How ZARA's founders became the second richest man in the world by selling clothes

Amancio Ortega, the founder of ZARA, is now in his 80s and has assets of 70 billion U.S. dollars, ranking second in the world's richest list in 2016, ranking second only to Bill Gates. Looking at the top few of the rich list, most of them come from emerging industries such as IT and the Internet. Ortega is unique because he comes from the most traditional industry—the apparel industry. In this traditional industry, Ortega did not follow the existing track to run the company. He is a veritable “anti-traditional”. Then, what aspects did he actually change the rules of the game? Professor Nikos Tsikriktsis, professor of operations management at China Europe International Business School and director of the China-EU Global EMBA Program, revealed to you.

In today's era of Internet +, O2O and other concepts, there is a message that has attracted the attention of a considerable number of people.

ZARA founder wealth ranks second in the world, engaged in the most traditional industry. What makes this traditional clothing company profitable?

Amancio Ortega, the founder of ZARA, is now in his 80s and has assets of 70 billion U.S. dollars, ranking second in the world's richest list in 2016, ranking second only to Bill Gates. Looking at the top few in the rich list, the vast majority come from emerging industries such as IT and the Internet. Ortega is unique because he comes from the most traditional industry—the apparel industry. In this traditional industry, Ortega did not follow the existing track to run the company. He is a veritable “anti-traditional”. So, in what ways did he actually change the rules of the game?

Reduce clothing production process from 9 months to 2 weeks

First of all, in the apparel industry, the entire process from design, procurement to production usually takes six to nine months. It takes only two or three months for the design alone. ZARA can shorten this process to 2 weeks. Many people think this is impossible, but ZARA has done it.

Taking logistics as an example, most of Zara's markets are in Europe. It chooses airfreight instead of traditional shipping, which can ensure that products reach the store quickly, which greatly shortens the new time. In addition, ZARA has also established a mechanism for rapid response to the market. Through big data, the feedback information of customers collected from stores is transmitted to the designers of the headquarters in a timely manner. The designers quickly respond to market changes based on feedback from customers.

ZARA mode

Concentrate inventory Rapid response and collaboration with local factories Deliver twice weekly fast feedback from stores

The rapid response mechanism also shows its advantages in terms of finance. The expansion of stores requires a lot of money, but ZARA does not have to worry about this. Those customers who often visit patrons are ZARA's banks, and their cash flows continuously to the company's headquarters. (The value of ZARA can be as high as 17 times compared to the industry average of 4 visits per year by customers.)

Rely on low cost and flexibility

Is ZARA's success based on a low-cost strategy? Obviously not. In terms of logistics, it chooses air transportation instead of shipping, and the cost of air transportation is bound to be much higher than the cost of shipping. In addition, 49% of ZARA's suppliers are located in Europe, and unlike many apparel companies, most factories are located in Southeast Asian countries. In Europe, the human cost is significantly higher than in Asia. Why does ZARA not follow the conventional rules? How can it make money if it costs so much?

ZARA has very little inventory due to a significant reduction in supply chain processes and rapid response to the market. Second, the cost of advertising is particularly low, with only 0.3% of sales, and the industry average is 3 to 4%. The customer is its advertisement.

Small batch production, allowing frequent customer patronage

Let us look at an anti-traditional thing again. In the apparel industry, the gross profit of a general company will be relatively high (the production cost of a piece of clothing may also be 3 US dollars), but usually there are few net profits. Where do the money go? Because companies usually make market predictions, there is usually an error with the actual demand. When the forecast is greater than the demand, the product will be surplus, and the final inventory will be dealt with in a discount way; when the forecast is less than When demand, it will lose sales. Companies need to balance the two. Most companies will always produce more products than market demand.

However, ZARA does not like this. Each product is produced in small batches, so it has very little inventory. It is always entering a new design cycle, allowing customers to frequently visit the store and reducing the gap between forecast and actual demand.

ZARA retail model

Weekly fashion updates now buy, or fail to increase, customer expectations - an average of 17 visits per year

ZARA inspired Chinese companies:

Do not take the road of low cost, can also improve competitiveness

The success of ZARA allows us to see that a traditional enterprise has achieved victory through anti-traditional practices. What is more instructive here is that it does not rely on low costs to compete as most companies do.

From the point of view of operations management, usually one company needs to compete with other companies and needs to be considered from four aspects. Cost, quality, speed, and flexibility. Not all companies need to compete through low-cost, ZARA is such a case, it's competition is actually speed and flexibility.

In the past, Chinese manufacturing relied on low costs. With the gradual increase in China's labor costs and the gradual disappearance of the demographic dividend, Chinese companies can eliminate the low-cost model and enhance their competitive advantage in three other areas. It is worth noting that although China’s labor costs are rising and exports are affected more, demand in the Chinese market is also rising, and domestic markets are becoming more and more popular. Compared with other countries, China still has the advantage of low transportation costs. So Chinese companies can make such a change from Made in China to Made for China. This requires a fundamental shift, because the low-cost strategy and the flexibility strategy are completely different directions.

When China’s economy enters a downward path, “operational management” will become even more important for Chinese companies. The reason is very simple. When the economy develops rapidly, people often neglect the operation and management and pay more attention to the development of the market. However, when the economy goes down, people will pay more attention to how to improve efficiency and reduce costs. What is needed at this time is constantly adjusting strategies and optimizing your own processes.