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Supply Chain Management of Zara (Case Study)

A supply chain management case study on ZARA.

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Supply Chain Management of Zara (Case Study)

  1. 1. CASE STUDY ON ZARA SUBMITTED TO: SUBMITTED BY: Prof. Subir Guha Kangna Sood Neha Chauhan Akanksha Chaudhary Ankit Israni Azizul Rub
  2. 2. INTRODUCTION • Jose Maria Castellano Rios was the Chief Executive Officer of the Spanish apparel company Inditex. • On January 15, 2002 he stepped to the podium to receive the International Retailer of the Year award from the National Retail Federation. • This year had been a down year for retailers. Retail consolidations and bankruptcies were occurring at the fast pace. But Inditex and its flagship company Zara managed to show impressive growth and strong profitability.
  3. 3. • 2001 had been a landmark year for Inditex, for the founder Amancio Ortega Gaona and for Castellano.
  4. 4. HISTORY OF ZARA • Mr. Gaona was a native of Galicia and he had worked as a clerk at a ladies apparel retailer before starting his own housecoat manufacturing business in 1963. • He opened the first Zara store in La Coruna in 1975. • By 1989, there were 82 Zara stores in Spain. Then he began international expansion with Zara stores in Portugal, Paris and New York.
  5. 5. • Zara’s parent company Inditex took on 4 other formats: Pull and Bear, Massimo Dutti, Bershka and Stradivarius. • Oysho was launched in 2001. This was an intimate apparel and swimwear brand.
  6. 6. SELECTED FINANCIAL INFORMATION FOR INDITEX Fiscal Year (Euro in millions) 1996 1997 1998 1999 2000 Income Statement Data Net Sales € 1,008.50 € 1,217.40 € 1,614.70 € 2,035.10 € 2,614.70 Growth 16.80% 20.70% 32.60% 26.00% 28.50% Gross Profit 487.5 599.1 814.8 1046.7 1337.7 Gross Margin 48.30% 49.20% 50.50% 51.40% 51.20% Operating Income 152.4 192.8 242.1 299.6 390.3 Operating Margin 15.10% 15.80% 15.00% 14.70% 14.90% Net Income 72.7 117.4 153.1 204.7 259.2 Balance Sheet Data Total Assets 820.3 977.2 1326.3 1772.9 2107.6 Total L & SE 820.3 977.2 1326.3 1772.9 2107.6 Financial Statistics Days Inventory (fye) 35.6 33.8 34.2 Net Working Capital -123.4 -133.7 -204.9 -234.3 -273.9 Operating Statistics Total Retail Sales (millions) € 1,525.50 € 1,998.80 € 2,606.50 Average Sales per Store (millions) € 2.04 € 2.17 € 2.41 Total Retail Stores 748 922 1080 Average Sales per Sq. Meter € 4,752.34 € 4,534.69 € 4,853.82 Total Selling Sq. Meters 321000 441000 537000 Same Store Sales 11% 5% 9%
  7. 7. Inditex-Net Sales & EBIT by concept Net Sales (Euro in millions) 1998 1999 2000 Zara € 1,304.20 € 1,603.40 € 2,044.70 Pull & Bear 131.9 143.8 172.6 Massimo Dutti 120.5 144.2 184 Bershka 22.3 82.1 134.9 Stradivarius N/A 26.3 72.5 EBIT (Euro in millions) 1998 1999 2000 Zara € 213.0 € 248.40 € 327.9 Pull & Bear 15.00 17.1 24.1 Massimo Dutti 14.2 17.4 20.3 Bershka -3.7 7.1 8.4 Stradivarius N/A 1.7 -3.2
  8. 8. • By 2000, over half of Inditex sales were outside Spain. • During 2000-01, Inditex received widespread favourable press and analyst coverage which resulted in Inditex’s success and attributing it to Zara’s unique integrated business model. • Due the success of Zara, it was being described as “possibly the most innovative and devastating retailer in the world”. • Inditex made an initial public offering of stock in May 2001 and was world’s third largest clothing retailer at time. • Zara offered clothing for women (about 58% of sales), men (about 22%) and Children (about 20%).
  9. 9. • In its offering document, Inditex described Zara in the following way:  Zara is a high-fashion concept offering apparel, footwear and accessories for women, men and children from newborns to adults aged 45.  Zara stores offer a compelling blend of fashion, quality and price offered in attractive stores in prime locations on premier commercial streets and in upscale shopping centers.
