“Inditex’s business model is characterized by the search for flexibility in adapting production to market demand by controlling the supply chain throughout the various stages of design, manufacture and retailing. This enables it to focus both its own and suppliers’ production on changes in market trends during each sales campaign. The Group’s logistics system is based on constant deliveries from the distribution centres of the various commercial formats to stores throughout each season. This system essentially operates through centralized logistics centres for each concept in which inventory is stored and distributed to stores worldwide.” [i]
No matter where you are in the world, when you want to go shopping, there is almost always a Zara. Zara has become the epitome of fast fashion in recent years blending quality, trendiness, and affordability all in one place. Zara customers have come to expect new styles as often as every two weeks. But how is this even possible?
As we have learned in TOM this semester, the retail industry is a challenging industry from an operations perspective. Companies must predict demand well before any fashion trends and demand from consumers can be measured. They are then required to carry significant inventory costs in order to bring their goods to market. Zara has seemingly bypassed this long production process and have found an improved operating structure compared to that of their peers. Is Zara just better at predicting trends? Are they insider trading fashion ideas from top designers? In this post we will examine Inditex as an extremely effective example of alignment between operating and business models.
Inditex’s business model is to deliver new trends to their customers quickly. They turn over inventory in stores rapidly and are constantly at the forefront of design and fashion. They distribute their merchandise through their own network of stores as well as their online presence. Their business model is widely recognized throughout the industry as a uniquely positioned and innovative [ii].
Inditex’s operating model facilitates their ability to delivery new merchandise frequently through a series of processes that reduces inventory holding and speeds up production time based on customer purchasing behavior. Inditex is able to execute on their business model by focusing on three key factors of their operating model.
- Focus on customer behavior
“The day-to-day work of those who make up Inditex is constant adaptation to customers, the environment and society. Both Inditex employees and its work processes are focused on listening to the customer” [i]. Inditex orders 50% of merchandise ahead of season, compared to nearly 100% with competitors. This reduction in inventory allows store managers significantly more flexibility to order new merchandise and reorder top selling merchandise continuously based on customer purchases. Management has stated that more than 80% of Inditex clothing is produced in direct response to sales data.
- Nimble sourcing strategy
Inditex’s sourcing strategy support their enhanced flexibility model. Specifically, the majority of Inditex’s clothing stock comes from regions that are geographically close to the main distribution centers in Spain, this reduces shipping times which can be a large part of the production time line [i]. As Inditex continues to grow globally, this will need to be an area of focus, in order to ensure they have the best as well as most convenient suppliers moving forward.
- High tech logistics
Additionally, Inditex has high tech distribution and logistics systems in place which management has cited as the company’s prime enabler of their industry-leading lead time from design to store in four weeks [i]. In 2014, Inditex mentioned their decision to launch an improvement to the already impressive logistics system, called the RFID project. RFID allows Inditex to uniquely identify an item and follow that item from production through sale [i]. Inditex is able to ship new items to store as quickly as every two weeks [iii].
These three key areas of the operating model are what enable Zara’s doors to stay open and their customers to leave happy (if not a bit poorer).
[i] 2014 Annual Report, http://www.inditex.com/investors/investors_relations/annual_report
[ii] 2015 Forbes, http://www.forbes.com/companies/inditex/
[iii] Business of Fashion profile, http://www.businessoffashion.com/community/companies/inditex
November 2014, RBC Capital Markets Analyst Report
September 2014, JP Morgan Analyst Report