Expert Blog Entry: Zara’s Supply Chain
Zara stores are found in most countries all over the world. The company’s aggression expansion of the business has led it to investing in 49 countries. Five of the new ones include; Peru, South Africa, Australia, Azerbaijan, and Taiwan. The company is also present in China, which has 132 stores (Inditex, 2017). Moreover, 30 of the shops are Zara outlets while the rest are Inditex concepts, and Oysho. Inditex is found in eighty countries with eight retail formats and 5,500 stores (Inditex, 2017). The company’s success is as a result of its tactful tailored retail strategies. It is reported that the company seeks to locate its outlets in well-established corridors (Inditex, 2017). Zara also changed its retail strategy so that it may cater for different seasons.
Maintaining a long supply chain is challenging because it leads to unnecessary delays either in supply or production. According to Caro et al. (2010), Zara sources most of its raw materials from its home country and neighbouring countries such as Morocco and Portugal. Using this strategy might be expensive and it saves a lot in the long run especially on products that are no longer trendy. By acquiring materials from home country and neighbouring countries, the company reduces the supply chain significantly. A short supply chain means that the production process is much faster than those companies that outsource raw materials from other continents (Caro et al. 2010). It also takes a short time to come up with new products thus ensuring that their commodities are always trendy, attracting consumers who are trendy as well. It also takes a short time to stock their outlets meaning that incase a customer wants a particular product, they can get it within a short time. Hansen (2012) asserts that even though Zara’s products are relatively cheap as compared to other brands, they do not compromise on quality. The company produces quality products that last for long periods without wearing out or losing value. The products also remain fashionable despite the time they stay in market due to their designs and quality.
Zara produces approximately 540 million items per year (Hansen, 2012). The management ensures that delivery is efficient and that it reaches all stores located in different parts of the world. Consumers are able to enjoy supply of new products after a short time thus enabling them to stay trendy (Inditex, 2017). Small batch deliveries are made two times a week to their outlets all over the world. This ensures that all markets are served equally thus leading to customer satisfaction.
The company’s overarching strategy is to achieve exponential growth by using vertical integrations to diversify their services and products. Caro et al. (2010) notes that Zara adapts couture designs, distributes, manufactures, and retails their products within fourteen days after the original design has appeared on catwalks. Doing so enables the company to satisfy the needs of their consumers and to meet their urgent desires. The fact that the company avails commodities that have first appeared on catwalks to different outlets all over the world makes the company outstanding in terms of its fast supply chain. The company also markets its products at a fast rate, thus, ensuring consumers get the intended information as soon as possible (Caro et al. 2010).
Zara delivers trendy and fashionable clothes that are meant for people with different tastes and preferences through the integrated and controlled process. The company’s ensures that a large proportion of its production remains in-house. It also makes sure that its factories reserve approximately 85% of the total capacity to make in-season adjustments easy (Inditex, 2017). Zara also relies mostly on sophisticated fabric that leads to production of unique and quality clothes. Sewing facilities are also located near to its headquarters in Spain to ensure that the production process takes the shortest time possible. Moreover, 50% of Zara’s clothes are manufactured and designed before the season ends (Inditex, 2017). If a certain design or style becomes popular and has a high demand on the streets, the company focuses on the product to ensure that it increases stock of the same (Crofton and Dopico, 2012). The newly manufactured styles are availed to the stores while the orders are still high.
Store managers carry out a research on what shoppers like, dislike, or the types of products that are on high demand. Customers’ feedback is given to the company’s designers who start designing the clothes. The company also responds to demands by developing and changing designs. For instance, the company normally operates 4.5 days weekly but it is flexible in such a way that some room is left for temporary labor and extra shifts to be added (Caro et al., 2010). The strategy allows the company to sell a large number of products consumers at full price due to the fact that it avoids scarcity of commodities as much as possible. The company’s total cost of production is low thus leading to its competitive prices that allow it to have a competitive advantage other companies. The company also enjoys high profits because it gets 85% of the price of their products while other companies get an average of 60 to 70 percent depending on the length of the supply chain. It is also worth noting that items that are not sold are not more than 10% of the company’s stock which means that they go little losses as compared to other companies which have an average of 17-20% of unsold stock (Inditex, 2017).
