Bonnie Strong At Inditex Business Applications Case Analysis I need help with a case study forbusiness appications. The casr is Bonnie Strong @ Inditex VIR

Bonnie Strong At Inditex Business Applications Case Analysis I need help with a case study forbusiness appications. The casr is Bonnie Strong @ Inditex VIRGINIA
DARDEN
Business Publishing
UVA-OM-1558
Sept. 5, 2017
Bonnie Strong at Inditex
It was an
Arteixo, Spain, headquarters for two months in June 2016 when the e-mail popped into her in-box one morning.
Bonnie Strong had only been working at Industria de Diseño Textil, S.A. (Inditex), at the company’s
invitation to be a
describe her experiences working for Inditex. In one week. With the dean in attendancel Strong set down her
coffee and began to type a response. Her mind was already racing with ideas for a presentation for the alumni
breakfast speaker at the Darden School of Business’s Spanish alumni meeting and
accounted for 65% of Inditex sales and 67% of its EBIT.1 (See Exhibit 1 for Inditex income statements and
Strong worked in the product store team for Zara, Inditex’s flagship “chic cheap” clothing store, which
balance sheets.) In 2015, Inditex opened 77 net new Zara stores.2 Due to Zara’s unique focus on store-level
sales trends and an iron grip on each stage of its supply chain, the fast-fashion company was able to migrate
This meant fewer fashion misses, fewer markdowns, and happier customers. Over the previous decade, this
had driven enormous global growth for Zara and parts of the promising business model had been
replicated in seven other retail brands Inditex owned. Optimism—and opportunity—was high for customers,
stockholders, and employees.
At 28, Strong was young for someone holding such an important role at Inditex-responsibility over the
Zara stores in the East Coast region of the United States–but she felt ready. While she had only been store
Strong’s passion for retail and her natural leadership abilities had convinced Inditex to take a chance on her
manager at the New York Zara store on an interim basis for one year before heading to Darden for an MBA,
The breakfast meeting was Strong’s chance to synthesize all she had learned and to show Darden that it shoul
strategy
be proud of her as a graduate
. Armed with the analytical tools gained at business school, Strong hoped
impress the alumni chapter with her take on the company’s logistics
, marketing, design, manufacturing, sup
chain, and financial performance. She had a lot of work to do to prepare.
he Inditex Way-A Path to Growth
Amancio Ortega Gaona started out as a dressmaker in 1963. He launched Zara’s first store in 19
aside city of La Coruña, Spain, and Zara’s first head office in Arteixo (which was part of the I
unicipality). Two years later, Zara’s first garment factory opened in Arteixo. It took slightly less tha
Inditex annual report, 2015.
Inditex annual report, 2015.
Tadrid was 300 miles away and Barcelona was 555 miles away from La Coruña.
Our goal is
ublic-sourced case was prepared by Stephen E. Maiden (MBA?01); Gerry Yemen, Senior Researcher, and Elliott N. Weiss,
iness Administration. It was written as a basis for class discussion rather than to illustrate effective or ineffective handlin
iboracters and their positions described in this case are fictional and any company information used was draw
don School Foundation, Charlottesville, VA. All rights reserved. To or
din a retrieval system, used in a spreadsheet
, or
UVA OM
my maste#, and high fashion brands) and determined that value could be added by offering the style
nhh at the lowest possible price. In a way, Zarn took advantage of the idiosyncratic way the upscalefach
Tradicionally, the design world launched two fashion shows each year (spring/summer and fall/wint),
of which neeurred just less than a full year before merchandise hit the store. Why so longOnders would
wath were risk taking in terms of which items would sell. The items ordered were produced on new, ad hoc
Hemen as a result of these shows and would typically be manufactured as a result of secured demand, with
wave produce, inspired by what they saw at fashion shows. Designer
raha thar manufacturers did not keep in stock. Brand marketers ordered fabrics, which could take 30 o 120
wwwpetitive pressures for new fabrics and complex collections among fashion brands kept lead umes long,
ana e Spring/summer) collections and styles after the current (e.g., fall/winter) shows were complete
Whilo many mass retailers replicated the high-fashion template where in-house designers or buyer
