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CHAPTER 1: OVERVIEW OF ZARA’S SUPPLY CHAIN 1 Introduction to Zara:

Zara, a Spanish multinational fashion retail brand, is a flagship company of the Inditex Group, the world’s largest apparel retailer It’s one of the world’s most successful fashion retail brands, with a revenue of €23.76 billion in 2022 The company specializes in fast

fashion and sells clothing, accessories, shoes, beauty products, and homeware

Founded in 1975 by Amancio Ortega in Spain, Zara has evolved into a global force with a presence in numerous countries The clothing retailer has nearly 3,000 stores, including its kids and home stores Zara’s international presence in over 96 countries with 156 online markets gives it a strong competitive edge (Forbes, n.d.) The company has grabbed a huge market share and captivated many consumers with its quality products and attractive offers

e Figure: Zara stores global presence

Source: (Wikimedia.org, 2023)

2 Zara’s supply chain: Vertical Integration: Zara has vertically integrated its supply chain, which controls every aspect of the production process, from design to distribution, With in-house factories, Zara has minimized reliance on external suppliers and gained control over

lead times The vertically integrated model enables the export of garments 24 hours, 365 days a year, resulting in bi-weekly deliveries to stores Products take 10-15 days from design to store shelves, with the distribution center in Spain handling inspection, sorting, tageing, and loading into trucks In most cases, clothing items are delivered to stores within 48 hours This integration allows Zara to retain control over areas like dyeing and processing and fabric availability to provide the correct fabrics for new styles according to customer preferences It also eliminates the need for warehouses and helps reduce the impact of demand fluctuations Zara produces over 450 million

items and launches around 12,000 new designs annually, so the efficiency of the

supply chain is critical to ensure that this constant refreshment of store-level collections goes off smoothly and efficiently

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Zara's Supply Chain Flow

Finished Garments Garment Orders

Source: (InsidelIM, 2022)

¢ Agile manufacturing: Zara's agile supply chain enables the company to quickly design and send new fashion items to stores in 4-6 weeks and modify existing items in 2 weeks This agility, marked by short production runs and frequent orders not only ensures accurate forecasts but also allows Zara to offer a diverse range of styles, create

scarcity, and generate a sense of urgency for customers to buy By maintaining low inventory levels, Zara achieves a high percentage of full-priced sales and attracts customers to their stores through frequent design changes The agile supply chain allows quick adjustments, facilitating responses to customer preferences in real-time, making it a successful model in the fast-paced fashion industry

Fast Fashion and Quick Response Manufacturing (QRM): Zara's commitment to

"fast fashion" is not merely a slogan but a strategic approach embedded in its supply chain philosophy The Quick Response Manufacturing (QRM) strategy is the linchpin

of Zara's ability to swiftly translate runway trends into accessible, in-store fashion By

maintaining a flexible and adaptive production process, Zara can respond rapidly to emerging styles, ensuring that the latest fashion is on the shelves in a matter of weeks, not months

Just-in-Time Manufacturing: Zara employs a just-in-time manufacturing strategy, producing smaller quantities of garments and replenishing stock frequently based on real-time sales data Zara focuses on optimizing production processes to achieve shorter lead times They employ modular manufacturing techniques, where garments are broken down into components that can be easily assembled later This modular approach facilitates faster production, reduces lead times, and enables quick adaptations to design changes In turn, doing this minimizes excess inventory and allows Zara to respond to changing customer preferences with shorter lead times Information technology: ZARA leverages cutting-edge technology to gain valuable insights that guide its design, production, and inventory management decisions

CHAPTER 2: MANAGING THE SUPPLY CHAIN OF ZARA lier Relationship Management (SRM) of Zara:

Establish strong relationships with key suppliers: Zara works closely with a network of autonomous workshops for manufacturing its clothes The company maintains strong relationships with these suppliers, often located close to its headquarters in Spain, to ensure quick turnaround times and flexible inventory management

Regularly communicate with suppliers to ensure alignment on goals and priorities:

Zara maintains regular communication with its suppliers This is not just about placing and fulfilling orders, but also about aligning the suppliers with Zara’s goals and priorities This alignment is crucial for ensuring that the suppliers can meet Zara’s requirements for speed and flexibility

Zara stated that the relationship with its suppliers is a process of continuous support and accompaniment