  10. 10.  Our in-house design and production capabilities enable us to offer fresh designs at our stores twice a week throughout the year. • At the end year 2001, Inditex was operating over 1200 stores in over 35 countries around the world. • Analysts projected that Inditex stores would easily number 2000 within 5 years.
  11. 11. • Zara’s vertically integrated model depended to a great extent on local Spanish sourcing for a large proportion of garment manufacture. But Castellano had considered that Zara would shift more production offshore (abroad), probably to Asia, to take advantage of the lower wage costs.
  12. 12. CRITICAL ISSUES FACED BY INDITEX: • How much of a shift was necessary to support Zara’s expansion and to meet possible pricing pressures. • How much of a shift could be made without undermining Zara’s success.
  13. 13. INDITEX’S PRODUCT POSITIONING + Price Next Benetton Cortefiel Gap Massimo Dutti - Fashion Vogele Zara Mango + Fashion Stradivarius H & M Fast Bershka Pull and Bear Matalan - Price
  14. 14. + Causal Bershka Gap Stradivarius Pull and Bear H & M Next - Young Mango Zara + Young Benetton Cortefiel Massimo Dutti + Formal
  15. 15. THE TEXTILE AND APPAREL INDUSTRY • In 1999, the global textile and apparel industry accounted for 5.7% of the production value of the world manufacturing output and more than 14% of the world employment. • The clothing market in the major countries was estimated at about $580 billion, with US accounting for about $180 billion and Western Europe about $225 billion, Eastern Europe about $14 billion, Latin America about $45 billion and some parts of Asia represented areas for potential market growth as income levels rose and markets matured out of a highly fragmented stage dominated by independent retailers.
  16. 16. • The production of textile is capital intensive. Textile manufacture tend to be highly specialized, depending on the raw materials (natural or synthetic or blend), whether the cloth is woven, knitted, matted or fused, the dying or painting, treatment and finishing and the overall performance characteristics desired for the end product such as how well it accepts and hold dye, how well it insulates and machine wash ability.
  17. 17. • Apparel production involves the procurement of fabric, the preparation of designs including samples and patterns, the cutting of fabric and the sewing and finishing of garments. For knitwear, the production process is modified to incorporate the procurement of yarn and the knitting process.
  18. 18. • In terms of production, the apparel industry could be roughly broken down into three tiers of quality:  a high quality segment – items that incorporate fashion elements and emphasize quality of material and workmanship such as ladies suits  a medium quality segment – quality of material and workmanship had to be acceptable but where there was little differentiation among producers and relatively little in terms of a time-sensitive fashion component (cardigans, khakis)
  19. 19.  a low quality segment – product competed on price • Low wage countries had grown their production volume in medium and low quality segment. They were also increasing their share of high quality production. • In apparel industry, meeting high quality demand was more important for profitability. • The more mechanized parts of production – fabric production, including knitting by machine and cutting – setup time was not significant.
  20. 20. • Except for commodity like garments, the ability to manage small batch production to meet the ever-changing tastes of consumers placed a premium on flexibility and responsiveness of the production system. • Sewing and finishing was done manually and so was labour intensive. • Women who were working in apparel production as workers were receiving low wages. • Significant drivers of production sourcing were wage levels, raw material quality and availability, skills requirement and workers productivity, transportation time and cost, political and foreign exchange risk and social responsibility concerns.
  21. 21. • Quotas and tariffs were also an important consideration. • China had entered WTO so it increased its production but also resulted in the reduction of trade barriers affecting imports of goods from the European Union into Latin American countries. • The regional reduction of trade barriers had fostered (promoted) increased manufacture in Eastern Europe, Turkey and Northern Africa in support of European markets and Mexican, Caribbean and Central American manufacture in support of the US market.
  22. 22. THE TEXTILE AND APPAREL INDUSTRY IN THE E.U. AND IN SPAIN • The textile and apparel industry in the E.U. employed about 2 million people in 1999. This generated a turnover of 178 billion euros. • Italy had the largest percentage of the E.U. textile and apparel business at 31%, UK at 15%, Germany at 14%, France at 13%, Spain at 9% and Portugal at 6%. • E.U. countries were leaders in the development of high-tech fibers and related technologies.
  23. 23. • This industry was known for subcontracting within regional clusters of small and independent but collaborative firms. • Inditex was tapping or managing into the subcontracting networks to run manufacturing on a larger scale. • The textile and apparel industry in E.U. run on low overhead. • In apparel, E.U.’s special strength was design driven manufacturing. There was close relationship between clothing and textile companies.
