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  Optimizing Operations Decisions the Zara Way 

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Successful players in the clothing retail industry have learned to optimize three key operations decisions related to design, sourcing and distribution.

In their article "Operations Management in Apparel Retailing: Processes, Frameworks and Optimization," UCLA's Felipe Caro and IESE's Victor Martínez de Albéniz review the decision models employed by fast-fashion retailers such as Zara to derive some current best practices.

Distribution Decisions
During the full price season, stock needs to be distributed across a network of stores, ensuring there are enough products and that they are replenished, especially when products are successful and frequently sell out. This becomes even more important during sale seasons.

A centralized inventory management system will allow retailers to ship stock to stores when needed, while two-tier inventory models allow a rapid response to demand.

Zara has adopted another distribution model, at the level of store display: If a product is unavailable in major sizes, it removes the product from the shop floor.

This requires that distribution decisions also take account of shipping scarce stock to other stores in the network, so that the right combination of sizes is always on display. Doing this can boost sales by as much as 4 percent.

It is also vital that inventory is maintained at the right levels according to which point in the season. If stocks run out too early in the season, there will be little room for optimization.

Sourcing Decisions
Sourcing decisions are critical to good distribution and sales. One challenge involves managing the risks of over or under ordering in relation to demand.

By focusing on the quantity/supply aspect in relation to overall demand, many retailers tend to ignore the fact that sales take place in a network.

The multipurchase model is more apt for companies where the lead times are shorter, and it is possible to use early demand information to adjust the forecast and produce more when demand turns out to be high.

This makes it all the more important to improve forecasts by observing early sales, so that extra stock can be bought in response.

Design Decisions
Design decisions require a good understanding of how consumers choose among products within a collection. Getting the assortment right means balancing the attractiveness to the consumer, the costs associated with greater variety, and the learning opportunities possible if the assortments are changed over the season.

In the fast-fashion context, retailers like Zara harness this opportunity by researching what sells, rather than sticking solely to safe bets.

Several consumer models could be used to find the optimal assortment, whether based on the overall collection, stock or revenue management.

One interesting optimization model is an index-based one. The assortment during each period is made up of products with the highest indices, based on unknown demand rates.

Future Decision Areas
Changing processes means adding new approaches to existing models. New challenges include: managing dynamic assortments and product introductions; managing store space; and guiding in-season sourcing and design. These require more complex dynamic optimization techniques.

Game theory models could be used to understand the strategic interactions between retailers. While constantly changing assortments may be beneficial to a retailer if taken in isolation, competition brings the risk of product wars, in which all retailers launch many new products. This increases everyone's costs but not necessarily their market share.
This article is based on:  Operations Management in Apparel Retailing
Publisher:  Sociedad de Estadística e Investigación Operativa (SEIO)
Year:  2013
Language:  English