zara’s supply chain model: an analysis of the...

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ZARA’S SUPPLY CHAIN MODEL: AN ANALYSIS OF THE

APPLICABILITY TO SOUTH AFRICAN FUNCTIONAL

APPAREL RETAILER CAPE STORM

Presented By: James Brennan and Margot McMaster

Supervised By: Professor Norman Faull

A Research Report presented to:

THE GRADUATE SCHOOL OF BUSINESS,

UNIVERSITY OF CAPE TOWN, SOUTH AFRICA

In partial fulfilment of the requirements for the Masters in Business Administration degree.

November 2002

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ACKNOWLEDGEMENTS

This report is confidential. It may not be used without prior written permission of the authors.

We would like to thank Cape Storm for giving us access to the organisation. We are grateful

to Cape Storm’s management team who generously gave of their time and willingly shared

with us their knowledge of the business. Specifically we would like to thank:

Andrew Baxter

David Loos

Nigel Wilson

Our appreciation is also extended to Professor Norman Faull of the Graduate School of

Business, University of Cape Town for his advice and insights. His guidance and counsel was

much appreciated.

We certify that this report is our own work and all references are accurately used in the report.

Signed

……………………….. …………………………….

James Brennan Margot McMaster

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ZARA’S SUPPLY CHAIN MODEL: AN ANALYSIS OF THE APPLICABILITY TO

SOUTH AFRICAN FUNCTIONAL APPAREL RETAILER CAPE STORM

ABSTRACT

Speed to market and flexibility in the supply chain are the key drivers that it is believed will

shape the future for apparel retailers around the globe. Zara, a Spanish fashion retailer, has

attained remarkable results in these areas. This has sparked interest in both academics and

business people alike resulting in the study of this highly successful supply chain model in

order to understand what aspects can be transferred.

This study investigates the detail of Zara’s model and the implications for South African

apparel retailer Cape Storm. It is hypothesised that elements of Zara’s supply chain model

are appropriate to Cape Storm.

Conclusions drawn indicate that there exists potential for the integration of concepts from

Zara’s model into Cape Storm’s business model.

KEYWORDS: Apparel retailing, Demand management, Information technology and

communications (ICT), Mass customisation, Partnering, Supply chain

management (SCM), Value stream mapping (VSM)

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GLOSSARY OF TERMS

Demand Testing: Concept test performed in the market aimed at testing product

demand in predetermined test locations (Test/ Concept Stores)

Fashion Garment: Sensitive to market trends therefore timing of release to market

critical.

Functional Garment: A performance garment designed for functional end use.

Internal Logistics: Dispatching and collecting of products

Leisure Garment: Sportswear

Product proliferation: The rate of introduction of new lines

Technical Garment: In terms of complexity of design and manufacture.

Technical Product Testing: Performance testing of functional garments

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TABLE OF CONTENTS

ACKNOWLEDGEMENTS I

ABSTRACT II

GLOSSARY OF TERMS III

1 INTRODUCTION 1

1.1 BACKGROUND TO THE PROBLEM BEING INVESTIGATED 1

1.2 INTRODUCTION TO THE AREA OF RESEARCH 2

1.3 PURPOSE OF THE STUDY 3

1.4 LIMITATIONS OF THE RESEARCH 3

2 DETAILED DEFINITION OF THE PROBLEM BEING STUDIED 4

2.1 RESEARCH QUESTION 4

2.2 HYPOTHESES 4

3 RESEARCH METHODOLOGY 4

4 LITERATURE REVIEW AND DISCUSSION OF RELEVANT THEORY 6

4.1 APPAREL RETAIL INDUSTRY 6

4.1.1 Product life cycles in apparel retailing 7

4.1.2 Demand uncertainty in apparel retailing 7

4.2 SUPPLY CHAIN MANAGEMENT WITHIN THE APPAREL INDUSTRY 9

4.2.1 Forecasting 9

4.2.2 Accurate response 10

4.2.3 Forecasting based on early sales 11

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4.2.4 Agile Vs Lean Supply Chain 12

4.2.5 Lead Time Optimisation 13

4.3 DEMAND BASED MANAGEMENT 14

4.4 MASS CUSTOMISATION 15

4.5 PARTNERING 17

4.5.1 Why firms are moving toward partnership 17

4.5.2 What is partnership 17

4.5.3 Partnership models 19

4.6 INFORMATION COMMUNICATION AND TECHNOLOGY 21

4.7 VERTICAL INTEGRATION 27

4.8 VALUE STREAM MAPPING 29

5 FINDINGS DISCUSSION AND ANALYSIS 30

5.1 ZARA 30

5.1.1 Operations 31

5.1.2 Demand Based management 35

5.1.3 Mass Customisation 39

5.1.4 Partnering 39

5.1.5 Information Communication and Technology 40

5.1.6 Vertical Integration 42

5.2 CAPE STORM 43

5.2.1 Operations 44


5.2.3 Partnering 49



5.3 HYPOTHESIS TESTS 51


5.3.2 Mass Customisation 53

5.3.3 Partnering 54



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6 CONCLUSIONS AND WHERE APPROPRIATE RECOMMENDATIONS 58

7 REFERENCES 59

WEBSITES 63

REFERENCED TEXT 63

8 APPENDICES 64

LIST OF FIGURES Figure 1: Product life cycle Uncertainty. Source: Hammond (2001)........................................ 7

Figure 2: Merchandiser's forecast without sales history and forecast based on first two weeks

of sales Source: Fischer et al (1999) ....................................................................................... 12

Figure 3: Relationships along the supply chain (Source: Anderson et al, 2000) .................... 21

Figure 4: Translation of Hagel and Brown’s three-tiered architecture (Source: Authors) .... 23

Figure 5: Stages of supply chain maturity (Source EOH presentation) .................................. 24

Figure 6: Value Chain outsourcing possibilities (Source: McKinsey Retail 1999)................. 26

LIST OF TABLES

Table 1: Partnership Types___________________________________________________ 18

Table 2: Zara's Remarkable Inventory Carrying Costs _____________________________ 31

Table 3: An overview of Zara's operations _______________________________________ 31

Table 4: Cape Storm Inventory Carrying Costs ___________________________________ 43

Table 5: An overview of Cape Storm's operations _________________________________ 44

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S UP ERVI S ED BY : P ROF . NO RM A N F AULL J A MES BREN NAN AND MARGOT MCM A STE R PA GE 1

1 INTRODUCTION

1.1 BACKGROUND TO THE PROBLEM BEING INVESTIGATED

Historically, companies have competed on the basis of lowest manufacturing costs and

highest product quality. Today, companies increasingly compete to provide the consumer

with the right product at the right place and the right time (Anderson, Lee 2000). Kotler

(2000) suggests that this indicates that competition has changed to that of competing supply

chains. This makes supply chain management (SCM) a critical discipline for companies

today.

Speed to market and flexibility in the supply chain are the key drivers that it is believed will

shape the future for businesses around the globe. Remarkable achievements in these areas

have sparked an interest in both academics and business people alike resulting in the study of

successful supply chain models in order to understand what aspects can be transferred.

The apparel retail industry is especially susceptible to fickle fashion trends and as a

consequence will benefit a great deal from a supply chain that responds rapidly to consumer

demand.

Zara, a Spanish retailer, has emerged as a global leader in apparel retailing differentiating

itself with a supply chain and sourcing capability that effectively embraces the concept of

flexibility and speed to market making it a prime source of study.

Addressing a forum of fifty top USA retailers, Prof. Warren H. Hausman (2002)

acknowledged Zara’s efficient supply chain model. In a comparison to key competitor, Marks

and Spencer’s (M&S) he highlighted that Inditex, Zara’s parent company, has a market

capitalization of $12.9 billion, compared with Marks and Spencer’s market capitalization of

approximately $12.7 billion. Moreover, Inditex’s turnover is about 25% the size of M&S at

approximately $3 billion in sales (based on most recent fiscal-year results). This investor

confidence reflects market sentiment that Zara is truly a leader in apparel retailing being

described as “…the organisation to watch, for any company in any industry that cares about

time to market, customer focus, and streamlining business processes."

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Zara’s speed to market and flexibility have been achieved through selective partnering and

efficient use of ITC and by means of a vertically integrated operation that spans: design, Just-

In-Time production, marketing and sales. Their model is one of mass customization and

demand management aimed at delivering higher margins through fewer stock outs and mark

downs, quicker time to market and lower inventory carrying levels than the industry standard.

Currently trading through more than 500 stores in 33 countries Zara boasts:

• An average of 20% growth per annum since 1990

• An Inventory to sales ratio of 7% versus an industry average of 13%

• Time to market for a new line, from start to finish, of three weeks versus an

industry average of nine months

• A 15% start of season commitment to production versus an industry average of

60%

• A design team that creates 5-8 new designs daily

• A four-week limit to the sale of any individual style, no matter how well it is

selling

• The introduction of new products into stores twice a week

• 70% of the product range changes every 2 weeks

1.2 INTRODUCTION TO THE AREA OF RESEARCH

The benefits to Zara’s supply chain are obvious. What is not so obvious is exactly how Zara

attains these remarkable achievements and what aspects of their supply chain model can be

transferred to other supply chains.

South Africa supply chains face similar issues to other supply chains and as such could

possibly benefit from a deeper understanding of leading supply chains, such as that of Zara’s.

Cape Storm, a functional apparel retailer in South Africa demonstrates a supply chain

remarkably similar to that of Zara’s when mapped on paper (see Appendices 1 & 2).

However, execution and use of supply chain elements differ. It is through a more detailed

understanding of how each of these supply chains function that we hope to highlight

differences and possible opportunities.

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1.3 PURPOSE OF THE STUDY

This study will focus on Cape Storm, a functional outdoor apparel retailer and Zara, a fashion

apparel retailer.

The purpose of this study is two-fold:

I. To understand the efficiencies of Zara’s “winning formula” supply chain

model

II. To explore the possibilities associated with extending this model to Cape

Storm

1.4 LIMITATIONS OF THE RESEARCH

This research is limited for the following reasons:

• We focused on a particular type of apparel retailer, which we will refer to as a functional

apparel retailer and as such, our findings may be restricted to this type of retailer.

• We undertake to use case base research and make use of a single case. As Leonard

Barton (1990) notes: “Single cases have limitations. The first is the limits to the

generalisations of the conclusions, models or theory developed from one case study.

When only one case is used, there may also be other potential problems. These include

the risks of misjudging of a single event, and of exaggerating easily available data.

These risks exist in all case research, but are somewhat mitigated when events and data

are compared across cases”

• Furthermore, our research on Zara is desk based or remote. We are reliant on available

literature to develop our understanding of the company’s model. In order to increase the

validity of this model, where possible, we have made use of multiple sources to cross

reference information.

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2 DETAILED DEFINITION OF THE PROBLEM BEING STUDIED

2.1 RESEARCH QUESTION

Is Zara’s supply chain model1 appropriate2 to South African apparel retailer Cape Storm?

2.2 HYPOTHESES

Zara’s supply chain model will be appropriate if, in its entirety or sections of it, will add value

to Cape Storm. The following hypotheses will be tested.

H1: Zara’s demand (pull) based management is more appropriate than traditional

supply (push) management.

H2: Zara’s method of mass customization is appropriate.

H3: Zara’s use of partnering in their supply chain is appropriate.

H4: Zara’s ICT model is appropriate.

H5: Zara’s vertical integration of the supply chain is appropriate.

3 RESEARCH METHODOLOGY

The research methodology to be employed in this study will be case based research.

A case study is a history of a past or current phenomenon, drawn from multiple sources of

evidence. It can include data from direct observation and systematic interviewing as well as

from public and private archives. In fact, any fact relevant to the stream of events describing

the phenomenon is a potential datum in a case study, since context is important (Leonard-

Barton, 1990).

To address this technique of study we will aim to employ triangulation. This is the use and

combination of different methods to study the same phenomenon, so as to avoid sharing the

1 Specifically the demand management, partnering, use of ICT and mass customisation of the Zara supply chain. 2 It is noted here that “appropriate” is defined as achieving either shorter time to market or greater flexibility.

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same weaknesses (Cook and Campbell, 1979; Campbell and Fiske, 1959; Jick, 1979). As such

the following combination of methods will be used.