  24. 24. • There was a significant volume of outsourcing of labour intensive operations to Eastern European and Mediterranean rim countries which were near enough to provide rapid turnaround and could be relatively easily monitored for quality control. • Spanish textile and apparel industry was comprised of small firms and traditionally was not strong in R&D or technological innovation. • In 1990’s Spain experienced greater prosperity with rising wage levels and its domestic customer base had become more sophisticated.
  25. 25. • Spanish people cared about fashion and quality while purchasing clothes. They don’t consider price. • Ortega’s home province of Galicia is in the rainy northwestern corner of Spain. Its economy had been rooted in farming, fishing and mining. Galicia had been poorer and there was high level of unemployment. Due to this many people in early 20th century emigrated from Galicia to Argentina, Uruguay and Cuba. • This helped in reducing unemployment and improving skill levels had been the priorities of the Galician regional government and labour organizations.
  26. 26. • Through Galicia had not been known as a center of textile and clothing manufacture on an industrial level, in 1980’s the region began an aggressive push to evolve traditional dressmaking skills and participate in the sector by promoting a concept of “Galician fashion.” • By 1998, 29 thousand people (most of them women) worked for about 760 firms in Galicia who were involved in textile and apparel business. • 75% of production consisted of the assembly line production of garments and 16% of knitwear production.
  27. 27. • There were large firms headquarters in Galicia – Adolfo Domingues, Caramelo, Mafecco and Zara. • Galicia’s share of national production in the textile and clothing sector increased from 7% to 14% from 1991 to 1997. • Employment generated by Galician clothing firms represented 10.5% of the total jobs created by this sector in Spain for this period. • Exports from the region increased ten fold from 1991 to 1998.
  28. 28. ZARA MODEL
  29. 29. Zara Planning and Design Cycle • There are two seasons, spring/summer collection arrive in stores in January/February and the Fall/winter collection arrive in August/September (reversed for the Southern hemisphere). • About a year in advance designers began to work to define dominant themes and colors, and then to put together an initial collection. • Zara had 200 designers. Designers were catwalk-influenced and expected to adapt haute couture style for the mass market.
  30. 30. • Zara produces about 11 thousand styles each year, and all in relatively small batches to begin with. This encourage them to experiment. • Designers work in large open spaces at Zara’s headquarters, with one design center for each of the women’s, men’s and children’s lines. • Sketches are prepared by hand but worked on a CAD system. • Design centers were light and modern, with pop music playing in the background.
  31. 31. • The store specialists work in same rooms, review daily detailed printouts of store sales and gather the feedback from store managers. Each store specialist is responsible for a group of stores by region and visit them periodically. • Each store manager should have retailing experience and is chosen for her commercial design sense and feel for market trends, because it is the job of the store manager to feed market information from the stores back in to the design and production decision making.
  32. 32. Pattern and Samples • In some cases, designs were sent out to third part suppliers for them to prepare sample or the sample pattern and then a sample garment were prepared in-house. • Patterns once finalized could be made available to the computers that would guide the cutting tools. • Based on the samples, the initial collection for the season was finalized and shown within Zara.
  33. 33. Production Sourcing and Scheduling • Once the initial collection had been approved, the related fabric procurement and production planning started. • Where garments were third party sourced, commitments were made 6 months prior to the scheduled store delivery, while garments for in-house production were scheduled for manufacture so that they are ready in time. • Of the outsourced production, about 60 percent came from Europe and 30 percent from Asia, with the balance from rest of the world.
  34. 34. • Decision to source or to manufacture in-house was based on a number of considerations, including expertise, relative cost and, especially, time sensitivity. • There are 21 Zara factories, each managed separately. • Garments with fashion styling tended to manufacture in-house while basics and knits tended to be outsourced. • Zara committed about 15-25 percent of its season inventory six months in advance of the season. By the beginning of the season about 50-60 percent of its season inventory had been committed.
  35. 35. • About a quarter of the season’s collection was made available at the start of the season. • In-house production was weighted 85 percent to in-season production and 15 percent to the next season’s production.
  36. 36. In-house Manufacture • Two basic steps: − Fabric procurement − Garment assembly and finishing • Inditex owned a fabric sourcing company in Barcelona (Comditel), several textile production companies and a share in a fabric finishing company, Fibracolor. • Comditel managed about 40 percent of fabric procurement. • Set up time for dying or printing was about 4 or 5 days, whole process taking about a week.