The principles on which Zara’s relationship with suppliers is based are enshrined

in its Sustainability Policy The first of the principles of relationship with

suppliers is transparency, which helps Zara to establish a bond of trust with them The second principle is continuous dialogue, which allows Zara to join forces to

achieve common and shared objectives, such as circularity, preserving the planet

and its resources, or promoting human and labor rights These common principles are embodied in specific strategies, objectives, and

communication and dialogue channels, which are constantly reviewed and

updated Thus, Zara has policies that define the principles of the relationship with all its suppliers — Code of Conduct for Manufacturers and Suppliers This document establishes the mandatory standards in matters relating to labor rights,

product health and safety, and environmental aspects Furthermore, to reduce the

environmental impact of the supply chain, Zara has a Green to Wear standard (Inditex), which is mainly applicable to factories that carry out wet processes The application of this standard is aimed at improving items’ health and safety aspects while promoting best practices Green to Wear includes aspects such as

sustainable and efficient management of raw materials, water, technology and

processes, chemicals, waste, and wastewater Any manufacturer or supplier wishing to form part of the company supply chain must comply with the Code of Conduct for Manufacturers and Suppliers and Green to Wear standards

¢ Collaborate with suppliers on innovation and process improvement: Zara goes

beyond a transactional approach with its suppliers and actively collaborates on innovation and process improvement initiatives Engaging suppliers in the product development process and seeking their input on efficiency enhancements fosters a culture of continuous improvement and ensures that Zara stays at the forefront of industry trends

2.2 Diversification of Suppliers: The concentration of suppliers in a few regions exposes Zara to potential disruptions caused by geopolitical events or natural disasters By diversifying its sourcing, Zara can mitigate these risks and ensure a more stable supply chain The fast fashion industry has come under increasing scrutiny for its environmental and social impact Zara is working to improve its sustainability practices, and diversifying its supplier base can help the company source materials and products from ethical and sustainable sources Zara is expanding its sourcing network into new regions

Zara’s commitment to fast fashion has led to some risks and concerns ¢ Overreliance on a small number of suppliers — prioritizing regional suppliers from

Spain and Portugal can expose Zara to potential risks caused by geopolitical events or natural disasters

¢ Fast fashion is a business model that relies on the rapid production and consumption of clothing This can lead to environmental and ethical concerns: overconsumption of resources and the production of large amounts of waste, using sweatshop labor and not paying its workers a fair wage

¢ Production costs in traditional sourcing regions like China continue to rise As a result, Zara is working to diversify its supplier base to ensure a more stable supply chain By diversifying its sourcing, Zara can mitigate these risks, look for more cost-

competitive alternatives in countries with lower labor costs, and improve its sustainability practices by sourcing materials and products from more ethical and sustainable suppliers

Zara maintains a diversified network with 1729 suppliers in 44 countries globally (Inditex, 2022) Zara sources fabrics and other inputs from external suppliers with the help of sourcing personnel at headquarters and two purchasing offices in Barcelona and Hong Kong at the same time Capital-intensive operations, which enhance cost-efficiency through economies of scale

are conducted internally, while the simple, labor-intensive operations are subcontracted

(Ferdows et al 2004) Although Zara remains committed to ensuring proximity to suppliers, and 51% of its production has its origins in suppliers located near Spanish headquarters to respond quickly towards intensive demands from customers, almost as much comes from suppliers spread all around the globe Zara’s supplier list, therefore, includes twelve clusters

that concentrate 92-97% of the production: Spain, Turkey, Morocco, Portugal, India, Bangladesh, China, Pakistan, Brazil, Vietnam, Cambodia, and Argentina The clusters offer

spaces for cooperation and are designed to promote a sustainable and productive environment in geographic areas that are strategic to the development of Inditex’s business model (Inditex, 2022)

2.3 Technology Integration: An effective SCM is impossible to achieve without information technology, while the development and use of IT became more pervasive in the SCM era (Gunasekaran & Ngai, 2004) Zara has integrated technology into various aspects of its supply chain operations The company combines the principles of just-in-time inventory management with AI and real-time data analytics, creating a Just-In-Telligent supply chain system to enhance efficiency, responsiveness, and customer engagement Unlike many competitors, Zara’s use of AI is not limited to consumer behavior analytics but extends throughout its supply chain and inventory management systems By embracing cutting-edge technologies like RFID tagging, real-time analytics, and machine learning, Zara aims to maintain its competitive edge in the fast-paced fashion industry

