Zara: Lean Fashion

Zara: Lean Fashion
By Eric Holmes

Managers of any business are faced with a common challenge: “How can the business operate with the minimum waste to produce the maximum value for the customer?” The Toyota Production System was developed to address this issue in the automotive industry, and Toyota’s methods evolved into a series of practices known by the adjective: “lean” (Womack, 1990). Today, industries from health care to defence adopt lean strategies to streamline their operations. The core concepts underpinning lean strategy are summarized below:

1) Customer Focus

• Value defined by customer

2) Stable operations

• Cycle time reduction
• Clean, organize and standardize

3) Worker empowerment

• Workers continuously improve processes
• “The 5 why’s” (Root Cause Analysis)

4) Waste Reduction
5) Process Improvement

• Process charting and simplification

Figure 1. Lean Goals

Many examples of the lean concepts above can be found in the 2006 case study titled: “Zara: IT for Fast Fashion”. Case authors Andrew McAfee, Vincent Dessain and Anders Sjoman describe how Zara's parent company Inditex, developed operational capabilities which exceeded those of competing firms such as The Gap and H&M. The authors describe Zara’s ability to rapidly deliver a wide variety of clothing, while maintaining a relatively low price. Zara’s competitive advantage can be attributed to their successful implementation of lean techniques, beginning with a strong focus on creating value for their customers. Zara’s vision is described on the Inditex website: “Zara's approach to design is closely linked to our customers. A non-stop flow of information from stores conveys shoppers’ desires and demands...” (Inditex, 2011). By understanding its fashion conscious customers, Zara identified the operational capability necessary to put the right fashion into the right market at the right time. “Zara needed to be able to respond very quickly to the demands of target customers, who were young, fashion-conscious city dwellers” (McAfee, 2006). A number of lean techniques allowed Zara to achieve this objective.

Zara empowered its workers to influence sales decisions rather than dictating these from the top down. The case notes that: “senior managers wanted to take advantage of the intelligence and trust the judgement of employees throughout the company, instead of relying on a small set of decision makers.” Sales floor managers were valuable conduits of consumer knowledge which flowed back to headquarters in Spain where the fashion design department continually worked to create the next wave of products. One mechanism for this knowledge flow was the twice-weekly order, which required Zara sales managers to meet with their staff in order to determine which items were selling well, and which were not. When orders were placed, sales managers had considerable control over what their store would receive, and this allowed Zara to customize their offerings to a diversity of markets. By the end of 2010, Zara had opened over 5,000 stores worldwide including locales as different as Iceland and Saudi Arabia. (Inditex, 2011) By empowering its employees, Zara’s management allowed its organization to be sensitive to local trends. By processing all orders through Zara headquarters, upper management had the opportunity to see global trends and to plan their growth strategy accordingly.

At Zara, non-essential capital expenditure was trimmed for the sake of crucial operational functions such as maintaining rapid manufacturing and distribution. Zara’s point of sale infrastructure is a good example of a system which was deemed “good enough” and was left with a deliberately frugal budget to keep administrative overhead low. At the time of the case, Zara’s IT spending was considerably lower than competitors at 0.5% of sales, and IT staff represented less than 0.5% of Zara’s workforce (McAfee, 2006). The company’s focus remained on rapidly designing and delivering the latest trends in clothing to its customers. Zara focused its capital expenditure here, deploying a sophisticated logistic system capable of handling large through-put including a 45,000 garment per hour staging system (Ghemawat, 2006). Zara’s focus on streamlining its manufacturing and distribution led it to outsell its rival H&M in sales in 2005, and The Gap in 2008 leading to its current position as the world’s largest clothing retailer (BBC, 2011). A Japanese competitor named World Co. matched Zara’s rapid manufacturing cycle times, but was unable to match its profitability because of its large administrative costs amounting to 40% of sales compared to only 20% for Zara (Ghemawat, 2006). Zara’s ability to “trim fat” extended to its marketing, which made maximum use of an enticing storefront to create a singular experience for its customers. Preferring to spend on its stores rather than on large marketing campaigns, the Zara store design itself became the focus of considerable planning. In 2009, to manage store interior design data, Inditex turned to a software company named PTC. PTC described Zara’s situation as follows:

“Delivering the right information to the right person at the right time is important in any industry but it is vital in the fashion business because of the industry's short cycle times. Any delay in opening new stores due to incomplete or outdated information means a considerable monetary loss for the company.” (PTC, 2011).