  37. 37. • Zara relied on external sourcing for synthetics and more fashion fabrics. • Based on styles and sizes, the Zara factories cut the fabric. • Fabric was cut by machine based on a computer layout or pattern pieces. • The layout was arranged by people working at computer terminals who specialized in appropriate layout with minimum waste. • The cut fabric pieces were marked and bundle for sewing. • Sewing was subcontracted to a network of 400 smaller firms, the areas where wages were low and unemployment high.
  38. 38. • Zara enabled many women to work, including on a part-time basis. • Deliveries between the Zara factories and the subcontractors occurred many times in a week. • Overall turnaround time for sewing ran a week or two. • Pressing, tagging and final inspection occurred in Zara factories. • It takes around 10 days to finish a style production.
  39. 39. In-Season Production • Zara committed only 50-60 percent of production in advance of the season, the remainder manufactured on a rolling basis during the season. • The in-house portion of the in-season production could be easily modified in response to the market demand. • According to Miguel Diaz Miranda, VP of Manufacturing – The size of production run-scale is not an issue. They cover the cost on the garments through markup. It is the product that drives the customer.
  40. 40. For an expected very strong demand, they take higher risk on the fabric purchasing decision. Sometimes they take a decision that from a economic point of view might not seem sound. For example, if an item was selling well, but if they think that they are saturating the market with one look they stop manufacturing it and create unsatisfied demand on purpose. • It was the ability to respond in-season that gave Zara a different fashion risk profile. • Zara respond with alternative offerings when the initial collection items perform poorly.
  41. 41. Distribution • Distribution of both outsourced and in-house manufactured garments was centralized at Zara’s 50,000 square meter distribution center in Arteixo. • Centrally located among fourteen manufacturing plants. • Garments move along 211 km of track from the cluster of factories. • Hanging garments were arranged on coded bars that sorted automatically by style within the distribution center; stock picking was done manually.
  42. 42. • Folded garments were sorted on a carousel, with each garment dropped down a chute toward a box for its destination store based on its bar code. • About 2.5 million garments move through the distribution center each week. • The distribution center was utilized at 50 percent capacity at the end of 2011, more distribution capacity needed to come on-line, and the company was building a second distribution center in Zaragoza, Spain.
  43. 43. • Shipments were made out of distribution center twice a week, by truck to Europe and by airfreight to stores outside Europe. • No inventory was held centrally, and there was almost no inventory at the stores that was not on the selling floor.
  44. 44. Retailing • Store mangers asked for items that they wanted in their store, but the final allocation were made centrally, taking into account current store sales and inventory information. • Stores received new inventory several times a week. • Freshness in assortment is very important. • Items that were not sold could be returned for possible reallocation to other stores or for other outlet sales.
  45. 45. • Only previously in stock could be marked down. Zara tried to minimize the volume of merchandise moved at end-of-season sale prices. • Zara experienced 15-20 percent markdown sale of season volume. • Zara did not advertise, instead relied on word of mouth. • Typical expenditure for retail advertising is 3-4 percent of sales. At Inditex it ran at 0.3 percent, almost all of that for simple newspaper notices of the sales period.
  46. 46. The Stores • Zara stores were uniform, including as to lighting, fixtures and window display, as well as the arrangement of garments, with a targeted floor space of 1200 square meters. • Store locations were upscale in prime high street areas and the store design, displays and windows emphasized an upscale, fashion forward message. • The uncluttered arrangement of goods in uncrowded spaces coordinated by color made the experience of shopping more like that in high-end luxury stores.
  47. 47. Pricing Strategy • Zara prices are based on comparables within the target market. • Before 2001, they had a single tag that showed all of its different prices by country. This simplified the tagging procedure and also permitted goods to be moved from store to store without retagging and also permitted goods to be transshipped between one country to another without retagging.
  48. 48. • At the beginning of 2002, Zara switched to a system of local price marking in the stores, using a device that read the bar code and printed the appropriate local price.
  49. 49. Growth Strategy • Most of the stores are company owned although in some markets (e.g the Middle East) Zara had opened a small number of stores through franchises and in some other markets (e.g Japan) Zara had opened stored through alliances. • Zara did not establish local distribution centers and warehouses when it entered a market or engage in store-opening promotions. • Zara had about 450 stores in 33 countries.
