May 8, 2017 - 2.2 Operational performance metrics of Zara inventory distribution . .... (ie. cotton, yarn, lyocell, etc) by key suppliers (Spain, Portugal, Turkey,.
Aberdeen Business School Coursework Submission Form
Student Number
1610035
Student Name
Matteo Bracciotti
Course:
M.Sc.
Purchasing
and
Supply
Management Module:
BSM311 – Operations Management
Assignment:
Coursework 1
Date:
8th May 2017
Co-ordinator:
Carol Air
No. of Pages:
23
Word count (excluding covers, tables,
4335
executive summary and references)
chain
Table of contents
Table of contents ........................................................................................................................................ I Table of Figures ......................................................................................................................................... II Executive summary ................................................................................................................................. III Introduction ................................................................................................................................................ 1 Part 1 ............................................................................................................................................................. 2 1 Zara Company: Background ............................................................................................................ 2 1.1 “Input-‐Transformation process-‐Output” model ............................................................................. 2 1.1.1 Input resources ....................................................................................................................................................... 3 1.1.2 Outputs ....................................................................................................................................................................... 4 1.1.3 Transformation process ...................................................................................................................................... 4 1.2 The Four V’s model ................................................................................................................................... 4 1.2.1 Analysis ...................................................................................................................................................................... 5 1.3 Zara operational objectives ................................................................................................................... 6 1.3.1 ENVIRONMENTAL AND SOCIAL SUSTAINABILITY OBJECTIVES ..................................................... 7 1.3.2 OPERATIONS PERFORMANCE OBJECTIVES .............................................................................................. 7 1.4 The characteristics of manufacturing and service processes .................................................... 9 1.4.1 Process type ............................................................................................................................................................. 9 1.4.2 Process layout ...................................................................................................................................................... 10 PART 2 ........................................................................................................................................................ 12 Background ......................................................................................................................................................... 12 2 Zara operations strategy: classify and analyse ...................................................................... 12 2.1 Gap Performance and possible improvement .............................................................................. 13 2.2 Operational performance metrics of Zara inventory distribution ........................................ 14 3 Conclusion .......................................................................................................................................... 15 3.1 Recommendation ................................................................................................................................... 15 3.1.1 Managing resource improvement ............................................................................................................... 15 3.1.2 Continuous improvement approach ........................................................................................................... 16 References ................................................................................................................................................ 18
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Table of Figures
Figure 1: The “Input-transformation-output” model. Source: Google. Figure 2: The Four V’s model. Source: Slack, Chambers and Johnston, 2010. Figure 3: Characteristics of the process types for Manufacturing and Service process. Figure 4: Show the relationship between Process types and basic layout types. Figure 5: Comparison between the legacy and the new process. Figure 6: Operational performance measures metrics. Figure 7: Continuous improvement cycle model.
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Executive summary The proposed study aims to understand some operation concepts taught during the semester through the support of in-depth evaluation and discussion made in class but also with the support of individual research in order to appraise them. This coursework was assigned with the scope to review, analyse and present solutions to extended the case. In addition, it allows the researcher to develop its skills and design and assess the understanding of operations management in order to apply the range of concepts, theories and models examined. However, this report was applied in accordance with Zara, which was designed as “vehicle” of this study in achieving the final scopes. In fact, through this case example it was possible to demonstrate how the analysis of operations management concepts, models and theories such as ITO model, Four V’s model, process and layout type contributed contribute in achieving competitive advantage in operational objectives. Besides, it was classified and analysed through use of appropriate operations strategy models the existing operational strategy of Zara, providing an evaluation of its role to meet the Zara operational objectives. The findings of this report were based in assessing the mentioned aims with the support of knowledge and understanding of the researcher in order to demonstrate its ability to apply a range of operation concepts. In conclusion, the report recommended some operations improvement that might be strategic to reduce the gaps in performance and suitable to set a better strategy in achieving operational objectives.
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Introduction Operations management is a vital part of an organization to achieve success because it includes that activity of managing the resources to produce and transfer products and services (Slack, Chambers and Johnston 2010). Instead, operations function is that part of the company responsible for the function of operation management. This means that every company has an operations function because each of them produces either product or service for the ultimate customer (Slack, Chambers and Johnston 2010). Therefore, operation function is one of three main core activities of an organization, while the other two activities are (Slack, Chambers and Johnston 2010): •
Marketing function, which is the main activity to communicate products or services to the organization’s markets in order to create customer requests.
