According to Gartner, a supply chain is a group of functions and processes focused on optimizing the flow of products, services and related information from sources of supply to customers or points of demand. It stretches across multiple tiers in the supplier network to customers and to customers of those customers. In fashion retail, customers are B2B like wholesalers, franchises, multibrand stores or direct-to-consumers (B2C) channels such as physical owned stores or e-Commerce.
Supply Chain includes planning, sourcing and procurement, manufacturing, distribution, transportation, and services within a company and its ecosystem of partners. In fashion, these processes are not owned, or not totally owned, by the supply chain department and are split across the product/design areas and logistics department. Everything is connected, from merchandising to marketing and stores: budgeting, collection structure, purchase orders, inbound/outbound calendars, etc. The financial health of a company is impacted by how these processes are orquestrated, enabled by digitalization (PLM, WHS, OMS and other systems) and talent. In a seasonal business like fashion, leading brands are managing their cash flows efficiently by defining the right collection structure that will impact on inventory turnover supported by the right suppliers network/location.
Supply chains cover everything, from product development to product delivery, truly being the backbone of successful companies. Supply chain management refers to optimization of processes and systems. It’s the “hardware” side of the business. The supply chain is an essential part of the back-end of business, hidden from the eyes of the customers, it enables a product to be sold in the right place, to the right customer, at the right time and more importantly, in a cost-effective way. Today, thanks to e-commerce growth, supply chain is a key customer experience lever.
“New Retail” is trying to face volatile scenarios or uncertainty with an agile, connected supply chain that enhances traceability and transparency. Different strategies are defined, from postponement, made-to-order, customizations, limited-editions, collaborations… From a tech standpoint, augmented reality, blockchain, IoT, advanced analytics or AI are some of the trends driving the competitive advantage to supply chains while facing “liquidity” or volatility.
Inditex (ITX) / Zara: How to reduce inventory life cycle risks
There are no celebrities or famous names in the design studios of Zara. On the contrary, Gucci had Alessandro Michelle, Moschino has Jeremy Scott or Chanel had Karl Lagerfeld. The Spanish fast-fashion brand takes a different approach: environmental analysis. This is identifying and understanding trends, social buzz, special events, competitive products, celebrities’ posts, customers feedback…
Then, Zara in-store and e-commerce product testing will improve the efficiency of their production and distribution. Inditex has 7,469 stores in 202 markets and millions of followers on Instagram, FB, Twitter, Wechat, Weitao…The customer is at the heart of its business model and listening is essential.
We perform active listening on the messages arising from item searches both in stores and in the online channel. Then we process them using innovative analytical systems that allow us to create product coordination proposals to satisfy our customers’ needs, facilitating their decision-making (ITX Annual Report 2019).
Inditex‘s hyper-responsive supply chain is comprised of a network of 1,985 suppliers. Nearshore manufacturing represents 54% of the factories (in countries such as Spain, Portugal, Morocco, and Turkey) and 36% are located off-shore. Basics, those clothes with a longer shelf life, are usually produced in off-shore countries (eg. China, Bangladesh, Vietnam) and it takes around 1-2 months to ship from China to the US or Europe (and 3-4 months from manufacturing to shipping). Trendy items, the essence of fast-fashion, are commonly manufactured in near-shore locations such as Spain, Portugal, Turkey, Bulgaria or Poland. Turkey is emerging as a global-textile hub.
Inditex’s distribution is centralized through a highly automated Distribution Center (DC) in Arteixo, Galicia. Each brand (Zara, Massimo Dutti, Bershka, etc) opperates its own centralised logistics facilities, where it receives and stores its inventory for distribution twice per week to its shops and online warehouses all over the world. Inditex’s latest stock integration projects include LAPA implementation, a high-capacity RFID reader for stocktaking in stores with high volumes of items. Also XWMS, an innovative warehouse management system capable of managing the distribution of the mixed integrated stock (parcels and hanging garments), in an orderly manner according to multiple criteria (collection, SKUs, etc) through shipments whose frequency is configurable for each store depending on customer demand. Then, a logistics connection point located in Lelystad, the Netherlands, is devised to operate fully with integrated sotck, incorporating the latest innovations in technology and automation of logistics infrastructures.
When comparing financial results between Inditex (ITX) and H&M, its main competitor, we see how profitable and efficient it is (+17p.p on EBITDA margin and +8 p.p on net profit). What are the success factors? A higher turnover and higher margins by selling less during discount periods (higher sell-through). ITX accurate forecasting and allocations system optimize inventory costs management. Zara listens to what customers are requesting, understands their needs and aligns its operations to achieve the best financial results compared to its competitors.
Luxury retailers have a high profit margin as the result of a high gross margin. Zara’s net profit is due to optimizing everything below COGS line in the P&L, succeeding in managing leverage, net financial debt and inventory turnover. So, it’s not only about effective purchasing but efficient supply chain management also.
RBC released their latest report on European General Retail and these are some interesting comments related to inventories and sourcing:
- Strong omnichannel models winning. We think apparel retailers with a relatively integrated store/online business model, and a strong design/buy setup, have shown the best sales performance. We expect this to continue into 2023. We think online growth had a pandemic induced acceleration, and is now reverting back to its longer term growth trajectory.
- Near term cost headwinds, improving supplier terms. Retailers face margin pressure from external sourcing headwinds, higher labour and energy costs. But several larger retailers have told us they are seeing improved supplier terms now, which along with some easing of fx, raw material and freight costs, suggests a more favourable outlook for gross margins in H2 2023. Inventories should normalise by Spring with a likely much tighter industry buy next year.
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