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GLOBAL PURCHASING AND SUPPLY
[C11GB]
2016-2017
COURSEWORK – REPORT
Identifying Supply Management Challenges and Solutions
DATE OF SUBMISSION: 16.11.2016
WORD COUNT: 4078
SUBMITTED BY:
ABHISHAKE MATHUR - 091621355
MOHAMED DARMAN – H00255197
ROXANNA MARIA SEQUEIRA - H00172851
TANIA STANLY – H00261417

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Table of Contents
1. INTRODUCTION: ...............................................................................................................................3
2. BACKGROUND OF ZARA ................................................................................................................4
3. CHALLELNGE 1: Inaccessibility to all customers (Sourcing)............................................................5
3.1. SOLUTION: .................................................................................................................................6
4. CHALLENGE 2: Carbon Foot Print and Sustainable Supply Chain....................................................9
4.1. SOLUTION: ...............................................................................................................................10
5. CHALLENGE 3: Ethical Issues .........................................................................................................11
5.1. SOLUTION: ...............................................................................................................................12
6. CHALLENGE 4: Centralization of Logistics Resources, Price Differentiation and Duplication of
Collection....................................................................................................................................................14
6.1. SOLUTION: ...............................................................................................................................14
7. CONCLUSION:..................................................................................................................................17
8. REFERENCES: ..................................................................................................................................19

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1. INTRODUCTION:
As per the 2016 report released by Forbes, Zara ranks as number 53 on the ‘World’s Most
Valuable Brands’ (D’Cuna, 2016). Whilst fashion retailers usually take up to a minimum of 6
weeks to design a new product and make it available for their customers in stores, Zara takes a
meagre 2 weeks. Hence, it is no doubt that this successful brand has proven its credentials and
succeeded in becoming a benchmark when it comes to it speed and flexibility. However,
applying such unconventional methods to their supply chain and logistics processes may
incorporate risks with would have otherwise been avoided.
This paper will scrutinise the various methods for improvement in fashion retail, starting with
identification of the various issues and challenges faced by Zara as per recent newspaper articles
and case studies pertaining to the brand followed by possible suggestions for reducing or curbing
those identified challenges. The following case study will consider factors such as those affecting
their supply chain.
This looks at the challenges faced by Zara due to increased centralization leading to overall high
costs of the products and their difficulty to expanding to far locations. Factors affecting their
customers such as their inaccessibility to all the customers equally, price differentiation strategy
and duplication of their collections in various regions. Zara is also being accused of increasing
carbon footprint and their inability to maintain a sustainable chain. Last but not the least, ethical
issues such as providing little recognition to workers, consumers and the environment, Zara’s ill
treatment towards the workers and poor working conditions for their workers are critical
challenges that need to be addressed immediately.
Followed by successful identification of the problems and offering solutions for the same, this
paper also suggest short term, medium term and long term suggestions for Zara, keeping in mind
their long term strategies of expanding well into the Asian markets.

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2. BACKGROUND OF ZARA
Zara is a global clothing retail brand located in La Coruña, Spain, that opened its first store in
1975. Its parent company Inditex, however, was established in 1963 by Amancio Ortega Gaona,
by the name of GOA, as a garment wholesaler. He opened Zara as an outlet for cancelled orders
when a customer happened to cancel a sizable order, and has grown at an exponential rate since
(Ferdows et al, 2003). Zara generates majority of the revenue of Inditex, about 80% as compared
to the various other brands owned by the parent company (Agogo and Sedelmeyer, n.d.).
Zara’s supply chain is seen as the ideal model to be followed, with many other top fashion
houses on the look out for details on effective execution. Zara, with no doubt, has an extremely
agile supply chain with a very short time-to-market, however, all its products, even those from
the various suppliers around the world, passes through Spain (Ruddick, 2016).

