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Inditex: Agile Fashion Force, Thesis Paper Example

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Words: 3343

Thesis Paper

Inditex Case Study

Inditex is the parent company of the popular designer brand, Zara. As a luxury fashion brand, it has a great environmental impact, and the leadership of the company is currently working on integrating corporate social responsibility in the brand’s supply chain. The below review will focus on the company’s performance against industry targets and goals set by the management. Te author of the current review will focus on the current supply chain design and that of similar companies’, to identify the main development areas of Inditex’ sustainability strategy.

Zara, according to PR News Wire (2001) was one of the first fashion retail companies that introduced Lean manufacturing to meet sustainability targets. The company has several internal policies that regulate business ethics and sustainability. Inditex has a separate Code of Conduct and Responsible Practices, a Code of Conduct for Manufacturers and Suppliers, and a Right to Wear guiding principles for customers, consisting of five different elements: safe and clean to wear, tested to wear, green to wear, teams to wear, and social to wear initiatives. The product lines are regularly tested according to strict company guidelines, developed in collaboration with industry experts.

Company Analysis

According to the annual report of 2014 (Inditex, 2014), the Spanish company improved its financial performance in the past five years. As of 2014, the company employs 137.054 people worldwide. The company’s business model is unique in the luxury fashion industry, as it does not produce the bulk of its products prior to the season, like other companies (Abnett and Amed 2015). Instead, the company plans 15 percent of production in advance, and plans further manufacturing based on the feedback from retailers and the market. This means that the company that owns Zara brand can significantly reduce waste and increase operational efficiency by planning ahead. However, this planning based on market demand is not the only unique feature of Inditex’s business model. Lean manufacturing is embedded in the entire supply chain of the company.

Inditex currently operates in 88 countries (Inditex, 2014), and manufactures in 50 different countries, on five continents. Transportation is one of the main sources of the company’s carbon footprint, and Inditex is currently working on developing strategies to reduce CO2 emissions related to transportation and manufacturing.

As the press release confirms, “the success of Inditex is based on controlling all the steps of manufacturing clothes: from design to fabric to manufacturing, distribution and sales in order to cut costs and make huge gains in speed and flexibility”. The company discovered that Lean manufacturing does not only provide improved profitability, but also higher flexibility as well. This flexibility can be considered as a competitive advantage on the highly saturated fashion market.

The innovative approach towards supply chain management led to shorter production times. A merchandise that is leaving the designer’s table will be ready to buy in another continent in only two weeks. The shorter time it requires to create and deliver a product reduces the cost of storage and delivery. The delivery schedules of Zara are also carefully planned, therefore, the company makes substantial savings. These savings make it possible for Inditex to manufacture its products mostly in Europe. By cutting inventory costs, Inditex’ business model is able to support the higher production prices in Europe (usually around 15 percent higher than in Asia).

As the Business of Fashion Magazine (Abnett and Amed 2015) confirms, when the Lean approach to supply chain was introduced at Inditex, it is likely that the main goal was not sustainability. However, the more effective production based on market demands resulted in waste reduction, and lower utilization of resources. It can be assumed that Zara simply accidentally stumbled upon sustainability as an additional benefit of Lean. For companies that are looking to improve their competitiveness and reputation at the same time, Lean manufacturing and the restructuring of supply chains can offer multiple benefits.

However, it seems that Zara did not start embracing the idea of developing a sustainable business model in time. As Abnett and Amed (2015) state, the company’s waste volume and water consumption increased between 2009 and 2013. This shows that without integrating sustainable policies into the company’s vision and mission, embedding values within the culture, real progress cannot be achieved. While Indetex’ supply chain was re-engineered to reduce waste and make business processes more efficient, other areas of business did not share the same vision. It was only in 2014 when the company started taking the need for implementing CSR into the entire value chain and company strategy seriously, as the 2014 annual report (Inditex 2014) confirms.

Abnett and Amed (2015) also report that today the integration of CSR into the entire strategy is complete. All business activities are supervised by the CSR department, and suppliers are selected based on the results of sustainability audits. Further,  Perez, a former CSR employee told Abnett and Amed (2015): “our sustainability covers all aspects, [from] the design of the garment to the end”. From the above review, it is evident that Inditex has realized that corporate social responsibility should not be restricted to single initiatives, projects, or business areas. It should be a core part of the company’s policies and long-term strategy. Sustainability should be also a part of corporate vision and culture. In order to reveal how successful Inditex was in implementing CSR in every business area, the author would like to review the 2014 annual report’s sustainability target and goals section next.