•
Product/service development function, whose role it is to enhance customer interests through new products or improvements of the existed products.
In addition to the core functions, Slack, Chambers and Johnston (2010) mention support functions that ensure effective process of the core activity. These activities are the accounting and finance functions, which share data to undertake convenient economic decision and manage the financial resources of the company. The second support function is the human resources, which is responsible for developing and controls the organization’s members in order to enhance the organization’s welfare.
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Part 1 1
Zara Company: Background
The case organisation selected as “vehicle” of this study is Zara. Zara (2017) is one of the most famous international fashion companies located in Spain and the leader company of Inditex (Industrias de Deseno Texti S.A.), one of the world’s largest distribution groups. Zara sells traditional and fashion clothes and accessories in the most areas of the world (Ruddick 2014). Since the first store, Zara established about 1770 shops in 86 countries around the world. The success of this company is due to the strategic communication through its developed supply chain between stores, inhouse designers and its factories (Ruddick 2014). However, Ruddick (2014) explained that there are other key factors for this success such as quality of product, flexibility, reliability and responsiveness that Zara established as main goals.
1.1 “Input-Transformation process-Output” model Slack, Chambers and Johnston (2010) stated that all companies have an “inputtransformation-output” process (ITO) that takes inputs resources to produce goods or services as outputs for the customers. The operations involved in the general ITO model are almost the same for each type of industry. The difference focuses on the nature of inputs utilized and outputs created. In order to understand in practice this model (figure 1), it will be explained in accordance to Zara case.
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Figure 1: The “Input-transformation-output” model. Source: Google.
1.1.1 Input resources This phase engages the transformed resources and the transforming resources (Slack, Chambers and Johnston 2010). Generally, the transformed resources include any operation’s processes that use a set of inputs like materials, information and customers to be elaborated and transformed within ITO process. Usually one of these inputs is the key factor in an operation (Slack, Chambers and Johnston 2010). Concerning Zara case study, the transformed resourced refers to the raw materials purchased (ie. cotton, yarn, lyocell, etc) by key suppliers (Spain, Portugal, Turkey, India and China) in order to be treated and transformed in the process (Inditex 2017). Moving on to the second set of inputs, transforming resources include the cooperation of facilities and staff in the process in order to convert the transformed sources. Zara plans the design and production in a unique facility, Inditex headquarters in La Coruna, where most of the output is produced with an efficient structure and coordination of equipment and staff. Moreover, the staff operates with competence in the ITO process in order to achieve successful and high margin profits (Ferdows, Lewis and Machuca 2005).
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1.1.2 Outputs The outputs are in the form of products (clothes and accessories), which is divided in three major lines: one for women’s line, one for men’s line and the last one for children (Ferdows, Lewis and Machuca 2005). These products are identified as “pure” products because are recognized as tangible items (Slack, Chambers and Johnston 2010).
1.1.3 Transformation process The transformation process is all the activity that converts one or multiple inputs into outputs to be supplied in the market (Schroeder, Goldstein and Rungtusanatham 2011). Therefore, the main operation or macro operation of Zara is to manufacture traditional and fashion clothes. However, this phase has to involve some micro operations like move raw materials from warehouse site to the manufacturer site, blend all the inputs together and store the final products for a short time in a warehouse before to convey it in the shops. Although this model centralizes mainly the internal environment of the organisation in order to understand the operational process stages, it is also important to analyse the interaction with the external environment (Schroeder, Goldstein and Rungtusanatham 2011). This interaction might affect internal operations with economic, physical, social and political factors. For example, Zara met some government restrictions such as local laws that limit or ban the entrance of new brand to protect the local suppliers in their local market (Lu, Karpova and Fiore 2011).
1.2 The Four V’s model According to Slack, Chambers and Johnston (2010) all companies have similar operational processes but they differ in some aspects in terms of Volume, Variety, Variation of the output, but also in terms of customer’s Visibility of the product. Thus, the ITO model is supported by the analysis of the Four V’s model (Figure 2).
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Figure 2: The Four V’s model. Source: Slack, Chambers and Johnston, 2010.