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3. CHALLELNGE 1: Inaccessibility to all customers (Sourcing)
With all of Zara’s supply chain commonly associated with ground breaking results and
exemplary strategic stances taken in the market it, would be fair to say that they have learnt from
their mistakes. Zara, being one of Spain’s largest apparel retailer has branched out to an excess
of 2,000 retail stores in more than 88 countries, a milestone many in their industry strive
towards.
However, it is worth noting that Zara’s manufacturing capabilities are relatively limited when it
comes to supplying the globe with its forth-moving fashion initiatives. They use a blend of rapid
and flexible sources within Europe, predominantly in Spain and Portugal, as well as using
financially viable options within the Asian manufacturing forum (Tiplady, R., 2006).
Zara’s sourcing strategy is split between an efficient and low-cost approach for its basic products
that are sourced and manufactured in Asia, Zara’s approach to these products stems from the in-
expensive nature of the Asian market. However this in turn compromises the quality of the
product. Their pricing strategy reflects this as these products tend to be marketed at the lower
end of the pricing spectrum.
On the flip side, Zara also sources and manufactures their products in-house. These products are
developed from company owned workshops in Europe that isn’t at all as cheap as they are in
Asia. Nonetheless, this approach allows Zara to upscale their product in terms of quality, as well
as mitigating the uncertain demand associated with such items. Having these products produced
locally allows Zara to be agile and flexible to ever changing market trends.
Nevertheless, how accessible are these products to the growing Zara customer base? Could they
actually benefit from a decentralized production base and venture out to the Americas and the
MENA region? Would they benefit from a focus on the quality management with their Asia
suppliers using the same blue print used for their European production line?
The answer to these questions is relative and open to discussion. Many would agree to the fact
that customers outside Spain and Europe are paying a premium in order to keep up with Zara’s
trends. Especially those in the United States, Asia and particularly Japan (See figure 1).

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Figure 1I: Cost variations in Zara stores in different continents for the identical dress
Therefore, yes, financially Zara is doing extremely well and reaping the benefits of their well-
streamlined production strategy, but at what expense? Possibility of losing customers due to the
higher pricing of their products, due to their inability to distribute at an even cost across the
globe? In fact some customers may not even consider Zara as an option, as the pricing of
products are above their means.
At this stage, it is also possible to question if Zara’s vertically integrated corporation could be the
most optimal solution for their agile supply chain, as most of their external suppliers are in close
proximity to its headquarters in Spain, in contrast to their global customer base (Ferdows, Lewis
and Machuca, 2003; Christopher et al, 2006).
3.1. SOLUTION:
With a plethora of solutions to pull from for this particular issue, it is worth looking at e-
procurement and e-logistics. These are two mediums by which all if not most establishments will
benefit from with regards to their supply chain, as well as transparency and integration within
different facets of their company.
Nonetheless, before illustrating the benefits that come along with e-procurement and logistics,
it’s worth looking at a model from Kraljic (1983) that suggests using his four box portfolio
analysis model to analyze supplier selection based on the outcome of the profit impact and the
supply risk. A two by two matrix can then be used to determine four categories to decide on,
whether to supply or manufacture in-house (figure 2); these include ‘strategic’ (high profit

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impact, high supply risk), ‘bottleneck’ (low profit impact, high supply risk), ‘leverage’ (high
profit impact, low supply risk) and ‘non-critical’ (low profit impact, low supply risk) (Agogo and
Sedelmeyer, n.d.).
Figure 2: Kraljic’s Supply Matrix
Given Kralijic’s supply matrix, Zara may be able to make its products more accessible to their
customers by reducing their procurement costs. Identifying the product and how it impacts their
profit may provide room for maneuver with regards to final pricing of their inventory. Thus,
allowing them to make their products more affordable and consequently being able to approach a
wider customer base.
E- Procurement & E-Logistics
E-procurement covers many interactions within business, allowing better communication
between businesses, suppliers and customers. Services provided through e-procurement allow
better information flow through a sophisticated networking system, namely electronic data
interchange (EDI). E-logistics is defined to be “the mechanism of automating logistics processes
and providing an integrated, end-to-end fulfillment and supply chain management services to the
players of logistics processes” (Yadav et al, 2007).
In the case of Zara, applying such systems into their procurement and/or logistics strategies will
allow Zara to identify better ways of finding their products at a cheaper price. For example, a