The company sticks to a predictable, deep, and fast rhythm that is based on order fulfilment to its stores. Crofton and Dopico (2012) posit that each of Zara’s stores sends two orders weekly on particular days at a specified time. The time when trucks leave the stores are specified as well as the time scheduled for shipments. When garments finally arrive at the stores, they are priced and labelled appropriately. This defined rhythm of purchasing and supplies enables workers involved in procurement, retail, and production to know when to carry out specific tasks to avoid delays. The strategy is also beneficial to customers because they are aware of the time they are supposed to visit Zara’s stores to check on new garments.
Zara’s success is as a result of its successful operation methods. It’s vertically integrated chain of supply and cross-functional strategy of operation enables the company to maintain mass production of clothes under push control leading to lower markdowns, lower markdowns, well-managed inventories and creation of value for shareholders in both long and short term (Inditex, 2017). Zara stays on top of hot trending clothes thus being the best example of a well done fast fashion approach.
Starbuck’s Internal Report
Procurement Process
Starbuck’s merchandise and coffee are sourced from different parts of the world and then delivered to the company’s retail stores which are 16, 700 in number (Starbucks, 2017). The stores serve 50 million consumers in 51 countries weekly (Starbucks, 2017). Before, 2008, the company was establishing new stores in different countries thus leading to consumption of a lot of money (Starbucks, 2017). The company later developed a new strategy of procurement and maintain supplies.
Starbucks employs a single worldwide logistics system to manage all its stores effectively. In general, Starbucks Company purchases coffee beans from Africa, Europe, the United States, and Asia in ocean containers (Starbucks, 2017). After the unroasted beans reach their final destination, they are transported to six storage plants. Once the beans are roasted, they are packaged and transported to regional distribution centres. The company has five distribution centres located in the United States. Three of the distribution centres work under third-party logistics companies while two is company owned. Starbucks has two distribution centres located in Europe and others in Asia which are all operate under third party. Their warehouses not only handle coffee but a wide range of products (Geereddy, 2014). Other items stored in the warehouses such as cappuccino mix and furniture are required by the company’s retail outlets.
Supply Chain
Depending on the location of stores, supplies are done by either regional distribution centres, large or small distribution centres. The company has thirty three distribution centres located in U.S, five in Canada, Seven in Asia, and three in Europe (Starbucks, 2017). The central distribution centres carry baked goods, dairy products, and other paper products such as napkins and cups. Coffee and other products are transported by dedicated trucks to the company’s retail stores and retail outlets (Marques, Camillo and Holt, 2015). Frequent deliveries are made to ensure that the stores and outlets do not run out of stock.
Supplier Selection
According to Geereddy (2014), inbound statistics for the company refers to selection of the finest coffee beans by Starbucks’ appointed buyers who do the selection from coffee producers in Asia, Africa, and Latin America. Unroasted or green coffee beans are bought directly from farmers by the company’s buyers. The products are then trucked to storage sites (Geereddy, 2014). From the storage sites, beans are roasted and finally packaged and then transported to distribution centres. It is important to note that Starbucks Company does not outsource procurement of its products so as to make sure that quality is not compromised. The company does not involve intermediaries in selling its products (Geereddy, 2014). Most of the products are sold in their stores.
Challenges Faced
According to Brizek (2014), the company is at high risk of competition from other companies with similar concepts such as Timothy’s and New World Coffee among others. Competition leads to reduced number of consumers in different regions. The company also does not have enough experience in a market where price is highly sensitive. The company should, therefore, be in a position to defend itself from such retailers due to extensive initiatives taken to sustain the brand advantage (Brizek 2014). Apart from direct retailing, the company now has distribution alliances with Capital Records, Nordstrom, and Pepsi-Co to expand its distribution portfolios and products sold (Brizek 2014).
The company also experiences fluctuations in the prices of coffee and dairy products. It is quite challenging for the company to plan and allocate a specific amount of funds for purchasing dairy products and coffee whose prices change depending on climate, political, and economic stability of the countries selling such products (Talpau and Boscor, 2011). Prices of such products go high leading to increased production cost thus reduced profitability. Change of coffee bean and dairy products prices may lead to attempts of increasing prices of coffee which may not be desirable to loyal customers (Talpau and Boscor, 2011).
