Will climate change dampen Inditex (Zara)´s rapid-fire supply chain?
How to manage inditex´s unique supply chain design under climate change?
Will climate change dampen Inditex (Zara)´s rapid-fire fulfillment supply chain?
Climate change is a prominent issue facing the world. Its impact include rising sea levels, changing weather patterns and exterme weather, pressure on water and food, political and security risks, human health risks, as well as impact on wildlife and ecosystem (1). Indeitex, a spanish clothing and accessories company, is the world´s largest apprarel retailer. Its brand Zara (number 51 of the world´s most valuable brands) (2), is the leader in fast fashion. By the end of 2016, Inditex generates 23 billion euro in revenue (3). Why should Inditex´s management concern about climate change´s on its supply chain?
(a) Size. Global clothing production has doubled between 2000 and 2014. From a supply chain perspective, just making 1kg of fabric generates 23kg of greenhouse gases on average (4). As the largest apparel retailer, Inditex contributes significantly.
(b) The uniqueness of Inditex´s supply chain. Its management philosophy is about speed and responsiveness of the whole chain (as opposed to isolated parts). Use Zara as an example, unlike competitors, it manufactures roughly half of its products in its own factories, have a centralized distribution center (all finished product passed through the distribution center in La Coruna in Spain), has twice weekly shipment, and deliberately operates its manufacturing and distribution centers at low utilization. These design help to react to peak or unexpected demands faster than rivals. (5). Due to this uniqueness, the climate change impact could be amplified. For example, the centralized distribution center means more transportation, and a low utilization manufacturing center means higher capacity / building facilities are needed. These all mean higher energy and resources consumption that contribute to climate change.
Current Action
Sustainable management of supply chain is identified as high strategic relevance for Inditex internally and externally (6). Its current effort focuses on eco-store and logistics management.
Eco-store:
Inditex applies many cutting edge technologies to reduce stores environmental impact. In 2016, 71.6% stores are eco-efficient and it is expected to reach 100% by 2020. This is achieved by, for example, installing LED lighting, centralized energy monitoring system etc.
Logistics:
The 10 logistics centers are run and owned by Inditex in Spain, with most production in proximity, so as to cut travel distances and reduce energy consumptions and emissions. Going forward, it aims to apply latest technology and software to make dispatch time management more efficient and precise and double the speed with which boxes are moved, stored and collected.
In 2016, inditex worked 53 suppliers globally with close to 7000 factories. Most of them have different manufacturing standard. In most cases, Inditex´s ability to influence is very limited for their climate change standard. Therefore, in order to achieve sustainability for the whole supply chain, Inditex has developed a supplier selection protocol and is working to increase supplier tractability in the short term. Another goal is to standardize packaging among suppliers, so as to increase packing density and cut transportation (and therefore emission) in the medium term.
Recommendation:
Implement natural disaster recovery plan for distribution contractors
Due to climate change, the tendency of natural disaster like flood becomes much more frequent and irregular. It might have an immediate and significant impact on the transportation network. Considering Inditex sources from 53 countries for supply, which are shipped to “proximity”6 countries for production, and further shipped to 10 concentrated distribution center in Spain, and twice a week dispatched to 7292 stores in 93 countries, the probability that its transporation network be impacted by natural disaster is high. To guarantee the responsiveness of the supply chain, inditex shall make sure all of its external distribution partner has a natural disaster recovery plan in the short term, and identify a few strategic partners that would prioritize Inditex shipment in times of natural disasters for the long term.
Ongoing evaluation of supply chain design with data
Inditex mentions that “it is no coincidence that our ceaseless search of greater efficiency ties in perfectly with our all-encompassing commitment to sustainability.” This is a paradox with its fire-filling supply chain philosophy, where sometimes half empty plane or factories (low utilization) are deliberately designed. If efficiency and sustainability are overly emphasized, there is a risk the responsiveness of the supply chain be jeopardized. Therefore inditex shall continue to collect data and run computational optimization model to find the optimal balance.
Finally, shall Inditex open a manufacturing and distribution centers in Asia? With the increasing number of stores, does it make sense to ship raw material from Asia to Europe, and finished good back to Asia? This doesn’t seem to be the most climate friendly supply chain design. What will be the critical mass needed, so that such a regional centre will not jeopardize the global responsiveness while shorten the transportation (and reduce emission) in the region?