The annual report of Inditex (2014) describes the company’s sustainable strategy in detail, and analyzes its performance against targets. The report states that “The Inditex business model is based on horizontal, flexible organization, focused on innovation and team work” (Inditex, 2014:28). The report also confirms that sustainability is an integral part of the company’s business model, and principles of the leadership are utilized to plan long term operations, strengthen the supply chain, and develop internal policies further based on the monitoring of the company’s environmental impact and targets.

Background information on Lean and the Fashion Industry

A recent white paper (Infor 2012) analyzed the impact of introducing Lean in supply chain management on sustainability, effectiveness, profitability, and performance in the fashion industry. According to the authors, the main external drivers of change that motivate an increasing number of fashion companies to introduce Lean are the narrowing production cost advantage of China and Asia, the increasing cost of outsourcing, and the prevalence of shipping delays that have negative implications on the firm’s financial performance.

As of 2013, the manufacturing cost gap between developed countries and China was found to be only 16 percent (Infor 2012: 3). This means that outsourcing is no longer an obvious choice. It is likely that this trend has contributed towards Inditex’ decision to reduce its outsourcing and introduce Lean.

Another trend that justifies firms’ decision to introduce Lean supply chains is the increasing cost of outsourcing. As the majority of stores of luxury fashion companies are located in the global west, the logistic costs of transportation increase operational expenses. It is also important to note that in countries where technologies and regulations are not controlled by industry bodies or government agencies, the quality cost of outsourcing can also be significant. Adding to the above costs the increased shipment time and cost of fashion plan changes, it is evident that outsourcing is becoming less favorable for fashion companies.

In order to evaluate the impact of Lean on organizational efficiency, sustainability, and financial performance, it is important to clarify the definition of a Lean Supply Chain. According to the Infor report (2012: 6), “Lean supply chain management uses Internet-enabling technologies to effect collaborative, real-time synchronization of product and service transfer, demand priorities, vital market place information, and logistics delivery capabilities”.

Choi and Li (2015) further introduces another approach towards making supply chains more sustainable: the idea of a closed-loop supply chain. In this type of supply chain, waste and reusable materials are either re-generated or re-used. This approach is currently present in the list of initiatives of Inditex, and stores already started recycling hangers and alarms, while a new system is being developed to minimize waste through an innovative cutting technique (Inditex, 2014). As Choi and Li (2015: 15401) state: “Even though the remanufacturing process also incurs additional carbon and pollutant emissions, it is commonly believed that the remanufacturing process in closed-loop supply chain management can help reduce the damage brought to the environment”.

Reputation, Sustainability, and Lean

Following scandals related to unethical and dangerous practices in 2005, Inditex introduced Lean and sustainability policies. According to the EOI website reviewing the company’s reputation (n.d.), one of the Bangladeshi textile production facility working as a supplier for Inditex collapsed, killing more than 60 people. The company responded by creating a compensation fund and taking full responsibility for its selection of business partner. The company has started to build effective collaborations with international workers organizations, and introduced ethical codes of conduct for all suppliers. By taking the initiative and focusing on preventing further negative impacts of the company’s business activities, Inditex not only embraced sustainability and ethical practices, but also managed to improve and maintain its reputation and integrity. Still, in 2011, the company was implicated in claims related to slave labor in Brazil. One environmental issue is reported by the EOI Magazine (n.d.), when the company was responsible for an oil spill in Arteixo.

Reed and Chiang (2012) found a strong ling among Lean, sustainability, and brand reputation. According to the study, the main trends and forces behind implementing both Lean and CSR in the corporate strategy of companies are to:

  • reduce costs
  • satisfy the needs of the market better
  • preserve corporate resources
  • enhance the company’s reputation
  • keep up with legislation and regulations
  • differentiate products
  • attract talent
  • meet the expectation of stakeholders
  • discover and exploit innovative opportunities
  • improve capital performance
  • embracing ethical business principles.