leratorships determined the merchandise produced in big batches on six-to-nine-month lead times, Zara did
things dinerently. The success of mass-fashion retailers like Zara was based on: (1) reliance on picking up and
adopting niyles from the fashion world rather than creating something unique; (2) using in-stock standard
continuous stream of new merchandise. By following this strategy, Zara smoothed out peak/trough activity
fabrics immediately available for delivery from manufacturers; and (3) keeping selections fresh with a
magnitude faster operations than its peers before considering any other supply-and-demand chain
across all departments, kept inventory fresh to minimize unsold or obsolete stock, and could offer orders-of-
improvements
teams only started working on the next
customer Centricity
mall near her home in New Jersey. She had loved that job loved the customer interactions, the feel and color
Strong first heard about Zara during high school, when she was working at the local The Gap store in the
and smell of the new fabrics, the excitement when new styles came in. That had been where the apparel retail
bug first bit her. But early on, she became frustrated at some of the higher-level decisions that affected the
stores. Certain V-neck sweaters or pleated trousers that she knew were not popular kept arriving to be stocked
After a few months, they migrated to the discount rack. Meanwhile, other items that customers loved woul
stock out
quickly. The store manager just shrugged and said, “That’s what corporate wants.” When a friend
hers at the store left for a job at Zara, Strong began to hear reports of a much different store environment.
At Zara, new products were arriving practically all the time, and they were fresh, hot items. Regu
customers, mostly 17-to-22-year-old women, would come almost weekly to see what new fun and sexy st
were available. Because batches were small
, there was an urgency to buy what was in the store. Strong espec
liked reports that store managers had a significant say in what hit the shelves. That made sense to her .
knew better what would sell in a certain store than the person servicing customers every day? It was the prin
reason Strong took a job at the New York Zara during college and then continued with the store as an ass
manager following graduation.
Store managers at Zara stood next to the epicenter of the business—the customer-and were thu
gnificant responsibility. Managers were trained to analyze raw customer data every day and to solicit cu
edback, and they examined sales and replenishment reports hourly. Each day, managers were req
mpile and return to headquarters granular feedback that included why certain items were tried on
mately not purchased. Managers ordered product twice weekly, each time trying to gauge deman
UN
Page 2
a
products
inspected and immediately shipped,
to open Zara’s first logistics center (which was around 108,000 square feet), also in Aridio. This
Porto, Portugal, followed by stores in New York and Paris in 1989 and 1990, respectively. By 1986, they
holding company. By 1988, Inditex was ready to export its formula. Zara opened its first www
Inditex’s first public report, Inditex had 748 stores worldwide (489 of them in Spain) and three ex
learn that Zara delivered small batches of new items to its stores twice a week, a delivery rate that was
brands (Pull & Bear, Massimo Dutti, and Bershka). The company operated a design center in Spain
200 designers producing 30,000 designs and 11,000 new items per year. Industry observers were as
speed, which had customized software in its central Spanish distribution center that allowed
its Spanish operations center, though not necessarily to produce them more cheaply. While nearly all of it as
But it was soon understood that Inditex was also following a unique plan to produce its products de
Europe and Northern Africa to enhance its flexibility. Lines could be quickly cancelled and clearance Sales
were outsourcing supply to lower-wage Asian countries such as China, Inditex kept its supply primarily
inventory backlogs could be avoided. This meant that Inditex could sell 80% to 85% of its merchandise a
price while typical apparel retailers only sold 60% to 0% of their merchandise at full price. To Indites, the
for higher production costs related to paying air freight twice a week to ship hangers file
with trendy clothing around the globe, and for the higher costs of sending less-than-full truckloads
merchandise across Europe.