  50. 50. ZARA- STORE LOCATIONS : 2000 Company Owned Franchise Joint Venture Total Spian 220 220 Portugal 32 32 Belgium 12 12 France 63 63 United Knigdom 7 7 Germany 6 6 Poland 2 2 Greece 15 15 Cyprus 2 2 Israel 9 9 Lebanon 2 2 Turkey 4 4 Japan 6 6 United States 6 6 Canada 3 3 Mexico 23 23 Argentina 8 8 Venezuela 4 4 Brazil 5 5 Chile 2 2 Uruguay 2 2 Kuwait 2 2 Dubai 2 2 Saudi Arabia 5 5 Bahrain 1 1 Qatar 1 1 Andorra 1 1 Austria 3 3 Denmark 1 1 Total 410 27 12 449
  51. 51. A SOURCING DILEMMA • Zara was on the right track for a continuation of the measured and organic growth off its business model and unique positioning. • Management had constantly revisited Zara’s strategy. • One element of the strategy was production sourcing. • Zara had announced that the proportion of outsourced manufacture would grow, initially to 60 percent, to take advantage of increased low cost production coming on-line.
  52. 52. RELATIVE WAGE LEVELS Hourly Labor Cost (US $) Textiles Clothing India $0.60 $0.39 China 0.62 0.43 Tunisoa 1.76 NA Morocco 1.89 1.36 Hungary 2.98 2.12 Portugal 4.51 3.7 Spain 8.49 6.79 USA 12.97 10.12 Italy 15.81 13.6
  53. 53. 30 25 20 15 10 5 0 0 0.62 1.76 1.89 2.98 4.51 8.49 12.97 15.81 0.43 0 1.36 2.12 3.7 6.79 10.12 13.6 hourly wages ($) Relative Wages Levels: Textiles & Clothing Clothing Textiles
  54. 54. PRODUCTION MOVEMENT Production Allocation 1998 1999 2000 In-house 53% 50% 44% External 47% 50% 56% 100% 100% 100% Origin of Production 1998 1999 2000 Spain 29% 25% 20% Portugal 27% 24% 22% European union 10% 9% 5% Rest of Europe 8% 11% 15% Asia 19% 23% 29% Rest of World 7% 8% 9% 100% 100% 100%
  55. 55. OUTSOURCING BENEFITS AND RISKS Some of the motivations for outsourcing are • Economies of scale- an important objective in outsourcing is to reduce manufacturing costs through the aggregation of orders from many different buyers . Indeed the aggregation allows suppliers to take advantage of economies of scale ,both in purchasing and in manufacturing. • Risk pooling- outsourcing allow buyers to transfer demand uncertainty to the CEM.
  56. 56. One advantages that CEMs have is that they aggregate demand from many buying companies and thus reduce uncertainty through the risk pooling effect. The CEMs can thus reduce component inventory levels while maintaining or even increasing service level. • Reduce capital investment- another important objective in outsourcing is to transfer not only demand uncertainty to the CEM but also capital investment. Of course, the CEM can make this investment shared between many of the CEMs customers.
  57. 57. • Focus on core competency- by carefully choosing what to outsource , the buyer is able to focus on its core strength, that is, the specific talent , skills, and knowledge sets that differentiate the company from its competitors and give it an advantage in the eye of the customers. for instance, nike focus on innovation, marketing, distribution, and sales , not on manufacturing. • Increased flexibility- It refer 3 issues- (i) the ability to better react to changes in customer demand. (ii) The ability to use to suppliers knowledge to accelerate product development cycle time.
  58. 58. (iii) The ability to gain access to new technologies and innovation. These are the critical issues in industries where technologies change very frequently, for eg: fashion products. • Loss of competitive knowledge- outsourcing critical components to suppliers may open up opportunities. Similarly outsourcing implies that companies lose their ability to introduce new designs based on their own agenda rather than the suppliers agenda. Finally, outsourcing the manufacturing of various components to different suppliers may prevent the development of new insights, innovations and solutions that typically require cross functional teamwork.
  59. 59. A FRAMEWORK FOR BUY/MAKE DECISIONS To introduce the framework , we classify the reasons for outsourcing into 2 major categories: •Dependency on capacity:- the firm has the knowledge and the skills required to produce the component but for various reasons decides to outsource. •Dependency on knowledge:- in this type of dependency the company does not have the people, skills, and knowledge to produce the component and outsource in order to have access to these capabilities.
  60. 60. The Distinguish Between Integral And Modular Product Modular Product A modular product can be made by combining different components. A personal computer is the good example of a modular product in which the customers specify memory and hard drives sizes , monitor , software and so forth. This implies: • Components are independent of each other. • Components are interchangeable. • Standard interfaces are used. • A component can be designed or upgraded with little or no regard to other components. • Customer preferences determine the product configuration.