Through continual refinement, and application of lean principles to its core business, Zara made strategic decisions regarding how to allocate its capital expenditure in a manner that maximized customer value. This allowed the business to flourish.

Zara’s implementation of the lean techniques enabled it to thrive in the competitive fashion clothing market. By allowing its focus to remain on fuelling customer’s desire for the latest styles in clothing, and by making careful choices about which projects to commit capital to, Zara has succeeded in maintaining its growth until the present day. Continued growth will require Zara’s effort in maintaining their operational advantage over ever-wiser competitors. Lean practices emphasize continual process improvement, and therefore Zara’s commitment to lean practices cannot coincide with complacency.




References:
1) Womack, J., Jones, D. and Roos, D., 1990. The machine that changed the world. New York: Rawson Associates.
2) Zara “Who we are” Page, 2011. Inditex Group - Zara -. [online] Available at:
[Accessed 23 October 2011].
3) McAfee, A., Dessain, V. and Sjoman, A., 2006. Zara: IT for Fast Fashion. Harvard Business School Case Number 9-604-081.
4) Ghemawat, P. and Luis Nueno, J., 2006. Zara: Fast Fashion. Harvard Business School Case Number 9-703-497.
5) BBC News, 2011. Zara-owner Inditex profits from global expansion. BBC News [online] Available at: [Accessed 23 October 2011].
6) PTC Press Release, 2009. Inditex Group Selects PTC Windchill To Accelerate Interior Design Of Its Retail Network . [online] Available at: < http://www.ptc.com/appserver/wcms/standards/textsub.jsp?&im_dbkey=90967&icg_dbkey=21> [Accessed 23 October 2011].

What McKinsey is Looking for:

According to the McKinsey careers site, here are the following attributes that they seek in an associate (the level that MBA's would enter)

·         Problem solving. Analytical and conceptual reasoning abilities, curiosity, creativity, business judgment, tolerance for ambiguity, and quantitative facility.

·         Achievement. Ability to set high aspirations for self, achieve outstanding results, handle obstacles well, show signs of entrepreneurship, and take personal risks.

·         Influence skills. Ability to positively influence others, possess self-confidence without arrogance, listen, understand, and respond well to others.

·         Interpersonal capabilities. Ability and willingness to take on leadership roles, seize opportunities and take action, help build highly effective teams with a shared vision, be sensitive to the thoughts and feelings of other team members.

Among these attributes, I find "tolerance for ambiguity" quite interesting. I wonder what (ethically?) ambiguous situations associates find themselves in? I know that McKinsey does a lot of work for governments, and they seem to be quite muddled with warring factions. One thing is for sure: I need to do more homework on them before finalizing my cover letter.

Ambiguous terms abound when you review some of their online descriptions. "work-streams", "performance cells" and the like. There is definitely a language of consulting evolving here, and it seems very closely linked to East Coast Business school terms. (such as "leveraging" etc)

Review of Russell Wardrop's short course on public speaking

Presentation Preparation Steps:

1. Analyze:  What basic things need to be in place before I can present effectively?
1. venue:  what level of formality, how many people, how diverse a crowd? 
2. audience:  who are they?  how old are they? what are they interested in hearing about?
3. technology:  what do I need to set up?
2. Brainstorm:
1. creative thinking, unbounded
3. Construct (Back to Brainstorm in an iterative loop)
1. layout presentation on paper first
2. later turn to computer
4. Deliver
1. execute the presentation plan
5. Evaluate
1. what could have gone better
2. continuous improvement

The above work flow closely resembles Demming's Plan, Do, Check, Act Cycle.

Presentations should be delivered with:

1. Energy
2. Spontenaity 
3. Creativity

 Presentations should involve a voice which is:

1. Louder
2. Lower
3. Slower

..than you may initially be comfortable with.

Voice and physical presence are important.

