Zara can get clothes from runaway to retail in less than two weeks. This mind-bendingly rapid pace has turned the Spanish-owned retailer into an international retailing juggernaut. They’ve transcended fast fashion and are now almost anticipating demand. The secret to their phenomenal success is operational.
Normal retailers try to save money by booking 40 to 60 percent of their seasonal lines up to 6-months in advance. This allows them to book time in Chinese factories when it is cheap and ensures that the factories will have the available capacity to fill their orders. It also keeps capacity at high-skill factories tied up on your line and not your rival’s. Because factory time is limited, retailers that don’t own manufacturing capacity are highly committed to this timeline for most of their merchandise.
This saves retailers money up front, but it costs them flexibility. They might get stuck with a bunch of merchandise that doesn’t sell. In that case, the only way to move it is through discounting, and on low-margin items like apparel, discounts equal losses. To make matters worse, sales have to be advertised, which costs more money.
Zara has only 15 to 25 percent of their line for a season committed six months in advance, versus 40 to 60 percent at most apparel retailers. 50 percent of its clothes are manufactured mid-season, versus 15-20 percent at normal retailers – they’ve flipped the ratio of committed product to fresh product. This means they can respond to trends with lightning fast intensity.
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They can do this because they manufacture in-house, close to their design headquarters in Spain. For long-lead time items (think basic t-shirts), Zara still uses Chinese manufacturing on 6-month lead times. But Zara reserves 85% of the capacity at its factories for in-season manufacturing. The wages at their sophisticated cut and sew facilities in Europe are exponentially higher than those in China and other countries, but the short lead time (less than 14 days) and lack of discounting makes up for it.
Those short, highly specific, trend driven production runs have other benefits, too. Shoppers anticipate new styles on a bi-weekly basis, meaning they make more store visits and make more purchases. If a style is a flop, it’s a small run and it can be moved out fast – no season long commitments to unpopular clothes. If it’s a hit, it’s easy to increase the production run and up the prices. In essence, Zara has shrunk the time gap between demand and supply, maximizing its ability to hit demand peaks.
Because Zara is the only major retailer working this rapidly, it’s even able to create demand for certain products by anticipating consumer preferences. No need to forecast – other retailers look to Zara for the way fashion is moving. This is made possible by their massive in-house design team, which works closely with the factories to ensure the clothing design makes sense from a manufacturing standpoint, not just a fashion standpoint.
Small batches and tight attention to demand means fewer markdowns, which is what ultimately pays for the whole costly process. Zara can sell up to 85% of the items in a store at full price, and they can raise or lower that price based on real-time feedback from store managers. It’s a tighter model, and one that delivers high growth and high profits.
Unlike other retailers however, Zara cannot scale rapidly in new markets. In order to truly reproduce its model in North America, for example, Zara would need to open a U.S. design center and buy a bunch of factories, before ever making a single retail sale – a pretty big bet. As a result, they’ve stuck to their familiar markets with only limited North American expansion. If a U.S. retailer with manufacturing capacity (think American Apparel) were to adopt their quick response model, however, they might see the same positive feedback systems and no-discounting mechanisms take hold.
For a counter example, look to Uniqlo. That is another fashion-forward affordable retailer, but they use an operations and design approach that is the exact opposite of Zara’s. They rely on extremely long lead times and very cheap manufacturing for products that are timeless and highly basic. They do not own most of their factories, and they manufacture for all four seasons year round, rather than paying for rush orders or emergency shipments. They keep their overhead low and sell well-designed, well-made clothes at very low prices.
Both models work for now. The trick is to find the model that most closely fits the needs of your customer, and that your back-end is best equipped to manage. Of course, with China prices rising and growing concerns about safety in Bangladesh and Pakistan, the low-cost model is becoming more difficult across the board. Meanwhile, Zara is getting better and better at quickly meeting the needs of its customers.