Firstly a literature review relevant to the subject area of study will be undertaken. The

literature review is intended to contextualise our research within the framework of current

literature and academic thought. It is also aimed at deepening the researchers’ understanding

of the area of study and as such will serve as a basis of comparison when testing the

hypothesis.

A second method of data collection will be through interactions directed at the principle

informant1, Cape Storm. These interactions will take the form of one or more of the

following:

• Structured interviews

• Unstructured interviews and exchanges

• Personal observation

• Informal conversations

• Attendance at meetings and/ or events.

• Feedback to Cape Storm management to confirm validity of findings

We believed that an objective way to begin these interactions was through the use of value

stream mapping (VSM) (Section 4.8). For Zara, this entailed a desk-based approach. For Cape

Storm this took the form of value stream mapping exercises held with principle informant(s).

We hoped to contextualise our examination of both Zara and Cape Storm’s supply chains and

in particular the production facilities in each company through the use of high level or

overview value stream maps (Appendix 1: Cape Storm’s Value Stream Map (Overview) and

Appendix 2: Zara’s value stream map (Overview)).

1 Voss, Nikos and Frohlich describe the principle informant(s) as the person(s) “who are best informed about the

data being researched”.

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4 LITERATURE REVIEW AND DISCUSSION OF RELEVANT THEORY

4.1 APPAREL RETAIL INDUSTRY

The past few decades have witnessed some dramatic changes in industry. The 1970’s saw the

advent of the quality improvement drive with Total Quality Management (TQM) leading the

fore. The following decade, the 1980’s, brought with it a new competitive landscape, ushering

in lean manufacturing. Concepts such as Just-In-Time (JIT), flexible manufacturing and zero

inventories were introduced with the view to achieving manufacturing excellence. Since the

1990’s the focus has shifted again to globalisation. This has forced the disintegration of many

industries, shortened product life cycles, increased the need for outsourcing, highlighted

expanding product variety and driven advances in technology.

The apparel industry has not escaped these changes and has been subject to additional trends.

In the mid 1980’s Asia became the preferred market for many products. Most of the

traditional apparel infrastructure was radically altered and Asia set the benchmark with high

quality at low prices. Most retailers began searching the world for the best prices and the

percentage of sourced buying soared.

Currently many retailers continue to blur the line between themselves and manufacturer.

Sourcing has become the norm for many supply chains with E-Commerce and E-Sourcing

growing into major avenues for these businesses. The wave of globalisation is forcing

mergers and acquisitions, creating a fast changing retail landscape that increasingly limits the

possibility for retailers to establish an independent presence in uncharted territory. These

consolidations are opening opportunities for smaller players.

The responsibility of managing inventory is continually shifting up the value chain towards

the manufacturers while assembly of the final product is moving down the supply chain and

as close to the customer as possible (owing to the increased need of mass-customisation).

Furthermore, market trends indicate that a significant number of apparel manufacturers have

their manufacturing and assembly offshore. This is in order to achieve lower production costs

through significantly lower labour costs as well as the economies of scale realised through

centralised production. However, off shore production has resulted in longer lead times,

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greater inventory carrying in the supply chain and reduced ability to respond to market

demand.

4.1.1 Product life cycles in apparel retailing

The apparel retail market has notoriously short product life cycles, predominantly attributed to

fickle fashion trends and increasingly demanding customers (due to heightened customer

education levels and increased availability of a variety of products, a result of globalisation).

Hammond (2001) observes that during the early stages of a product’s life cycle, demand

prediction is difficult because of the lack of demand history. Similarly, at the end of a

product’s life cycle, as the product becomes obsolete, demand prediction is uncertain and

keeping inventory has a high carrying cost.

Figure 1: Product life cycle uncertainty. Source: Hammond (2001)

4.1.2 Demand uncertainty in apparel retailing

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Markdowns are a key indicator of how well matched supply and customers demand is. The

significant growth in markdowns indicates a notable mismatch between supply and demand.

Fisher and Raman (1999) point out that despite this huge oversupply, consumers aren't finding

what they want in stock. Referring to the Kurt Salmon Associates Annual Consumer Outlook

Survey of 1998, 70% of apparel consumers enter a store with a clear idea of an item they want

to buy, but 49% leave without buying because they can't find what they want. Of these, 67%

can't find the item in their size.

‘Innovative’ products like fashion apparel have relatively short product life cycles,

unpredictable demand with historically long lead times. These short product life cycles,

together with the uncertainty of market demand compounded by retailers’ inability to respond

to market demand due to long lead times have resulted in increasing stock outs and

markdowns for retailers.

Fisher & Raman (1999) list three reasons demand management for short lifecycle products is

challenging:

• The demand patterns for these products make estimation of demand and demand

variability extremely difficult.

• Traditional forecast methods usually assume at least one year of demand history is

available, which is not possible for short life cycle products since they generally have a

life cycle that's less than one year.

• The cost of carrying inventory is much higher for short lifecycle products because of the

risk of obsolescence. This necessitates inventory-planning algorithms that are more

precise than those that have been developed for functional products.

Furthermore, Hammond (2001) states that there is a correlation between demand uncertainty

and sales volume, product life cycle and product proliferation.

Increased product proliferation means that demand will be divided over a growing number of

stock-keeping units (SKUs). Even if manufacturers and retailers can forecast aggregate

demand figures with some certainty, it is becoming increasingly difficult to predict how that

demand will be distributed among the many SKUs they sell. As products proliferate and

become more susceptible to changing whims, the risk grows that a given product line will

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have disappointing sales and have to be discounted. But if a manufacturer decides to go lean

on inventories, it runs the risk of stock outs, lost sales, and endangered relationships with the

chains (Abernathy et al, 2000). Additionally, low sales volume products tend to have

relatively higher demand uncertainty.

The combination of these factors denotes the challenge supply chains face to ensure product

supply or availability is accurately matched with market demand. Underlying this is the

challenge of keeping product obsolescence low, developing an ability to respond to market

signals as well as the ability to develop accurate demand forecasts and update these based on

recent information makes demand management a critical factor facing apparel retailers in

today’s market.

4.2 SUPPLY CHAIN MANAGEMENT WITHIN THE APPAREL INDUSTRY

The ideal scenario for retailing is being able to offer the right product in the right place at the

right time for the right price. However, this proposal remains frustratingly elusive. Managing

supply chains effectively is a complex and challenging task, due to the current business trends

of expanding product variety, short product life cycle, increasing outsourcing, globalisation of

businesses, and continuous advances in information technology. This section discusses some

of the current thinking on supply chain management within the apparel industry.

4.2.1 Forecasting

It is inaccurate forecasting which leads to stock outs and markdowns. To address this

problem, many managers have turned to one or another popular production-scheduling

system. But quick-response programs, Just-In-Time (JIT) inventory systems, manufacturing

resource planning, and the like while effective, do not eliminate the issues inherent in supply

chain forecasting. For example, a tool like manufacturing resource planning may allow a

manufacturer to rapidly change the production schedule stored in its computer when the

original forecast and plan need adjusting. Creating a new schedule does not help, though, if

the supply chain has already been filled using on the old forecast.

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Similarly, quick response and JIT address only part of the overall picture. A manufacturer

might hope to be fast enough to produce in direct response to demand, virtually eliminating

the need for a forecast. But in many industries, sales of volatile products tend to occur in a

concentrated season, which means that a manufacturer would need an unjustifiably large

capacity to be able to make goods in response to actual demand. Using quick response or JIT

also may not be feasible if a company is dependent on an unresponsive supplier for key

components.

Lee et al (1997a) introduces a phenomenon known as the “Bullwhip effect”. It describes how

the distortion of information as it moves through the supply chain can result in costly

inefficiencies. These are introduced through excess inventories (due to each stage in the

supply chain carrying surplus inventory to hedge against supplier inefficiencies), slow

response times, longer lead times, and lost profits due to stock outs, greater obsolescence,

overreactions, unnecessary interventions and second-guessing. Literature suggests that more

open, frequent, and accurate information exchange companies can eliminate many of these

problems and ensure ongoing improvement and that by working closely together, companies

and their suppliers can create highly competitive supply chains.

4.2.2 Accurate response

The accurate response approach to forecasting demand was first proposed by Fisher et al in

1994. It entails outlining what forecasters can and cannot predict well. It further suggests

means of making the supply chain fast and flexible in order that managers can postpone

decisions about their most unpredictable items until they have some market signals such as

early-season sales results, to help correctly match supply with demand.

This approach incorporates two basic elements that other forecasting and scheduling systems

either totally or partially lack.

• It takes into account missed sales opportunities. Forecasting errors result in too little or

too much inventory. Accurate response measures the costs per unit of stock outs and

markdowns, and factors them into the planning process. Most companies do not even

measure how many sales they have lost, let alone consider those costs when they

commit to production.

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• Accurate response distinguishes those products for which demand is relatively

predictable from those for which demand is relatively unpredictable. It does this by

using a blend of historical data and expert judgment.

These two elements help companies rethink and overhaul the designs of their products as well

as important aspects of their supply chains, including the configuration of their supplier

networks, schedules for producing and delivering unfinished materials, transportation and the

number and location of warehouses.

It is theorised that companies, empowered with knowledge of which products have

predictable demand and which do not, can then take different approaches to manufacturing

each class of product. Those products with relatively predictable demand should be made the

furthest in advance in order to reserve greater manufacturing capacity for producing items

with unpredictable sales demand closer to the selling season. This strategy has the possibility

of allowing companies to make smaller quantities of products with unpredictable demand in

advance. Selling information can then be used to determine how well the different goods are

faring and therefore which products to make more of.

4.2.3 Forecasting based on early sales

In ‘Rocket Science Retailing is almost here, are you ready?’(2000) Fischer, et al maintain that

of their work on short life-cycle products, their findings about forecasting based on early sales

are “the most robust empirical findings”. This study showed that in all cases, forecasts derived

using subjective judgment were quite poor, while forecasts developed from intelligent

interpretation of initial sales data were dramatically more accurate.

In the example used by Fischer (1999), forecasts made in advance of any sales information

had forecast errors ranging from 50% to 100% with an average of 55% compared to the 8%

error of forecasts for the same products developed by a simple extrapolation of the first two

weeks of demand.

This suggests that a simple extrapolation of a small amount of early sales data could provide

forecasts that are dramatically more accurate than the initial 'gut-feel' forecasts.

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Ideally, information from the marketplace should flow as far upstream and in as close to real

time as possible. In this way all the parties in the supply chain work to the same information

and reduce their dependency on the forecast.

Figure 2: Merchandiser's forecast without sales history and forecast based on first two weeks of sales

Source: Fischer et al (1999)

4.2.4 Agile vs lean supply chain

Christopher (2000) proposes the key to survival in turbulent and volatile markets is agility.

Where agility is a business-wide capability that embraces organisational structures,

information systems, logistics processes and, in particular, mindsets, having the key

characteristic: flexibility. Christopher (2000) specifically defines agility as ‘the ability of an

organisation to respond rapidly to changes in demand both in terms of volume and variety’.

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Lean manufacturing is about doing more with less, to imply a ‘zero inventory’, Just-In-Time

approach. Many companies that have adopted lean manufacturing as a business practice are

anything but agile in their supply chain.

Within a mixed portfolio of products and markets there will be some products where demand

is stable and predictable and some, where the converse is true. In these cases, a hybrid, lean-

agile, supply chain strategy is appropriate. As Fisher (1997) has pointed out it is important

that the characteristics of demand are recognised in the design of supply chains.

The aim of the agile supply chain should be to carry inventory in a generic form - that is,

standard semi-finished products awaiting final assembly or localisation. This is the concept of

‘postponement’, a vital element in any agile strategy.

The point at which real demand penetrates upstream in a supply chain may be termed the

decoupling point. The challenge to supply chain management is to seek to develop ‘lean’

strategies up to this decoupling point but ‘agile’ strategies beyond that point. This is achieved

by using generic or modular inventory to postpone the final commitment it should be possible

to achieve volume-oriented economies of scale through product standardisation. The flow of

product up to the decoupling point may well be forecast driven; after the decoupling point it

should be demand driven.