Review of Accounting (F. Mitchell)

2010 Exam Review:


Appendix of Ratios: (N=Numerator of ratio, D=Denominator of ratio)

Overall Performance Measures

1. ROTA (Return on Total Assets)
1. N= Net Profit before Finance Cost and Tax (Income Statement)
2. D= Total Assets (Balance Sheet)
2. ROE (Return on Equity)
1. N= Net Profit after Tax (Income Statement)
2. D= Total Equity = Share Capital+Retained Profits+Revaluation Reserve (Balance Sheet)
3. Sales Growth (Year on year)
1. ((2009 Sales/2008 Sales)-1)*100% = 7.5% (Income statement)
4. Asset Growth (Year on year)
1. ((2009 Assets/2008 Assets)-1)*100%=6.6% (Balance sheet)

Profitability:

1. GPP (Gross Profit Percentage)
1. N=Gross Profit (Income Statement)
2. D=Sales (Income Statement)
2. NPP (Net Profit Percentage)
1. N=Net Profit (Income Statement)
2. D=Sales (Income Statement) 
3. S&D Cost % (Sales and Distribution Cost Percentage)
1. N=S&D Cost (IS)
2. D=Sales (IS)
4. Admin. Cost %
1. N=Admin Cost (IS)
2. D=Sales (IS)

 Asset Productivity:

1. Overall asset productivity:
1. N=Sales (IS)
2. D=Total Assets (BS)
2. Non current asset productivity:
1. N=Sales (IS)
2. D=Non-Current assets (B/S, top)
3. current asset productivity:
1. N=Sales (IS)
2. D=current assets (BS, top)

 Working Capital:

1. Inventory Days: (N/D*M)
1. N=Inventory (B/S)
2. D=Cost of Sales (I/S)
3. Multiplier=365
2. Payable Days: (N/D*M)
1. N=Trade Payables
2. D=COS (I/S)

 Liquidity:

1. Current Ratio:
1. N=current assets (bs)
2. D=current liabilities (bs)
2.  Quick Ratio:
1. N=cash (b/s)
2. D=current liabilities (b/s)

Gearing:

1. Financial Gearing:
1. N=Non Current Liabilities (ie loans) (b/s)
2. D=Liabilities including equity but excluding current liabilities (b/s)
2. Interest Cover
1. N=EBIT (Earnings before interest and taxes) (is)
2. D=Interest Costs (is)

  Balance Sheet Structure:

1. non-current assets
1. N=non-current assets (bs)
2. D=total assets (bs)
2. current assets
1. N=current assets (bs)
2. D=total assets (bs)
3. current liabilities
1. N=current liabilities (bs)
2. D=total liabilities (bs)
4. non-current liabilities
1. N=non-current liabilities (bs)
2. D=total liabilities (bs)
5. equity
1. N=total equity (bs)
2. D=total liabilities (bs)

1. Report on Performance of Nevershut Ltd.
1. attributes: 
1. profitable, although profit is decreasing
2. sales growth
3. asset growth
4. has positive operational cash flow (cash generative operations)
5. stable selling and distribution costs
6. stable asset productivity#
7. gearing is decreasing
2. focusing on negative attributes
1. ROA, ROE decreasing
1. ROA decreased from 12.6% to 6.7%, decrease of 47%
2. ROE decreased from 11.3% to 5.4%, decrease of 52%
2. decrease in ROA,ROE due to decreasing profitability as seen by gross and net profit decreases
1. this counteracts positive effect of sales growth
2. asset growth is in fact largely due to revaluations
1. 400% increase in revaluation reserve 2009 from 2008
2. 183% increase in revaluation reserve 2010 from 2009
3. poor admin cost control  with 33% increase 2010 from 2008
4. rising inventory days 12.9% increase 2010 from 2008
1. not good for firm with perishable inventory
5. rising payable days  43% increase 2010 from 2008
1. large increase in trade payables from 2009 to 2010
6. strong reduction in current and quick ratios indicating the decrease in working capital
7. Large capital outflows may be dividends which the company can ill-afford
2. Report on Shareholder's Target Price of £5/share:
1. profitability of Nevershut would have to increase to be in line with that of prospective parent company Resale PLC
2. Book Value/share
1. 
   

