Fashion Logistics and Quick Response

Martin Christopher, Bob Lowson and Helen Peck

Overview

The ability to respond to customer requirements on a timely basis has always been a fundamental element of the marketing concept. However, there has perhaps never been as much pressure as exists today to accelerate further the responsiveness of marketing systems. ‘Time-based competition’ has become the norm in many markets from banking to automobiles. The challenge to marketing and logistics in the current environment is to find ways in which product development times can be reduced, feedback from the marketplace made more rapid and replenishment times compressed.

Nowhere is this pressure more evident than in markets governed by fashion. Fashion is a broad term which typically encompasses any product or market where there is an element of style that is likely to be short-lived. We have defined fashion markets as exhibiting typically the following characteristics:

• Short lifecycles. The product is often ephemeral, designed to capture the mood of the moment; consequently, the period in which it is saleable is likely to be very short and seasonal, measured in
• High volatility. Demand for these products is rarely stable or linear. It may be influenced by the vagaries of weather, hit films, television shows or even by pop stars and footballers.
• Low predictability. Because of the volatility of demand it is extremely difficult to forecast with any accuracy even total demand during a period, let alone week-by-week or item-by-item demand.
• High impulse purchase. Many buying decisions for these products are made at the point of purchase. In other words, the shopper when confronted with the product is stimulated to buy it, hence the critical role of ‘availability’ and, in particular, availability of different sizes, colours and so on.

The combined effect of these pressures clearly provides a challenge to logistics management. Traditional ways of responding to customer demand have been forecast-based, with the resultant risk of over-stocked or under-stocked situations.

More recently there has emerged another trend that has added further complexity and difficulty to the management of fashion logistics. The growing tendency to source product and materials offshore has led in many cases to significantly longer lead times. While there is usually a substantial cost advantage to be gained, particularly in manufacturing, through sourcing in low labour cost areas, the effect on lead times can be severe. It is not only distance that causes replenishment lead times to lengthen in global sourcing. It is the delays and variability caused by internal processes at both ends of the chain as well as the import/export procedures in between. The end result is longer pipelines with more inventory in them, with the consequent risks of obsolescence that arise.

Much of the pressure for seeking low-cost manufacturing solutions has come from retailers. At the same time there have been moves by many retailers in the apparel business to reduce significantly the number of suppliers they do business with. This supply base rationalization has been driven by a number of considerations, but in particular by the need to develop more responsive replenishment systems – something that is not possible when sourcing is spread over hundreds, if not thousands, of suppliers.

Managing the Fashion Logistics Pipeline

Conventional wisdom holds that the way to cope with uncertainty is to improve the quality of the forecast. Yet, by definition, the volatility of demand and the short lifecycles found in many fashion markets make it highly unlikely that forecasting methods will ever be developed that can consistently and accurately predict sales at the item level. Instead ways must be found of reducing the reliance that organizations place upon the forecast and instead of focusing on lead time reduction. Shorter lead times mean, by definition, that the forecasting horizon is shorter – hence the risk of error is lower. In the same way that the captain of a supertanker has a planning horizon that is determined by the vessel’s stopping distance (many miles), so too in business the forecast period is determined by the time it takes to design, make and ship the product – lead time, in other words.

There are three critical lead times that must be managed by organizations that seek to compete successfully in fashion markets:

• Time to market. How long does it take the business to recognize a market opportunity and to translate this into a product or service and to bring it to the market?
• Time to serve. How long does it take to capture a customer’s order and to deliver the product to the retail customer’s satisfaction?
• Time to react. How long does it take to adjust the output of the business in response to volatile demand? Can the ‘tap’ be turned on or off quickly?

Time to Market

In these short lifecycle markets, being able to spot trends quickly and to translate them into products in the shop in the shortest possible time has become a prerequisite for success. Companies that are slow to market can suffer in two ways. First, they miss a significant sales opportunity that probably will not be repeated. Second, the supplier is likely to find that when the product finally arrives in the marketplace, demand is starting to fall away, leading to the likelihood of mark-downs. Figure 5.1 illustrates the double jeopardy confronting those organizations that are slow to market. New thinking in manufacturing strategy which has focused on flexibility and batch size reduction has clearly helped organizations in their search for quick response. The use of highly automated processes such as computer aided design (CAD) and computer aided manufacturing (CAM) has revolutionized the ability to make product changes as the season or the life cycle progresses.