1.2.1 Analysis Volume (Low) – Zara introduces new designs every 2/3 weeks in small quantities, which normally means high costs to sustain this strategy. Indeed, Zara is able to keep low cost unit due to the shorter time frame necessary to replace the empty shelves with new items, which lead to attract customers that increase the sales because they always find new products. Moreover, through small volume production, Zara retailers can replace the unsold products after few weeks due to the low impact on the stockholding level (less than 10%) compared with the average (17-20 %) of the competitors (Ferdows, Lewis and Machuda 2004). Variety (High) – The volatility demand of clothing and the short life cycle due to the seasonality changes imply to plan fewer assets in Zara organization and continuous creation of new designs (Ferdows, Lewis and Machuda 2004). Zara replied to the uncertainty of the product with high capital investment, which improves the flexibility, focusing most of the production in-house (Ferdows, Lewis and Machuda 2004). In fact, compared to H&M and Gap, Zara purchases all the inputs within Inditex firm (located in Spain) instead of outsource in another continent such as Asia or Africa for the low cost production. Ferdows, Lewis and Machuda (2004) explained that this strategy would reserve more complex production planning due to the engagement of
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several small factories with few joint ventures spread in other regions, but will bring potential advantages to the operations process. Variation in demand (High) – Zara is known as Fast-Fashion retailer because it is able to supply in each season larger number of articles compared to the other rivals (Caro and Gallien 2010). This means that Zara is more flexible due to the small quantity produced per products, which means availability in the racks due to the high capacity to distribute new products every two weeks (ie. anticipate new collections). As result, Zara expands its market share for the higher variety of product that meet the continuous changes of the clothing trend and let to the increase customer visits per year (17 instead of 4) in the stores (Caro and Gallien 2010). Visibility (High) – Customers usually have short waiting tolerance if they notice that the retailer staffs operate inefficiently and dissatisfy them. However, Zara engages staff members who have good communication skills and experience (ZARA 2017). Through this policy and the rapid replenishment of new collections in the shops, the customers are completely satisfied to ask for goods that in other stores would not be sold (Ferdows, Lewis, Machuda 2004). However, high visibility requires high unit costs that are mostly covered by Zara due to the competitive advantage of its efficient supply chain (Caro and Gallien 2010).
1.3 Zara operational objectives The operation strategy includes strategic decisions and actions that design the role, objectives and activities of the operations (Slack, Chambers and Johnston 2010). Thus, the operational objective is one component of the operation strategy, which usually refers to cost, quality, delivery and flexibility. In some cases, there are also further types like innovation, safety and environmental sustainability (Schroeder, Goldstein and Rungtusanatham 2011). In order to devise and prioritise the operational objectives of Zara organisation, it is necessary to understand the mission and vision statements, which help to derive the main objectives, which build in quantitative and measurable terms, part of the mission statement (Schroeder, Goldstein and Rungtusanatham 2011).
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1.3.1 ENVIRONMENTAL AND SOCIAL SUSTAINABILITY OBJECTIVES According to Zara’s mission statement (ToughNickel 2014): “Through its business model Zara aims to contribute to the sustainable development of society and that of the environment with which we interact.” Based on the statement, Zara did not make direct reference to clothing, but it highlights three important components: the business model, the environment sustainability and a sustainable society. The latter two elements mentioned explain the intention to cooperate for a sustainable operations design in terms of integration and general welfare in a larger number of societies but that cannot ensure if Zara is able to achieve this (ToughNickel 2014). Concerning environmental sustainability, Zara website states that in Zara retailers have applied a reduction policy of electricity consumption, recycling furniture and an organic manufacturing processes that leads Zara to be an eco-friendly image for the environment (ToughNickel 2014).
1.3.2 OPERATIONS PERFORMANCE OBJECTIVES However, all organisations have standard operational objectives that are applied for each types of operation (Slack, Chambers and Johnston 2010). These standard objectives are classified as “performance objectives” and are compared between the current performance parameters to the next five years performance. The scope of comparison is for a benchmarking purpose and it can help to understand if the operation process is behind or over the competition average (Schroeder, Goldstein and Rungtusanatham 2011). The five basic performance objectives will be analysed in accordance with the Zara.