  61. 61. Integral Product It a product which is made up from components whose functionalities are tightly related. Thus, • Integral products are not made from off-the-shelf components. • Integral products are designed as a system by taking a top-down approach. • Integral products are evaluated based on system performance. • Components in this are performed multiple function.
  62. 62. A framework for make/buy decisions product Dependency on knowledge and capacity Independent for knowledge, dependent for capacity Independent for knowledge and capacity modular Outsourcing in risky Outsourcing is an opportunity Opportunity to reduce cost through outsourcing integral Outsourcing is very risky Outsourcing is an option Keep production integral
  64. 64. • Early procurement related to little value addition to the organization. • Zara recently adopted good procurement strategies which will results in good competition and highly profitable company from others. • Survey of electronic companies identified 19% profit gap is there between the least and the most successful companies. • Lower cost of goods sold accounted for 13% • This industry is having cost of purchased goods and services as 60-70 percent of the cost of goods sold.
  65. 65. •2005 comparison shows that Pfizar Profit margin was about 24%, Compared to Dell’s 5 % and boeing’s 2.8%. • Reducing Procurement cost by exactly one % of revenue will leads to the net profit. •To achieve the good profit margin , Pfizer would need to increase its revenue by 4.17 %, Dell by 20% , and Boeing by 35.7% • Implication is that smaller the profit margins, the more focus is on reducing procurement cost • Zara formed structure of ensure good supply, Form partnerships, Simplify and made operations automate , Focused on more purchasing power with minimum cost and more revenue with more profit impact.
  66. 66. SUPPLIER FOOTPRINT • Many industries have changed their supply strategies in the last three decades. • In the 1980’s , American automotive manufacturing companies focused on suppliers either in the U.S. or in Germany. • In 1990’s Suppliers shifted in Mexico, Spain, and Portugal. • Finally in the last years supplier footprint have moved to China. • High – Tech industry has been observed with trends.
  67. 67. • In 1980’s Focus of U.S. high – tech companies was on sourcing in the United States; in the 1990’s , on Singapore and Malaysia, and recently on Taiwan and China. • Challenge for the Zara is therefore to develop a framework which will give a good supplier footprint. • Zara should consider this strategy by keeping various factors in mind and they are type of product or component purchased, forecasting ability, Profit impact, Technology, Product associated.
  68. 68. • For this Zara took the concept of functional and innovative products and right supply chain of the products with the good product strategies. • Functional products are slow products with low profit margins like Soup, milk e.t.c
  69. 69. • High – tech products associated with fast products with high margins of innovative products like cosmetics, fashion items • Supply chain strategy for both the products are different. • Appropriate supply chain strategy for functional products is push and supply chain strategy for innovative products is pull. • For the retailer who procures functional products , the focus should be on minimizing total landed cost ,i.e. from the cost of purchasing to the delivering cost or final destination.
  70. 70. • Cost includes are 1. Unit cost 2. Transportation cost 3. Inventory holding cost 4. Handling cost 5. Duties and taxation 6. Cost of financing On the other hand , When procurement is done from innovative products , focusing on total landed cost is the wrong strategy . Because of the high margins and higher forecast error
  71. 71. • Focus for the innovative products should be on reducing lead times and on supply flexibility • When a retailer procures functional products , Sourcing from the low cost countries, for example , Taiwan e.t.c. Is appropriate • When sourcing is done from the innovative products , the focus is on suppliers close to the market area , i.e., where the products are being sold with small lead time
  72. 72. CHARACTERISTICS OF FUNCTIONAL VERSUS INNOVATIVE PRODUCTS DESCRIPTION FUNCTIONAL INNOVATIVE Product clock speed Slow Fast Demand character Predictable Unpredictable Profit margin Low High Product variety Low High Average forecast error At the time production Is committed Low High Average stock out rate Low High
  73. 73. • This representation mainly focus on the following 1. Component forecast accuracy 2. Component supply risk 3. Component financial impact 4. Component clock speed CRITERIA • Component forecast accuracy is not necessarily the same as the finished product forecast accuracy • Criteria also belongs to the decision may be to focus source
  74. 74. Strategy on minimizing total landed cost, lead time reduction , or increasing flexibility • When component forecast accuracy is high, Supply risk is low, financial impact is high, and clock speed is slow, a cost based sourcing strategy is appropriate and vice versa • Focus should be on the minimizing of total landed cost should be the main objective of the prime procurement strategy as must consider for the overall portfolio of the strategies