4.2.5 Lead time optimisation

The ability to meet customer demands in ever shortening delivery times and to ensure that

supply can be synchronised to meet the peaks and troughs of demand is clearly of critical

importance in this era of time-based competition.

Key to achieving flexible demand response to fast-changing markets lies upstream of the

organisation in the quality of supplier relationships. Often it is the lead-time of in-bound

suppliers that limits the ability of a manufacturer to respond rapidly to customer requirements.

Supply chains by their very nature will contain a number of elements. These supply chain

partners often have different objectives. In particular, upstream companies (manufacturers and

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material suppliers) are focused on maximum capacity utilization rather than on flexibility.

Their cost structure is such that a single week of downtime can erase many weeks of

profitable production. Hence they are booked long in advance, setting long lead-times or

alternatively slow response times.

Fischer et al (1997), propose that replenishment quantities should arrive after a lead-time. The

shorter this lead time, the greater the proportion of demand that can be supplied based on

forecasts, and the better the match between supply and demand over the life of the product.

The initial shipment should be big enough to cover the expected demand over the 'read' period

and the replenishment lead-time, plus a hedge to protect against stock-outs given the highly

inaccurate initial forecasts.

4.3 DEMAND BASED MANAGEMENT

While supply chain management deals with the buy-side of the enterprise, demand based

management addresses the sell-side of the enterprise. A major problem in most supply chains

is the limited visibility of real demand. Supply chains tend to be extensive with multiple

levels of inventory being held between the point of production and the final marketplace.

Thus supply chains tend to be forecast driven (push) rather than demand driven (pull)

Christopher (2000).

Lee (2001) defines demand-based management as managing the instruments used in

influencing demand. These include pricing, promotions (discounts, rebates, etc), assortment,

shelf management and deal structures (terms and conditions, price protection, return policies,

etc).

In order to make the right decisions regarding these instruments, the organisation must:

• Understand the impact of changing the levels of these instruments on the demand

for the product under consideration, as well as all related products

• Recognize the management objectives and constraints faced by the enterprise

• Incorporate the true supply chain costs corresponding to the demand resulting

from the use of these instruments

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• Link Demand-Based Management decisions with supply chain planning and

execution decisions, so that demand can be anticipated and met with the right

amount of inventory. Otherwise, either excessive leftover inventory or stock-outs

will result

• Carefully measure and monitor actual performance

Lee (2001) continues by listing ten keys to demand based management in retail (Appendix 3:

Lee’s 10 Keys to Demand Based management in Retail). In this, he highlights that “The consumer

must benefit”. This supports findings by Bruce et al (2000) who purport that significant

opportunities exist for supply chains that focus on the customer. The point in a supply chain

where a product is planned, ordered and replenished is often a source of major disruption. By

focusing on the customer and the demand side and by marrying demand with supply, Bruce et

al (2000) suggest that major disruption can be avoided. Theory proposes that the bullwhip

effect can be significantly reduced by centralising demand information and integrating

demand with supply. As Kurt Salmon Associates (1993) point out, reducing the bullwhip

effect can cut costs in the retail supply chain by 12.5 to 25%

4.4 MASS CUSTOMISATION

No longer satisfied with mass produced standard products, consumers are becoming more

demanding and market demand is therefore becoming less predictable. Customers are looking

for tailored solutions to meet their specific and rapidly changing needs. Supply chains are

required to be in touch with as well as responsive to the end customer. Changes in technology,

consumer preferences, and the inefficiency of seasonal manufacturing have led to a revolution

in manufacturing. Where once competitive advantage was governed by the lowest price, the

modern consumer is looking for differentiation.

According to Managing Change (1998), “individuals now want to be seen and treated as

individuals and many are prepared to pay for this. In many businesses, 20% of total customers

provide 80% of profits but in many cases these profitable customers are discriminating. They

want to have products that meet their particular needs.”

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Christopher (2000) states “the aim of the global supply chain should be to carry inventory in a

generic form, i.e. standard semi-finished products awaiting final assembly or localisation.”

This concept is known as postponement, or delayed configuration. It is based on the principle

of seeking to design products using common platforms, components or modules but where the

final assembly or customisation does not take place until the final market destination and/or

customer requirement is known.

The advantages of postponement include:

• Holding inventory at a generic level. This results in fewer stock-keeping

variants and hence less inventory in total

• Generic components allow greater flexibility

• Forecasting is easier at the generic level than at the level of the finished item

• Local customisation allows for a higher level of variety at lower total costs

Gilmore and Pine II (1997) identified four approaches to mass customisation namely:

• Collaborative customisation is appropriate for businesses where customers, compelled

to choose from a wide range of options, become frustrated. Collaborative customisers

“conduct a dialogue with individual customers to help them articulate their needs, to

identify the precise offering that fulfils those needs, and to make customized products

for them.”

• Adaptive customisation is appropriate for businesses whose customers require a

product to perform in different ways in different circumstances. “Adaptive customisers

offer one standard, but customisable, product that is designed so that users can alter it

themselves.”

• Cosmetic customisation is appropriate for businesses whose customers, while requiring

differentiation in presentation, will use the product in the same way. “Cosmetic

customisers present a standard product differently to different customers.”

• Transparent customisation is appropriate to businesses whose customers’ needs are

known but who want to feel that goods are produced specifically with them in mind.

“Transparent customisers provide individuals with unique goods or services without

letting them know explicitly that those products and services have been customized for

them.”

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While these four approaches are unique in the way in which customisation occurs, they all

have in common the understanding of changing consumer requirements as well as an

understanding that the mass production of undifferentiated goods will no longer allow a

company to gain competitive advantage.

4.5 PARTNERING

4.5.1 Why firms are moving toward partnership

The growing trend toward globalisation coupled with a progressively more demanding

customer base has resulted in increased pressure on companies and supply chains to deliver

products and services of a higher quality, more quickly and at lower prices.

Companies are therefore moving towards one of two trends:

• Focusing on core activities and outsourcing “peripheral” activities

• Forging partnerships with suppliers and/ or customers

Both of these are aimed at creating highly competitive supply chains that reap benefits such as

increased market share, inventory reductions, improved delivery service, improved quality

and shorter product development cycles.

4.5.2 What is partnership

Academic literature is littered with various definitions of the term partnership. Lambert,

Emmelhainz, Gardner, (1996a) describe it as a “customised business relationship based on

mutual trust, openness, shared risk and shared rewards that yields a competitive advantage,

resulting in business performance greater than would be achieved by the firms individually.”

Ellram (1995) adds the dimension of information sharing: "an agreement between a buyer and

a supplier that involves a commitment over an extended time period, and includes the sharing

of information along with a sharing of the risks and rewards of the relationship." La Londe

and Cooper (1989) define a logistics partnership as "a relationship between two entities in a

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logistics channel that entails the sharing of benefits and burdens over some agreed upon time

horizon”

Three levels of partnering between the extremes of an arm's-length relationship and a joint

venture have been identified namely: Type I, Type II and Type III.

Table 1: Partnership types

Type I. The organisations involved recognize each other as partners and, on a limited basis, coordinate activities and planning. The partnership usually has a short-term focus and involves only one division or functional area within each organization

Type II The organizations involved progress beyond coordination of activities to integration of activities. Although not expected to last "forever," the partnership has a long-term horizon. Multiple divisions and functions within the firm are involved in the partnership.

Type III The organizations share a significant level of integration. Each party views the other as an extension of their own firm. Typically no "end date" for the partnership exists.

Source: Douglas M. Lambert, Margaret A. Emmelhainz, and John T. Gardner, "So You Think You Want a

Partner?", Marketing Management 5 (Summer 1996b: 28)

Furthermore, Lambert et al (1999) define drivers as “Strategic benefits that will result from

strengthening a relationship: asset/cost efficiencies, enhanced customer service, marketing

advantage, and profit growth/stability.” These authors purport that for a partnership to

succeed, each party must have sufficient drivers and that if “both parties do not perceive, and

do not have a realistic chance of obtaining significant benefits from the relationship, then it

will fail.”

Partnering introduces other phenomenon that can seriously impact the partnership and/or the

individual businesses involved. Lieb and Randall (1996) suggest that the most serious

concerns include:

• The potential for loss of direct control over logistics activities

• Uncertainties about the service level to be provided

• Questions concerning the true cost of outsourcing

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Ellram (1995) further identifies poor communications, lack of top management support, lack

of trust, lack of supplier total quality management programs, poor up-front planning, lack of

strategic direction for the partnership, and lack of shared goals.

While Ackerman (1996) adds the most common reasons that partnerships fail are:

• A lack of understanding between the parties about the job to be done

• Over-promising and under-delivering by the seller

• Deliberate attempts by personnel in the buying firm to make the partnership

fail

• Unprofitability for the seller and subsequent poor service

• No orderly process for separation

Stuart and McCutcheon (1995) suggest that for the most part, these causes of conflict fall

into two general categories:

Category I: A mismatch in perceptions over the appropriate degree of

partnering

Category II: Improperly executing the partnership building process

4.5.3 Partnership models

Literature identifies several models for partnership identification and development. Stuart

(1993) highlights key factors for determining the degree of partnership that should exist based

on the degree of joint problem solving and sharing of benefits that could be achieved, the

level of committed resources and the potential for productivity improvements and competitive

advantage gains.

Gardner, Cooper, and Noordewier (1994) developed a strategic model of partnership

formation and management with five stages: choosing a partnership strategy, choosing a

specific partner or partners, designing the partnership, evaluating the partnership, and

evaluating the partnership strategy.

Ellram (1995) adds a distinct five-stage process specifically directed at purchasing

partnerships and identifies specific selection criteria for potential partners. These stages are:

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• The preliminary phase

• Identifying potential partners

• Screening and selecting partners

• Establishing relationships

• Evaluating the relationship

Bagchi and Virum (1996) present a twenty-two step model aimed a logistics alliance

formation, control and management. The framework is comprised of three phases namely:

• Identify the need for the alliance

• Plan and manage the alliance

• Manage operations, measurement, and control

The benefit of these models is that they have the potential to assist businesses in determining

whether partnerships are required. The suggested criteria for selecting a supplier are a means

by which this relationship can be structured and managed.

Literature seems to fall short in the area of determining the type of relationship to choose (e.g.

a long-term, arm's-length contract or a partnership) as well as failing to recognise the

uniqueness of each partnership, treating each relationship the same. One thing that is clear

however is the increased benefits to highly evolved relationships in a supply chain. Anderson

et al (2000) illustrate the scope of impact and the benefits of the evolution of relationships in a

supply chain.

Increasing capabilities and benefits

Scope of Impact

Across alliance

partners

With customers

& Suppliers

Between business

functions

With business activities

Optimisation Integration Collaboration Synchronisation

Step 3: Virtually synchronise the supply chain across players into one logical enterprise

Step 2: Improve collaboration and control with vendors and customers

Step 1: Integrate functions of the existing supply chain

Synchronised

Collaborative

Integrated

Traditional

Increasing capabilities and benefits

Scope of Impact

Across alliance

partners

With customers

& Suppliers

Between business

functions

With business activities

Optimisation Integration Collaboration Synchronisation

Step 3: Virtually synchronise the supply chain across players into one logical enterprise

Step 2: Improve collaboration and control with vendors and customers

Step 1: Integrate functions of the existing supply chain

Synchronised

Collaborative

Integrated

Traditional

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Figure 3: Relationships along the supply chain (Source: Anderson et al, 2000)

4.6 INFORMATION COMMUNICATION AND TECHNOLOGY

Popular literature contains numerous examples of studies performed around the increasing use

of information, communication and technology (ICT) and its impact on the global

marketplace but it fails to define exactly what is meant by ICT. The name, information,

communication and technology gives a fair understanding of what it entails but the

boundaries of this definition remain unclear.