1.3.2.1
Quality
This objective means that the company produces goods or services through a specific approach that leads to both external customer satisfaction as well as efficient organization of the internal operation process (Slack, Chambers and Johnston 2010). Quality is the main visible object in the outbound products and also it allows the company to reduce costs and mistakes if there is a quality coordination of the ITO process. Zara has high quality performance between all the operations due to the developed supply chain system applied in the recent years, which leads to satisfy the final customer, with less unit cost (Lopez and Fan 2009).
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1.3.2.2
Speed
Speed refers to the time frame between the customer order and the operations execution (Slack, Chambers and Johnston 2010). This objective has large impact on the operational process in terms of decision-making and movement of inputs resources within ITO model, because it allows faster response to external customers requirements (Slack, Chambers and Johnston 2010). Zara organisation is the most competitive in the fashion industry regarding the internal process due to its capability to coordinate all operations in short time frame (Caro and Gallien 2010).
1.3.2.3
Dependability
In operational concept, the term dependability means schedule the entire organisation in order to deliver in time goods or services when the customers need (Slack, Chambers and Johnston 2010). In this concept, the value of the cost and speed do not impact the performance because the only scope is to satisfy the final customer. The impact of dependability in operations can have important relevance for the efficiency of the entire system and reliability of the company to the customer (Slack, Chambers and Johnston 2010).
1.3.2.4
Flexibility
This objective explains the ability to change the operations in relation to the customer’s needs (Slack, Chambers and Johnston 2010). Developing a flexible operation within ITO model can bring advantages to the entire system in terms of response, optimization of the time and high level of dependability (Slack, Chambers and Johnston 2010). Zara has the capacity to set flexible operations due to the competitive supply chain performance, which leads to establish competitive recycle of new collections in the store, produce low volume per product at reasonable cost and reduce lead time shipment to the stores due to the vertical integration of the supply chain (ToughNickel 2014).
1.3.2.5
Cost
Cost objective is an important factor for those companies based on price competition (Slack, Chambers and Johnston 2010). In fashion industry, the cost driver is a potential tool to be competitive, because lower cost attracts more customers and enhance the potential target to improve the organization structure. Zara sustains
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reasonable costs within the operation process due to the in-house system, which allowed achieving high quality of product but higher cost instead of costs that might be lower with the outsourcing decisions by competitors to developing countries like Asia or Africa (Ferdows, Lewis, Machuda 2004). However, Zara is able to set in the market a reasonable price due to the competitive supply chain design, which allows quick response to customer demands and gain high margin profit (Ferdows, Lewis, Machuda 2004).
1.4 The characteristics of manufacturing and service processes 1.4.1 Process type In Zara operation processes exists a relationship between manufacturing and service process type. In the Four V’s model (figure 2) it has been analysed volume-variety behaviours in Zara operational process. Slack, Chambers and Johnston (2010) stated that these two dimensions move together and in Zara’s case, it was examined the application of low-volume operations processes with high-variety of products and services (Ferdows, Lewis and Machuda 2004). Thus, based on the characteristics of figure 3, Zara focuses its manufacturing design on “Jobbing processes” type due to the matching of low volume and high variety with less degree of repetition tasks and high intermittent flows, which leads to a high degree of changes in the variety of product. Instead, concerning the service process, Zara is centralized on “Service shop” type due to the high interest levels for customer contact, customization, volumes of customers and staff discretion (Slack, Chambers and Johnston 2010). Based on “service shop” type, the Zara front-office sets a range of product in the stores, while Zara back-office operations focus on production and delivery in the store.
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Figure 3: Characteristics of the process types for Manufacturing and Service process. Source: Slack, Chambers and Johnston 2010.
1.4.2 Process layout After the appraisal of the manufacturing and service process type in accordance with Zara, now it is possible to layout the processes (figure 4) based on the process types identified.
Figure 4: Show the relationship between Process types and basic layout types. Source: Slack, Brandon-Jones and Johnston 2016.
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The different process type identified for Zara (Jobbing processes and service shop) will imply different layout types for manufacturing and service processes. In fact, the first process might focus on “Functional layout” due to the operational process design of Zara, which based all the production in-house facilities due to the advantages in terms of speed, flexibility, dependability and fast replacement (Ferdows, Lewis and Machuda 2004). While for service process, Zara is based on “Cell layout” type because the stores are divided in three levels: women, man and children. Each of them is structured in different departments such as accessories, shoes, and clothing, allowing thus better service level for the customers (Ferdows, Lewis and Machuda 2004).