¢ Data Analytics and Business Intelligence (BI): BI tools gather and analyze vast amounts of data from various sources, including PDAs and Point-of-sale (POS)

systems, customer interactions, etc Zara has used these BI tools as a data-driven

approach to identify customer preferences and demand patterns, monitor the performance of its product and track its inventory in real-time and make more informed decisions about stocking levels As a result, Zara can respond faster and better to

customer needs, reduce waste and costs, and increase sales and profits

¢ IoT (internet of Things): The full potential of IoT is being exploited by Zara, which brings products from factory to shelf in a matter of weeks (Caro, 2012) RFID tags are attached to each garment, allowing the company to track and monitor products in real time This technology enables accurate and efficient inventory tracking at every stage, from warehousing to shipping and distribution By having real-time visibility into inventory levels, Zara can make informed decisions regarding restocking, replenishment, and order fulfillment, thus optimizing transportation and inventory management, and improve overall operational efficiency

¢ SINT - Integrated Stock Management System, which combines the inventory of online stockrooms and store warehouses, allowing them to fulfill orders from both sources This results in efficiency, a smaller carbon footprint with a low level of

leftovers and shorter wait times For implementation, Zara has collaborated with several technology-powered initiatives In 2018, the fast fashion powerhouse teamed up with Jetlore, an Al-powered consumer behavior prediction platform, and El Arte de Medirn, a Spanish big data company that helps measure performance The firm also partnered with Intel and Fetch Robotics to measure clothing volume in boxes and improve stock inventory Microchips from Tyco, an alarm provider, are also used to track product data and locations along the supply chain (Gosselin, 2020) Zara has also partnered with

Zara has also partnered with French technology company Holooh and digital-science research institute Inria to create a mobile augmented-reality app to improve customer engagement and sales The initiative will allow customers who have downloaded the ZARA AR app to hold up their phone to certain store windows or a sensor within the store and see models come to life on their screens — walking and even talking - wearing selected items from the Zara range, which they can then click through and

buy By integrating Reality Augmented technology into the app, ZARA enables customers to pre-view their preferred clothes via mobile and eventually assist their customers to have a better experience and product choice (Craig 2018)

Yellow Hoodie Crop Top

their stores to check out the latest arrivals In addition to introducing new collections regularly, Zara also updates existing collections frequently They continuously refine and adjust their offerings based on customer feedback and sales data If a specific ttem or clothing is performing particularly well, Zara will produce additional units to meet demand Similarly, if an item is not selling as expected, they will discontinue it quickly to prevent further losses This constant updating keeps customers interested and coming back to see what’s new in stock By combining multiple collections and frequent refreshments, Zara creates a sense of urgency among shoppers to purchase items before they sell out Customers know that once an item is gone, it might not be returned anytime soon This exclusivity drives sales and helps build brand loyalty

Zara uses artificial intelligence to predict future trends, track inventory levels, and The ability to properly forecast demand is particularly important for Zara because one of its core strategies is to keep low inventory at stores and replenish them twice weekly based on demand expectations

The traditional method of demand forecasting relied on historical sales data and intuition, which was often inaccurate and unreliable Zara also faced challenges in accurately predicting customer demand for its products, particularly for new and seasonal collections Therefore, Zara now uses machine learning algorithms and utilizes advanced tools such as demand sensing software or PDAs and POS systems to gather and analyze customer preference data to plan future designs based on feedback, rather than on hunches and guesswork It collects data from its online platform and physical stores to gain insight into customer behavior and preferences This enables the company to optimize business processes and product offerings to better suit individual needs and

interests

2.5 Inventory Management a Just-In-Time (JIT):

Zara’s inventory management system is based on the principles of Just-in-Time (JIT) production, which aims to minimize inventory levels and reduce the risk of stock

obsolescence due to rapidly changing fashion trends This strategy enables Zara to

replenish its stores with new items swiftly and efficiently

A significant factor contributing to Zara’s success is its decision to retain a substantial portion of its production in-house This approach ensures that Zara’s factories reserve 85% of their capacity for in-season adjustments, providing the

organization with the flexibility to vary the quantity, frequency, and diversity of new

products launched Zara’s strategy of producing each product in limited quantities allows for an exceptionally rapid turnover New designs can be in-store within 15 days, enabling Zara to respond to customer demand by producing more of its popular products and fewer unpopular garments

Through its JIT production model, Zara is also able to drop new products in smaller collections multiple times per season based on must-have trends This agile approach allows the company to operate with flexibility, responding to real-time demand fluctuations By avoiding large, upfront commitments to mass production, Zara can quickly adjust production based on sales data and customer feedback, ensuring a more precise alignment with market needs

