A supply chain management case study on ZARA.

1. CASE STUDY ON
ZARA
SUBMITTED TO: SUBMITTED BY:
Prof. Subir Guha Kangna Sood
Neha Chauhan
Akanksha Chaudhary
Ankit Israni
Azizul Rub

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. • 2001 had been a landmark year for Inditex, for the founder
Amancio Ortega Gaona and for Castellano.

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. • 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. 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. 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. • 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. • 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.  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. • 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. 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. 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. + Causal
Bershka
Gap
Stradivarius
Pull and Bear
H & M
Next
- Young Mango Zara + Young
Benetton
Cortefiel
Massimo Dutti
+ Formal

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. • 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. • 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. • 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.  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. • 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. • 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. 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. • 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. • 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. • 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. • 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. • 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. ZARA MODEL

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. • 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. • 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. 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. 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. • 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. • 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. 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. • 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. • 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. 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. 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. 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. • 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. • 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. 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. • 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. 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. 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. • 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. 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. 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. 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. 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. 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. 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. 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. 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. • 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. (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. 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. 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. 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. 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

63. PROCUREMENT STRATEGIES

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. •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. 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. • 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. • 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. • 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. • 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. • 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. 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. • 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. 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