Figure 5.1: Shorter Lifecycles Making Timing Crucial

Time to Serve

Traditionally in fashion industries orders from retailers have had to be placed on suppliers many months ahead of the season. Nine months was not unusual as a lead time. Clearly, in such an environment the risk of both obsolescence and stock-outs is high, and a significant inventory carrying cost is inevitably incurred somewhere in the supply chain as a result of the lengthy pipeline.

Why should the order to delivery cycle be so long? It is not the time it takes to make or ship the product. More often the problem lies in the multiple steps that occur from the point at which a decision is taken to place an order, through the generation of the accompanying documentation (particularly in overseas transactions involving quota approvals, letters of credit and so forth), into the suppliers’ processes – which themselves are likely to be equally lengthy. Often the total time in manufacture is considerable because of the traditional, batch-based production methods. In other words each step in the total manufacturing cycle is managed separately from the others, and the quantities processed at each step are determined by so-called economic batch quantities. Furthermore, when manufacture takes place offshore, considerable time is consumed in preparing documentation, in consolidating full container loads and in- bound customs clearance after lengthy surface transportation.

The underpinning philosophy that has led to this way of doing things is cost minimization. Primarily the costs that are minimized are the costs of manufacture, and secondly the costs of shipping. In fact, this view of cost is too narrow and ultimately self-defeating. The real issue is the total supply chain cost including the costs of obsolescence, forced mark-downs and inventory carrying costs.

Time to React

Ideally in any market, an organization wants to be able to meet any customer requirement for the products on offer at the time and place the customer needs them. Clearly, some of the major barriers to this are those highlighted in the previous paragraphs: time to market and time to serve.

However, a further problem that organizations face as they seek to become more responsive to demand is that they are typically slow to recognize changes in real demand in the final marketplace. The challenge to any business in a fashion market is to be able to see ‘real’ demand. Real demand is what consumers are buying or requesting hour by hour, day by day. Because most supply chains are driven by orders (that is, batched demand) which themselves are driven by forecasts and inventory replenishment, individual parties in the chain have no real visibility of the final marketplace. As Figure 5.2 suggests, inventory hides demand. In other words the fact that there are usually multiple inventories from the retail shelf back through wholesalers, to suppliers means that upstream parties in the chain are unable to anticipate the changing needs of the customers other than through a forecast based as much upon judgment and guesswork as it is upon actual consumer demand.

Figure 5.2: Inventory Hides Demand

The Lead Time Gap

The fundamental problem that faces many companies – not just those in fashion industries – is that the time it takes to source materials, convert them into products and move them into the marketplace is invariably longer than the time the customer is prepared to wait. This difference between what might be called the ‘logistics pipeline’ and the customers’ order cycle time is termed the ‘lead-time gap’. Conventionally, this gap was filled with a forecast-based inventory – there was no other way of attempting to ensure that there would be product available as and when customers demanded it.

The problem was that often it would be the ‘wrong’ inventory: for example, sizes, colours or styles that were not those actually demanded. Figure 5.3 highlights the problems of the lead-time gap which in the fashion industry was traditionally measured in months rather than weeks.

Figure 5.3: Lead Times

These lengthy supply pipelines often result in revenue losses in the final market. Table 5.1 provides an indication of the size of these losses, and of note is the cost of carrying inventory. The biggest item is forced mark- downs – mainly at retail – with the total losses amounting to over 14 per cent of retail sales. A distinction is made between promotional mark- downs, that is, special sales, and the marking down that occurs out of necessity when a season ends and unwanted goods must be moved to make way for new merchandise – forced markdowns.

Table 5.1: Revenue Losses in the Apparel Pipeline (% Retail Sales)

	Fibre and Textile	Apparel	Retail	Total
Forced markdowns.	0.6%	4.0%	10.0%	14.6%
Stock-outs.	0.1	0.4	3.5	4.0
Inventory @ 15% carrying cost	1.025	2.9	6.4
Total	1.7%	6.9%	16.4%	25.0%
Source: Lowson, King and Hunter, 1999

It is against this background that the Quick Response (QR) movement originated in 1984 from a textile industry research programme in the United States. Studies at the time revealed a clothing industry pipeline in which inventories and work in progress had reached alarming levels (see Table 5.2), and it is a situation that can still be seen in many industries. More information concerning the history of QR can be found in Hunter (1990) and Gunston and Harding (1986).