One thing that is clear is the increasing importance of leveraging the use of ICT to achieve

new levels of efficiency and innovation and thereby, competitive advantage. A recent study

by ICG I etitled 'The Impact of the Internet on the European Apparel Market' purports that a

typical retailer could more than double profitability over the next 4-5 years by using

integrated ICT solutions in the supply chain. It also asserts that those failing to adopt such

solutions could see their profits evaporate. This finding is understandable when one considers

that the supply chain includes, amongst others, the supply storage and movement of materials,

information, personnel, equipment and finished goods within the organisation and between it

and its environment (Meredith and Shafer 2002). Embedded in this chain are “generic” supply

chain management issues such as stock outs, markdowns, high inventory carrying costs and

unresponsive supply chains which further supports Quinn’s (1997) argument that total supply

chain costs represent more than fifty percent, and in some cases up to seventy-five percent of

the total operating expenses for most organisations. From this, it is evident that supply chains

must seek to understand ICT if they hope to successfully compete in contemporary

marketplaces.

For the most part, ICT considers the ways in which organisations share information, how they

communicate and the technologies they use to support varying functions both within the

organisation and beyond its borders. Initially, these functions were highly differentiated

between intra- and inter- organisation uses. That is to say, the way an organisation employed

ICT for its internal functions was very different to those used in dealing with the outside

world. Today, these differences are becoming less evident as companies move toward a single

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fully integrated enterprise solution that will allow them to maintain a single solution for both

intra- and inter-organisation interaction. The result is that ICT is becoming more standardised.

So, exactly what are the aspects of ICT that firms are employing? John Hagel and John Seely

Brown (2001) propose a three-tiered architecture. At its foundation, it includes a software

standards layer, a service grid, and an application services layer (Figure 4).

I Internet Capital Group The Impact of the Internet on the European Apparel Market (November 2000)

This architecture describes a holistic view of the use of ICT in an organization and supports

flexible collaboration, not just within a single firm, but also in the extended enterprise because

it is based on common standards for information and communication. For this reason, this

architecture is particularly suited to the boundary of an enterprise (i.e. activities that occur

between companies and their suppliers or customers). Simply translated, it depicts the

following:

Tier 3 is the “highest level” in the architecture. As such it is the layer that users are more

likely to interface with. This layer will therefore include those services that facilitate the

everyday functioning of the organizations. These will include, off the shelf and proprietary

software packages that support business processes such as production scheduling, inventory

management, forecasting, marketing, costing etc.

Tier 2 lies underneath this layer and is named the service grid. A simplistic view is that this

layer provides the physical network as well as the functionality to utilize, co-ordinate and

manage that network and the applications that run off it. As such, this layers serves to support

the tier 3 layer through the provision of networks, shared utilities, resource management

utilities and transport management utilities to name but a few.

Tier 1, the software standards layer, includes developing and maintaining information

standards (i.e. how information is presented and shared), communication protocols (i.e.

determining how different layers and components “talk” to each other) and software standards

(i.e. software standards that enable organisations to share software applications).

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While advances in all three layers are important in understanding the increased use of ICT in

organisations, it can be argued that the development of software standards has had the greatest

influence. Taking into account that the failure to develop robust communication and

information standards would have prevented the success of software standards, one cannot

ignore how vital software standards are in understanding how different organizations with

different ICT solutions interact.

It is the development of software standards such as XML that have allowed the translation of

“personalized” ICT solutions into common or standardized versions that can run on any

platform. The popular use of the World Wide Web in this regard has been the driving force

behind this standardization. It has allowed organisations to develop “stand alone” applications

that can be viewed and used by anyone in the world. This has revolutionised the way

organisations do business and more importantly, in the light of this paper, how supply chain

management has been revolutionised.

Software standards Layer

Service Grid

Application Services Layer

Tie

r 1

Tie

r 3

Tie

r 2

Software standards e.g. XMLInformation standards e.g. RosettaNetCommunication protocols e.g. HTTP and TCP/IP

Shared utilities – e.g. security, authentication and performance assessmentSpecialized utilities for service management e.g. provisioning, monitoring,

synchronization, conflict resolutionResource knowledge management -e.g. directories, brokers, data transformationTransport management - e.g. message queuing, filtering, metering, routing

Application services that support everyday business processes such as production scheduling and inventory management

Software standards Layer

Service Grid

Application Services Layer

Tie

r 1

Tie

r 3

Tie

r 2

Software standards e.g. XMLInformation standards e.g. RosettaNetCommunication protocols e.g. HTTP and TCP/IP

Shared utilities – e.g. security, authentication and performance assessmentSpecialized utilities for service management e.g. provisioning, monitoring,

synchronization, conflict resolutionResource knowledge management -e.g. directories, brokers, data transformationTransport management - e.g. message queuing, filtering, metering, routing

Application services that support everyday business processes such as production scheduling and inventory management

Figure 4: Translation of Hagel and Brown’s (2001) three-tiered architecture (Source: Authors)

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Theoretically there are a number of benefits to be gained from using ICT concepts in the

supply chain. Numerous authors have suggested the potential of ICT for individual functional

areas such as marketing (McKenna, 1997), purchasing (Ellinger and Daugherty, 1998) and

logistics. Additionally, ICT is expected to make the flow of goods transparent (Bowersox and

Daugherty, 1995). In support of this, Lee et al (1997) identify the relevance of information

exchange in avoiding one of the best known problems in the supply chain, that of Lee’s

bullwhip effect.

Until very recently, the relatively limited range and reach of information and communication

technologies together with the costs of capturing, transmitting, exchanging, and accessing

remote information had limited supply-chain design to a very restricted set of options. These

co-ordination requirements include the ability to share information about customer demand,

products and production schedules, capacity and inventory and costs and prices. In many

cases, the challenges associated with managing the necessary integration between the

manufacturing and operations processes of different firms led firms to own functions and

processes where they had no special advantage. Companies were constrained by costly and

functionally limited point-to-point technology solutions, which are based on Electronic data

interchange (EDI) over Value added network (VAN) services (Gurbaxani 2002).

Figure 5: Stages of supply chain maturity (Source EOH presentation)

With the emergence of global telecommunications networks, Internet, intranets, the World

Wide Web and sophisticated communication and information solutions, comes the ability to

Stage 1:Functional Focus

Stage 2:Internal Integration

Stage 3:External Integration

Stage 4:Cross-Enterprise Collaboration

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co-ordinate and integrate operations and strategy across the supply network. This has had a

direct influence on the organisation’s ability to radically re-design supply chain models.

A recent EOH study found that cross-enterprise collaboration is on the increase (Figure 5). It

seems that with the ability to broaden their solution spaces, organizations are moving toward

an integrated networked approach to supply chain management. In view of this, McKinsey

Retail has highlighted sections of the value chain that it believes are increasingly being

outsourced (Figure 6).

A variety of approaches to this networked business model have been witnessed. For example,

trading exchanges have emerged to provide the connectivity and standards necessary to

integrate the operations of multiple partners. Exchanges have been launched by independent

companies attempting to create neutral marketplaces for the buying and selling of goods and

services within specific verticals, and across verticals. In other cases, large competitors have

banded together in consortia to facilitate the purchasing aspects of their operations, while

others are facilitating the selling activities through industry exchanges (e.g. Orbitz in the

airline industry). In general, these consortium-based approaches attempt to be inclusive,

inviting many industry participants to join the exchange. A different model is that of the

private trading exchange (PTX) - also called a private hub - in which a supply chain leader is

linked to its suppliers and customers. Forrester Research (Favier et al, 2001) defines a private

hub as an online venue, controlled by a single firm, that supports integration and collaboration

with selected partners (Gurbaxani 2002).

By virtue of the above developments, even the smallest of businesses now have the potential

to trade in the global economy. Assessments have been made that the rate of innovation, in

terms of product/service outputs, the production/delivery processes and consequently

consumer preferences/markets will continue to increase more rapidly and result in increased

complexity (Rycroft and Kash, 1999). This fundamental change in the approach to interfacing

with elements of the supply chain and the marketplace (Ritchie and Brindley, 1999) has lead

to increasing pressures on the management of supply chains due to:

• Demand for greater value add in each component of the supply chain

• Globalization and trade liberalization resulting in greater competitive pressures

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• Demand for lower prices on goods sold resulting in demands for cost

reductions in the supply chain

• Increased speed of delivery and flexibility in the supply chain through demand

for greater internal coordination as well as increased coordination of the value

chain

• Greater demand for improvement of external collaboration

• Increased customer demands such as the demand for improved quality and

customer relations

Figure 6: Value Chain outsourcing possibilities (Source: McKinsey Retail 1999)

While the ability to communicate effectively and to share information exists, the

implementation, maintenance and co-ordination of ICT solutions across a value net or supply

chain are a highly complex and a difficult reality to achieve. It seems that the majority of

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firms are struggling with scenarios of supply chain re-design while considering investment1,

technical, organizational and networking factors, B2B or B2C solutions and the implications

of the global e-commerce market.

Another model, being adopted by an adventurous few, is that of integrating components of

ICT into the existing business model while leveraging the benefits and gains from innovative

use of ICT to secure a significant competitive advantage. In the apparel retail market the most

notable player to have achieved marked success at this is Zara. This company uses ICT as an

effective intra-organisation communication tool to manage a tight production schedule that

leverages highly sophisticated and “cutting-edge” manufacturing processes to achieve a tact-

time of two weeks for the commercialization of new product lines, from design center to shop

floor.

Above and beyond these “cutting edge” technologies used by Zara is the underlying 3-tier

architecture discussed earlier. While Zara has not leveraged this technology to conduct e-

business, it makes extensive use of its ICT capabilities in integrating and communicating with

its suppliers and outsourced manufacturing modules.

4.7 VERTICAL INTEGRATION

The need for flexibility and responsiveness is of growing importance as the nature of

competition continues to change from one of price and quality to one of timing and

placement. Richardson (1996) notes that vertically integrated firms have gained the lead in

implementing process innovations designed to shorten production cycles. These firms

generally demonstrate the element required to link flexibility and fast cycle manufacturing

with rapid learning about demand and customer desires.

Vertical integration is not generally considered a superior form of organisational structure in

volatile environments. Its very nature limits a business’ ability to morph. The risk associated

1 Within an organization, each company will need to acquire the necessary server hardware, and third-party

software including B2B middleware, a Web server, translation tools for data transformation, and of course the

applications and underlying databases. It is also worth noting that the software solutions available today are still

evolving implying that upgrade and maintenance costs will run high.

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with capital investment and the inability to rapidly downsize or upgrade is often also a

prohibitive factor in supply chain integration. This sentiment is echoed by Prahalad and

Hamel (1990) and Quinn (1992) who note that firms in volatile competitive environments

should focus on their core competence and look for ways to apply it in amore or less

temporary arrangements with other firms.

On the other hand, Harrigan (1983) argues that potential benefits to vertical integration, even

in volatile environments, can be realised. These include product differentiation that is difficult

to imitate as well as superior marketing intelligence, both gained through forward integration.

An indicator of the potential benefits from this integration is the degree of value added at that

stage (Richardson, 1996). In apparel retailing, the retail environment appears to be a

significant factor in product differentiation. Store appearance and atmosphere, merchandise

mix, service and local marketing efforts are all significant elements of the fashion apparel

business.

Agency theory1 aids in understanding the costs and benefits of vertical integration. The

central idea behind agency theory is that firms, in a competitive environment, will organise

the value chain of activities in their industry in the most efficient manner. That is, they will

either organise successive activities within one firm or use exchanges between separate firms

depending on which approach minimises agency and other transaction costs (Richardson,

1996). The challenge for the firm is to find a combination of activities and co-ordination

mechanisms that pay off given the dynamics of the industry. Reve (1990) captures this in his

model of agency theory in which he argues that the hierarchy of the firm is seen as a co-

ordination mechanism for managing suppliers and buyers. Describing alternatives that include

various forms of alliances or bilateral vertical agreements as well as market exchanges, Reve

(1990) posits that full integration of an asset, skill or capability is only necessary when these

are highly specific.

A firm is vertically integrated when it owns assets (Grossman and Hart, 1986) organises

activities (Riordan, 1990) or controls activities (Reve, 1990) in successive stages of the value

1 Agency theory includes agency models (Jensen and Meckling, 1976), transaction cost theory (Williamson,

1988) and Principal-Agen models (Grossman and Hart, 1986)

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chain. When exchanges are characterised by uncertainty over inputs, infrequent exchange, and

the need for transaction specific invests, Agency Theory predicts that at times, it may be more

efficient to vertically integrate, that is, bring two successive activities within the firm

(Williamson, 1988).