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company named CommerceOne discovered that utilizing an e-procurement software that allows
automation of the requisitioning process conveyed a reduction in process costs for each order.
On the higher end, they saved almost $150, where the lowest savings were around $5 per item
(Simchi-Levi, Kaminsky, and Simchi-Levi, 2007).
Application of such a system may be beneficial to Zara as they could both reduce the costs to
their business as well as allow avenues for reduction in inventory pricing. In turn allowing
customers to consider the pricing of their product as acceptable (given pricing in different
geographical locations – See figure 1).

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4. CHALLENGE 2: Carbon Foot Print and Sustainable Supply Chain
The global apparel industry is currently valued at 3 trillion US dollars and makes up to about two
percent of world’s Gross domestic product (GDP), and it is expected to grow even more in the
years to come (Fashion United, 2016). The fashion industry over the years has seen tremendous
growth and much of it is contributed to its ability to quickly respond to the changing consumer
needs which is the major factor behind the success of brands like H&M, Zara and Benetton
(Tokatli, 2008). However, major growth has a downside, where the apparel industry in total
contributes to a gigantic ten percent of the global carbon emissions, second only to Oil (Forbes,
2015).
“Fast Fashion” is the term characterized by short production and distribution lead time to
complement the supply to uncertain or in some cases fluctuation demand yet keeping the
merchandise trendy and fashionable (Cachon & Swinney, 2011). With the advent of quick
fashion and frequent change in collections, fast fashion retailers are encouraging and drawing
consumers to visit their stores and dispose of their clothes following the idea of here today and
gone tomorrow (Bhardwaj and Fairhust, 2010). A study conducted in the UK revealed that most
clothes are worn only seven times before they are discarded (CNBC, 2016). This
overconsumption trend justifies the enormous 150 billion new clothing which is produced
annually (Kirchain et al, 2015).
Zara’s Carbon Foot Print:
As discussed in the previous chapters, Zara production is mostly in-house in Spain or nearby
countries like Portugal, Morocco and Turkey for its trendiest design where more agility is
required in terms of taking a product from the drawing board to the store. However, the more
basic products like t-shirts and sweaters which run on a traditional season based schedule are
produced in mass numbers from developing countries. In these countries, the cost of production,
warehousing and labour are far cheaper as these countries are in developing stage, the rules and
regulations regarding gas emissions, waste management and other environmental impacts are
less as compared to their developed counter parts. In some cases, these economies encourage
foreign investment to boost employability of its young workforce and improve general standard
of living in the region.

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In a game changing report published by Greenpeace in 2012 highlights the prevalent practice of
using toxic materials in the production of most of the biggest names in the fashion industry. The
report tested a total of 141 clothing articles by reputed brands like Vero Moda, Mango, Levis,
Zara about 89 of them had NPE (nonylphenol ethoxylates), which is a hazardous chemical, and
upon washing the clothes, the same is discharged into the water bodies to further intoxicate the
marine life. Zara, in addition to the presence of NPE, there was also amines (a cancer-causing
agent) present in its azo dyes. Even though the level of the substance was found in the acceptable
limit any presence of cancer causing agent in the clothes worn by individuals was criticized
worldwide (Huffington Post, 2012). Zara’s production is 40 percent in house i.e. in Spain and
then majority of their suppliers are based in low-cost developing countries in the Far East and
hence, if the destination of the product is Australia then the raw material and the finished product
makes a round trip of the world before reaching the end customer.
4.1. SOLUTION:
Zara’s quick output of materials also puts increasingly high pressure on its supply chain partners
as all the raw materials required either must be in stock or based somewhere in its entire supply
chain, local or abroad. Zara’s supply chain needs to be scrutinized in a way that the suppliers
gets the clear message of not compromising on the quality of the raw material as it impacts the
quality of the product. Vertical collaboration can be used as a technique to communicate better
with their suppliers and share knowledge, expertise and technology to function more efficiently
and error free (Cao and Zhang, 2011; Mentzer et al 2008). Zara can also invest in having
systems in place to organize a stricter quality control for all the inbound fabrics, dyes and other
product related to its production line. Zara has a reputation of not having the mark downs or sales
which means that considerable of its garments must end up at a landfill site, one of the
recommendation is to produce more environmentally friendly piece of clothing which can be
recycled and reused. This practice will also mean encouragement of sustainable practices in the
fashion industry to discourage consumerism.

