that Zara owns and manages almost all its retail stores. This allows standardized layout and window displays and close communication and collaboration between store managers and headquarters. Zaras tightly coordinated system allows quick response to market demand. At the beginning of each season only small numbers of each new item are produced and are placed in a few lead stores. According to market response, Zara then adjusts production. Typically, Zaras products spend no more than two weeks in a retails tore. Product market specialists provide critical feedback that is used both to adjust production levels and to make design or color modifications to existing items. The close, informal information networks within Zara are critical to product design. Although designers begin working on new designs some nine months before each new season, continuous adjustments to designs are made in response to new information on fashion trends and customer preferences. Designers and market specialists are encouraged to be alert to the new ranges released by the fashion houses of Milan, Paris, London, and New York; to the styles worn by trendsetters on TV, in popular music and in the leading-edge clubs and also to feedback received from store managers and other employees.

Zara Total Quality Management The idea of total quality management (TQM) emphasizes planning for quality, including designing the product in such a way that consistent quality is more easily obtained and more easily measured. The impetus for a company to devote significantly more resource to quality through a TQM program comes from a trend that most companies are now experiencing-an increased competitive pressure that leads to higher costs associated with poor quality. The product must be design in such a way that it can be produced consistently without losing sight of the design aspect demanded by the customer. the production process must be design with quality in mind.

Quick Response Quick response (QR), a program developed by textile and apparel manufacturers and retailers around 1985 as a way to cope with problems challenging the apparel industry, uses a combination of strategies to reduce inventory levels, improve merchandise quality, increase worker productivity, increase stock turnover, and reduce merchandise markdown and inventory cost. Fundamentally, QR is a way to gather information about consumer preferences and to reflect them in production decisions in a timely manner. To comply with consumers needs, QR relies on sales data. Through computerized information system, sales data are transmitted and transformed as useful information that reveals consumers preferences and reactions, and decisions are then made promptly to respond to what consumers want. The QR strategy links all activity to real time demand. It is customized by the individual retailer or manufacturer and is particularly suited to small and medium-sized firms. it is designed to be context specific and to be contingent upon the setting. Quick Response as an operations strategy is designed to overcome the impact of seasonality in operations.

2. How special do the distinctive features of Zara business model affect its operating economics? One of the most profitable brands is Zara, the clothing retail group. It first begin in La Coruna Spain which the first store is open 1975 and today the city is the headquarters for its global operation. Currently it has operated 45 countries with over 531 stores worldwide in Americas, Asia, Europe and Africa. All of them were situated at major cities of the country. During expansion focus were given at core fashion philosophy which are creativity and quality design together with rapid response to market demand will generate more profit. To achieve high profit results, Zara developed a business model which develop a system requires short lead times, decrease quantities produced to decrease inventory risk, and increase number of style and choice. Business modal of Zara can be separated into three components which are concept, capabilities and value drivers. The fundamental concept of Zara is maintained design, production and distribution process which allow Zara to react quickly to shift in consumer demand. Zara capability is the capabilities of the resource require exploiting the opportunities and executing the conceptual strategy. Production process, keeping design and manufacturing in house or strategic partnership are kept in tight control by Zara. To proof that Zara has control, Zara is now maintain 80% of production process in Europe, 50% Spain which both are close to La Coruna headquarters. With this partnership benefit are created by created within distance of both manufacturing and operational process, which allow Zara to be flexible and design and produce over 12000 new items annually. Zara value drivers can both be seen and unseen benefits are return to all stakeholders. Tangibility, inditex the parent company of Zara, has 11.02% net margin on operations and their market capitalization (Equity market value) is 13, 981 (in thousands) in 2002. Their net working capital (current assets current liabilities) is 133 (in thousands). Zara financial success can be seen through its financial performance. It's subsidiaries Inditex SA had triple it's profit and during 2001, despite a year of economic downturn, Inditex SA manage to increase profit by 30%. Unseen, the affect of customer loyalty are also increase due to brand is associated with good fashion and affordable price.
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3. What distinguish Zara from other clothing-line company? Do comparison with another famous fashion company of your choice.