Review of Macro-economics (J. Crook)

The test for macro-economics is on Thursday, Oct. 20th from 9-1030AM at Adam House room 1.
The test is closed-notes and consists of 6 questions, of which 2 can be chosen for credit.  Only 2 questions can be answered.

Link to Macro Economic Glossary (scroll down the glossary page to get to MacoEcon)

Topics:

Tutorial 1:  Question:  What determines Supply and Demand?
The Price of a certain good affects it's supply and demand as shown by the Supply and Demand curves.
The price of other goods can affect the price of a good, and the way in which it affects it is determined by these factors:


Factors affecting Demand:
1)  Demand curve shift due to substitute's price.  Substitute goods experience opposite demand shift.
2)  Demand curve shift due to complement's price.  Complementary goods experience same demand shift.
3)  Demand curve shift due to Consumer income increase/decrease.
  3a)  Inferior good's demand curve shifts up and right as Consumer income decreases.
  3b)  normal good's demand curve shifts up and right as Consumer income increases.
4)  Demand curve shift due to Consumer's taste

Factors affecting Supply:
 1)  Price of a good, leading to movement along the Supply Curve.
 2)  Supply curve shift due to the Price of inputs used to create the good/service.
 3)  Supply curve shift due to changes in technology.
 4)  Supply curve shift due to changes in Government Regulation. 

Examples:

Market for New Cars:
How do the following market changes affect equilibrium car price?
 1)  Consumer Income Decrease:  Cars are a normal good.  Therefore a decrease in consumer income has a corresponding decrease in the demand curve.  The equilibrium price would decrease as a result.
 2)  Bus Fare price decrease:  Bus Fares are a substitute good for New Cars because a consumer's choice to take the bus replaces the need to buy a new car.  Therefore,  a decrease in bus fares will lead to an increase in Bus demand, and a corresponding decrease in New Car demand.  This will lead to a lower equilibrium price.
 3)  Car Plant Worker's Wage Rate Decrease:  Lower costs of production represent lower input costs of supplying cars to the consumer.  The supply curve shifts upward and a higher equilibrium price results.
 4)  Gas price increase:  Gas is a complementary good for new cars, assuming that the new cars run on gasoline.  Therefore a rise in gas prices would be accompanied by lower demand for gas and a lower demand for new cars that use gas.  The demand curve shifts downward, and the new equilibrium price is lower.
 5)  2nd Hand Car price decrease:  2nd Hand Cars are a substitute good for New Cars, and therefore a decrease in 2nd Hand Car price would be accompanied by an increase in 2nd Hand Car demand.  The New Car Demand Curve would shift down and left, leading to a lower equilibrium price.

Housing and Car Market:
If consumer's incomes increased, how would prices and quantities change for housing and cars?
 1)  What causes the supply curve to be very steep in the case of housing?

Holding other factors constant:
demand curve:  quantity (or quantity/year) demanded versus price. 
supply curve:   quantity (or quantity/year) supplied versus price.

equilibrium reached when supply and demand curves intersect.

Supply and Demand:
http://afs.berkeley.edu/~pberck/EnvEcon/supply.htm


Tutorial 2:  The Circular Flow of Income


1)  Identify the individual components of a nation's GDP.

GDP=Y=Cp+Ip+Gp+Xp-Zp

2)  What condition is necessary for the economy to be at equilibrium?

AD=Y, or Aggregate Demand is equal to output.
In an open economy, AD=Cp+Ip+Gp+Xp-Zp
Graphically, this condition occurs when a given AD curve intersects a 45 degree line drawn on a graph of Y vs. AD.

 3)  How would flooding in the UK affect UK GDP?

Increase in Gp as the government fixes the damage.  Gp is an autonomous expenditure, and would cause AD to shift up.
Increase in c, the marginal propensity to consume, because goods were destroyed and now have to be replaced.  This would cause the AD curve to change slope, although the effect would be temporary due to the temporary nature of the calamity.

Typically, governments seek to stabilize output in order to keep GDP at a "full employment level".  Even when an economy is operating at potential output, there is still a "natural rate of unemployment" which simply means that the wage being paid is not sufficient for some % of workers to seek a job.  (These workers don't need to work to survive, and can opt out of the employment market.)