The company does not only face stiff competition from other coffee companies but also those that copy Starbucks strategies, products, and method of presentation. Talpau and Boscor, (2011) state that due to the ongoing trend of fast foods and coffee shops, upcoming companies will want to use the strategies used by the successful brands. This presents potential threats of imitation which may lead to undesirable results to Starbuck Company. For instance, it may lose some of its customers who may decide to experiment other retailers. Their products could also be similar to other coffee shops thus leading to similar tastes and experiences which may not be appealing to already existing customers(Patterson, Scott and Uncles, 2010). Customers may not find the need of having to specifically buying Starbucks coffee because they can access it from other retailers.
Competitors
Brizek (2014) asserts that some of the main competitors of Starbucks Company include; Dunkin’ Donuts and McDonalds. Dunkin’ Donuts introduced its specialty drinks in 2000s and made its name as a destination coffee shop. In 2006, Dunkin put more efforts than before to outcompete Starbucks (Seaford, Culp and Brooks, 2012). Since then, the company has continued to expand the products it offers and offering other substantial food items.
McDonalds in 2015, earned more than $26 billion, which was way higher than what Dunkin’ Donuts and Starbucks earned (Seaford, Culp and Brooks, 2012). McDonalds earns more than its competitors because of it larger menu. Consumers prefer visiting McDonalds because they have a wide variety of products they can choose from. Additionally, McDonalds has for a long time been known as a fast food centre and not for its coffee (Brizek, 2014). In 2000s, McDonalds introduced iced and flavoured coffee which led to increased competition to Dunkin’ Donuts and Starbucks (Seaford, Culp and Brooks, 2012). Such competition leads to decreased number of Starbucks’ customers.
Recommendations
Starbucks should consider simplifying its supply chain for different coffeemakers. The main challenge is that it has several distribution centres which store their products. Distribution from such centres to retailers takes long or at times becomes inconvenient due to unavoidable circumstances. The company should, therefore consider supplying coffee and other dairy products from a single store. Doing so makes it easy to supervise operations, take stock, and make distribution easier due to the reduced number of people managing operations.
Starbucks should also consider shortening the supply chain to improve supplies. The current method used to make supplies of dairy products and coffee is not quite sustainable because it is expensive and also takes a long time to deliver the products. The company should invest in fewer more effective suppliers to who will transport the products to a centralized location. This method will save the company the production cost thus leading to increased profitability.
Internal Memo
To:
From:
Date:
Subject: Improving Starbuck’s supply chain
Introduction
Moving towards greater sustainability in the supply chain is embraced by multinational, local, and small businesses. Most companies in different parts of the world consider the supply chain as one of the most difficult operations in business. Ensuring that the supply chain of a business is sustainable is quite beneficial to a company. A supply chain may represent the well-being of the environment and the society. However, it is important not to overlook the benefits that a business can enjoy from a sustainable supply chain (Carter and Liane, 2011). One of the advantages of a sustainable supply chain is that it increases the value of the brand thus attracting more consumers.
A sustainable supply chain is generally less resource intensive as compared to that which is not sustainable. Gold, Seuring and Beske (2010) note that increasing the sustainability of a supply chain leads to increased efficiency. Increased efficiency is as a result of availability of reduction of the time taken to make get products and increasing the availability of such items. Due to the ongoing concerns, governments have increased their focus on increasing sustainability of businesses, drafting regulations and laws that companies are supposed to follow to avoid fines and penalties. Most proactive organisations align themselves in a suitable position to avoid legal and regulatory setbacks. Some of the sustainable measures of a supply chain include anti-corruption measures, fair labour practices, human rights and environmental progress, and protection (Gold et al. 2010).
