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Industry Sep 24, 2019 4 min read

Supply chain management: how does Zara do it?

For today’s retailers, fast fashion stresses the importance of an optimized supply chain that can deliver upon consumers’ expectations.

Zara supply chain management

By Marie Johnson, Contributing Author at Enlightened Digital

In today’s retail market, fast fashion is winning over the hearts (and wallets) of consumers. Looking past the controversial aspects of fast fashion, like the production of excess waste and unregulated manufacturing standards, today’s consumers have instead sided with fast fashion’s perks, like the quick turnover of style trends and budget-friendly products.

But what do these preferences mean for today’s retailers? Creating an effective supply chain that improves market demand and smart production models is more important than ever before.

Today’s consumers have been quick to adopt fast fashion and the benefits it has to offer. Easy to access trends and price-conscious styles are two of its primary selling points, which have led the $35bn industry to take over 66% of all online fashion traffic in the first half of this year alone. 

The retail industry historically produced high-fashion designs with slow response times. Designers and retailers would forecast demand a year in advance and tailor their releases by season. As consumer trends demand lower prices and faster response times, the apparel industry has shifted dramatically. 

This has popularized “fast fashion,” a term that refers to apparel manufacturers who change out their collections faster than next day delivery. It provides consumers with a continuous supply of new trendy styles in only limited amounts. 

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But how do they do it?

Fast fashion retailers today depend on an agility-oriented supply chain equipped to bring goods to market quickly and cost-efficiently. Industry pressure of speed-to-market has since forced retailers to rethink their manufacturing and supply chain strategies. 

Fast fashion goods are instantly produced and pushed onto store shelves immediately. To accommodate this speedy schedule, distribution, order fulfillment, and warehouse operations must also adapt.  

To successfully compete in today’s trend-focused marketplace, retailers must learn to shorten their supply chains and secure direct control over design, production, and logistics — a strategy referred to as vertical integration. 

What is vertical integration? 

Vertical integration happens through the acquisition of companies at different stages of production or distribution. Retailers that adopt a vertical integration supply chain strategy are met with: 

  • better control of their value chain 
  • reduced distribution costs 
  • better alignment of pace to ever-changing fashion trends 

It also offers the possibility to react almost instantly to customers’ changing tastes, accurately analyze demand, and then respond swiftly using fast-cycle manufacturing processes. Other trumps of vertical integration include:

  • tighter process control
  • reduced risk in the supply chain
  • improved oversight of quality
  • enhanced visibility for customers

Vertical integration also opens more opportunities for retailers to create an agile supply chain through practices including just-in-time production, lean inventory management, and inventory optimization. 

Zara: an agile supply chain case study

Zara was one of the first retailers to offer stylish designs at wallet-friendly prices; a gap in the fashion market that companies had yet to perfect.

Today, Zara is one of the largest international retail chains, spanning over 90 countries and 3,000 stores. It’s influenced even the most iconic and long-lived fashion brands in its operational execution. As fashion editor, Masoud Golsorkhi once told the New York Times, “[Zara] broke up a century-old biannual cycle of fashion. Now, pretty much half of the high-end fashion companies make four to six collections instead of two each year. That’s absolutely because of Zara.” 

Most apparel retailers determine 50% of their designs for a seasonal line 6 months in advance, with 80% of the inventory committed by the beginning of each season. Considering how quickly today’s trends evolve and change completely, this is now a risky strategy. Today, betting on trends well in advance doesn’t guarantee sales in six month’s time. 

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Zara determines only 20% of a season’s line 6 months in advance, entering the season with 50% of committed inventory. For the remaining 50% of its line, it adopts just-in-time production, a practice that helps them to respond to any “of the moment” trends or customer preferences. This also lets them be agile when it comes to quantity, frequency, and variety of new merchandise.

Reactive production model

Through their just-in-time production model, Zara is also able to drop new products in smaller collections multiple times per season based on must-have trends. Smaller merchandise launches not only cut losses if the trend doesn’t stick but also lend themselves to the customers’ perception of “exclusivity.” This motivates consumers to buy goods at a full price rate, to avoid FOMO if they don’t buy now.

Finally, inventory optimization models are used to help determine appropriate volumes of merchandise at each retail location. 

With these supply chain practices at play, merchandise lines at Zara don’t stay on the shelves for long. The company captures 12 inventory turns per year, compared to the industry norm of 3-4 per year.

For today’s consumers, fast fashion means greater access to trends at affordable prices, but for retailers, fast fashion stresses the importance of an optimized supply chain that can deliver upon consumers’ expectations. 

To be most effective in the future, retailers must replicate the practices of leading companies like Zara, using market demand and supply chain as driving forces toward business success.