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5. CHALLENGE 3: Ethical Issues
Barnes and Lea-Greenwood (2006) identify a pressure on suppliers to get items to the market
within the shortest possible time. This may reach a stage wherein companies may begin to ignore
their ethical practices.
Fletcher (2008) implies that ‘fast’ fashion does not consider the impact it has on its stakeholders
and provides little recognition to workers, consumers and the environment. Zara focuses on
beating its competition in terms of flexibility and agility, since there is no need for durability in
fast fashion, as customers prefer to have their wardrobes shift over time (Joy et al, 2012).
Dickson (2000) classifies customers to not likely look at the ethical aspect when purchasing a
product, instead, he says they are more likely to use product criteria. This is also because
consumers are practically unaware of what the ethical practices of the industry should be
(Hustvedt and Dickson, 2009). This encourages fashion stores to compromise on the cost of
labor (SCM Globe Corp, 2016).
Zara ability to present its product to the market within a span of 15 days makes it a market
leader, one of its kind, however, it presents a possibility of people working behind the scenes
longer than they should be (Butler, 2015). This also depends on the location of production; the
European Commission (n.d.) has enforced strict laws related to labor in Europe, and hence,
wages of European workers are relatively higher than those in developing countries (TradeGecko
Pte. Ltd, 2016). SCM Globe Corp (2016) numbers these to be 8.00 Euros per hour, being the
average cost to employ about 3,000 workers in Spain as compared to its Asian counterparts of
about 0.40 Euros per hour.
According to Chopra and Sodhi (2014) Zara strategically sourced its trendy items from
production facilities in Europe itself to reduce the time-to-market. On the other hand, it sourced
the more staple clothing from suppliers in low cost countries such as Turkey and Asia. The
challenge that arises here would be having sufficient visibility and tracking of the original
suppliers and contractors without incurring huge costs for it (Supply Chain Movement, 2016).
Zara was under investigation in 2011 for having a contractor who used employees in sweatshop
conditions in São Paulo (Burgen and Phillips, 2011). Zara’s parent company Inditex
compensated those workers and signed an agreement with the Brazilian Labour Ministry in 2011,

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however, the Ministry still managed to find evidence of ill-treated workers since (Butler, 2015).
Inditex, on the other hand, brushed off those allegations by saying that they increased audits of
their manufacturers since 2012.
Issues have also been raised of Zara discriminating its in-store and back office employees based
on their ethnicity (Gajanan, 2015). Employees question the corporate culture of Zara, especially
in the USA, and have raised many claims with regards to the kind of employees Zara is looking
for (The Guardian, 2015).
5.1. SOLUTION:
Dickson (2000) suggests that consumers be educated on the basic ethics that businesses in the
fashion industry must follow. He also mentions, that though it is an essential component to drive
fashion houses towards ethical production, the businesses themselves need to work towards
responsible behavior and convince the customer of it. Bennett (2015) reported that according to
consumers, most UK clothing firms are not transparent of their ethical behavior. Especially after
the disaster at the Rana Plaza factory in Bangladesh that exposed a lot of the unethical practices
of high-street fashion stores, consumers are more aware of the role they can play to bring about a
change (Moore, 2014). Many consumers are now willing to pay an additional price for items
that have been produced through ethical practices, thus encouraging businesses to follow them
(Gupta and Hodges, 2012).
Though most developing countries have laws in place to protect worker rights, it is likely that the
workers are not aware of these laws or the government isn’t able to implement them effectively
enough (Gupta and Hodges, 2012; Arli and Lasmono, 2010). Zara should ensure that that their
said ethical practices are enforced within the organization (Diddi and Niehm, 2016). Carter and
Jennings (2002) suggest companies work with minority groups in developing countries, keeping
human rights the central focus in order to maintain the working conditions and fair wage.
Fletcher (2008) suggests sustainability in the fashion industry to bring in the ‘slow’ element, not
in terms of reducing the speed of the existing processes, but to bring more connection of human
activity. Zara also needs to work on its people element, not just at it headquarters, but also in