The strategy worked. In 2001, Inditex offered as much as 26.09% of its shares in an IPO for USD7.5 billion
to USD8.3 billion, a price-to-earnings multiple of 26 to 29 times its estimated 2001 earnings. Over the next 12
months, the stock rallied nearly 50% as observers began to understand the company’s unique business model
and appreciate its growth prospects. Founder Ortega Gaona, who owned 59% of company shares, became one
of the richest men in the world. Significant growth continued throughout the next decade, even
great recession of 2008 and 2009 as the company effectively embedded itself as the “transmission chain
between high-end designers and the street. By the time Strong joined the company, Inditex had become
world’s leading fashion retailer, present in 86 countries and with apparent room for expansion in all
of
banners. Strong wondered how the company had done it. What was the secret sauce? And what was ahes
through the
Mass Fashion Retailing Opportunity-A Calendar Thing?
Exiting the 1960s, winning mass-basic apparel retailers such as Benetton and The Gap took advar
the “casual” revolution by: (1) producing fleece, denim, and jersey; (2) promoting highly standardized
styles; and (3) associating their offers with highly advertised brands. By the 1980s, copycat discour
begun to imitate their basic designs, applying competitive pressures and driving down prices and profil
Focused apparel specialists attempted to answer this problem by fencing off a subcategory and cor
remium prices. Victoria’s Secret had successfully executed this model, but many lacked the low-cost
nd traffic synergies to sustain success.
Mass-fashion retailers like Zara evolved in the 1980s with the promise of democratizing luxury.
empt to impose their style, mass-fashion retailers sought to bring the hottest fashion trends to
ickly as possible. Zara recognized that the source of creativity should come from the fashion sys
Page 5
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Proximity Sourcing-The Secret Sauce?
Inditex sourced nearly 50% of its product from nearby locations in Spain, Portugal, and northern Morocco,
which allowed lightning-fast three-to-five-week lead times.] Proximity sourcing was often touted by researchers
more and more on low-cost Asian manufacturers with much longer lead times. (See Exhibit 6 for regions.)
the
company had relied
times. Inditex’s weighted lead time was approximately 14 weeks, still half the average of other retailers.
About 15% of Inditex’s production occurred in near-proximity locations in Turkey with 10-to-12-week lead
Moroccan production, with its lower-cost labor supply, had become increasingly important to Inditex.
Clothing manufacturing was
highly labor intensive and could account for 30% to 40% of a manufacturer’s
Guangdong province earned about EUR150 per month, Moroccan laborers earned only slightly more at
operating costs, or more if higher-end products required higher labor intensity. While Chinese workers in
EUR 180 to EUR200 per month.10 This was compared to EUR 1,200 per month demanded by the average
Spanish factory worker. Moroccan products travelled by ferry, and then a few hours by truck to the Spanish
mainland.
Strong noted that the company could fine-tune the functions it chose to outsource or keep in house. For
instance, the teams collaborated in the headquarters to monitor design, prototyping, and computer-aided fabric
cuts while outsourcing sewing, dyeing, and coloring. Zara cut waste by ordering fabrics in only four colors and
delayed printing and dyeing until items were close to Inditex factories. More than 350 workshops supported
Zara with approximately 11,000 workers. Inditex maintained flexibility to source finished products from
manufacturers or in collaboration with its faconneur network of subcontractors.11
The two sourcing models, finished product and faconneur, differed from each other principally in the
transfer of control of the process from product conception and design to manufacturing. (See Exhibit 7 for a
diagram.) Unlike Chinese finished-product manufacturers, which were often hired to produce large quantities
of basic staples, Moroccan faconneurs accepted smaller, more complex batches of just a few thousand units.
The advantage to Inditex of lower order batches was that collections could be fine-tuned and adjusted in season.
Lead times for simple items like T-shirts and other tops could be as little as 10 days. Strong also noted that by
lowering bulk purchases preseason, Inditex could lower its working capital tied up in inventory, which also
decreased the risk of markdowns and stock overhang. Increasingly, faconneurs were also asked to produce
finished products as a way to push certain product research, design, and development costs upstream. This
further aided the cash conversion cycle as the much larger Inditex dictated agreeable payment terms.
