World Trade - December 2008 - (Page 54)

Great Moments IN WORLD TRADE Fast Fashion BY JEREMY N. SMITH F ollowing his competitors made Amancio Ortega a millionaire. Following his customers made him a billionaire. Amancio Ortega In 1975, Ortega, formerly a Spanish bathrobe maker, opened the ﬁrst Zara clothing store. His business model was simple: sell highfashion look-alikes to price-conscious European consumers. When that succeeded, he had a new idea: radically alter the design and distribution model of the entire clothing industry. At the time, six months passed between a garment’s in-house design and its in-store delivery, forcing manufacturers and retailers alike to bet big on two to three annual collections. One big ﬂop could ruin everybody. What Ortega wanted was “fast fashion”: designs he could bring before— and, if necessary, away from—customers as quickly as possible. Partnering with José Maria Castellano, an information technology expert and former ConAgra executive, Ortega gathered an internal design team that eventually numbered in the hundreds. Each was empowered by a rapid-response production system to follow-up immediately on the latest fashions, tweaking color or pattern day to day, order to order. Automated inventory systems, meanwhile, linked stores to factories in a continuous feedback loop. In as few as two weeks from the drawing board, Zara knew what was selling and what wasn’t. Either way, the days of big inventory bets—and associated ﬁnancial hits—were over. Last year, Amancio Ortega celebrated his seventy-first birthday as the world’s seventh richest person. Inditex—Zara’s parent company—is an industry icon, “possibly the most innovative and devastating retailer in the world” in the words of Daniel Piette, fashion director of Louis Vuitton. This year the ﬁrm will launch an estimated 10,000 new designs, each an object lesson in the advantages of supply chain ﬂexibility. While “flexibility” is a general term that can refer to a series of supply chain improvements, the most important in retail are postponement and supplier and transportation capacity commitments, says Warren H. Hausman, Professor of Operations Management in the Department of Inditex Management Science & Engineering at Stanford University. For example, a manufacturer might buy undyed fabric and postpone the color choice until the last minute. Likewise, in making capacity commitments to suppliers, instead of specifying a shirt’s type and size and color, one would instead contract for several hundred hours of weekly cutting, sewing, and assembling. Finally, in working with transportation providers, retailers wouldn’t tell suppliers what specific SKUs they’re shipping, instead simply reserving capacity for those shipments by sea or air. Such moves “keep supply chain partners happy, but delay the decision on speciﬁc SKUs—be they color, style, or other feature—as late as possible in the supply chain process to keep up with fashion,” Hausman says. The result is popular items are on shelves when people want them, eliminating stockouts, while unpopular goods are rarely produced in mass quantities, avoiding markdowns. “On reduced stockouts, you’ve gotten smarter at getting more of the products that turn out to be hot,” Hausman says. “What you’re doing when you reduce markdowns is, you’re selling more stuff at full price.” In his analysis, the expected revenue and proﬁt lift from such improvements average, are respectively 6 and 27 percent. A modest increase in revenue so dramatically affects proﬁt because the effect of stockouts and markdowns is much lower revenue—30 to 40 percent lower in an industry where proﬁt is typically 10 percent of revenue. Given that supply chain flexibility improves the bottom line so much, why hasn’t every retail executive followed the example of Amancio Ortega? “Attempting to implement supply chain flexibility is non-trivial, especially if you use postponement,” Hausman says. “It’s a different way of organizing as opposed to managing individual SKUs. It requires a change in business process, which can cause upheaval in the business organization.” Zara aside, retail has been the laggard when it comes to pursuing supply chain ﬂexibility, Hausman says, but adoption of innovative ideas will increase over the next decade. “Over the next ﬁve to ten years the leading companies in this space will implement versions of these concepts,” he says. “Once that happens the laggards will either follow along or be beat out by the market place.” WT 54 WORLD TRADE DECEMBER 2008

Table of Contents Feed for the Digital Edition of World Trade - December 2008

World Trade - December 2008 Contents The Promise of Peril The Current Reality with IP in China Supply Chain Watch Tradewinds Performance Partners: Awards of Excellence Managing With Mobility What 2009 Bodes for the Supply Chain Small Business Takes to Export Green is Here for Good Fast Fashion

World Trade - December 2008

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