Table 5.2: Clothing Pipeline Inventories and Work in Progress (Weeks)

	Inventory	WIP
Fibre
Raw material	1.6
WIP		0.9
Finished fibre @ fibre	4.6
Fibre @ textile	1.0
Total	8.1	0.9
Fabric
WIP – greige		3.9
Greige goods @ greige	1.2
Greige goods @ finish	1.4
Finishing		1.2
Finished fabric @ textile	7.4
Fabric @ apparel	6.8
Total	16.8	5.1
Apparel
WIP		5.0
Finished apparel @ apparel	12.0
Ship to retail	2.7
Apparel @ retail Distribution centre	6.3
Apparel @ store	10.0
Total	31.0	5.0
Total	55.0	11.0
Source : Lowson, King and Hunter, 1999

Today, QR is now a recognized operations strategy (Lowson, 2002) and as such, it continues to attract considerable interest for two additional, yet closely related reasons: first, the ability of this strategy to cope with the complexity of fashion logistics; and, second, as a method to combat the relentless shift toward offshore sourcing from low-wage economies.

In all fast-moving consumer goods (FMCG) industries, demand is now more fragmented and the consumer more discerning about quality and choice. There is also an increasing fashion influence: no single style or fashion has dominated for any length of time. For many consumer sectors, demand is approaching the chaotic in its insatiable appetite for diverse services and goods. ‘Mass customization’ and individualized products with shorter season lengths; micro merchandising and markets segmented at the individual level; large numbers of products chasing a diminishing market share; are all evidence of the inexorable movement toward a sea change, and mark the folly of firms expecting to operate as they have in the past. One of the most important findings from the early studies was the ability of QR to compress time in the supply system. If the pipeline is condensed to about one-third of its traditional length, not only did the design of goods better reflect more accurate consumer information, it is possible for the retailer to reassess the demand for products while the season is under way and receive small, frequent reorders from the supplier, provided reorder lead times are short enough (of the order of 2–4 weeks) (Gunston and Harding, 1986).

The effect on sales forecast errors of compressing the supply system is shown in Figure 5.4. Here, the central horizontal axis shows the number of months ahead of the season that predictions are made, and the upper and lower curves show estimates of the forecast error. Twelve-month lead times are common in many FMCG sectors, and yet significant improvements are available if these times can be reduced.

Figure 5.4: Lead Time and Forecast Error

Quick Response Strategies

Quick Response (QR) can be defined as:

A state of responsiveness and flexibility in which an organization seeks to provide a highly diverse range of products and services to a customer/consumer in the exact quantity, variety and quality, and at the right time, place and price as dictated by real-time customer/consumer demand. QR provides the ability to make demand–information driven decisions at the last possible moment in time ensuring that diversity of offering is maximized and lead-times, expenditure, cost and inventory minimized. QR places an emphasis upon flexibility and product velocity in order to meet the changing requirements of a highly competitive, volatile and dynamic marketplace. QR encompasses an operations strategy, structure, culture and set of operational procedures aimed at integrating enterprises in a mutual network through rapid information transfer and profitable exchange of activity.
(Lowson, King and Hunter, 1999)

QR has a number of strategic implications for the organization. Research has shown that mere implementation of technology or particular procedures without the strategic underpinning leads to sub-optimal performance (Lowson, 2002).

The Alignment of Organizational Activity to Demand

This is a fundamental principle of QR. All activities within an enterprise should be paced to demand and customer behaviour. Products and services are produced and delivered in the variety and volume that match demand. The activity within a company moves to the beat of this drum. Swings in demand are closely monitored: too little or too much leads to waste and inefficiency. Whether it is marketing, purchasing, new product development or operations, all endeavours follow the market tempo, and the realization that this alignment may necessitate a change in corporate culture. Consequently, it is important that senior management recognizes and understands these demand patterns. Resources need to be deployed that can undertake this vital externally focused role.

Linkages Between Demand and Supply

Given the importance of the alignment activity mentioned above, a strategic understanding of the drivers of demand and its synchronized connection with supply is imperative for QR. In the past much attention has, quite rightly, been placed upon improvements in supply. However, demand is the target – no matter how sophisticated the supply weaponry, it is ineffectual if the target is not understood. Only when the value and benefits sought by the customer/consumer are appreciated in all their complexity, can a strategy to supply them be developed. This involves detailed assessment of supply and demand processes and sub-processes by customer or consumer grouping. Together with the supply of a tangible product, there are myriad other dimensions peculiar to the customer/consumer. These include varying information content, time- frames, physical arrangement for logistics, service support, marketing campaigns, and information systems.