From the above list, it is evident that Lean and CSR implementation go beyond creating one single benefit for the company. Indeed, corporate responsibility can be used to increase the brand’s value and differentiate the product. As it has been discussed previously, Inditex introduced Lean primarily for the reason to reduce cost and make its operations more effective. However, discovering the additional business performance improvements that Lean and the related sustainability innovations brought forward, it embarked on a journey of implementing codes of conduct and sustainability principles. This resulted in both cost reduction and revenue growth. The company gained market share, improved its financial performance, and profitability. There is also a close correlation between CSR promotion and brand reputation. Therefore, it is clear that by introducing CSR, Inditex managed to repair its brand image and strengthen its customer engagement.

CSR Initiatives

The 2014 annual report (Inditex 2014) highlights the sustainability milestones of the company. According to the analysis, in 2014 the company extended its product health and safety control guidelines and requirements to more of its suppliers, completed multiple production audits, while providing support and training for partners. This collaborative approach towards “greening” the company’s supply chain is beneficial for both the suppliers and Inditex. The company is able to ensure that it is working towards its sustainability targets with contractors on board. Suppliers, on the other hand, are able to acquire knowledge related to more effective production methods and technologies that will benefit their entire organization.

Further, in 2014 Inditex has introduced a new environmental sustainability standard for factories using wet process, and evaluated more than a hundred of these companies working as suppliers for Inditex. Finally, within one year, Inditex opened more that 300 eco-efficient retail outlets.

The company’s priorities, defined in the 2014 annual report include supply chain traceability and integrity, which is an important part of every sustainability strategy. Without being able to trace the source of products and raw materials, it is impossible to determine how sustainable the supply chain of the company is. Another related priority is the efficient use of resources, and this can also be viewed as priority related to sustainability. By eliminating waste and making production, transportation more efficient, the entire organization can benefit from not only lower costs, but also reduced CO2 emissions and water use.

The strategy of the company related to sustainability has set targets and measurable development plans. The following section of the company analysis will cover the current initiatives and long term strategies within Inditex in detail.

Inditex and CSR

The main corporate strategic priorities related to sustainability and CSR have already been highlighted in the previous part of the company analysis. It is now time to examine each element in detail in order to identify the main themes, and evaluate the effectiveness of the programs.

According to the company’s recent report (Inditex 2013), sustainability guidelines and initiatives have already been implemented in various areas of the business. In the area of raw materials and design, angora wool products have already been eliminated. The company also focuses on utilizing organic cotton, and provides training programs for farmers to support them in funding organic cotton farms. The company is also a member of the Better Cotton Initiative. The main challenge related to this goal is that the origin of cotton within the company’s supply chain is not traceable.

Fabric treatment and processing sustainability goals have also been set by Inditex. The company is committed to completely eliminate toxic chemicals from its supply chain by 2020. The related, already mentioned “Clear to Wear” program is able to trace over 8000 chemicals in the supply chain. In 2013. the company managed to carry out over one million chemical analyses, based on collaboration with researchers, and created the Bangladesh Water Pact. The related measures are based on inspection of compliance with the policies throughout the supply chain.

In the garment manufacturing part of the supply chain, Inditex’s goal is to achieve zero waste within internal operations. This ambitious goal is justified by recently introduced pattern-cutting technologies and facilities created for recycling waste textiles. Currently, the company has managed to reduce waste to under 10 percent, and will continue to work towards achieving the target.

The logistics and transportation related initiatives include a measurable goal of reducing greenhouse emissions by 20 percent through close proximity sourcing, developing sustainable facility buildings. In 2013, the energy consumption across the core business fell by 3 percent (Inditex 2013).

At the retail and point of sale business area of the supply chain, the company introduced its own standard. The Inditex eco-efficient standard defines progress as a reduction of electricity use by 30 percent by 2020 and water use by 50 percent by 2020. In order to achieve the above target, the company has introduced store-wide recycling programs of plastic hangers, and energy monitoring of individual stores. As of 2013, the company had more than one thousand eco-efficient stores.

At the end-of-life area of the supply chain, the company is committed to reduce landfill by upcycling or donating unsold items. Inditex also has programs for educating customers about garment care. To avoid deadstock, the company has an effective system to redistribute unsold stock to other stores. Items are also donated to charities, and Clevercare information is provided for customers. The main difficulty the company is currently facing is that only a small number of non-profit organizations are able to process the volume of donations available from Inditex, therefore, the company needs to focus on finding new partners for collaboration.

The annual report of Inditex (2014) highlights some of the current sustainability initiatives of the company that are related to environment, social issues, and ethics. While the implementation of sustainability in the supply chain of the company through Lean initiatives has already been analyzed, it is important to pay attention to some of the individual projects to determine how well CSR is embedded in the corporate strategy of Inditex.

