As we have talked about Inventory Management during this week, I would like to share with you this article. Zara is one of the best examples that maintaining a low inventory levels is synonym of reaching huge profits and we can also link some concepts studied at class with this article.
I would like to point out some of its key factors: a short lead time (24h in Europe and 40h in Asia/America), the small size of batches (stock delivered is just what the stores need) and the customer feedback (to align Zara’s designers to clients’ preferences).
The advantage is that if sales doesn’t increase as it’s expected, the unsold inventory is really low (so, the overstock is not costly for them) and they can react quickly by designing, manufacturing and distributing new styles in a couple of weeks (while the trend is still in the peak).
On the other hand, if demand suddenly increases they are flexible to meet it. That’s because they don’t operate at full capacity, so extra shifts or labor can be added when needed. Therefore, the probability that Zara goes out of stock is really low. In class, we studied that a high service level requires a high safety stock but it’s false in Zara’s case.
In summary, Zara’s inventory management strategy allows them to sell a higher percentage of items at full price (because of the sense of shortage and exclusiveness) while at the same time they minimize the total cost (low inventory level and low percentage of unsold items).
By: Arnau Casellas, Daniel Puerto and Pol Ribera
Reference: C. Lu, 4 December, 2014, Trade Gecko