The main reason of Zara success are also due to it's competitive advantage. Zara has better competitive advantage in area such as product development, strategic partnership, and cost of production, advertising and marketing and information technology infrastructure. Product development In comparison with other clothing company such as . Zara allow store managers to autonomy in determining the product in display in their stores and which to place on sale, and which product to be sale and also do research on store trends, to determine profitability of the product. All this information will be send back to headquarters in La Coruna. From this information it allow Zara to design and effectively plan and produce Zara products. Zara also have design team which consist of 200 people, which they can create 12000 new style a year. The combination of getting market information combine with the expertise of design team, allow them to product product from design to distribution in just 3 to 4 weeks. On the other hand, clothing company such as La gucci, depend on small elite design team which plan both design and production needs in advance. As a result, stores does not have power in deciding on which product to display or put on sale, as they will always depend on headquarters which had plans according to the forecast. Thus, there are no power for stores to sell which product on what type, quantity and others. Everything is fixed and unflexible, and thus this can result in non profitable business. Thus overall Zara provides additional value to stakeholders, customers, and stores in producing quality clothing at affordable prices.

Strategic partnership and cost of production When compared to competitors such as LaGucci, Zara business strategy focus on strategic partnership and cost production which result in strategic competetive advantage. Unlike most competitors such as Benetton and Gap, Zara does not use Asian outsourcing. Zara product materials are 80% manufactured in Europe and about 50% produce in Spain close to the headquaters. These ensure the quality and originality of the product. In comparison many Zara competitor such as Benetton outsource many percentage of their production to cheaper Asian country such as China where labour is cheap. Although cost of production in Spain is more
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expensive by 17-20% compared to Asia, it has it advantage in operation compared to competitor. Despite made in Europe, the strategic partnerships that Zara maintains with manufacturers in Europe allow for a product throughput time of 3-4 weeks from conception to distribution. This because happen, the company designs and cuts its fabric in-house and it acquires fabrics in only four colors to keep costs low.. Zara postpones dyeing and printing designs until close to manufacture, thereby reducing waste and minimizing the need to clear unsold inventories. The proximity of these suppliers gives Zara great flexibility in adapting their product lines based on up to date market trends and consumer behavior. It also decreases costs of holding inventory.

For comparison, other company such as Benetton outsources to other country such as China, have lowered their labour cost and production cost, but sacrifice their close proximity to headquarters. While cost of labor is lower, they have problem in flexibility in changing orders or current trends which result inneficcient operational performance. Inventory costs are higher for competitors because orders are placed for a whole season well in advance and then held in distribution facilities until periodic shipment to stores. Thus overall Zara has proximity and flexibility advantage over it's competitors. Zara has the advantage of respond quickly to shift in cosumer demand and provide high quality and original product, as opposed to competitor Benetton which only focus on lower cost of labour. Advertising and Marketing Advertising and Marketing is among the factor that it have over it's competition. 0.3% of Zara total revenue are spend on advertising and marketing. For comparison other competitor such as Benetton spend 3% to 4% of total revenue on advertising and marketing. Thus Zara have competetive advantage. Zara achive this collabarate with their peers in uses Zara location, store layout and product life cycles are the marketing tools for Zara. For example, Zara put their store in strategic location on prime retail such as Wall mart, Tesco and others so that it can be seen by people. obviously they are not going to make store in village, because of it's low number of people, and they can't afford it. Moreover because of product development cycles mentioned earlier, customers are trained to visit Zara stores often because new items are presented weekly and are often not restocked. Thus because, feeling of scarcity, it encourages to come to store and buy frequently or buy product in one large bundle. Zara also invest many in store layout in order
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to keep the stores looks fresh, trendy and appeling. Test facility are located in Spain . There they test all kind of store layout. On average every 5 years, Zara store will be remodeled in order to keep up with trends. Though Zara does not invest heavily in direct marketing, they made a great effort in image and brand marketing through advertisment leaflets, online and others. This is important to make customer attract and loyal. Thus overall Zara were able to balance cost advantage and main maintain brand recognition and customer loyalty. Information and communication In term of information and communication, Zara is quite different from it's competitors. On average 0.5% of total revenue are spends on IT, while only 0.5% account for IT employees workforce. For comparison ofof competitors such as Benetton which spend on average 2% of total revenue on IT expenditures and have 2.5% of their total worker jobs on IT. This advantage comes because Zara use the combination of human intelligence such as store manager and market research and combine it with information technology such as computer and PDA, which result in hybrid model for information flow from stores to headquarters. One example of application is shown when managers in Zara stores use handheld devices to send standardized information regarding customer feedback and ordering needs directly to in-house designers. This allows Zara designers to be inforemed on quick change in customer demand and also allow to determine which goods in the store that are not desirable. For comparison most competitores such as Benetton rely completely with information technology as opposed to Zara which hybrid both human and technology. Zara method results in good managing inventory, linkages between demand and supply, and reduced costs from obsolete merchandise. However there are room for improvement in IT application, since currently IT technology keep expanding and improve. For example a few years ago computer use Microsoft word 2003 and now update to 2007. New technology such as RFID had been applied in some sector, as opposed to the past which rely only on bar code. Overall the hybrid between human and IT had allow Zara to have cost advantage over their competitors.