Demand Relationships

QR recognizes that both customers/consumers and products are dynamic and place unique demands on the organization. Identical products, jeans for example, will have unique product flows depending upon customer/consumer buying behaviour and QR needs (whether a department store, speciality store, supermarket, wholesaler, independent corner store, or whatever). Similarly, product attributes will vary by product, for example, volume and flow characteristics, demand patterns, seasonality, promotional strategy, cyclical needs, information content, credit terms and customer incentives and repeat purchase patterns. These attributes can be aligned with the QR product categories of ‘basic’, ‘seasonal’, ‘fashion or short season’ and ‘ultra-short season’. These different customer/consumer and product behaviours will customize and tailor QR channels in line with the requirements. Once this assessment is done, it is possible to apply specific QR components or systems that can be tied into the unique supply pipeline.

Resource Configuration

Conventional strategy looks long-term for some form of advantage by configuration of activities and resources to the environment of the operation: a strategic fit between strengths and weaknesses and opportunities and threats. In the QR world, this strategic architecture is inter-organizational. Strategy and strategic thinking are at a network level, encompassing many external interconnections. In addition, within this configuration must fit the mapping of customer/consumer values and perceived benefits onto operations, in order to underpin the link between demand and activity (as above).

Time

Time as a strategic weapon is vital to QR operation, but like any weapon its effectiveness depends on the circumstances of its use. Strategies of time compression have gained much popularity of late. Unfortunately, as with many such movements, the application has been widespread but often ill considered. A time-based strategy is subtle and above all else, must be well thought out. Mere slashing of time for the sake of it misses the point. As with demand, time-based competition requires careful assessment as to where best it can serve customers/consumers.

Fast and accurate adaptation to market change is perhaps the most important element of the QR strategy. The adroitness and dexterity to move to satisfy unplanned demand or previously unrecognized market niches, require any organization to be strategically configured for such a response. However, this architecture will only be effective if the operational environment is understood and the opportunities for time compression assessed. Accuracy and flexibility will reduce time delays, and postponement strategies will enable products, indeed all activity, to be tailored to known and exact needs rather than those forecast. It should also be remembered that the use of time for advantage will be inter- organizational: gains made internally will rapidly be lost if not carried through by network partners.

Primacy of Information

Data and information are the foundation of QR – every business is an information business. Here, we are not dealing with information technology (IT), but a strategy for information systems (IS). Technology is merely the vehicle used to carry vital data resources. The links between demand and successful, accurate and flexible supply are data and the resulting information. For any operation in the 21st century, the prime strategic consideration is the use of information as a resource. Timely and accurate flows will enable fast and accurate responses without waste and unnecessary cost.

Partnerships and Alliances

Perhaps one of the most significant developments in recent management and business thinking has been externalization: the recognition that performance relies increasingly upon a series of alliances and relationships with other enterprises in the environment as the most effective way to deal with constantly changing market conditions. Competition is now between networks rather than individual firms. The coordination and relationships between these various entities are matters for strategic consideration. From a QR perspective, the web of relationships and mutual networks upon which the organization depends requires a professional management approach, and increasingly firms are devoting staff and other resources to this task. The use of outsourcing, the concept of virtuality, and a focus on core value-adding processes have heightened this pressure for proper external organization and management with commercial partners. This requires a greater understanding of organizational behaviour and communication beyond traditional boundaries, particularly power and culture, in order to manage the growing number of strategically significant relationships that impact on the modern firm.

Global Sourcing and Quick Response

As highlighted earlier, consumer demand is becoming more volatile. QR is designed for such an environment. The clothing industry is perhaps one of the most demanding challenges for logistics management, with hundreds of colours, thousands of styles and millions of stock-keeping units (SKUs) on the retail shelves at any one time. Further, the average shelf lives of these merchandise items shortens with each passing year.

A key factor in the value of QR is its ability to deal with uncertainty or variance. There are numerous sources of uncertainty in a supply pipeline, starting with demand through to the reliability on the part of suppliers and shippers, and Quick Response offers the ability to counter the negative impacts of uncertainty. Speed and flexibility are the key, but it is important to realize that the level of uncertainty associated with the product dictates the optimal level of speed and flexibility required. The type of supply chain needs to fit the characteristics of the product as well as the uncertainty associated with it.

