November 2008 | Commentary | Checking In

Getting All, Like, Demand-Driven

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Did you know that a 16-year-old girl in Spain is the logistics genius behind one of the most sophisticated and effective retail supply chain operations on the planet? Neither does she.

The typical Zara demand signal—to buy or not to buy—sets in motion a demand-driven process that has the global apparel chain retailer, based in Spain, growing in a down market. How is this possible? Zara also expects to open more than 600 retail units next year. How is that possible?

Zara also uses expedited shipping, earning more in sales and saving on inventory and touches to offset the extra transport cost. Even though Zara gets product to market quicker than competitors, its logistics process, thanks to demand-driven commitment, is not so fast as to be unmanageable.

Zara utilizes higher-cost Spanish and European labor to produce 75 percent of its line. The savings on containers from the East and inventory in transit, the ability to build smaller marketed, targeted lots and eliminate the risk of cheaper knock-offs flooding the market, plus the sales increase resulting from speed to market, are more than enough to offset the higher costs of domestic and near-sourced labor.

Near-sourcing smaller lots keeps inventory investment lower than competitors and reduces the markdown risk when demand falls off. Zara uses a hub-and-spoke system located in Spain to ship to the world—even to New York and Moscow—in 48 hours or less.

And it all starts with a 16-year-old and demand-driven dedication that reaches into her mind and all the way back to the design boards at Zara headquarters. Clothing retailers typically rely on designers to set style trends and predict what consumers will want the following season. Zara relies instead on demand intelligence—determining what is selling in stores and what is popular on the street, then designing, producing, and delivering to retail outlets globally within two to eight weeks. If a product becomes, like, so yesterday, it is instantly dropped from production and another product follows. The retailer builds small lots of all items, even top sellers.

Zara uses stockouts as a marketing device. If a consumer sees something she likes but does not immediately buy it, she may go back to the store to buy it later and find it gone forever—a great Pavlovian device to convince shoppers to buy without a second thought. These positive and negative demand signals flow all the way back to design and production quickly enough to enable Zara to beat industry markdown averages by multiples, beat new product introductions by a factor of three over the industry average, and attract more annual customer retail visits than competitors. All this with less waste.

Can demand-driven logistics practices help shield businesses from a down economy? Like, totally!

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