Finally, inventory optimization models are used to help determine appropriate volumes of merchandise at each retail location They have been put in place to help the

company determine the quantity that should be delivered to every single one of its retail

stores via shipments that go out twice every week The stock delivered is strictly limited, ensuring that each store only receives just want they need This goes towards the brand image of being exclusive while avoiding the build-up of unpopular stock

In conclusion, by incorporating Just-in-tme manufacturing in its supply chain, Zara can reduce inventory costs and space requirements, streamline production, and deliver a product that is exactly what customers want

b Leverage automation:

Zara has leveraged generative AI to optimize its inventory management, reducing waste and improving sustainability By analyzing historical sales data and market trends, Zara can generate accurate demand forecasts and adjust its production and inventory levels

accordingly This has not only reduced the amount of unsold inventory but also minimized the environmental impact of excess production

Zara distributes their stock to stores and online warehouses around the world from

centralized logistics hubs, efficiently integrating its store and online operations during the warehousing, shipping, and distributing processes By leveraging automation including Business Intelligence (BI), the Internet of Things (IoT), and Integrated Stock Management

System (SINT) in its inventory management, Zara can gain real-time visibility into its

inventory and streamline its distribution processes The use of technologies also contributes to the accuracy of inventory tracking and reduces the risk of overstocking or stockouts

Business Intelligence (BI): Zara's inventory is centralized in two main warehouses in Spain, where it is sorted and shipped to its stores around the world Zara uses BI to track and control its inventory levels, and to allocate the right products to the right stores, based on demand and availability BI tools collect and analyze vast amounts of data from various sources, including Point-of-sale (POS) systems, customer interactions, etc Zara has used these BI tools as a data-driven inventory management approach to track their inventory in real-time, identify patterns and trends, and make more informed decisions about stocking levels

loT: The full potential of IoT is being exploited by Zara, which brings products from the factory to the shelf in a matter of weeks (Caro, 2012) RFID tags are attached to each garment, allowing the company to track and monitor products in real-time This technology enables accurate and efficient inventory tracking at every stage, from warehousing to shipping and distribution By having real-time visibility into inventory levels, Zara can make informed decisions regarding restocking, replenishment, and

order fulfillment

SINT - Integrated Stock Management System, which combines the inventory of online

stockrooms and store warehouses, allowing them to fulfill orders from both sources

This results in efficiency, a smaller carbon footprint with a low level of leftovers and

shorter wait times

The business has already taken numerous steps in this direction, such as the “Closing the Loop” program The aim of this initiative is the reuse and recycling of textile products, footwear and accessories, strengthening the circular economy in its sector (Inditex, n.d.)

By 2020, Zara is committed to achieving Zero Discharge of Hazardous Chemicals by 2020 (the ZDHC program), training all of its designers in the cruciality of circularity, and not using fibers from endangered forests

In 2022, Zara promised to use 100% renewable energy in their operations In 2023, they promise to eliminate single-use plastics for customers The company wants to attain zero waste in all its locations and facilities, use of 100% cellulosic fibers, and 100% of all packaging materials collected for reuse or recycling in its supply chain by 2023 Zara (Inditex) plans to cut emissions along its value chain by over 50% in 2023 (on the path to attaining net zero emissions by 2040: using materials with a smaller environmental footprint, transforming our supply chain, extending our circularity projects and helping improve biodiversity)

Additionally, before 2025 is up, Zara claims all of its collections will be made of 100%

sustainable cottons and linens, and 100% recycled polyester

Ethical Sourcing:

Zara is committed to ethical sourcing practices, maintaining stringent labor standards, and advocating for workers’ rights Zara has a robust corporate governance and compliance system aimed at demonstrating its firm commitment to good governance, social and environmental sustainability, and conveying that corporate ethical culture to all its stakeholders The company has instituted a comprehensive Code of Conduct and Responsible Practices that sets

forth guidelines for its suppliers in terms of labor conditions, workers’ rights, and safety standards Regular audits and inspections of supplier factories are conducted by Zara to ensure adherence to these standards Moreover, the brand prioritizes partnerships with suppliers who share its sustainability objectives, including those who utilize environmentally friendly production methods and responsibly source materials

c Monitor and audit suppliers for compliance with sustainability standards Zara places a significant emphasis on monitoring and auditing its suppliers to ensure compliance with sustainability standards within its supply chain

The main framework governing the relationship with all Zara’s suppliers is the Code of Conduct for Manufacturers and Suppliers This document establishes the mandatory standards in matters of labor rights, product health and safety and environmental aspects