Many fashion or fast-moving goods sell in distinct seasons, and are on the shelf for just one season and almost totally replaced in the following year. Figure 5.5 represents sales of a typical product subject to pronounced seasonal fluctuation.

Figure 5.5: Seasonality Profile

The normal practice is to manufacture as much as possible of the finished goods inventory required before the season starts and then deliver half to two-thirds of the necessary products before the beginning of the season (point A) and ship the balance of the inventory at pre-agreed times (say, point B), or wait re-orders (points B to C). QR takes a different route. Although it may pose manufacturing capacity problems, as little as possible is made or shipped before the season. From day one, PoS data are gathered, analysed, and then used to understand demand preferences. Manufacturing is then guided by the continuing (daily or weekly) PoS data. Re-order and re-estimation and replenishment approaches are then used for frequent re-orders (points A to B). This QR approach can be better appreciated when applied to a particular demand situation such as global or offshore sourcing.

The Costs of Offshore Sourcing

As earlier discussed, a Quick Response operations strategy offers a high degree of speed, flexibility and responsiveness in supply pipelines. This has substantial implications for sourcing decisions, particularly those involving offshore sourcing. Empirical research has established that sourcing offshore to secure lower cost inputs (typically from low-wage, underdeveloped regions) can have negative consequences; once the hidden and inflexibility costs are quantified (Lowson, 2001).

Hidden costs are those that are not typically anticipated by the buying organization, but almost always occur. Some examples include the various initial investments to establish the new source of supply, control of quality and delivery variables; high initial training costs, coupled with a high staff turnover affecting both throughput and quality; significantly lower operator efficiency offshore; irrevocable letters of credit charges; delays at the port of entry, last minute use of air freight and other logistics costs; expensive administrative travel to correct problems; process inefficiencies and quality problems; long lead times and the need for large buffer inventories; and finally, the not insubstantial human cost involved in the conditions endured in many foreign factory environments often employing child labour and over-using natural resources.

Inflexibility costs are the costs of using suppliers that are inflexible and unresponsive to changes in demand (before, during and after a product selling season), leading to disproportionate levels of demand amplifi- cation across a longer supply network and a number of considerable cost implications.

It is only when these two cost categories can be properly quantified that the advantages and disadvantages of low-wage, foreign purchasing can be fully understood, and a method for their true representation becomes apparent. Once the hidden costs are categorized, sourcing from sources on the basis of low cost alone becomes far less attractive. Further, when the costs of inflexibility are added, it becomes clear that using a domestic Quick Response supplier may be a far better option due to the added velocity and flexibility that is provided.

The Quick Response Alternative

Collapsing the product pipeline can reduce time and provide a more efficient response to rapidly changing consumer demand. In this way, a QR operations strategy will encourage the cross-enterprise re-engineering of business processes, from product development to replenishment, with resulting improved stocking points, lower inventory, lower cost and increased sales. The value chain is reconfigured to reflect speed of response, flexibility and differentiation. Table 5.3 compares two different sourcing alternatives: the Quick Response domestic supplier and the offshore counterpart.

Table 5.3: QR and Faster Turnover

	QR supplier	Offshore supplier
Consumer purchase price (£)	100,000	100,000
Customer purchase price (£)	60,000	60,000
Gross margin (£)	40,000	40,000
Average inventory (£)	10,000	24,000
Gross margin (%)	40.00	40.00
Inventory turns (pa)	6.02	2.5
GM ROI (%)	400	167

In this initial scenario two possible buying decisions are reviewed using QR and then offshore sources of supply. First, end-consumer purchases, whether bought from a retailer or manufacturer, are assumed to be £100,000. It is then assumed that the customer (a manufacturer or retailer) has bought the goods for the same price (£60,000). An averaged gross margin is also assumed of 40 per cent on these sales. The only difference between the two sourcing alternatives is the flexibility and speed of response. The ability of the QR supplier to rapidly replenish the stock of the customer (manufacturer or retailer) to real-time consumer demand allows the customer to turn inventory of the product six as opposed to 2.5 times a year. This faster turnover rapidly increases the customer’s gross margin return on each pound invested in inventory from £1.67 to £4.00, more than twice that of the offshore competition. Because of this inventory turnover advantage the manufacturer or retailer could afford to pay a premium for the product and still get a better return (Table 5.4).