4)  How do increases in Autonomous Expenditure affect Aggregate Demand?

An increase in Ca,Gp,Ip or Xp cause an upward shift in the AD curve.  These are autonomous expenditures and are not affected by the level of income/output in an economy.

A decrease in Ca, Gp, Ip or Xp cause a downward shift in the AD curve.  Take the example of decreased investment Ip during a given year.  Holding all other expenditures constant and assuming that c, t and z were also constant, the reduction in Ip would account for the entire reduction in AD.  Now look to the next year.  AD from the previous year becomes the "Initial Output" for this year.  Because Cp=Ca+c(1-t)Y, the amount of Consumer expenditure in the following year would be less due to the total AD reduction from the previous year.  Imports would also be less because they depend output Y as well.  (Zp=z*Y).  Assuming that c,t and z were held constant, the amount spent by consumers and imported would be reduced by a factor of (Y-(reduction in Ip) )/Y

Because consumer spending by households and import spending by the economy depends on output (Y), any autonomous change in output affects AD for the current cycle, and this affects output for the next cycle.  Because every succeeding year depends on the previous year's AD as it's initial input, the chain of events leads to drifting in output over time based on the change in planned consumption, planned investment, planned government expenditure, or planned exports.  If the balance is not adequately maintained by the government, economies can drift downward as less expenditure leads to less and less demand ad finitum.

What causes GDP to change when autonomous investment changes?  (ie:  what is the mechanism for this change?)

1. Firms experience an "unplanned reduction" (or increase) in stocks

Tutorial 3:  Output Multiplier: 

1. What would cause a rise in GDP in a 4 sector economy?

• Increase in planned consumer spending Cp
• Cp could increase due to Ca increasing
• Cp could also increase due to c (Marginal Propensity to Consume) increasing
• Cp could also increase due to t (tax rate) decreasing
• Increase in planned government spending Gp
• Increase in planned exports Xp
• Increase in planned investment by firms, Ip
• Decrease in z, the marginal propensity to import

Underlined items above would cause the slope of the aggregate demand curve to increase
Other items would cause the AD curve to shift upwards, but retain the same slope.

  2.  What is the Output Multiplier?

Change in output Y / Change in Autonomous Expenditure

Limitation of the Output Multiplier:  Only tracks changes related to Autonomous Expenditure.

  3.  GDP falls.  How is Government Tax Income affected?  How is the Govt. Budget affected?

NTp=t*Y
This means that Planned Net Taxes equals the net tax rate times output Y.
If Y decreases, and the tax rate remains the same, then tax income decreases proportionally with Y.
The government budget is:  Budget surplus (shortfall)=NTp-Gp
If NTp is less than Government Expenditure Gp, then there is a negative balance, and a budget shortfall.

  4.  In a 4 sector economy, Gp falls, but NTp fall by the same amount.  What would happen to Y?

Y would decrease.

  5.  What is the Tax Output Multiplier?

The Tax Output Multiplier is a way to track the change in Output due to tax increases or decreases.
The formula is:
-c*Y/(1-c(1-t))

The way to use it is:
Change in Y = (change in tax rate, including sign) * Tax output multiplier

  6.  How is AD affected by the dramatic fall in US house prices?

1. In the short term, because many house owners are "under-water", meaning that they owe more than their house is worth, Cp decreases because they are subject to the same high payments as before (due to US loan conditions) but are subject to more stressful economic conditions.  Many homeowners lost their jobs, and were unable to make payments leading to a glut of houses on the market.
2. Gp increase
3. Because houses are now less expensive, demand for houses may increase.  However, because of the high default rate on home mortgages, many homes were taken from their owners and are sitting on bank's balance sheets.  This rapid increase in supply led to a corresponding plummeting of prices and many homes remain unsold to date.

