Massey University’s retail guru, Jonathan Elms brought one of the interesting stories from the conference was that of how Zara, a Spanish based retailer had become one of the most successful in the world by applying Lean Principles.
Zara will be coming to New Zealand this year so I found this a fascinating insight into how Amancio Ortega Gaona the founding chairman of the Inditex fashion group somehow managed to create a retail chain which today dominates the world’s high streets, making him the world’s richest man in October 2015.
I have cut and pasted the story below and included the link to the original here: https://theleadershipnetwork.com/article/lean-manufacturing/zara-lean-fashion-retail
When Ortega opened his first store in the city of A Coruña in 1975, he initially called it Zorba after his favourite film Zorba the Greek. As there was a local bar with the same name and he had already invested in the sign for the store front, Ortega was forced to adapt and use most of the letters to create a new name.
Just as well because 40 years later, Forbes named ZARA as one of the world’s most valuable brands, worth $9.4 billion.
While Ortega might have got lucky with the name, there is nothing fortunate about ZARA’s long-lasting success. But what’s its secret? And how has it become the largest fashion retailer on the planet?
As the Inditex Chairman and CEO Pablo Isla says,
“There is no additional secret apart from the business model and the execution.”
And ZARA is perhaps the most outstanding example of a well-executed and sustained Lean business model outside of the automotive industry.
Here are five ways ZARA has used proven Lean techniques to stay ahead of its rivals and achieve its global success.
‘JUST IN TIME’ PRODUCTION
Lean production or simply Lean is common language in many industries, however the principles behind it may be known by other names.
It is widely recognised that ZARA deliver fast fashion through an integrated design and production process, which is often referred to as ‘Just in Time’ production.
‘Just in time’ was pioneered by the Toyota Motor Company in 1948. [ii] In the words of Toyota, it means making “only what is needed, when it is needed, and in the amount needed.” The objective being the elimination of waste, inconsistencies, and unreasonable requirements from the production process, resulting in improved productivity.
‘Just in time’ was widely used as a business term in the 1980’s but from 1990 onwards the term Lean has been used across most industries to describe this methodology.
Through its ‘Just in time’ or Lean business model, ZARA breaks the fashion supply chain rules by holding low stock and updating its collections continuously. Twice a week, at precise times, store managers order clothes, and twice a week, on schedule, new garments arrive. To ensure this happens, ZARA controls more of its manufacturing than most retailers.
New designs are can arrive in store within fifteen days, which means that ZARA can respond to its customer demand by producing more of its popular products and disregarding less popular items.
ZARA was designed from day-one to be responsive and agile. Rather than outsourcing to Asia, ZARA uses a network of automated factories in Spain and over 300 small finishing factories in North Africa and Turkey to constantly create unfinished products.
When a new design has been approved, the unfinished products are pulled, sent to the finishing shops and turned into products that are ready to shipped in as little as 24 hours to Europe, and in 40 hours to the Asian and North American markets.
Dr. Warren Hausman of Stanford University says that this innovative way of working allows retailers like Zara to ‘reduce unwanted markdowns and lost sales enabling firms to increase profits by as much as 28 per cent’. [iii]
According to Hausman, Zara is approximately four-times more profitable than the average retailer due to high-margins and reduced inventory risk.
One of the most obvious Lean techniques used by ZARA is a pull-model, which is also known in the Toyota Production System as a Kanban system.
A Kanban system uses a queue of resources that are ready to be pulled by the following process as they are needed.
When a resource is pulled, a signal is sent to the following process to replace what was used or completed. To avoid over-producing and over-ordering, the Kanban system keeps small quantities of resources that are needed and replaces what is used, only when it has been used.
ZARA creates up to 1,000 designs every month based on store sales and current trends. It monitors how much money customers spend in store to evaluate and understand which designs are being purchased and then it updates its next designs accordingly.
When Amancio Ortega Gaona opened his first store 40 years ago, the company’s goal was to provide customers with the latest fashion trends at a reasonable price.
The pull system relies on having a loyal customer base, as their feedback is communicated to the design team, which then creates the design and sends back to the market to satisfy demand.
ZARA quickly realised that the demand for ‘on trend’ products is highly uncertain. Therefore it buys capacity from its fabric suppliers, but does not commit to a particular colour or print until it has a clear picture of customer preferences.
ZARA also continuously gathers customer feedback from retail stores through leading edge IT infrastructure, which allows its designers to identify new trends that the customer wants to buy. [iv]
ZARA’s design process is much more focused on the customer than we might realise. It is also a very good example of continuous improvement or kaizen at work.
Every evening, store managers from 2,000 stores in 88 different countries feed everything they have learned about their customers buying habits into a computer at the collection counter. This information is then sent to the distribution centre, where it is picked up by Zara’s design team. Designers then digest the information allowing them to make improvements, reduce customer friction and, most importantly, make excellent fitting clothes.
The data aims to capture the most popular selling garments. The database also keeps a record of all the items of clothing that are returned. This is very important, as designers can determine very quickly whether an item needs to be discontinued or can be altered.
If the overwhelming customer feedback on a cardigan is that the sleeves fray very easily, then the designer might be able make minor adjustments. However, if the general consensus is that a suit is badly made, then the designers would elect to discontinue the product.
Using this strategy ZARA has cut the time it can deliver new styles to market from six months to just three weeks.
ONE PIECE FLOW
Pioneered by Toyota executive Taiichi Ohno, One Piece Flow [v] is a way of producing small quantities of items to match the pace of customer demand.
One-piece flow is the opposite of mass production.
– Mass production is the production of large quantities of standardised products.
– One Piece Flow is the movement of a product one piece at a time through the production process.
With mass production, the more items are produced the lower the production cost of an individual item. Whereas One Piece Flow reduces all types of wasteful activities, it enables businesses like ZARA’s to be agile and respond to customer demand much more quickly and efficiently.
Approximately eight-hours after a store manager places an order based on customer demand, items are then picked, packed and ready to leave its distribution centre in North-west Spain. Because ZARA’s logistics are centralised, it can send products anywhere in the world within 48 hours.
Just over fifty per cent of ZARA’s clothing, usually the more trend-led items, are produced in Spain, Turkey and North Africa instead of Asia, which means goods can move much more quickly through its central hub.
“This level of control allows ZARA to set the pace at which products and information flow.”
It also demonstrates just how effective Lean techniques can be.
[iii] Harvard Business Review on Supply Chain Management by Harvard Business School Press
[iv] Operations Rules: Delivering Customer Value through Flexible Operations By David Simchi-Levi
[vi] Harvard Business Review on Supply Chain Management by Harvard Business School Press
Operations Rules: Delivering Customer Value through Flexible Operations By David Simchi-Levi
Harvard Business Review on Supply Chain Management by Harvard Business School Press