Table 5.4: QR and a Higher Cost of Goods

	QR supplier	Offshore supplier	Cost advantage applicable
Consumer purchase price (£)	100,000	100,000
Customer purchase price (£)	78,000	60,000	30.33%
Gross margin (£)	22,000	40,000
Average inventory (£)	13,033	24,000
Gross margin (%)	22.00	40.00
Inventory turns (pa)	6.02	2.5
GM ROI (%)	169	167

In the table the price paid for goods by the customer has increased by one-third, but because of the flexibility and responsiveness of the supplier, the return on inventory has increased by 1.2 percent or from £1.67 to £1.69.

Table 5.5 views the sourcing decision from another perspective: the decision to move sourcing offshore to a competitor with lower unit cost but a slower response. In this situation the foreign supplier would need to reduce the purchase price by nearly 35 per cent to retain a comparative gross margin return on investment (GM ROI) to that of the QR supplier.

Table 5.5: A Move to Offshore Supply

	QR supplier	Offshore supplier	Cost advantage applicable
Consumer purchase price (£)	100,000	100,000
Customer purchase price (£)	60,000	38,448	35.92%
Gross margin (£)	40,000	61,552
Average inventory (£)	10,000	15,379
Gross margin (%)	40.00	61.55
Inventory turns (pa)	6.02	2.5
GM ROI (%)	400	400

The more flexible and higher velocity supplier proves more competitive than the lower-cost one, even without taking into account the other hidden and inflexibility costs.

Product velocity also produces other benefits. Replenishing stock in response to real-time demand ensures that the right goods are available, reflecting what is being demanded. Revenue will rise as products in demand are sold at the expected price rather than marked down as unwanted. Table 5.6 shows the combined effect of velocity, faster inventory turns and reduced markdowns.

Table 5.6: The Effect of QR Velocity

	QR supplier	Offshore supplier
Consumer purchase price (£)	113,000	100,000
Customer purchase price (£)	60,000	60,000
Gross margin (£)	53,000	40,000
Average inventory (£)	10,000	24,000
Gross margin (%)	40.00	40.00
Inventory turns (pa)	6.02	2.5
GM ROI (%)	530	167

As product velocity increases, so too will revenue, as there is less need to sell goods below optimum price points. The customer’s (manufacturer or retailer) return on investment grows to over three times that of a competitor.

Finally, Quick Response also has an impact on strategic pricing decisions. Velocity and flexibility in the supply system will allow an original equipment manufacturer (OEM) or retailer to reduce the price of the finished goods below that of the competition and capture greater market share (Table 5.7). Because of QR flexibility and responsiveness, the retailer or manufacturer can reduce the purchase price to the consumer by 32 per cent and still earn a slightly better return in terms of GM ROI than competitors.

Table 5.7: QR and Strategic Pricing

	QR supplier	Offshore supplier	Cost advantage applicable
Consumer purchase price (£)	76,840	100,000	–32.00
Customer purchase price (£)	60,000	60,000
Gross margin (£)	16,840	40,000
Average inventory (£)	10,000	24,000
Gross margin (%)	21.91	40.00
Inventory turns (pa)	6.0	2.5
GM ROI (%)	168	167
* Based upon purchase price of £113,000

The Importance of Agility

Successful companies in fashion markets seem not just to be able to capture the imagination of the consumer with their products, but are often characterized by their agility. In other words, they have the ability to move quickly, uninhibited by cumbersome processes and lengthy supply chains. Many organizations are finding that it is possible to make significant improvements by adopting a twin strategy of simultaneously reducing the logistics lead time and capturing information sooner on actual customer demand.

The Spanish-based apparel company Zara provides a good example of how an integrated design, manufacturing and retail group is successfully managing its international supply chains. The first Zara shop opened in La Coruna, Northern Spain in 1975. In under 30 years the business had grown to become one of Spain’s leading textile and apparel companies, with sizeable production facilities in Spain, purchasing operations in south-east Asia and the Caribbean, a finance holding company in the Netherlands and around 200 retail outlets (owned by the company) in Europe and the Americas.