799 words
Reference
(1) Herderson, R:M., et al, Climate Change in 2017: implications for business (HBS No. 317-032)
(2) Forbes https://www.forbes.com/companies/zara
(3) Anual report 2016, Inditex http://static.inditex.com/annual_report_2016/en/year-review/commercial-presence/
(4) Garg Age, Economist Apr, 2017 https://www.economist.com/news/business-and-finance/21720200-global-clothing-production-doubled-between-2000-and-2014-looking-good-can-be
(5) Rapid-fire fulfilment, Kasra Ferdows, Michael A Lewis, Jose A.D: Machuca, Harvard Business Review
(9) https://www.inditex.com/our-commitment-to-the-environment/climate-change-and-energy/eco-stores
(11) https://www.inditex.com/how-we-do-business/our-model/logistics
Swan, this is so interesting and especially so for the sheer volume that Inditex manufactures out of Europe. I think the questions you pose are spot-on — I don’t think it is at all climate change friendly (or cost efficient) to ship goods back and forth from Asia to Europe and then back to Asia again, especially if their shipments are not at full capacity. However I wonder if there is a political cost to off-shoring warehouses to Asia (for example, government push back or tax implications).
I am also intrigued by their move towards eco-stores — I wonder if they are making similar strides in their warehouses and factories, where it seems like they could cut down on waste the most. For example, making denim requires a lot of water, and with the recent drought in places like South Africa and California, climate change has the potential to impact even the production of their items, not just the transportation of them.
In reading this post, two questions came to mind: (1) Current efforts seem focused on the short term – has management created a long-term plan? and (2) What other factors has Inditex considered beyond eco-stores and logistics?
When I consider the fashion industry and sustainability, the wastewater from textiles and dye comes to mind. I wonder if Inditex has considered or addressed these issues as part of their ongoing efforts? In considering the role of climate change, what responsibility does Inditex have in going beyond regulatory requirements and producing clothing sustainably?
Swan, this is a very interesting article. I had not heard of any retailers that are focused on the “Eco-store” in the way that Zara currently is.
One common criticism of the fast fashion industry is that the product quality is not high, resulting in clothing being thrown away sooner than items purchased from other stores. This has many negative environmental impacts assuming the article of clothing is replaced, including additional raw material usage, increased use of packaging, and additional shipping time. This has made me wonder: could Zara invest in the quality of its products instead of focusing on the supply chain to have a greater positive impact on the environment? This approach could have a more visible impact on consumers, but could help tackle a larger driver of the negative impact to the environment.
Very interesting perspective on Zara’s supply chain! My first instinct about Zara has always been supply-chain effectiveness in making Zara a competitive advantage against its supplier but I have never thought about the climate impact behind their efficient supply chain model. Regarding the current action Zara is taking, I have a few thoughts:
1) The actions from Zara are not addressing the root cause of its climate damage, but rather a repairing action from doing A (eco-store) to compensate B (supply chain issue). However, it would be interesting to quantify its impact with eco-store.
2) From the essay, I do think it makes sense to chose some suppliers in Asia. Not very sure about the cost impact, but this seems to address the root cause of the supply chain’s impact on climate. The risk might be this does not align with the cooperate strategy or potentially damaging their existing supplier relationship.
After reading this, it seems to me the greatest CO2 impact Inditex has is from transporting its goods from raw material to end consumer. While I agree that opening manufacturing plants in Asia or the US would help decrease shipping costs, I’m curious to see how much of the CO2 emissions come from sea cargo versus truck. My understanding has been that transport by water is much more efficient per weight than by land. This makes me question how much of an impact opening a plant in other continents would have given the costs and challenges of setting up a logistics center abroad for a company that has been so centralized in Spain since its founding. I’m curious to know if their logistics centers are close to sea ports and if they could relocate any Spanish logistics centers to be as close to the seaports as possible?
I think the major issue is that fast fashion’s business model is unfortunately CO2 intensive due to how short the “days wearable” is for the end consumer, which means purchasing more quantity of clothes. While increasing the quality would help with CO2 emissions, it would go against the customer promise of buying cheap fashionable clothes that last a season. Thus I’m not very optimistic that there is much Inditex can do apart from minimize travel distances by land and have low CO2 emission stores to decrease its impact on climate change.
http://timeforchange.org/co2-emissions-shipping-goods
http://business.tenntom.org/why-use-the-waterway/shipping-comparisons/
Very interesting article, but I believe the steps inditex is taking are very reactive in nature instead of being proactive. As you mentioned that the whole industry generates high green house gas (1 kg textile to 23 kg greenhouse gas) I am curious to find out if Inditex has invested in streamlining their production process to reduce this number. I believe a big chunk of this number is attributed to dying, heating and other manufacturing processes hence it would be interesting to know if Inditex has developed procedures to counteract and reduce these emissions. Moreover if Inditex has in fact developed such processes, maybe they can be implemented to the entire industry creating greater sustainability.
Thank you all for spending time to read about Zara & Climate Change!
I do find the HBR article (below) really interesting that details Zara s supply chain (that partners with Toyota) and directly talks about Bullwhip effect and other concepts we learnt in class – it is short so I highly recommend to skim through. (it is not directly linked to climate change)
(5) Rapid-fire fulfilment, Kasra Ferdows, Michael A Lewis, Jose A.D: Machuca, Harvard Business Review