Once a garment was produced, it made its way back through Inditex’s state-of-the-art just-in-tim
distribution center, one for plastic covered garments on hangers and one for folded clothes boxed in cardboa
containers. The distribution system could handle about 40,000 items per hour and execute store deliver
within 24 to 48 hours. The company shipped items to stores twice a week, 70% by truck and 30% by air. 12
Inditex’s distribution model was unquestionably more costly than that of peers that transported
packages on ocean freighters. In practice, an item could be produced in China and shipped to Spain before
ppeared in Tokyo showrooms, which wasn’t necessarily maximizing efficiencies. Still, truck shipments
7 Sanford C. Berstein & Co., LLC
illi and Angus Chan, “Inditex: Best-in-Class Mass-Fashion Retailer,” Bemstein Research, September 2008
UVAOM 155
willing to abaoth
Page 6
merchandise
Page
Bre
as much
accounted for about 1% of the full price of an item while air shipments were 2%. Inditex was
this cost in order to maximize the full-price selling of its merchandise. And because Inditex
suggested that if Inditex had markdowns as severe as its peers, its operating margins would shrinka
8%, which compared favorably to the only 1% effect on profit margins due to higher distribution costs.
less likely to be on sale, the markdowns were about 30% less than other apparel retailers. Sensitivity analysis
a
at
a
Growth for as far as the Eye Can See?
justify the
every
operational improvements in the existing store base and store expansion. Inditex’s centralized distribution and
As Strong evaluated Inditex’s future prospects, she saw two principal levers for improved performance,
centers or local management talent, were not required. By comparison, competitor H&M Hennes & Mauriu.
management model meant that cost normally associated with the entry into a new market, like distribution
cost of property teams, merchandising, local distribution centers, and other infrastructure that it opened in
AB (H&M had to rapidly scale new market sales in its more localized business model in order to
stated growth target was 8% to 10%.13 Strong thought Inditex’s more measured guidance for store growth was
market. As such, H&M transmitted to Wall Street a store-expansion target of 10% to 15% while Inditex’s
smart in that risk was lowered while the company could choose to expand in any of the 86 countries it already
served based on the local opportunities. She liked the Inditex business model’s operational leverage.
Strong noted that over the previous seven years, 71% of the company’s profit growth had resulted from
sales growth and 75% of the sales growth had come from new-store square footage. While much of Inditex’s
historical growth had come from the expansion of its Zara brand, seven other brands were also
Inditex growth plans (see Exhibit 8 for an overview of all brands). All the brands followed the Zara model of
part
of the
of its product committed, whereas the typical retailer had 80% to 100% committed). 14 Strong believed the
proximity sourcing, fast and
flexible collections, and high open-to-buy (Zara entered each season with just 60%
brands with the best chance to succeed were likely the most fashion-intensive ones—the ones that targeted
consumers rich enough to support the company’s European-centric sourcing cost. She wondered if one of the
ncillary brands had even more potential than Zara.
Each of the brands developed in house was first tested and perfected in the Spanish market before being
ported. Each of the nonapparel brands had more than 200 stores in Spain, while Zara Home and Oysho still
d more than 100 stores in Spain. Each of the non-Zara brands leaned on the parent company’s IT and
tems-development, logistics, and real estate expertise for rent negotiations as it expanded into new markets.
In the last decade, Inditex had focused its expansion in high-growth markets such as China. In 2001, 46%
ompany sales were in Spain, 80% in Europe, and just 7% in Asia. Strong noted that by 2013, 21% of Indites
were in the Spain market, 45% in Europe, and 20% in Asia.15 China had been a particular area of focus-
da rising GDP per capita of the urbanizing population, which was highly correlated to per capita clothing
1.
. The company had stated aims to open about 130 stores in China per year going forward, representin
20% of projected Inditex store openings. Whereas in Spain, Inditex had a 14.6% market share, in Chin
t share was estimated at just 0.6%.
keto e

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