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PART 2 Background The operation strategy for a business refers to the decisions and actions planned in addressing the entire operations to contribute and support the main objectives. Moreover, it supports the organisation’s business strategy and it synchronises the different operations function of the business to achieve success (Slack, Brandon-Jones and Johnston 2016).
2 Zara operations strategy: classify and analyse In the second part, this study will look at the operations strategy through the support models in order to classify and analyse the existing operational strategy of Zara. Because of the emerging technical and human issues in the market environment, Zara developed new innovative operations research models with high responsive design, production and distribution infrastructure in order to set each inventory shipment from its two main warehouses located in Spain to its stores located in the world. Thus it can fulfil all customer orders with speed, flexibility, high quality and lower cost (Caro et al. 2010). Caro et al. (2010) examined the new global distribution process applied by Zara in order to achieve with high performance all the current operational objectives. As the figure 5 shows, the new operational process that Zara implemented is able to cover its weekly store shipments (it is one of the operational objectives).
Figure 5: Comparison between the legacy and the new process. Source: Caro et al. 2010.
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The difference of the process showed in figure 5 between the old process and the new one focuses on the use in the new process of the shipment requests from store managers and the previous data of the sales to forecast the demand. Subsequently, these two inputs are implemented in the next phase through an optimization model that use three important data: the forecasted data, the inventory per articles and the amount of unsold product both from the warehouses and from each store, and the assortment decisions (Caro et al. 2010). The objective of this new model is to optimize the global sales through fast shipment approach. The forecasting model also involves a qualitative method to create an approximation of the upcoming orders for each size per each article in each Zara store that definitely improved the standard methodology of analysis. The characteristic of this qualitative method (figure 5), in accordance with Zara distribution manager, is based on a linear combination of two relevant inputs that are converted in sales estimation through the consideration of store inventory and the stock remaining in the warehouse: the objective and centralized time series of the historical sales per articles, and the subjective and decentralized delivery order by the stores manager (Caro et al. 2010). This approach has been applied since 2006 as operational strategy and is giving back large benefits and advantages in terms of profits and capability to achieve the current operational performance objectives (Caro et al. 2010). Thus, this new forecast model brought optimization and improvement for the shipment requests to Zara stores due to the more efficient and credible measure data approach (Caro et al. 2010).
2.1 Gap Performance and possible improvement Although it has been evaluated positive benefits for forecast future delivery orders from the improved communication within Zara operational process (Caro et al. 2010), it would be recommended to improve this important process through the use of good capacity measuring system to forecast the demand. In fact, due to the volatility and seasonality demand of this industry sector, Zara should make as much as possible accurate forecasts in order to better suit the operational objectives and reduce the gap of lead-time for the shipments. This is possible with high level of capacity planning and control (Slack, Chambers and Johnston 2010). In fact, focusing the capacity in forecasting the seasonal demand, it is possible to prevent the peak time of the year where Zara retails will have more order rate from the customer due to, for instance the impact of some factors such as the weather conditions, pre-vacation or post-vacation period, changing of economic conditions and so on (Slack, Chambers
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and Johnston 2010). Overall, this improvement is likely to improve the performance of the distribution network strategy applied by Zara.