Furthermore, in order to reduce the environmental impact of its supply chain, Inditex has its own Green to Wear standard, which is mainly applicable to factories that carry out wet processes The application of this standard is also aimed at improving items’ health and safety aspects, while promoting best practices To achieve this, Green to Wear includes aspects such

as sustainable and efficient management of raw materials, water, technology and processes, chemicals, waste and wastewater

Any manufacturer or supplier wishing to form part of the Inditex or Zara supply chain must comply with the Code of Conduct for Manufacturers and Suppliers (hereinafter CCMS or Code of Conduct), with the Green to Wear standard, if applicable, and with its traceability requirements Non-compliance, which is verified through frequent and periodic audits, may result in the termination of the business relationship

The long-standing relationship with Zara suppliers is based on a process of accompaniment, assessment and improvement that begins even before they work with the company So as to ensure that only those that have a long-standing relationship with Zara suppliers are based on a process of accompaniment, assessment and improvement that begins even before they work

with the company So as to ensure that only those that meet its social and environmental

standards belong to the supply chain, all new suppliers and manufactures will be carried out an initial verification of compliance with requirements, through pre-assessment audits before commencing their business relationship with the company Once a factory passes the pre-

assessment, social audits are conducted periodically and regularly at each supplier and factory in Inditex supply chain to verify compliance with the Code of Conduct These audits can be

carried out by internal or external auditors but are always unannounced and include a site visit

to assess aspects such as wage rates, working hours, health and safety conditions, among other requirements pertaining to the Code of Conduct

Based on the social audits, suppliers and manufacturers are rated in accordance with their degree of compliance with the Code of Conduct In 2022, the active suppliers were classifying as follows:

2022 2021 2020 2019 2018 Sere Number of Number of Number of Number of Number of Classification suppliers’ Percentage suppliers Percentage suppliers Percentage suppliers Percentage suppliers Percentage

A 650 38% 653 37% 575 32% 784 40% 661 35% B 1,018 59% 1,077 60% 1,152 64% 1,051 53% 1,045 56% Cc 10 1% 18 1% 27 2% 44 2% 80 4% er io 30 2% 23 1% 24 1% 38 2% 47 3% PR 21 1% 19 1% 27 1% 68 3% 33 2% Total 1,729 100% 1,790 100% 1,805 100% 1,985 100% 1,866 100%

1, It includes suppliers with more than 20,000 purchase units in the 2022 spring/summer and autumn/winter campaign Suppliers with purchase of less than 20,000 units represent 0.22%

Social classification Audit results A Complies with the CCMS B Does not comply with some non-relevant aspect of the CCMS Cc Does not comply with some sensitive, but inconclusive aspect of the CCMS Subjet to CAP Breaches of the CCMS triggering the immediate implementation of a corrective action plan PR Undergoing an auditing process

Source: (Annual Report Inditex, 2022)

Compliance with the Green to Wear standard, which applies to facilities that mainly carry out to the industry’s wet processes, is regularly verified through environmental audits This kind of audit is performed by independent external auditors during pre-announcements visits

which include a review of the documentation and unannounced analyses of waste war, where

applicable Zara shares the results of these water analyses with the rest of our industry as part of its collaboration with ZDHC

2.7 Risks management:

a Geopolitical risks: Geopolitical risks arise from a deterioration in the political

situation, a society’s crime levels, changes in the ideology, leadership and regulation of

its authorities, politically motivated conflicts at home or in nation states that threaten operations or expected prospects

Main risks Description and impact Main mitigations

Business - Potential instability in the territories |- A value chain with multiple environment where the supply chain is located, as | geographic origins which and political | well as where products are marketed, | provides the necessary violence poses a significant risk Socio-political | flexibility and adaptation to

instability arising from social | demand, ensuring alternatives uprisings or other causes of political | should it become necessary to violence, as well as their potential | switch between — different

spread to other countries, may affect | manufacturing markets in case

the company’s ability to operate in| of severe, continuous affected territories, with the ensuing | disruptions

impact on value chains, sales and |- Diversification of points of sale expansion, or damage to the facilities |- Monitoring of country risk and

proximity to the local market - These circumstances may result in |- Continued tracking of the

frictions that hinder the normal | unfolding conflicts and its movement of goods due to political | complex repercussions closely, instability, infrastructure saturation, or | putting in place plans to constraints, especially on key routes, | mitigate its impact, especially in which generate bottlenecks due to | relation to its workforce in the supply-demand imbalances that limit | affected markets

access to transport and/or erode |- Sourcing materials and business margins production from diverse

locations to avoid dependence on any single region

Government _|- Due to Zara’s extensive direct and |- Systematic tracking of the