The central issue behind vertical integration in the retail industry appears to be that of control

rather than ownership. The benefits of vertical integration can often be more efficiently

obtained through vertical agreements than by ownership. However, in the apparel industry,

assets and capabilities along the value chain are at low risk of obsolescence with volatility

sitting mostly in the end market. As such, the only major drawbacks to vertical integration in

this industry are the potential for introducing management complexities, greater variety

necessitating more extensive expertise.

4.8 VALUE STREAM MAPPING

In June 1998 the Lean Enterprise Institute launched the Lean Took Kit with its first module:

Learning to See (Rother and Shook). The second module, Seeing the Whole (Jones and

Womack) was added in March 2002.

The value of this holistic approach is that it increases the understanding of the context within

which a business is operating. Awareness of issues that come out of this context is essential

to effect good research in terms of our methodology being employed, that being triangulation.

Value stream mapping essentially focuses attention on charting the flow of individual

product families within a plant from receiving to shipping. It brings to light areas that can be

optimised in the value stream by focusing on the entire flow of the product as opposed to

isolated processes along the value stream or aggregated activities serving many value streams.

Furthermore it aims to highlight non-value adding activities such as storing, picking, packing,

shipping, unpacking, binning, checking, reworking and information movements thereby

providing sources for improving responsiveness, quality and flexibility and waste elimination.

At every level, information processing and physical transformation of the product is observed

and recorded. Customer desires in terms of orders or schedules are observed moving up the

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value stream, while the progress of products, in terms of raw materials and finished items

(inventory) is observed moving downstream in response to this information.

A current state map is first drawn. This snapshot is then analysed and successive future state

map(s) are developed, detailing enhancements to the value stream. Coupled with an action

plan for implementation, these maps have proved invaluable to organisations around the globe

providing significantly compressed and smoothed value streams containing a fraction of the

original steps and dramatically reduced throughput times.

5 FINDINGS DISCUSSION AND ANALYSIS

5.1 ZARA

Zara, a Spanish apparel retailer, is part of the Inditex group that was formed by Amancio

Ortega who started out as a lingerie manufacturer in 1963. The first Zara store was opened in

1975 with resounding success and has grown to over 500 Zara stores in 33 countries.

Speed to market is the benchmark by which Zara operates and the whole company is geared

towards getting affordable, demand driven, designer-look fashions to its stores with minimum

risk. Zara achieves a time to market, from design completion within 3 -15 days (average 7 – 8

days).

Both forward (retailing and market research) and backward (design, fabric and dyeing)

integration of core activities was adopted early on when business grew and Ortega became

frustrated with inefficiencies in his supply chain. Non-specialised functions are outsourced to

some 400 workshops and co-operatives in the surrounding area of Galicia and in Portugal

(Barrie, 2002). This vertical integration has leant itself well to achieving efficient time to

market, high flexibility and response times with low working capital invested in inventory.

This in turn has resulted in inventory carrying costs significantly lower than that of their

competitors.

As at 31 January 2002, Zara’s working Capital invested in inventory was as follows:

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Table 2: Zara's remarkable inventory carrying costs

Item % Of annual sales

Raw materials 1.4%

Work in progress 0.6%

Finished goods 8%

This compares favourably against an industry average of 13% for finished goods alone. In

addition, Zara has markdowns of 15 - 20% during half yearly sales versus 30 – 40% amongst

traditional apparel retailers. The advantages of this world-beating time to market combined

with these benefits more than offset the higher local manufacturing costs.

5.1.1 Operations

Table 3: An overview of Zara's operations

External

Production

• Approximately 40% of garments - those with the broadest and least transient appeal – are imported as finished goods from low-cost manufacturing centres in the Far East.

Internal

Production1

• Approximately 60% of garments are produced by quick-response in Spain, using Zara’s own highly automated factories and a network of smaller contractors (Christopher, 2000).

• Zara’s current operation has at its centre a 16-factory complex from which some 12,000 styles are dispatched to Zara's shops each year.

• Zara creates, selects and cuts the fabrics treated and finished in its own mills, and makes its own patterns.

• Products are assembled by some 400 workshops and co-operatives in the surrounding area of Galicia and in Portugal (Barrie, 2002).

Raw material

Procurement1

• Inditex (Zara’s parent company) is the sole owner of Comditel, a procurement company, which supplies Inditex 40% of its finished fabric requirements. No single external supplier accounts for more than 4% of supply. 65% of all fabrics are sourced in Europe, 33% Asia and 4% elsewhere (Singh, 2002) In addition to sourcing fabric, Comditel also sources all findings (e.g. zips and buttons) and trims.

• Over 50% of fabrics are purchased un-dyed as ‘greige’. Materials are

1 Located in Inditex’s Industrial Production Area -La Coruna

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ordered prior to design, which requires those procuring materials to be familiar with textile trends and to have a close relationship with the designers.

Raw material

Finishing1

• Material or fabric is also held in ‘greige’ i.e. un-dyed and unprinted and if demand for a particular garment turns out to be higher than expected then local manufacturers can quickly manufacture additional product (Christopher, 2000).

• The dyeing process is highly automated and the machinery used is capital intensive. Inditex has engaged in a significant partnership in Fibracolour (39.97% owned by Inditex) ensuring optimum service. The postponement of the treatment of fabric ensures optimum flexibility to be responsive to market demand, enabling Zara to minimise their stock outs. Hence holding un-dyed textile is less risky than finished garments.

Design 1

• Zara’s design team is 250 strong, all relatively young designers. At the beginning of each season, after walking the streets, visiting fashion shows and night clubs, a team of 55-60 designers, prepare a portfolio of templates that are used as the platform for the next season’s styles. These designs can be altered or new designs created as the season moves along. Successful designs are slightly altered either in colour, styling, material or accessories. This ongoing modification of the initial collection is based on demand and feedback from stores.

• The demand planning function is managed within the design team. Designers talk daily to store managers, to discover which items are most in demand, to review product sales performance and discuss customer feedback. Supported by real-time sales data, they then feed repeat orders and fresh designs into the manufacturing plant. When a store manager sends in a new idea to the designers, they decide if it's appealing, if so, they come up with specs (Echikson, 2000a). The design teams use computer aided design (CAD) tools to create prototypes that are kept at Head Office. Designs are scanned into computer and then electronically transmitted to production computers in the factory.

• 5-8 new designs are created every day. All new designs are developed using materials currently in stock. Since the sourcing of fabric takes place prior to design, the supplier lead-time for materials does not impact on Zara’s time to market for new products.

• Zara books production in advance, but confirms precise design


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requirements at the latest possible time. Most retailers have committed 60% of their production at the start of a season; the figure at Zara is 15%. This delayed production allows Zara to dump a range that turns out to be unpopular earlier in the production cycle and at a lower cost than would otherwise be the case.

Test Shops • Zara use early sales as basis to forecast demand. Customer interest for every new product design is measured through a certain number of test shops. Specific software, based on mathematical algorithms, is applied to identify future ‘hits’ and which products to drop. Identified winners are scheduled for mass production at single runs of 100 000 to 350 000 (Harle et al, 2002).

Fabric

Cutting1

• The manufacturing plant is futuristic, with huge clothes-cutting machines that are run by a handful of technicians in a laboratory-style computer-control centre (Echikson, 2000b).

• The 17 factories are semi specialised cutting facilities, organised by garment type. The process is highly automated with the cutting equipment being computer controlled.

• Small production batches of 25-30 SKUs can be undertaken, providing increased flexibility.

Internal

Logistics

• Once the fabric is cut into product components, these are distributed to a network of 400 small co-operatives/ workshops. Every 2 -3 days small trucks deliver the garment pieces with sewing assembly instructions to the co-operatives. The logistics are owned and managed by Inditex.

Assembly

and stitching2

• Inditex has outsourced this labour intensive part of their supply chain to over 400 co-operatives/ workshops, none of which are owned by Inditex. The workshops are garment specific and assemble products exclusively for Zara.

• The partnerships established are collaborative with benefits being realised for both parties: Zara ensures visibility, communication and efficiency by installing their own ICT system across all workshops. In addition Zara manages the logistical support provided to deliver high quality, small flexible lot sizes. In return, the workshops are guaranteed turnover.

• The workshops are supplied with pre-cut pieces and easy-to-follow instructions. Workers then stitch the pieces into finished products.

1 Located in Inditex’s Industrial Production Area -La Coruna 2 Outsourced Partners (Co-operatives and Workshops) Located in Spain & Portugal

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• These workshops between them employ some 11,000 grey-economy workers. Most of the informal economy workers the workshops employ are mothers, grandmothers and teenage girls looking to supplement their household income.

• The workshop network gives Zara a high degree of production flexibility.

Washing,

Ironing, and

Packing1

• Once the products have been sewn, they are brought back to the Industrial Production Centre to be washed, ironed and packed.

Distribution

Centre 1

• The distribution centre is a four storey 500 000 sqm building, opposite Inditex’s Head Office. The top two floors are used for hung apparel and the lower two floors for folded apparel and accessories. It is connected to 14 of the Zara factories through a maze of tunnels. These are linked with 211 km of moving rails suspended from the roof with cables that carry the merchandise.

• Every 2 -3 days small trucks visit each workshop, collecting completed garments to bring them to the distribution centre

• The primary role of the distribution centre is to sort and stage assortments for shipping to the stores. Most finished garments are only in the distribution centre for a couple of hours. A small percentage of garments are stored. Every item is checked twice for quality. Selected, sorted, rerouted, and restored – some automatically, some with the help of warehouse workers.

• Bunches of clothes on hangers or in suspended racks, each supported by a metal bar with a series of bars that spell out a mechanical code (an address) that indicates where exactly in the warehouse the bundle must end up. These garments travel along the underground tracks, electronically tagged, from Zara's adjoining manufacturing plants to the individual store specific chute that ensures each order reaches its right destination. Optical reading devices sort out and distribute more than 60,000 items of clothing an hour (Helft, 2002).

• Every store has its own staging area. As soon as a stores order is ready, it is carted directly to a loading dock. Trucks are packed by delivery route, in order of delivery.

• Deliveries are scheduled (received, packed and shipped) by time zone.


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Everything from the sequence and size of deliveries to truck routes and rail configurations are tweaked to meet requirements (Helft, 2002).

Shipping • Deliveries are shipped to the stores between 2 and 6 times a week. • Trucks service the European stores within 24 hours of leaving the

distribution centre. • Stores outside of Europe have their product air freighted and they

receive it within 48 hours of it being shipped. Retail Stores • The stores receive 2 - 6 deliveries per week, with new lines received

twice weekly. This constant replenishment and refreshment requires lower inventory carrying than traditional apparel retail and stimulates higher repeat visits.

• Zara's store managers are regarded as organisational intelligence gatherers. They carry handheld computers to communicate daily selling trends, consumer comments, store orders, and design suggestions to both the design and distribution departments. Deliveries are triggered by real-time inventory data collected through a network of computer handsets feeding through the Internet into computers in La Coruna (Helft, 2002).

• Product ticketing historically took place at the distribution centre, with a single ticket carrying the pricing information for all markets Zara operate in. However with the number of markets growing, tickets were becoming cluttered. In order to simplify pricing for customers Zara has reverted to tickets that only carry the price relevant to the country in which the item is being sold. This requires different tickets for different markets. To achieve effective ticketing with minimal disruption or complication to operations at the distribution centre, Zara have morphed their systems so that this stage can be executed at store level.

5.1.2 Demand based management

5.1.2.1 Response times

Speed to market and flexibility of the supply chain are believed to be the key drivers that will

shape the future of the retail apparel industry. Zara undoubtedly sets the world standards

through intelligent use of demand-based management.

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Zara pre-positions material, capacity and design concepts to enable high-speed response to

market demand. Lee (2001) states, “Their Demand-Based Management sophistication enables

them to introduce new products every week, amounting to 12,000 new products introduced

each year...”

