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Zara Gap: Change the Culture, Change the Game

Join Theory, Google, H&M, McKinsey, Foot Locker, Lafayette 148, LL Bean, the Retail Prophet and more at Sourcing Journal’s Virtual Sourcing Summit, R/Evolution: Overhauling Fashion’s Outmoded Supply Chain, Oct 14 & 15.

Zara Gap and Disruptive Innovation

To say that 2015 was not a good year for apparel retailers is putting it mildly. From the backup at the West Coast ports in the earlier months that cost billions to the slow sales and early discounting caused by warm winter weather at the end, and myriad other issues in between, nothing went right for the rag trade. Perhaps John Thorbeck, chairman of supply chain analytics firm Chainge Capital, put it best when he said, “Something’s got to give.”

Speaking last week at the LIM College Townhouse during Sourcing Journal’s sold-out briefing titled, “The Zara Gap and Disruptive Innovation,” Thorbeck told a room full of apparel and supply chain executives that Zara, which recorded an 18 percent increase in sales last year, has a lot of the same issues they do—the Inditex-owned retailer is just better at solving them.

“They’re simply the best students of the subject and always the most curious,” he commended. “I find that curiosity to be an important part of their culture.”

Company culture and how it needs to change was a key part of Thorbeck’s presentation. Using Peter Drucker’s oft-quoted line, he said, “The best way to predict the future is to create it.” And in order to do that, apparel companies need to get to the heart of merchant culture. Why? Because—and here’s the rub—the supply chain isn’t the problem.

Recounting the time when, as CEO of G.H. Bass & Co., he sought help from a Harvard Business School teacher while debating the difference between manufacturing in Maine versus Puerto Rico, he said, “He gave me words that are still shocking today. One, location doesn’t matter, and two, you should be able to make and produce in 10 days anywhere in the world.”

Zara’s business model is well documented: designs produced at the retailer’s headquarters in A Coruña in northwest Spain reach its 2,000-plus stores within three weeks; more than half of its clothing is manufactured domestically or in nearby countries; store managers place biweekly orders and deliveries arrive twice a week.

Certainly, it’s a well-oiled machine, but brands and retailers needn’t duplicate it in order to survive. They just need to become smarter—and it has to be a top to bottom shift.

“What’s undeniable about fast fashion is the financial performance of it. Is that financial performance accessible to those who may not even be competing in those product lines or to those customers? Is it a marketing and innovation model or is it something else?” he asked, adding, “Innovation is change and it’s really hard.”

And the reason that more than 70 percent of change initiatives fail, according to transformation expert John Kotter, is that companies don’t approach it holistically.

As Thorbeck warned, “If you’re not going to get into the heart of merchant culture you’re going to have a hard time changing how risk is managed in this industry.” Another Drucker quote was offered to explain why: culture eats strategy for breakfast. “And a culture that is so embedded in lowest cost sourcing is very difficult to change,” he continued.

Let’s face it: everybody has been working on speed-to-market in some way, hoping it would be the cure-all their business needs. Even high-end designers think a see-now-buy-now model, instead of showing collections six months before they hit stores, will boost their sales.

“All of those initiatives have to deal with existing processes, and all of those initiatives were to drive cost down and push risk somewhere else,” Thorbeck continued. “We’ve reached the limits of racing to the lowest cost to cushion inefficiency.”

Markdowns, he said, are one of the highest costs in the retail business, so making more and more cheap fashion in the hopes that something will stick won’t solve the underlying issue.

“That’s why I can’t understand why we work so hard to get another dime or nickel or quarter in Asia, when we’re not losing dollars but dozens of dollars on this side,” he said.

Zara Gap and Disruptive Innovation

So, rather than forecasting off of demand history or proxy, and bulking an order and negotiating it six months out, Thorbeck suggested the key to managing risk and profitability lies in postponing finished goods commitments until closer to, or in season. That will reduce lead times and inventories. Also central to mitigating that risk is staging capacity and hedging materials to exploit improving forecasts.

“This is not an argument for speed across the board. There’s nothing wrong with a long lead time. If you have demand history and you’re confident, there’s nothing wrong with having a five-month lead time,” he said. “This is not all about taking 100 percent of your product line and moving it to speed and flexibility. The pain points in markdowns and stockouts are in a relatively narrow part of the line. If you can isolate where the volatility is, you can have a way to create a new mix.”

And that’s something that Zara does really well. By pre-positioning materials and capacities with rapid redesign the retailer was able to cut its lead times from 12 months.

Furthermore, as Thorbeck added, “They don’t just focus on color; they focus on the whole stock. They’ve shortened that curve for uncertainty and, furthermore, they’ve actually managed selling out on this side. So they’ll give up volume but they’re selling it almost all at full price.”

Missed last week’s event? Stay tuned for Part II of Thorbeck’s presentation to follow this week.

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