The Energy and Climate Change Strategy of Inditex (2014: 84) “is focused on promoting efficient and rational use of the energy resources, reducing greenhouse gas emissions and collaborating on the fight against climate change”. The Terra Project is focusing on the protection of the Galician heritage forest. Inditex is an active partner, providing support for forest-eco-friendly program research and forest protection. The majority of Inditex stores worldwide have now obtained a LEED certification, and the company is working on further improving the energy efficiency of its outlets by developing and renovating eco-friendly stores worldwide. Projects that optimize deliveries and packaging have also been introduced (Inditex 2014:85). All stores apply the Waste Minimization Plan that involves reuse of alarms and plastic hangers. Further, the company supports several research initiatives, such as Eureka in Turkey that focuses on developing new technologies to improve the health of the product, and the CIQ pre-testing program.

The above collaborative projects and company-wide initiatives show that Inditex has made sustainability a core aspect of its corporate strategy short term and long term. The company’s values and vision are closely aligned with the actions taken to achieve sustainability targets.

Summary of Findings

Comparing the performance of Inditex’ brands before and after the introduction of Lean and sustainability policies, it is evident that the company has benefited from the changes in several ways. As the Business of Fashion (Abnett and Amed 2015) confirms, the company’s greenhouse gas emissions dropped, but this also had a positive impact on operational expenses and balance sheets. By integrating the CSR systems with all business systems, corporate social responsibility is embedded in every part of the supply chain. In foreign markets, the company uses a cluster system to vet, evaluate, audit, and train suppliers. The main strength of Inditex’s initiatives focusing on making its supply chain more effective and more responsible lies in the ability to collaborate with not only suppliers, but researchers, non-governmental organizations, such as Greenpeace to develop more effective and less resource-reliant ways of production.

While the company still faces several challenges, such as the lack of ability to trace raw materials, it is currently working on projects to make every resource used by the company traceable. The initiative to get all the stores of the multiple Inditex brands environment-friendly has certainly had a positive impact on customer reputation and brand image. By placing sustainability into that visible part of the supply chain, the company has managed to use CSR initiatives to connect with customers and strengthen the identity of the individual brands.

Conclusion

Inditex’ example clearly shows that luxury fashion companies can be both “gold” and “green”. The author of the above case study analysis can best describe the impact of Lean and CSR in the company’s strategy as a domino effect. While the main driver for change in the case of Inditex was to increase productivity and reduce waste through Lean, the management discovered additional benefits of embracing corporate social responsibility. It is also important to note that the detailed codes of conduct for both internal operations and suppliers are providing Inditex with a solid foundation. The review of the 2014 annual report has identified a close alignment between the company’s short-term vision and the current CSR-related initiatives. Covering social, environmental,  and ethical aspects of corporate social responsibility and reporting on the progress towards targets, Inditex has managed to move towards integrity by embracing transparency in every field of its operation. While scandals and reported environmental concerns have been revealed from the past, it is evident that today Inditex has extensive collaboration agreements with environmental organizations, government agencies, workers’ unions, researchers, and other stakeholders that help the group achieve its goals related to reducing the company’s environmental impact. As it has been noted previously, the main strength of Inditex’s strategy is that it relies on strong stakeholder collaboration, and is able to engage with customers on an emotional level, which further increases the brands’ reputation and value.

References

Business of Fashion. 2015.  Inditex: Agile Fashion Force. Retrieved from             http://www.businessoffashion.com/articles/intelligence/inditex-agile-fashion-force

Choi, T. M., & Li, Y. 2015. Sustainability in Fashion Business Operations. Sustainability, 7(11), 15400-15406.

EOI Magazine. n.d. Inditex: A closer view of the company. Retrieved from      http://www.eoi.es/blogs/ricardogarro/2012/02/02/inditex-a-closer-view-of-the-company/

Inditex. 2013. Sustainability Goals.

Inditex. 2014. Annual Report 2014.

Infor. 2012.  A Lean Supply Chain is Key to Fashion Business Success.

PR News Wire. 2001. Zara Clothing Retail Model Based on Lean Inventories and Market Flexibility Could Change the Future of Manufacturing. Date Published: September 09, 2001

Reed, M. E., & Chiang, D. T. 2012. Eco-advantage strategies and supply chain effects. Journal of Supply Chain and Operations Management, 10(1), 212.

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