According to Hausman (2002), “Zara's success is based on extreme responsiveness: a garment

can go from design to manufacture to store shelf in about ten days!” This rapid production

capability enables Zara to respond immediately to consumer buying patterns and keep the

product line fresh. Hausman (2002) elaborates, “Contrary to popular perception, Zara does not

carry out each activity at superhuman speed. Instead, detailed medium-term resource planning

sets the stage for high-velocity response in the short-term. Capacity is implicitly booked with

a network of garment manufacturers. Imported material is bought ahead of time and pre-

positioned for use. Similarly, designers create a portfolio of style platforms ahead of the

season and create new designs by slightly modifying them just before production.”

This allows Zara's designers to respond to the smallest shifts in fashion. Zara minimizes risk

by producing in small batches, which can then be increased quickly in line with demand.

Designs can be tweaked at the last minute in response to fashion trends. If an item does not

sell, production can be scrapped immediately and substituted quickly, with limited inventory

already in the system.

5.1.2.2 Intelligence gathering

Zara functions on pull demand. It links demand based decisions with supply chain planning

and execution decisions so that demand is anticipated and met with the correct amount of

inventory. This is achieved through careful measuring and interpretation of early market data

to establish production forecasts. This is followed by extensive and continuous intelligence

gathering to understand demand in order that forecasts can be modified or improved. This

supports the idea that centralised demand information minimises the bullwhip effect.

In Ultimate enterprise value creation using demand based management (2001) Lee. states,

“Zara has employed a combination of extensive data collection and monitoring, coupled with

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a labour-intensive process to analyse the data to arrive at decisions on their marketing

instruments

Customer feedback is a key differentiator, since the design team act on this information.

Feedback from the quality of garments to the colours customers would like to see in the

stores. If a style is not selling, staff will ask customers what they think of the garment and

feed this information back to the design team. It is the way Zara fine-tune their collections.

Zara's managers are intelligence gatherers. Every day, they report on what shoppers are

demanding and what they do not like. Zara staff is known to visit university campuses, discos

and other venues to observe what the young and hip are wearing. In addition they have “trend

spotters” around the world, who file daily reports on what's hot, as well as "commercials,"

who track and report product movement in-store and scan popular media for clues about

what's next in fashion (Vitzthum, 2001).

All this information is fed back to a young, multi-lingual team of regional managers who sit

around a long, communal desk fitted with lots of phones and computers. They are the nerve

centres of Zara's operations. Designers in Spain then check a database for these dispatches

and daily sales numbers, using the information to create new lines and tweak existing ones.

5.1.2.3 Customer focus

Zara focuses on their customers. This supports finding by Lee (2001) and Bruce et al (2000)

who suggest that major opportunities exist in this practice.

To this end, Zara uses a strategy that encourages frequent store visits and ensures a level of

“Zaramania” in its customers through passive consumer education.

This strategy entails conscious undersupply of products, which is perceived by Zara as more

desirable than holding slow-moving or obsolete stock. In addition, product life cycles are

limited to four weeks with 70% of the product range in stores changing every 2 weeks. This

approach keeps Zara up-to-date with ever evolving fashion trends without ever appearing

dated or targeted to the masses.

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Customers are conditioned into purchasing immediately, if they see something they like,

because it won't necessarily be in the store when they return in the future. This availability

limit has created additional demand through customers visiting and purchasing more

frequently than the current market average. This concept of finding something new every

week is familiar to Spaniards, however elsewhere customers have needed, “a little bit of

coaching in the Zara shopping experience” (Crawford, 2001).

The trend of shorter fashion cycles is to some extent consumer-led, affected by shorter

attention spans and fast changing cultural influences which are picked up by designers.

5.1.2.4 Forecasting

Zara’s business model is flexible enough to cope with sudden changes in demand. Production

is consciously kept at a level slightly below anticipated demand, in order to keep stock

moving.

Zara responds to actual demand as opposed to merely forecasting anticipated sales. This

model minimizes the risk of being saddled with lots of unsold stock, and it maximizes

demand fulfilment through quick response to market demand.

Zara’s forecasting is based on demand testing in pre-selected “test stores”. Merchants

systematically examine early sales data to estimate future demand for various products. They

conduct this analysis for every product at pre-determined periods in its sales cycle, re-

ordering accordingly. Examination of the first weeks of sales data results in an improvement

of planning accuracy, which results in a more accurate meeting of consumer demand.

This approach is more objective than that used by most competitors, who manufacture most

of their collections in advance, which involves guessing what consumers will want six or nine

months down the line.

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5.1.3 Mass customisation

Historically, differentiated garments were only affordable at higher price points. Zara sell

their innovative designs at mid market prices, defining their offerings as “the democratisation

of fashion”. They use cosmetic customisation to differentiate products (that will serve the

same end use) in terms of presentation.

Mass customisation is made possible by keeping in touch with customer preferences and

having the ability to respond to the market demand. Zara achieve this through their agile

supply chain being able to respond immediately to the intelligence they gather, in terms of

customer preferences, market trends and current sales patterns.

Carrying fabric in a generic format and having a supply chain which can produce and ship

products to store in short lead times, allows Zara to tweak and modify garments based on

feedback from their stores. This form of postponement provides Zara the opportunity to

develop production schedules based on daily demand data gathered by Zara’s sales people.

Customer feedback drives product evolution. Seasonal template modification is expedited by

limiting the product life cycle of every garment to four weeks. This makes room new or

revised production schedules as well as new designs. Product that is not received well by the

market is kept to a minimum as a result of the low inventory carry levels.

Zara’s ability to sustain its market position is the change in what Gilmore and Pine II (1997)

refer to as ‘the mass-market mind-set’. They state that: “Adept mass customisers realise that

customising the actual product is only one way to create customer-unique value. Customising

the representation of the product, or how it is presented or portrayed to the customer, can be

effective as well.”

5.1.4 Partnering

Zara has established strategic business links with independent firms through the outsourcing

of labour intensive functions (sourcing, stitching and assembly). These partnerships enjoy

mutual trust and openness yielding a competitive advantage and resulting in enhanced

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performance. Relating this to Lambert et al (1996b) model, this would be defined as Type III

partnerships.

An interesting approach to partnering seems to have developed in Zara’s value chain. It would

appear that a high level, strategic view of the supply chain has been taken and those elements

that provide differentiation in terms of deliverable times and/ or those elements representing

core competencies have been retained by the company. Labour intensive and non-core parts

of the value chain have been outsourced.

Evidence of the agency theory also comes into play here where Zara have deemed partnering

more appropriate than ownership. Zara has leveraged partnerships representing critical value

chain parts in order to provide guaranteed success and a degree of control through substantial

investments in these firms.

5.1.5 Information communication and technology

As detailed earlier in this report, ICT considers the ways in which organisations share

information, how they communicate and the technologies they use to support varying

functions both within the organisation and. beyond its borders.

So, exactly what are the aspects of ICT that firms are employing? John Hagel and John Seely

Brown (2001) propose a three-tiered architecture. At its foundation, it includes a software

standards layer, a service grid, and an application services layer (Figure 4).

While the ability to communicate effectively and to share information exists, the

implementation, maintenance and co-ordination of ICT solutions across a value net or supply

chain are a highly complex and difficult reality to achieve. Firms are struggling with scenarios

of supply chain re-design while considering investment1, technical, organizational and

1 Within an organization, each company will need to acquire the necessary server hardware, and third-party

software including B2B middleware, a Web server, translation tools for data transformation, and of course the

applications and underlying databases. It is also worth noting that the software solutions available today are still

evolving implying that upgrade and maintenance costs will run high.

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networking factors, B2B or B2C solutions and the implications of the global e-commerce

market (McMaster 2002).

Zara appears to be calmly integrating components of ICT into its existing business model all

the while leveraging the benefits it gains from their innovative use of ICT to gain a significant

competitive advantage in the apparel retail market

For fabric cutting and manufacturing, suffice to say that Zara employs the most advanced

machines in the continued drive toward quality, flexibility and fast deliveries. On the

distribution side, Zara owns a sophisticated, multi-level distribution centre that is fully

automated. Optical reading devices scan electronic tags attached to each item. Quality checks

are performed using advanced visual scanning technologies after which a product is

distributed to one of two places. Those items destined for stores connected by underground

rail and tunnels are dispatched to be received in the stores private staging area. Products

scheduled for “regular” stores are packed, in order of delivery, with shipments destined for

other stores on the same delivery route. Additionally, deliveries are scheduled (received,

packed and shipped) by time zones and transported by either truck or aeroplane.

All of the above co-ordination, tracking and routing is controlled by advanced information

systems. As mentioned above, Zara invests heavily in these systems. Spearheading this

crucial investment has been José Maria Castellano, 53, Inditex's CEO since 1984

He seems to appreciate the fundamental requirement of Zara’s business model to obtain and

understand real-time information. In this regard, he has called for innovative ways of

communicating this information. One such innovation is the equipment of sales staff with

wireless handsets. These are used to communicate inventory levels to store managers, who in

turn use internet-connected phone lines to pass the numbers on to both the design/order and

distribution departments. This information is then translated into information relevant to each

department and it triggers (pulls) new orders through the supply chain.

A further addition to the Zara technology is the use of hand-helds/ digital cameras to transmit

images as well as data from remote locations to design centres. These centres are already

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equipped with computer aided design software and communications solutions, which allow

the sharing of new designs.

Above and beyond these “cutting edge” technologies used by Zara is the underlying 3-tier

architecture discussed in section 4.6 “Information, communication and technology” While

Zara has not leveraged this technology to conduct e-business, it makes extensive use of its

ICT capabilities in integrating and communicating with its suppliers and outsourced

manufacturing modules.

5.1.6 Vertical integration

Based on the definition of vertical integration developed earlier (section 4.7), Zara is

vertically integrated: it owns assets, organises activities and controls activities in successive

stages of the chain (Reve, 1990). This integration spans procurement, design, Just-In-Time

production and sales.

Zara is heavily invested in capital-intensive advanced information systems, textile finishing

operations and manufacturing technology. They produce, 50% of their product by value,

internally. The remainder (e.g. leather goods, fragrances and some apparel) is manufactured

by third parties. The in-house production model includes a closely monitored outsourced

portion in which products are sewn by external workshops (labour-intensive) located

primarily in Spain and Portugal.

As a result of this vertical integration, Zara has more control over its supply chain than their

competitors. This gives the group the flexibility to respond to fickle fashion trends. This

supply chain model has resulted in higher margins, fewer stock outs and mark downs, quicker

time to market and lower inventory carrying levels than their competitors.

According to Reve’s (1990) scale Zara uses a hybrid of bilateral vertical agreements as well

as market exchanges and traditional vertical integration. They can be seen as being virtually

vertically integrated because there is a high degree of collaboration with their partners. This

collaboration is enhanced by providing the ICT network across all partners and through the

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provision of logistics to support the co-operatives/ workshops allowing the entire supply chain

to be closely connected and highly synchronised with a high level of visibility and control

over the supply chain.

5.2 CAPE STORM

Cape Storm is a relatively young functional outdoor apparel retailer formed by two

individuals who through personal experience in adventure sport identified a need in the

market for functional, active, outdoor apparel products. Today, the company offers a

comprehensive range of these products that cater for a number of activities including

adventure racing, cycling, mountaineering, running, ski-boarding as well as trek and travel.

The benchmark by which Cape Storm operates is the delivery of high quality, technically

advanced design and sound products to discerning customers.

Cape Storm has two types of customer:

• End User – Customers that purchase directly from the retail concept stores and/or

wholesale retail stores (functional and/or leisure wear end users).

• Wholesalers – Customers who purchase for the purpose of on-selling to functional and/

or leisure wear end users.

The company demonstrates vertical integration from design through to retail. Non-specialised

functions are outsourced as is excess capacity requirements. Lean manufacturing is practiced

where possible but the nature and size of the business coupled with the business environment

in South Africa does not lend itself well to this.

Cape Storm’s working capital invested in inventory, as at 21 November 2002, was as follows:

Table 4: Cape Storm’s inventory carrying costs

Item % Of Annual Sales

Raw Materials 5.5%

Work in Progress 4.2%

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Finished Goods 14.9%

Total Inventory 24.6% of Annual Sales

5.2.1 Operations

Table 5: An overview of Cape Storm's operations

Design • Members of the management team drive new product development. Their personal passion for many of the activities, for which the products are designed, is reflected in their product. These individuals are not specifically dedicated to this function and so new product development is an organic process. It is influenced by a number of different sources, including new fabric technology, customer feedback or requests.