2.2 Operational performance metrics of Zara inventory distribution Based on the new operation research model analysed in the previous paragraph, in this section will be presented the framework of Zara’s inventory distribution. The objective of this model is to achieve a balance of the right quantity of output to delivery from the inventory to the stores, avoiding thus overstock or under stock in the retail sites (Caro and Gallien 2010). Two assumptions have been made to design these metrics, which consider first the distribution for a large number of articles with a network that covers all Zara shops, and second the time of stock out that occurs during the day will be ignored by the metrics (Caro and Gallien 2010). This framework of inventory distribution was aligned with Zara operational objectives through the strategic vertical integration between the inventory store to the retail shops. This means that Zara manages under its decisions the complete flow in the supply chain, from design and production to the distribution and logistics of the products to the final stores (Guan and Rehme 2012). This integration has many advantages for the company such as it enables the distribution channel to transfer products in challenging markets, improves gains and reduce marginal costs in the internal supply chain. Moreover, vertical integration allows fluent decision-making and proceeds more quickly due to the authority structure that permits faster solution to the internal conflicts (Guan and Rehme 2012). Therefore, with vertical integration, Zara is able to meet all the operational performance objectives such as speed in response to the customers order, flexibility, dependability, high quality of product and reasonable price. However, the latter objective is the unique “consequence” of this model because it affects the company’s required resources, the capabilities and the competitive advantages (Guan and Rehme 2012). But, through the vertical integration, it will be improved the coordination of the chain system by the company who will increase the capability to manage the chain with significant rationalization of the external relations, thus the costs will be reduced (Guan and Rehme 2012). The vertical integration was launched under the decision of Zara’s owner and the team managers, after the evaluation of the potential advantages in achieving better performance. This new concept called “Pronto Moda” or “Rapid-Fire Fulfilment” required large capital investment and time in order to get the forecasted expectations in Zara operational
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process (Ferdows, Lewis and Machuca 2004). This model ensures relevant advantages to the operational performance such as a unique distribution channel with vertical integration sell points and stores, fast replenishment and assortment in stores and quick response and order fulfilment (Martinez, Errasti and Rudberg 2015). Further, in order to satisfy all the objectives and gain competitive advantages in this industry sector, Zara manages an important human resources department, including a welldesigned
job
strategy
(Bonache
and
Fernandez
2002).
The
human
resource
department evaluates the conditions that allow Zara to achieve competitive advantage in an international environment. Zara reached a large international expansion process due to the developed skills to fulfil the stores with new designs every two weeks through
using
experienced
and
knowledgeable
people,
who
share
their
own
capabilities and collaborate to create good networking and communications in order to accelerate all processes (Bonache and Fernandez 2002).
3 Conclusion This coursework has been conducted to demonstrate the understanding of some operational concepts used by Zara, which helped this study to make critical thinking and evaluation of standard models in the first part such as the ITO model, the Four V’s model, the process and layout type and so on. In the second part, it has been analysed Zara operations strategy with the appraisal of models in order to state if the strategy was suitable to meet the current operation objectives. In conclusion, this study will recommend some improvements that might be useful to reduce the gap of performance in Zara operation strategy.
3.1 Recommendation 3.1.1 Managing resource improvement An important improvement in Zara to cover the unpredictable clothing demand and control a large amounts of information created by the activities is the implementation of the ‘Enterprise resource planning’ (ERP) system. Madapusi and D’Souza (2012) stated that ERP might provide benefits to a company’s operational performance because it leads to gather all information spread within the organization and as result a better performance is achieved. In fact, the figure 6 shows five measures that analyse the operational performance of ERP system.
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Figure 6: Operational performance measures metrics. Source: Madapusi and D’Souza (2012). The implementation of ERP system is a strategic investment and relevant tool to collect source in order to improve operational performance objectives. It will provide improvement in performance especially to the functional areas and business activities (Madapusi and D’Souza 2012). Moreover, this system advices to plan and control decisions concerning when the operations activity should be made, who is responsible to apply that operation, how much capacity is required and so on (Slack, Chambers and Johnston 2010). This potential system manages all resources of an organization allowing benefits such as integrate the entire supply chain information, relate with customers, supplier and other parties through high level communication by providing detailed time information and establishing a better view in monitoring the operations (Slack, Chambers and Johnston 2010).
3.1.2 Continuous improvement approach In Zara has to be highlighted the philosophy and approach of continuous improvement to the operations performance (Slack, Chambers and Johnston 2010). An example is the strategic decision that Zara applied through the vertical integration concept in order to achieve competitive performance of the supply chain. Since it happened, Zara still applies small improvement in relation to the changes of the markets and customer requirements (Guan and Rehme 2012). Also the improvement applied in the distribution network in order to quickly renovate the stores racks with new designs through the feedback of previous experience of a challenging market allowed Zara to be more compact and efficient (Caro and Gallien 2010). However, with continuous improvement the degree of improvement is not relevant, but the moment when this
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change occurs is what achieves best performance (Slack, Chambers and Johnston 2010). In addition, the improvement has to be based in accordance of PDCA cycle model (figure 7) that demonstrates the plan of actions when an organization decides to improve the operations performance (Slack, Chambers and Johnston 2010).
Figure 7: Continuous improvement cycle model.
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