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stores worldwide. Since the movement of its products in and out of stores is very quick, Zara’s
supply chain is extremely agile and reactive. However, this agility tends to have a negative
impact on its suppliers, especially in terms of working conditions.
Zara is seen to have two different supply chains, one for its trendy products which is fast-
moving, and the other is for its staple products, the movement for which is relatively slower.
Zara is so caught up in the supply chain of its trendy items and compliance with European laws,
that it isn’t able to develop its relationship with its first and second tier suppliers. Since it is
unable to maintin a good rapport with its suppliers in developing countries and are not invoved
with their production, Zara will not be aware of the kind of working conditions its suppliers and
contractors have have their employees in. Therefore, Zara should invest in relationship building
with its suppliers of staple products to ensure they follow ethical practices as well. Employees
that are satisfied and happy are seen to be more efficient and productive, leadng to better quality
products and improved brand image (Gupta and Hodges, 2012).

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6. CHALLENGE 4: Centralization of Logistics Resources, Price
Differentiation and Duplication of Collection
From the above discussions, it can be noted that the major drawback in Zara’s logistics is that
they own all the networks of their supply chain. This is a problem now, as Zara is starting to
function in all 5 continents which can in turn lead to increasing challenges such as higher prices
when they try to multiply their stores to new markets that may be located in far off places. In
order to distribute their products to Europe, Australia etc., as per their current strategies, they
require to replenish their stock continuously, further leading to increased distribution expenses.
Moreover, such decisions result in duplication of their codirections bringing about problems
affecting their strong point, their supply chain. What it means, is that when it is winter in
Argentina, they are making their summer collection in Europe. In order to curb these issues and
to continue maintaining their high standards, they are forced to copy designs of new artists
(Pulgise, 2016).
There is also the problem of increased centralization of logistic resources concerning the
warehouse of La Coruna and Saragossa leading to growing attention and condemnation for the
“price differentiation strategy it employs in different markets”. As per the study conducted by
Nueno & Ghemawat in 2006, it was found that customers located in Northern Europe spend up
to 70% higher than the customers from Spain. (Figure 1)
6.1. SOLUTION:
The above mentioned challenges can be curbed by incorporating solutions to make their logistics
more economical. These involve strategies such as segmenting their supply chain, reducing their
logistical agility, regionalizing and opening a warehouse outside Spain.
Regionalization: Although Zara's supply chain is priced higher than usual fashion retailers, they
have the benefit of little inventory & increased revenue from sales. As suggested by Chopra and
Sodhi (2014), regionalizing by outsourcing distribution in another region is a possible solution
for the overall high cost of their logistics. This can reduce costs due to simpler and faster supply
chains and can be done by selling their items to distributors located in Asia or towards fresh
industries or markets.