Like Italian fashion giant Benetton, Zara produces a single global product range, designed to appeal to an international target market, in this case fashion-conscious 18 to 35-year-olds (the same market segment as is targeted by The Limited and The Gap in the United States, and Next in the UK). The whole process of supplying goods to the stores begins with cross-functional teams – comprising fashion, commercial and retail specialists – working within Zara’s design department at the company’s headquarters in La Coruna. The designs reflect the latest in international fashion trends, with inspiration gleaned through visits to fashion shows, competitors’ stores, university campuses, pubs, cafes and clubs, plus any other venues or events deemed to be relevant to the lifestyles of the target customers. The team’s knowledge of fashion trends is supplemented further by regular inflows of EPOS data and other information from all of the company’s stores and sites around the world.

Fashion specialists within the design department are responsible for the initial designs, fabric selection and choice of prints and colours. It is then up to the team’s commercial management specialists to ascertain the likely commercial viability of the items proposed. If the design is accepted, the commercial specialists proceed to negotiate with suppliers, agree purchase prices, analyse costs, margins and fix a standard cross-currency price position for the garment. The size of the production run – the number of garments required – and launch dates (the latter vary between countries in accordance with custom and climate) are also determined at this point.

Raw materials are procured through the company’s buying offices in the UK, China and the Netherlands, with most of the materials themselves coming in from Mauritius, New Zealand, Australia, Morocco, China, India, Turkey, Korea, Italy and Germany. This global sourcing policy using a broad supplier base provides the widest possible selection of fashion fabrics, while reducing the risk of dependence on any source or supplier. Approximately 40 per cent of garments – those with the broadest and least transient appeal – are imported as finished goods from low-cost manufacturing centres in the Far East. The rest are produced in Spain, using Zara’s own highly automated factories and a network of smaller contractors. Two guiding principles underlie all of its operations: quick response to market needs and working without inventory. Here lies the company’s principle source of competitive advantage.

Zara’s manufacturing systems are in many ways similar to those developed and employed so successfully by Benetton in northern Italy, but refined using ideas developed in conjunction with Toyota. Only those operations that enhance cost-efficiency through economies of scale are conducted in-house (such as dying, cutting, labelling and packaging). All other manufacturing activities, including the labour-intensive finishing stages, are completed by networks of more than 300 small subcontractors, each specializing in one particular part of the production process or garment type. These subcontractors work exclusively for Zara’s parent, Inditex SA. In return they receive the necessary technological, financial and logistical support required to achieve stringent time and quality targets. Inventory costs are kept to a minimum because Zara pays only for the completed garments. The system is flexible enough to cope with sudden changes in demand, though production is always kept at a level slightly below expected sales, to keep stock moving. Zara has opted for undersupply, viewing it as a lesser evil than holding slow-moving or obsolete stock.

Finished goods are forwarded to the company’s huge distribution centre in La Coruna, where they are labelled, price-tagged (all items carry international price tags showing the price in all relevant currencies) and packed. From there they travel by third-party contractors by road and/or air to their penultimate destinations. The shops themselves receive deliveries of new stock on a twice-weekly basis, according to shop-by-shop stock allocations calculated by the design department. The whole production cycle takes only three or four weeks. In an industry where lead times of many months are still the norm, Zara has reduced its lead- time gap for more than half of the garments it sells to a level unmatched by any of its European or North American competitors.

Conclusion

Fashion retailing, and the manufacturing sector that supports it, are clearly highly dependent on an agile logistics capability. The ability to capture new design ideas, to convert these into products and to bring them to market in the shortest possible timescale has become a prerequisite for success in the fashion business. Paradoxically many retailers in this sector have actually seen their design-to-store lead times increase as a result of so-called low-cost sourcing strategies.

To compete successfully in short lifecycle and volatile markets requires that a wider definition of cost be adopted. The real cost is the total end-toend pipeline cost, which includes not only the manufacturing cost of the product, but also the inventory carrying cost, the cost of mark-downs as well as the cost of loss of sales through stock-outs. The key to the minimization of this total supply chain cost is the adoption of agile strategies, which focus on time compression and quick response. Retailers and manufacturers that recognize the importance of agility will out-perform those that do not.

References

Gunston, R and Harding, P (1986) Quick Response: US and UK experiences, Textile Outlook International, 10, pp 43–51

Hunter, N A (1990) Quick Response for Apparel Manufacturing, Textile Institute, UK

Lowson, R H (2001) Retail sourcing strategies: are they cost effective?, International Journal of Logistics, 4 (3), pp 271–96

Lowson, R H (2002) Strategic Operations Management: The new competitive advantage, Routledge, London

Lowson, R H, King, R and Hunter, N A (1999) Quick Response: Managing the supply chain to meet consumer demand, Wiley, Chichester