• Product range reviews are undertaken every six months. Last year, 40 new products were introduced.

• Specialist users are consulted by the design team post product conception in order that performance criteria for the product are understood. Once these requirements are established, the design team will specify the nature of the fabric required to meet the desired level of performance. A prototype of the product is then manufactured for performance testing.

• Demand planning is a separate function. Performance

Testing

• The functional and performance nature, of end use of certain products in Cape Storm’s range, require significant performance testing prior to release into the market.

• This process ranges from a couple of days up to a couple of years depending on the nature of the product.

Demand Testing

- Concept Stores

• Cape Storm uses their concept stores to test demand for new product. • Manufacture is internal giving the ability to manufacture small

batches for demand tests. Successful products are produced for stock, and offered to the wholesale customers. Unsuccessful product is discontinued.

Raw material

Procurement

• Fabric is purchased for production (i.e. post design). • Many of Cape Storm’s products demand the use of highly technical

fabrics. • Ongoing research and development of this fabric manufacture and

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finishing is both a highly specialised and capital intensive. • 70% of all raw materials are supplied by global suppliers, with 20%

coming from national suppliers and 10% from Local suppliers. • Supplier minimum order sizes result in Cape Storm having to carry

high levels of fabric inventory. • Supplier lead times range from 1 to 3 months, and the reliability of

national as well as local suppliers is inconsistent. • All fabrics are supplied completely treated and dyed and tend to be

garment specific. Pattern Cutting • For high volumes, pattern cutting is outsourced to a partner with

automated facilities. • For lower volumes it is more economical for this process to be done

by a manual process, internally. • Cape Storm’s range of products varies in technical complexity. Basic

garments comprise of 10 components while highly technical and functional performance products comprise of up to 110 components.

• The knowledge of these performance products has resulted in the manufacture of these being a core competency.

• Cape Storm has three types of production processes: internal from design to completion, external cut make and trim (CMT) and outright purchase. Currently product type determines the process used.

Internal from design to completion

• Accounts for 48% of sales value. • Cape Storm has four internal production lines. These are used to manufacture high-end performance product. Production is done in batches, with the exception of sleeping bags and prototype product were the approach is that of a job shop.

Production

External Cut Make and Trim (CMT)

• Accounts for 47% of sales value. • Cape Storm makes use of four local CMT operations and plans to add an additional two next year. The CMT's are provided with pattern, findings and fabric, they manufacture and package the garment and then deliver the product back to the Cape Storm factory.

Outright purchase

• Accounts for 5% of sales value. • Bike wear, aerobic wear and gloves are all purchased outright from specialist manufacturers. These suppliers are responsible for the entire production process (from receipt of Cape Storm’s order to the delivery of

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finished goods to the warehouse). • Production scheduling is done on a 3 month rolling basis with the production plan being updated weekly and external production capacity booked four weeks in advance. The production scheduling is driven by economic order quantities rather than small batches.

Embroidery • After the products are manufactured either internally or externally, the final stage in the production is logo embroidery. This is done internally for small production runs but outsourced for larger ones.

Quality Control,

Ticketing and

Packing

• Every item is checked twice, manually, for quality. • All products are ticketed, without pricing information since each

wholesale customer has their own pricing policy. • Currently there is no bar coding; there are however plans to introduce

this. Warehouse/

Distribution

Centre

• Product is held in the warehouse/ distribution centre until it is either sold to wholesale customers or called off by concept stores.

• Concept stores order product twice per week while wholesale customers order product as required.

• 90% of all orders are dispatched from stock within 24 hours of order receipt.

• Order capture, assembly and checking are all manual processes. There are plans for the introduction of bar-coding in order to automate the data captures process.

Shipping • Deliveries to the concept stores as well as local wholesale customers are done by internal logistics.

• Deliveries outside Cape Town are done by a national distribution firm.

Concept Stores • The concept stores receive a minimum of 2 deliveries per week, which enables them to keep low levels of inventory. After receiving the delivery the store staff check the delivery, ticket the product with pricing information and receive the inter branch transfer (IBT) on the store electronic point of sale (EPOS) system.


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The nature of the outdoor apparel industry in South Africa is one where wholesale customers

expect distributors to carry sufficient stock to be able to supply on demand. Cape Storm’s

wholesale customers do not commit to any form of future orders, or provide any form of

forecasting. As a result Cape Storm produces to stock, based on internal forecasting;

consciously producing less than anticipated demand in order to ensure that excess inventory is

not produced which will then need to be marked down.

Cape Storm’s concept stores are the company’s flagships. They are used to position the brand,

by showcasing the entire range of product in strategic locations.

Functional performance products are generally considered durable long-term purchases. This

influences frequency of purchase on these items and translates into lower frequencies than

that of a fashion product with limited “shelf-life”. Product range changes are conventionally

based on product life cycles and seasonality. This is reflected in the low product proliferation

(rate of introduction of new lines) at Cape Storm regardless of the diverse product range.

Cape Storm find product life cycles average between 3-5 years. This is attributed to the

technical and functional nature of the product resulting in a slow rate of adoption in the initial

stages of the product’s life cycle. Additional complexities exist in the diverging requirements

between retail and wholesale stores. Concept stores require regular new product introductions

while wholesale customers are resistant to high product proliferation, since this increases the

demand uncertainty, and hence their own ability to forecast resulting in either missed sales or

markdowns. The nature of the wholesale consumer is slower by comparison. The wholesale

consumers look for consistency therefore they attempt to stretch the product life cycles out.

Concept stores tend to introduce products more rapidly; customers know where to go for the

most advanced garments.

5.2.2.1 Intelligence gathering

Cape Storm encourages store staff to seek feedback on customer perception of products. The

designers’ personal participation and involvement in many of the activities informs the design

process as to what the market is looking for. Where appropriate functional specialists are

consulted in the design of functionally specific products.

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P AGE 48

Market data in the form of global trends in functional apparel retail is also gathered by means

of key management/ design members attending trade shows and global retail stores.

5.2.2.2 Response times

Lead times vary by product; they are dependent on raw material availability as well as

production capacity. The supply chain is not currently set up for quick response. Orders are

supplied from stock. If demand for a particular item significantly exceeds forecasts, then

providing materials are available, the production schedule can be modified to expedite an

urgent order. This is however disruptive, impacting other lines, since production capacity is

scheduled 4 weeks in advance.

5.2.2.3 Forecasting

Cape Storm test demand for new product through their concept stores. While there is a direct

correlation between demand in the concept stores and wholesale customers for certain a line,

this does not hold for all. Since wholesale customers do not provide any form of demand

forecast Cape Storm base their forecast on previous and concept store history. Production

batch sizes are based on these internally forecast demands and an economic order quantity.

5.2.2.4 Customer focused?

This company is more trends focused than customer focused. Cape storm anticipate new

trends that will be applicable to the South African market. The company then produces the

product and attempts to introduce it to the market by means of the concept stores (Push

supply).

5.2.2.5 Mass customisation

Cape Storm’s products are getting more end-use specific with the design process being

informed by consumer feedback as well as functional specialist consultation. After

performance testing of new products is complete, small batches are produced and sold in

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P AGE 49

concept stores. The primary purpose is to test consumer demand and feedback which is

monitored closely during this period. Product evolution is largely based on this feedback and

demand. Cape Storm produce for stock therefore, modified versions are only released once

the previous version has sold out. Hence, the time scale of evolvement for product is a

function of that product’s stock level and customer feedback.

The specific functional nature of the product together with the technical nature of the fabric

used in the product does not allow for much overlap. Fabrics and designs tend to be product

specific. Cape Storm do undertake individual customisation of product be it size alteration of

an existing garment or the manufacture of a specific order. This is however kept to a

minimum.

5.2.3 Partnering

Cape Storm makes use of partners in order to increase production capacity in their supply

chain. These partners manufacture less technical garments while more technical garments are

reserved for internal production. This appears to be a business strategy to limit knowledge

dissemination to competitors and thereby protect a core competency.

Partners are required to prove themselves by producing less technical garments. Over time,

once they have proven their competency, they are upgraded to the more technical garments.

The four cut, manufacture and trim (CMT) operations that Cape Storm currently uses are

product specific:

1 x Trousers and Shirts

1x Active wear

1x Head wear

1x Fleece garments

These partnerships fit Lambert et al (1996b) profile of Type I partnership. These partners are

not exclusive suppliers to Cape Storm with production capacity being booked one month in

advance.

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P AGE 50


Cape Storm demonstrates very little ICT use. Currently, the retail business runs on a different

IT system to the manufacturing business. A third system is maintained for accounting

software. This practice introduces sources for duplication of effort and data capture.

A strategy for the development of ICT in the business has been outlined and the company is

moving toward a more structured and formal business-wide ICT solution. Integrated

technological advances are also being considered (e.g. bar-coding devices).


In the context of their concept stores Cape Storm is vertically integrated from design to retail.

This integration provides Cape Storm with complete visibility of and control over all aspects

of the supply chain. In the context of their wholesale customers Cape Storm is vertically

integrated from design to wholesale. The lack of transparency on the part of their wholesale

customers in this particular supply chain results in Cape Storm having to carry buffer stocks

in order to guard to fulfil customer orders.

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S UP ERVI S ED B Y: P ROF . NOR MAN FA ULL J AMES BRE N NAN AND MARGO T MCM A ST ER P AGE 5 1

5.3 HYPOTHESIS TESTS


H1: Zara’s demand (pull) based management is more appropriate than traditional supply (push) management. The efficiencies of Zara’s model Appropriateness to Cape Storm Response Time • Zara pre-positions material, capacity and design concepts to enable

high-speed response to market demand. Speed to market and flexibility of the supply chain are believed to be the key drivers

• Detailed medium-term resource planning sets the stage for high-velocity response in the short-term. Capacity is implicitly booked with a network of garment manufacturers. Imported material is bought ahead of time and pre-positioned for use (Hausman, 2002).

Intelligence Gathering • Demand is driven through short product life-cycles (4 weeks), product

proliferation (70% of the product range changing every 2 weeks) and supply chain agility (lead times of 3 -15 days to respond to demand generated by these).

Customer Focus • Zara uses extensive proactive intelligence gathering which the design

team act on to drive demand. • Extreme responsiveness: rapid production capability enables Zara to

respond immediately to consumer buying patterns and keep the

Appropriate • Pre-positioning is appropriate for Cape Storm. Long sourcing lead-times

and relatively stable demand forecasts will support this as well as medium-term capacity planning that is already undertaken by Cape Storm.

• Demand testing is appropriate, increased forecasting based on early sales will provide reduce demand uncertainty and hence lower forecasting errors

• Production is currently consciously kept at a level slightly below anticipated demand. This stimulates a buyers panic and ensures more rapid take-up in the market.

• Lead time optimisation and quick response through smaller batches, which allow for more immediate response to demand, might be appropriate as volumes increase.

• Production schedules based on current sales information from concept stores could result in aligned demand and supply and therefore lower inventory carrying costs. This may be overshadowed by the production of stock to hedge against uncertain demand in wholesale customers.

• Pro-active intelligence gathering is appropriate as a means of understanding demand levers, which can be used to align demand and supply.

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product line fresh. This response is to actual demand as opposed to merely forecasting anticipated sales.

Forecasting • Initial demand is forecast through the use complex algorithms based

on early sales data from test stores. • Production schedules are based on current sales information and can

be altered overnight. • Production is consciously kept at a level slightly below anticipated

demand

Inappropriate • Shorter product life cycles and increased product proliferation would not

be appropriate for functional apparel retailing. With volumes already lower, this would only serve to increase demand uncertainty and hence risk.

Hypothesis test: Sections of Zara’s demand based management are appropriate to Cape Storm. Therefore, not enough evidence exists to reject this hypothesis. Possible further research: Would vendor managed inventory (virtual vertical integration) in wholesale customers reduce the demand uncertainty in the supply chain?

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5.3.2 Mass customisation

H2: Zara’s method of mass customization is appropriate. The efficiencies of Zara’s model Appropriateness to Cape Storm

Appropriate • Product evolution based on customer feedback is appropriate because it

will marry demand with supply. • Small production runs may be appropriate as volumes increase. These

will aid in reducing current inventory carrying costs and work in progress.