Supply Chain Considerations
Starbucks Company faces a lot of problems in its supply chain because their products are mostly transported directly from farmers to different distribution centres and then finally trucked to retail outlets. The supply chain is generally long and also encounters challenges such as delays and fluctuations regarding prices due to change of climate among other contributing factors (Marques, Camillo and Holt, 2015). Starbucks’ supply chain as well as the process of employee training is complicated. The company should seek to make adjustments on product assortment choices, marketing, labour deployment strategies, and display optimization (Marques et al., 2015). The company’s employees should undergo proper training, consumers should also know details about their options, and make sure that the inventory is stocked.
Starbucks Company should partner with a supplier who is set to ensure that the supply chain is sustainable in the long run. The supplier should shorten the supply chain and also ensure that the quality of dairy products and coffee is not compromised (Seuring, 2013). Since the company does the supplies, it is important for the supplier to ensure that the new method of making supplies is beneficial as compared to the initial method. Firstly, there are several central distribution centres thus leading to a long supply chain and unnecessary delays when making supplies (Seuring, 2013). The supply should state what the company will do to ensure that the supply chain is shorter to ensure that operations are carried out in a timely manner.
Before deciding outsourcing a supplier, Starbucks should ensure that the supplier shares the same goals while obtaining products such as coffee. Starbucks Company, for instance, does not compromise on quality of coffee. Starbucks carries out the process of obtaining such products by itself to ensure that they only get high quality coffee. The company should outline the measures it will take to ensure that they deliver quality products and services (Brandenburg et al., 2014). The method of collecting products from farmers should also be well explained to determine whether it is achievable and more effective than the existing one.
The other important thing that should be considered by a supplier is ensuring timely delivery of products. Seuring (2013) states that delays in making supplies often results into losses because the production process is also delayed. At times, delay in supplies could result to into delayed delivery of products to consumers. The resulting effect is that sales are reduced leading to decreased incomes. To ensure sustainability, the supply must come up with measures that ensure human rights are observed at all levels. People supplying dairy and coffee products should be empowered with basic rights. Supply systems that do not guarantee people basic rights are unsustainable. Some of the human rights problems that may be encountered include race and gender equality and children’s rights among others (Seuring, 2013). Such problems are not easy to identify in international supply chains so it is important to consider them while choosing suppliers and during development of business relationships.
The supply chain should not expose workers to exploitation by any chance through poor wages, poor working conditions, and lengthy work hours among others. To combat such a problem, a supplier should identify labour sources within the supply chain. Measures should be well spelt out by the supplier protect and avoid any possible abuses (Seuring, 2013). Poor working conditions in the supply chain may lead to a spoilt reputation of Starbucks Company because the processes carried out in the supply chain are part of the final product.
According to Ahi and Searcy (2013), environmental progress and protection is an ongoing concern in the current world. People rely on the environment to deliver raw materials and to create energy for industries. The supplier should be keen not to lead to over exploitation of the environment and to also ensure that resources are utilized wisely. The supplier should focus on reducing negative environmental impacts. The transportation methods used should also be environmental friendly to reduce carbon emissions. The packaging designs used should also be environmental friendly to reduce waste and to maximize on space. Ensuring that the method used to make supplies is sustainable could be an expensive exercise.
Conclusion
The supplier to be considered in making supplies of dairy products and coffee should ensure that sustainability is observed at all levels to ensure that benefits are derived in the long run.
Summary of key actions / action plan.
Some of the factors that should be considered while considering a supplies partner include; ensuring that quality dairy products and coffee are delivered, the supply chain is shortened, environmental sustainability is ensured at all levels of supply. Some of the possible ways of ensuring that sustainability is ensured is taking environmental friendly measures, availing fair labour practices and protecting human rights.
Waste in the Food Supply Chain
A third of the food that is produced by farmers does not reach the consumer. Some of the vital things to consider in the supply chain and to feed the growing population include innovative methods of handling waste, improved infrastructure and transport systems. The Food and Agriculture Organization (FAO) (2017) notes that a third of food produced does not reach our plates. This means that food is lost in the supply chain at various stages. The amount of food lost is, therefore, estimated to be 1.3 billion tones. Additionally, there are 3.3 billion tonnes of carbon dioxide emitted yearly and a loss of approximately 470 billion Euros annually as a result of food loss in the supply chain (FAO, 2017). This trend is not desirable because it is estimated that there should be a 50% increase of the food produced currently by 2030 to ensure that it is sufficient for the entire population (FAO, 2017). The food industry should play a major role in minimizing waste to increase sustainability.