Tutorial 5:  Money Supply: 

By controlling the treasury bond interest rate, the central bank is able to control the supply of money in the economy.  Referring to the picture below, if there is an excess supply of money at bond rate r2, the central bank lowers bond interest rates which have the effect of making bonds less attractive to investors, who now get a lower interest rate.  This encourages investors to buy bonds because

The following idea is taken from this website on monetary policy:   
http://edwardmcphail.com/intromacro/lecture14/lecture14.html 

When i>i_e the quantity of money supplied exceeds the quantity of money demanded so 
people buy bonds in order to decrease their money holdings. This drives up the price of bonds and causes a decrease in i.

What happens if prices levels increase?  This causes a shift in the demand curve for money as shown below.  Ld moves to Ld'

 If the government engages in "expansionary monetary policy", then the amount of money increases as shown in the excerpt below, taken from:  http://edwardmcphail.com/intromacro/lecture14/lecture14.html  

 1)  What makes the size of the output multiplier smaller in an open economy versus a closed economy?

Comparing the multiplier formulas for open vs. closed economies:

1. Open economy: m=1/(1*c(1-t)+z) where c and z are the marginal propensity to consume and import respectively.
2. Closed economy, z=0 and m=1/(1*c(1-t)) a larger multiplier because the denominator is smaller.

2)  What happens to imports when GDP (Y) rises?

z*Y=Zp, planned imports.  As Y increases so does Z.

3)  Why should M4 increase when M0 is increased?  Does this actually happen?

This does happen, although the multiplier is not as large as governments are targeting.
Open market operations involve buying bonds from commercial banks for cash, thereby increasing M0.  M0*m=M4, so the hope is that the multiplier will be large enough to substantially increase M4.  What banks do with the money however is not solely determined by the government.  If it isn't lended to the extent expected, m will be smaller and the amount of M4 created will be less.
  During the crisis of 2008, banks faced liquidity problems, and they hoarded the cash on their balance sheets to ensure that they could pay depositors and this is one reason that m was not as large as the government had hoped.

4)  How did US subprime mortgage markets affect bank reserves, even if the banks in question were not themselves mortgage lenders?

The default rate of mortgages led to a banking scare, which led commercial deposit customers to withdraw money at an unexpected rate.  Cash reserves in banks plummeted and they were forced to turn to the federal reserve, the US central bank.

5)  How did banks respond to a fall in their reserves?

Banks cut back on high-risk loans (such as sub primes that started the scare)

6)  Describe the opportunity cost of money.

A person will hold cash at the expense of the opportunity to make a return on those funds in the bond market.  When real interest rates are high there is not enough demand for cash and people turn to bonds.  Bond demand goes up and this causes interest rates to fall until they reach an equilibrium.  At this point money supply Ls and money demand Ld are equal.  Graphically, this represents the intersection between the money supply curve (a vertical line) and money demand ( a line sloping downward and to the right.  When interest rates are high, the quantity demanded of money is very small because bonds will minimize the opportunity cost of holding cash.  When interest rates are low the quantity demanded of money is larger because their is less opportunity cost.

7)  Describe the Paradox of Thrift:

During times of recession (economy is contracting), if everyone tries to save more money, aggregate demand will fall because consumer spending Cp depends on income.  Cp is defined as any income that consumers choose to spend, and if they instead save (Sp) the ultimate effect is a reduction in output until expenditure by the government, consumer or firms (Ip) is resumed.

Because output falls as a whole, savings as a percentage of output also falls, and therefore the paradox is that in attempting to save, less savings is realized.

8)  What affects the demand for money:

Money is useful for:

• transaction demand
• asset demand
• unexpected expenditure demand

How much money is held in cash versus bonds can be viewed on another chart, this time focusing on the marginal cost of holding the cash.  The cost is flat corresponding to a certain interest rate.  When the real interest rate rises, the cost of holding the cash (and forgoing bond investment) rises as shown below.

Investment demand changes based on interest rates, with more investment projects becoming feasible as the cost of financing decreases.

Tutorial 6: Inflation  


1)  Describe the Repo market and monetary control

A reverse repo is what happens if you buy a bond from the bank an they agree to repurchase it from you at a fixed date for a certain price.  From the bank's perspective, this is a repo, because they are doing the repurchasing.

If you sell a repo to the bank, you are effectively taking out a loan because you agree to pay the bank a certain amount on a certain date.