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Segmenting: As discussed above, the huge price differences paid by the consumers in various
continents can lead to frustrated customers. In the current scenario wherein customers can get
hold of the products easily through online shopping and publish their reviews and costs for the
same on social media, it is doubtful about how much longer the customers are willing endure this
price differentiation. As Diefenbach et al (2011) suggests, segmenting the distribution channel
attained by sorting out fast-moving products from the slow moving ones. Thereby, allowing
distinct low-priced store housing for the slower products that are located in far off continents is a
possible solution to the increase in distribution costs of products to far locations. Such projects
resulted in an overall supply chain cost reduction of 25% from 1997 for Sony BPE (Lovell et al,
2005).
Reduce Logistical Agility: Even though Zara is successful, mainly because of their logistical
agility, maybe by making it less agile, similar to the Swedish retailer H&M, thereby resulting in
reduced amount of continuous replacement of its stock and therefore reduced prices (Sandbayev,
2015). If this isn’t feasible, Zara can probably uphold their global logistics brilliance in 2
seasons.
Opening a Warehouse outside Spain: As mentioned above, Zara’s increasing international
existence would call for setups closer to their operations in Asia or GCC countries as they are no
longer a mere Spanish retailer.
Although their most promising market had been Spain till 2012, the following year France
surpassed China as the region with the maximum amount of stores other than Spain (Baigorri
and Berfield, 2013). Ever since 2007, they began to concentrate their growth in Asia as it lead to
revenue twice as much as the countries in other parts (Lu, 2014). The CEO of Zara, Mr. Pablo
Isla had commented on India not being far behind when it comes to their major priorities either
(Walt, 2013). It is interesting to note that consignments to Asia and China will have to travel
over 5,000 miles and hence, store houses in the countries in Asia can be immensely beneficial
and effectual as compared to their present procedure in order to keep up with their manufacturing
facilities.
Looking at the existing level of growth in Asian markets and the robust sourcing from Spain
pertaining to the European and American markets, the ideal location for a new Zara distribution
centre would probably be Asia. To be precise, Myanmar proves to be the perfect location as it is

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advantageously situated centrally to the markets that are of utmost importance to Zara such as
China, Australia, Macau and India. Myanmar also shares borders with India, China and
especially Bangladesh wherein manufacturing is done, thereby making it easier to accept
delivery and distribute inventory to serve Asia, Australia and the Middle East. The following
table looks at some of the perks of having a distribution centre in Asia, particularly Myanmar
(Kudo, 2009):

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7. CONCLUSION:
Zara’s need for a responsive supply chain is justified due to the ever changing fashion trends, in
today and out tomorrow. Thus, Zara focuses on ensuring its product reaches the consumer, over
focusing on the cost incurred. Zara is vertically integrated and has its internal functions well
planned and coordinated, even with its external suppliers and contractors, giving them a very
high competitive edge (Agogo and Sedelmeyer, n.d.).
The first challenge looked at how global sourcing has an impact on the company and its
accesability to consumers worldwide. It took into consideration the costs of having an outsourced
piece of clothing to travel around the globe before it actually reached the consumer. Kraljic
(1983) suggests using the matrix that he developed to categorize items into strategic, bottleneck,
leverage and non-critical items, and then decide accordingly if they needed to be made in house
or procured externally.
The second challenge discusses the impacts the first challenge has on the environment and what
can be done to improve the situation. It is seen that the original country of manufacturing may
not be implementing laws with reagrds to carbon emmissions, waste management or any other
environmental impact. Also, Zara is found to be discharging toxic material into water bodies; and
its excess production going to landfills. Therefore, Zara needs to take strict measures internally
to keep their supply sustainable.
The third chalenge is an extension of the second, it discusses the eithical conduct of Zara. It is
inevitable for Zara to comply 100% with ethical standards, considering the size of the
organization; and unsurprisingly, it has been involved in various scandals over the years.
However, Zara’s parent company Inditex takes deep interest in protecting Zara, as it is its most
prized possession.
The fourth challenge suggests ways to reduce logistical agility, regionalize and extend its
warehouse to countries outside Spain.
Despite these challenges, Zara operates successfully enough to be at the top of its game, with the
quickest procurement lead time. However, the only constant factor in the fashion industry is

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change, and in order to maintain its position Zara will need to invest in technology to reach out
to more customers (Petro, 2015).

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