4. Can Zara formula be applied by Malaysian industry? Malaysian industry can follow Zara business model which focus on short lead times, and increase the variety of any type of product. However Malaysian brand may no adopt the decrease of quantities produce. Malaysian brand can also separated their business model into concept , capabilities and value drivers. Malaysian brand fundamental concept should focus on maintain design and quality, production and distribution process, that will allow Zara to react as soon as possible to consumer demand. Malaysian brand also can follow Zara capabilities in term of resource require to exploit the opportunities and execute the conceptual strategy. This is done by keeping design and manufacturing in house or strategic partnership in good condition. For example, Jakel textile can make sure that the production of their textile product in warehouse, by having good managing in factory, good employee, enough equipment and others. While, ensuring that good strategic partnership, for example when applying centralized purchasing with others partners. For example if there, is logistic partner such as transportation, then they should keep good relationship with them for example by delivery goods on time, product quality etc.

Malaysian brand also can apply Zara product development strategy. This is done by allowing store manager to have power in determine which product to display in their stores, and which place on sale, and which product to be sale and also research on store trends. This helps in determine product profitability. Next the information can be send back to headquarters in Penang, Malaysia. The information will allow that company to know customer demand, and allow them to design a product that suit customer demand. For example demand reveal that people prefer, cheaper textile from China, India or other country as opposed to Singapore which prefer expensive but quality product.

Malaysian brand could also apply good Strategic partnership and cost of production. Like Jakel textile can also adapt strategic partnership which result in lower cost production. They can make the material in headquarters in Malaysia close to Selangor, without relying on outsourcing. Some

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other textile company to off shoring their production to other country such as Indonesia. Although cost of labour in Indonesia is slightly cheaper, then in Malaysia, the product qualities of Malaysian brand maintain. Furthermore, the market area in South east Asia is close, thus the distance is not very big. Other Malaysian brand example Jakel textile can also develop good relationship with their logistic strategic and partnership. They should be loyal to one transportation which is DHL Logistic. As if they keep with only one company as this will result in multiple discount, quantity discount and cumulative discount, some which can achive in short term and long term. Good relationship with single transport provider also result in flexibility, loyalty , faster lead times, reduce cost of holding inventory and many more. Thus it is important for the Malaysian brand to continue monitor DHL performance. Advertising and Marketing is something that Jakel textile could apply in order to get people attention. However contray to Zara advertising, which does not do advertize on Television to much, Jakel textile need to start making their presence on television through commercial. Advertisment through internet, is also important, however advertisment on TV is usually the trigger for people to be aware of the company and then later they would see it online. It is also important, for Pensonic to develop partnerhip with already recognize company. For example they can advertise partnership with CIMB. Advertisment leaflets, advertise on newspaper are also important. Thus advertising need some collaboration. Other advertising strategy can follow Zara. For example they can collaborate with their business partner in location, store layout and product cycles are also marketing tools. Example, are to locate their store in strategic location on superstore, such as Jusco, Tesco, Carrefour and others and thus result in visibility of the store. Customer will come to this superstore, as they can do many function in one place. For example, in Jusco it contain Cinema, Harris bookstore, Pizza Hut , Ariani and others, and thus people can do many things in one trip. Also Malaysian brand can also adapt Zara strategy of creating store in major cities. Furthermore Malaysian brand can also apply Zara quick product development cycle, would result in customer to visit the store often as new item are introduced every week and are often restocked. Malaysian brand can also apply the Zara information and communication strategies by mergint the human intelligence with information technology.

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References

1) http://www.scribd.com/doc/44941143/Zara-Case-Study

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