• Postponement strategies are appropriate to Cape Storm in so far as they eliminate the duplication of tasks. Ticketing could be an area that benefits whereas fabric dyeing and finishing could not be postponed due to the nature of the raw materials being used.

• Products are evolved based on customer feedback. Initial design is based on intelligence gathered about fashion trends in market place.

• Templates are prepared at beginning of each season – small production runs tested in test stores – those accepted go to market and these designs are evolved and production scheduled accordingly. Final assembly or customisation does not take place until the final market destination and/or customer requirement is known.

• Hold fabric in a generic format and have a supply chain which can produce and ship products to store in short lead times, this postponement allows Zara to tweak and modify garments based on feedback from their stores.

• Zara’s sales people actively gather and feed back customer comments to the design team on a daily basis. Their agile supply chain enables them to respond immediately to the intelligence gathered, in terms of customer preferences, market trends and current sales patterns.

• Flexibility of the supply chain is achieved through: • Control of the entire supply chain • Internal manufacturing of raw materials • Design being done based on available fabrics • Small production runs • Visibility of the entire supply chain • Product ticketing is postponed till the product reaches the store

Inappropriate • Templates preparation at the beginning of each season is not appropriate

as functional products are not as subject to fickle fashion trends and seasonality. Also products are developed for specific use and generic templates might not be transferable between products.

• Internal manufacturing of raw materials is not achievable due to the diversity and technical nature of the fabrics.

• Due to the specific functional nature of the garments and technical nature of fabrics used, postponement of fabric finishing is not practical.

Hypothesis Test: Sections of Zara’s mass customisation model are appropriate to Cape Storm. Therefore, not enough evidence exists to reject this hypothesis.

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5.3.3 Partnering

H3: Zara’s use of partnering in their supply chain is appropriate. The efficiencies of Zara’s model Appropriateness to Cape Storm

Appropriate • Currently Cape Storm has a type I partnership model. As the business

grows it is possible that Zara’s type III partnership model will become more appropriate as more established relationships are formed. The current partnership model is a function of volume which will be open to change as volumes increase e.g. Cape Storm’s CMT partners are not currently exclusive to them but agility may be improved as a more exclusive partnership/ bi-lateral vertical agreements can be established.

• Partners produce exclusively for Zara and are garment specific. • Control of the supply chain is retained through the support

infrastructure including an ICT network provided by Za • Zara strategically outsource the labour intensive function of stitching

and assembly. They have deemed partnering more appropriate than ownership of this labour intensive and non-core parts of the value chain. These partnerships enjoy mutual trust and openness yielding a competitive advantage and resulting in enhanced performance (TYPE III partnership according to Lambert et al, 1996b).

• Zara has leveraged partnerships representing critical value chain parts in order to provide guaranteed success and a degree of control through substantial investments in these firms.

Inappropriate • Substantial investments in partnerships are not appropriate at this time for

a business that is seeking to grow its own operations. • Exclusive production rights and strategic control of partners cannot be

realised without some value add for those businesses. Once again this is a function of volume that Cape Storm may be able to apply as volume increases.

Hypothesis Test: Sections of Zara’s partnering model may be appropriate to Cape Storm in the future but do not integrate well with the current business model. Cape Storm's current model of partnering is more appropriate. Therefore, not enough evidence exists to accept this hypothesis.

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H4: Zara’s ICT model is appropriate.

The efficiencies of Zara’s model Appropriateness to Cape Storm

Appropriate

• Zara’s ICT model has been developed in parallel with and is

complimentary to their business model. Appropriate use and capital

expenditure should match both the business model and business needs.

A platform should be created for the appropriate infrastructure to grow

with and according to the organisations needs.

• Effective use of ICT augments transparency throughout the

organisation and is therefore appropriate to Cape Storm.

• The effective use of available technologies boosts efficiency

eliminating redundant and repetitive tasks.

• Zara identified ICT as a key tactic to aid them in achieving their

strategy very early on. ERP solution – 3 tier developed around

business model, making use of cutting edge technologies.

• Zara is heavily invested in capital-intensive advanced information

systems, textile finishing operations and manufacturing technology

• Zara provides the ICT infrastructure for their partners in order to

ensure they have real-time visibility of information up and down the

entire supply chain.

• These include:

o Advanced machines for fabric cutting and manufacturing

o Fully automated distribution centre with optical reading

devices to scan electronic tags attached to each item

o Advanced visual scanning technologies to perform quality

checks

o Automated underground rail and tunnels linking 14

factories with the distribution centre.

o All of the above co-ordination, tracking and routing is

Inappropriate

• Overcapitalisation in advanced technologies would not be appropriate

as investment costs will outweigh benefits. Additionally, such heavy

investment in non-core activities would not be appropriate.

• Supply of ICT infrastructure to partners is unrealistic for Cape Storm

currently. This is due to the level of partnerships that currently exist as

well as the unrealistic capital expenditure that would be required

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controlled by advanced information systems.

o Wireless handsets - used to communicate inventory levels

to store managers, who in turn use internet-connected

phone lines to pass the numbers on to both the design/order

and distribution departments.

o Digital cameras to transmit images as well as data from

remote locations to design centres.

o Computer aided design software for product design

Hypothesis Test: Sections of Zara’s ICT model are appropriate to Cape Storm. Therefore, not enough evidence exists to reject this hypothesis.

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H5: Zara’s vertical integration of the supply chain is appropriate. The efficiencies of Zara’s model Appropriateness to Cape Storm

Appropriate • Cape Storm in the context of their concept stores is already vertically

integrated. • Transparency across the entire supply chain may be appropriate.

• Zara is virtually vertically integrated as a result of the high degree of collaboration with their partners. This collaboration translates into visibility and control over its supply chain.

• This gives the group the flexibility to respond to fickle fashion trends. This supply chain model has resulted in higher margins, fewer stock outs and mark downs, quicker time to market and lower inventory carrying levels than their competitors.

• Zara uses a hybrid of bilateral vertical agreements as well as market exchanges and traditional vertical integration. They can be seen as being virtually vertically integrated because there is a high degree of collaboration with their partners.

Inappropriate • Backward integration into raw materials would be inappropriate due to the

complex nature of research development and innovation. The limited volumes of these fabrics that Cape Storm use, would not justify the capital expenditure required.

• Control of the entire supply chain is not achievable in terms of raw materials requirements.

Hypothesis Test: Sections of Zara’s vertical integration model are appropriate to Cape Storm. Therefore, not enough evidence exists to reject this hypothesis.

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S UP ERVI S ED BY : P ROF . NO RM A N F AULL J A MES BREN NAN AND MARGOT MCM A STE R P AGE 58

6 CONCLUSIONS AND WHERE APPROPRIATE RECOMMENDATIONS

Supply chains strive to provide the consumer with the right product, in the right place and at

the right time. Demand uncertainty is the key variable, influenced by differing drivers in

different industries. This study concludes that certain aspects of Zara’s supply chain model

are applicable to Cape Storm. Since these aspects will add value through either shortening

Cape Storm’s time to market or achieving greater flexibility.

Literature supports what is evident in Zara’s business model in terms of:

• Demand Based Management, where products developed based on grass roots

intelligence and demand testing informs forecasting based on early sales.

• Mass Customisation, where product is evolved in response to consumer feedback. In

order to have the ability to respond the supply chain needs to be a hybrid of lean as well

as agile.

• Partnering, being an opportunity to increase capacity, however the nature of the

partnership is critical.

• ICT, should be developed around the business model in order to augment all other

factors.

• Vertical Integration, providing visibility and control of the entire supply chain. While

absolute vertical integration may not always be desirable virtual vertical integration a

hybrid augmented with appropriate partnering can achieve the same.

While the supply chain models for Zara and Cape Storm appear similar at an overview level,

drilling down into the various components listed above reveals notable differences. Zara’s

fashion based apparel market and Cape Storm’s functional apparel market differ in terms of

the nature of their product, their product life cycles, respective demand uncertainty and the

scale of their operations.

In spite of these significant differences, aspects of supply chain theory and principles related

to demand based management; mass customisation, partnering, ICT and vertical integration

are transferable.

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REFERENCED TEXT I Internet Capital Group The Impact of the Internet on the European Apparel Market (November 2000)

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8 APPENDICES

APPENDIX 1: CAPE STORM’S VALUE STREAM MAP (OVERVIEW)

NationalSuppliers

Global Suppliers

LocalSuppliers Findings

70% 20% 10%

Sourcing Design

Production Control

New designs created when required

55-60

WholesaleCustomers

Concept Stores

3 Stores (WP)

55 Stores National

Warehouse Buffer Stock

I

Stock Control

MANAGEMENT TEAM•Forecasting•Design•New Product Development

2 X Weekly

When required

Testing

•Technical testing up to 6 months.•In-store demand testing

ISmall production run for testing

QualityControl

Stitching& Finishing

Ticketing PackingPattern

Stores

Pattern

Cutting


Manufacturing

Inte

rnal

Exte

rnal

I I I

I II I I

II

NationalSuppliers

Global Suppliers

LocalSuppliers Findings

70% 20% 10%

Sourcing Design

Production Control

Production Control

New designs created when required

55-60

WholesaleCustomers

Concept Stores

3 Stores (WP)

55 Stores National

Warehouse Buffer Stock

II

Stock ControlStock Control

MANAGEMENT TEAM•Forecasting•Design•New Product Development

2 X Weekly

When required

Testing

•Technical testing up to 6 months.•In-store demand testing

ISmall production run for testing

QualityControl


Ticketing PackingPattern

Stores

Pattern

Cutting


Manufacturing

Inte

rnal

Exte

rnal

II II II

II III II II

IIII

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APPENDIX 2: ZARA’S VALUE STREAM MAP (OVERVIEW)

Daily

Daily

Daily

Young designersin the market

Stores

Distribution Centre

FinishingSewingCutting

Accessories supply

In-houseFabric

ManufactureExternal FabricManufacture

Design

Daily2 -6 X

Weekly

Daily

Daily

New line created in 2 Weeks

Washing, Ironing,Packing

SOURCING

Daily

I

I

I

II

I

Production Control

Daily

16 Garment Specific Factories 400 Local Co-Ops Single Centre

Connected to 14Factories by means of Underground tunnels

Ticketing

5-8 new designs daily

55-60

11 000

Garment Specific Factories

2-3 X weekly 2-3 X weekly

Daily

Daily

Daily

Young designersin the market

Stores

Distribution Centre

FinishingSewingCutting

Accessories supply

Accessories supply

In-houseFabric

ManufactureExternal FabricManufacture

External FabricManufacture

Design

Daily2 -6 X

Weekly

Daily

Daily

New line created in 2 Weeks

Washing, Ironing,Packing

SOURCING

Daily

I

II

II

II

II

Production Control

Production Control

Daily

16 Garment Specific Factories 400 Local Co-Ops Single Centre

Connected to 14Factories by means of Underground tunnels

Ticketing

5-8 new designs daily

55-60

11 000

Garment Specific Factories

2-3 X weekly 2-3 X weekly

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APPENDIX 3: LEE’S 10 KEYS TO DEMAND BASED MANAGEMENT IN RETAIL

1 The Consumer must benefit.

2 The system must deliver strategies that maximise objectives, subject to business

constraints.

3 Results must be immediate, sustainable, and measured by industry-accepted metrics

such as net profit and revenue.

4 Demand models must be created at the level where consumer decisions are made –

for each item in each store – so that merchandising strategies match unique local

demand.

5 To accurately forecast business outcomes in the retail environment, interaction

effects between items must be modelled explicitly.

6 In order to enable precise demand forecasts, capturing the peaks and troughs

associated with marketing events, merchandising activities should be modelled

explicitly across time.

7 The combined effects of all marketing decisions (price, promotion, space, and

assortment) must be modelled simultaneously, to capture important cross-effects

driving profit and volume.

8 To truly link supply to demand, all supply chain costs must be captured using

Activity-Based Costing.

9 To stay accurate over time, the system should be self-learning and evolving,

adapting to changes in the environment.

10 The system must integrate with business workflows and deliver actionable answers.

zara’s supply chain model: an analysis of the...

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