the case of zara

5/26/2018 The Case of Zara

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The case of Zara The Postponement strategy

I) IntroductionIn order to compete in the world of rising globalization and shortening of product life

cycle nowadays, firms have to deal with the demand for increasing product variety to

meet the diverse needs of customers. Mass customization has become a requirement for

many businesses especially in the dynamic, fast-changing industries. However, the more

product varieties, the more difficult it is to forecast demand, control inventory and

manufacture. Therefore, some innovative companies have integrated postponement

strategies with their supply chain operations to gain control of product variety

proliferation.

Zara is one of the most successful fast-fashion chains in the world, which is famous

for its ability to keep itself up to date with fashion trends and the incredibly short time

to introduce new products. In order to react quickly to fashion changes and consumer

demand, Zara maintains extremely efficient supply chain operations. By properly

designing the product structure and the manufacturing and supply chain process, Zara

can delay the point in which the final products assume their specific characteristics, thus

raising the flexibility to handle the changing demand for the multiple products. This is

known as the postponement approach.

In this paper, we will analyze how Zara achieves mass customization through

postponement, with a particular focus on the supply chain structure, relationship and

enabling activities supporting postponement strategy across the supply chain.

II) Analysis1) The Postponement strategy

Besides the supply chain efficiencies and marketing philosophies, one of the key

factors for Zaras success is its postponement strategy.

Postponement is defined as a strategy to intentionally delay activities, rather than

starting them with incomplete information about the actual market demands (Yang,

Burns, & Backhouse, 2005).

There are various models on postponement covering a continuum from pure

standardization to customization. In the context of this paper, we will be looking at the

postponement and speculation matrix (Figure 1) by Pagh and Cooper (1998).


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Figure 1: The postponement and speculation matrix

Figure 2: The postponement and speculation matrix 2

According the matrix, the full speculation strategy relies fully on forecasting, where

all the manufacturing operations are performed before knowing customer demand. On

the other hand, manufacturing postponement refers to the situation where certain

stages of the manufacturing process for a product are delayed until receiving a customer

order. In contrast, logistics postponement involves delaying the distribution or actual

delivery of a product until customer demand is known. Finally, the full postponement

strategy is the highest level of delay in the supply chain, which makes use of both

manufacturing and logistic postponement. There are trade-offs between different levels

of customer service and inventory, production and distribution costs when applying

different strategies. For example, the full speculation strategy incurs low production and

distribution costs but high customer service and high inventory costs, whereas the

opposite applies to the full postponement strategy. Therefore, depending on the

demand, costs, market and nature of the products or services, each strategy can be

applied accordingly.

The point at which the customers places an order or gives information regarding

demand pattern, is termed as the Decoupling Point in the supply chain (Chaudhry,

2010). The Decoupling Point differentiates between two segments of the chain, one of


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which operates without clarity on customer demand whereas the other operates after

information regarding final demand has been received (Figure 3).

Figure 3: Postponement process flow (Chaudhry, 2010)

Applying the matrix into Zara, the company uses the full postponement strategy,

where the manufacturing and logistics operations are initiated after the knowledge on

customer demand. The decoupling point is pushed upstream of the supply chain to

accommodate wider variety to satisfy customer demand (Figure 4).

Therefore, Zara is able to react to consumer demand by delaying decisions until the

last minute. Zara commits to only 50 to 60 percent of production in advance of the

selling season, compared to 80 percent for most clothing retailers.

Figure 4: Full Postponement Strategy


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There are different terminologies used to define different postponement types, which

are often defined on the basis of activities. The following section summarizes the key

postponement types that Zara utilizes in their value chain.

a. Product development postponementWhile the average design-to-sales cycle times in the apparel industry are more than

six months, Zara has achieved cycle times of five to six weeks. In order to achieve that,

Zaras designers are required to use the fabric that Zara has in stock. Moreover, the firm

employs standardisation of the design modules. At the start of each selling season, the

designing team create a library of models that serve as platforms for the models that

will be eventually launched (Swaminathan and Le, 2003) .Then the designers will go to

all the trendy places to get the feel of the last fashion trends and give adaption to the

models from the library after carefully examining the trends. That enables them tocreate 5 to 8 new designs everyday and about 12000 new products and designs every

year (Swaminathan and Le, 2003).

b. Manufacturing postponementWhen using manufacturing postponement, firms are able to operate without holding

finished good inventory while maintaining a majority of their stocks at pre-customised

form. The risk attached to the inventory at this stage is lower since their raw form

allows them for wider usage variations (Garcia-Dastugue and Lambert, 2007).

Manufacturing postponement thus means that companies hold products at platform

level, which will be customised later as per demand pattern. The principle of this is that

forecasting demand at component level is easier than that at finished good stage (Yang

at al., 2005).