Food security and food waste is a major problem in developing countries due to inadequate infrastructure. More than 40% of food produced is lost in different pre-consumption stages such as transporting, storage, harvesting, and drying (FAO, 2017). Even though complete elimination of waste in the supply chain is inevitable, reduction of the amount of loss leads to sustainable agricultural development and increased food security.
Promotional offers have a huge effect on the quantity of food purchased as well as the purchasing behavior. Promotions generally lead to an increase in the amount of food purchased by consumers. The consumption rate of certain products is also influenced by the level of promotion on the product. Most studies on food waste show that consumers’ food purchase behaviour is the main determinant of the amount of food wasted (Bond et al., 2013). Food purchase behaviour involves activities such as checking food inventories and buying unintended items. Time constraints also contribute to impulse buying.
Food waste is as a result of negative experiences resulting from promotional purchase. In most cases, sales promotions encourage people to buy items some of which they do not need (Ataman et al., 2010). Sales promotions in most cases temporarily increase sales to gain market share and to increase sales. Sales promotions are mainly used to clear year-end inventories before other new products are introduced. Sales promotions are also a tool of gaining a competitive advantage over other companies. Prices of commodities are significantly reduced and incentives are also offered to attract customers (Ataman et al., 2010). Even though sales promotions lead to increased volumes of sales, they do not lead to customer loyalty or brand identity.
There are customers who are loyal to certain brands but through sales promotions, people learn about new products and may be attracted to them through specific features as discussed above. In such cases, large numbers of customers buy particular products in large quantities because the promotions only last for a short time (Bond et al., 2013). Empty shelves at supermarket are, therefore, as a result of impulsive buying. Increased demand also leads to increased pressure to increase the production process.
On the other hand, sales promotions may also lead to a significant reduction in the total sales and demand of other items. People tend to focus on buying products that are currently on promotion because they tend to see their benefits during that moment (Ataman et al., 2010). For instance, in products that are similar, a consumer prefers buying the one that is on promotion either to enjoy the reduced price or to get another free item. Such strategies lead to reduction of sales in products that are not under promotion. Expiry of products may happen if a product is not bought for a certain period. All these lead to unnecessary waste.
Bullwhip Effect
The bullwhip effect refers to the distribution channel that focuses on inefficiencies in the supply chain. The effect refers to increased swings in inventory as a result of shifts in demands made by consumers. The intensity of the whip increases up the supply chain. Forecasts made decreases up the supply chain (Barlas and Gunduz, 2011). For example, most consumer products have a consistent consumption but problems arise and situations become unpredictable by moving away from the purchasing behavior of consumers.
Figure 1: The Bullwhip Effect (Coriolis Consulting, 2014).
Customer’s demand are not perfectly stable, there are times that demand is high for certain products and fall after sometime. Companies are supposed to forecast demands in an appropriate way to position various resources. While moving up the supply chain, each participant in the supply chain observes variations in terms of demand thus leading to need for ensuring that the stock is kept safe. During times of increased demands, there is an increase in orders from down-stream participants (Campuzano and Mula, 2011). When demands fall, orders may significantly fall or stop immediately but the inventory does not reduce.
Variations in the supply chain that lead to imbalances and changes in demand of products are mainly as a result of lack of communication, variations in the price of commodities, free return policies, sales promotions, and disorganization among others (Tayur, Ganeshan and Magazine, 2012). To solve the above problems it is important to address issues that directly impact the supply chain. For instance, prices fluctuations should be addressed to ensure that they are stable, communication between relevant parties should also be ensured, return policies should be regulated to avoid unnecessary losses, and provision of demand information should be regulated to make sure that the right information is given at a certain period (Stadtler, 2015).
To achieve stability and sustainability, a supply chain that is demand driven should be established to react to orders from customers. A demand driven supply chain results to improved visibility of the demands made by customers and movement of inventory along the supply chain. Improving communications in the supply chain leads to more effective positioning of the inventory and reduction of costs thus increasing profitability and efficiency of operations.
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