A Zara shopfront, London, 2007 (Source: Wikimedia Commons)
Ideas for Leaders #198

Fast Fashion Retailing – Transforming Operations Management

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Key Concept

Since the early 2000s, Spanish retailer Zara (founded 1975) has taken the fashion industry by storm, with its ability to react to rapid changes in market conditions and keep its stock fresh and up-to-date, once claiming it needs only two weeks (as compared to up to six months traditionally needed by rivals) to produce and distribute new stock. According to this Idea, other retailers can achieve similar success by optimizing three key operation management decisions: design, sourcing and distribution.

Idea Summary

The apparel industry (which includes clothing, footwear, accessories, etc.) is one of the world’s largest, due partly to the relatively low barriers to entry. According to Euromonitor International, there were more than 1,400 retail brands at the start of 2013. All of these brands are concerned about meeting growing demands and getting their collections out to stores quickly. According to Professors Felipe Caro and Victor Martínez-de-Albéniz (from UCLA Anderson School of Management and IESE Business School, respectively), the way forward is to adopt the new operations management frameworks pioneered by Zara and others.

Successful players in the clothing retail industry have learned to optimize three key operations decisions: design, sourcing and distribution. Such successful players include Zara, H&M and Topshop who have all become known as ‘fast fashion’ retailers, due to their approach of providing fashion almost on demand. Zara in particular (the flagship brand of the Spanish retail conglomerate Inditex) has received a lot of attention in recent years for its centralized distribution model.

In their paper, Caro and Martínez-de-Albéniz delve further into these three decisions, offering insight and advice such as:

  1. Design decisions: This requires a good understanding of how consumers choose among products within a collection. Retailers like Zara harness this opportunity by researching what sells, rather than sticking solely to ‘safe’ bets. Being aware of trends set when they happen rather than being tied to traditional seasonal spring and autumn collections.
  2. Purchasing/sourcing decisions: This requires managing the risks of over-ordering and under-ordering compared to demand. Caro and Martínez-de-Albéniz suggest that a multi-purchase model is apt for companies where lead times are shorter, and it is possible to use early demand information to produce more when demand becomes high.
  3. Distribution decisions: Once designs and their quantities have been decided, distribution decisions need to be made in order to properly distribute inventory across a network of stores. Here, again, the example of Zara is relevant; Zara’s distribution model is at the level of store display. If a product is unavailable in major sizes, it removes the product from the shop floor. This requires that distribution decisions take into account the shipping scarce stock to other stores in the network, so that the right combination of sizes is always on display. According to Caro and Martínez-de-Albéniz, doing this can boost sales by as much as 4 per cent.

Business Application

For retailers to meet demand and stay ahead of their competitors, making sure that design, sourcing and distribution decisions are taken properly and quickly is crucial. New challenges include the management of dynamic collections and product introductions, managing store space, etc. Changing traditional practices to resolve these issues will require integrating new approaches to existing models and, according to Caro and Martínez-de-Albéniz, more complex dynamic optimization techniques.

Game theory models could also be used to understand strategic interactions between retailers. For example, while constantly changing collections may be beneficial to a retailer such as Zara if taken in isolation, this may trigger competition bringing with it the risk of product wars, in which all retailers launch many new products. This increases everyone's costs, but not necessarily their market share.

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Authors

Institutions

Source

Idea conceived

  • June 2013

Idea posted

  • August 2013

DOI number

10.13007/198

Subject

Real Time Analytics