By adopting this strategy, Zara can avoid the high product obsolescence costs that are

often faced by fashion apparel retailers.

Figure 5: Zara's Demand-Driven Approach (Cheng and Choi, 2010)


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Zara focuses its forecasting efforts on the type and quantity of fabric it purchases. By

buying more than 50% of its fabric un-dyed, speed and flexibility are improved because

the fabric can be used for a variety of garments and line later. Not only does it reduce

the cost but it also reduces the chances of forecast errors. In undyed form, the fabric is

more easily converted other uses. Furthermore, it gives Zara the flexibility to adapt to

colours close to the selling season based on customer demand (Ferdows et al. 2004).

c. Logistic postponementZara has two main distribution centres in Spain that distribute all its EU distribution

and some of its global distribution, and a few smaller satellite distribution centres

elsewhere. Shipments from the distribution centres to stores are made twice a week,

based on customer demand in each individual store. Moreover, the inventory is

maintained on the basis of the sales history to individual stores. These helps reduce thestock-keeping units in the supply chain (Pagh and Cooper, 1998) while improving

customer responsiveness (Yang et al., 2004a).

2) Factors affecting the postponement strategies

In order for those postponements to happen without affecting time to market, Zara

operates an extremely efficient value chain management.

Zaras network is strongly integrated, where 60% of the production is carried out in-

house in Europe and 40% of its fabric is sourced from its parent company group -

Inditex. Products with highly uncertain demand are sourced from Europe whereas

products that are more predictable are sourced from its Asian locations. All of the

capital-intensive steps are executed within Zara-owned factories whereas labor-

intensive operations are outsourced to their partners (Cheng and Choi, 2010).

Zara works closely with its suppliers and customers, to enable constant information

to flow smoothly and quickly up and down the supply chain. Its team uses state-of-the-

art IT systems to track sales and customers preference for specific garments, styles,

colors and combinations. Moreover, Zara is able to offer a wide variety of products to

their customers.

All of these processes enable quick dispatch of products driven by real demand. Zara

is thus able to introduce new products more regularly in smaller patches, which in turn

results in less markdowns and reduced stock holdings than competitors in general.

Small patches of products may lead to stock-outs but it can also encourage customers to

have more desire for the garments and visit the stores more frequently. Zara is also

prepared to hold significant stocks of fabric to allow the clothing production system to


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be decoupled from the longer lead time fabric production system, which is helped by

having a substantial level of fabric supply originating from Inditex.

III) ConclusionThe postponement and speculation matrix has helped us understand the factors

that help Zara to become one of the most successful fast-fashion chains in the world. By

applying full postponement strategy in both logistics and manufacturing postponement,

Zara is able to quickly response to the constant changes in the fashion world and

achieves competitive advantages over its rivals. The model comprises of different

postponement strategies, which when analysed, indicated that Zaras postponement

applications were supported by its dynamic value chain structures. The analysis also

demonstrated that the information linkage across value chain is one of the most

important factors towards the application of postponement strategy. This ensures

detailed information can flow smoothly, accurately and quickly across the value chain,

which then gives companies the opportunities to tailor products and services around

customer preferences. Firms can therefore achieve mass customization through

postponement strategy without incurring huge operational costs that are associated

with proliferating product variety.


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Reference

Chaudhry, H.R. (2010). Postponement and Supply Chain Structure [pdf]. Available at:

http://repository.lib.ncsu.edu/ir/bitstream/1840.16/6468/1/etd.pdf

Cheng, T.C. and Choi, T.M.(2010). Innovative Quick Response Programs in Logistics and

Supply Chain Management.Heidelberg: Springer, 54-57

Ferdows, K., Lewis, M.A., & Machuca, J. (2004). Rapid Fire Fulfillment. Harvard Business

Review, November 2004, 104-110

Garci-Dastugue, S. and Lambert, D.M. (2007). Interorganisational Time Based

Postponement in the Supply Chain.Journal of Business Logistics, 28 (1), 57-81.

Pagh, J.D. and Cooper, M.C. (1998). Supply chain postponement and speculation

strategies: How to choose the right strategy.Journal of Business Logistics, 19(2), 13-32.

Swaminathan. J.M. and Lee, H.L. (2003). Design for Postponement[pdf]. Available at:

http://kertogral.etu.edu.tr/design%20for%20postponement%20Lee%20and%20Swa

minathan%20SCM%20handbook%202003.pdf

Yang, B., Burns, N., & Backhouse, C.J. (2004). Management of uncertainty through

postponement. International.Journal of Production Research, 42 (6), 1049-1064.

Yang, B., Burns, N., & Backhouse,C.J. (2005). An empirical investigation into the barriers

to postponement. International Journal of Production Research, 43 (5), 991-1005.

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