When Will US Firms Become Agile?

Yesterday in part 1, I began this series by identifying the central role of agility in the 21st Century economy and the fundamental shift in strategy and management needed to make it happen. I discussed the approach of virtual agility that was achieved by alliances with other firms and discussed the example of the Chinese firm, Li & Fung.

Today I take a look at internal agility, also in the retail clothing business, with the Spanish firm Zara, the leading brand of Inditex. Zara also operates in a very agile fashion but very differently from Li & Fung.. Its agility is internal, not virtual. It has embraced a set of managerial practices that are radically different from those of traditional management and that enable it to operate much more nimbly.

To the editors of Harvard Business Review, what Zara does seems “questionable, if not downright crazy”, as the excellent HBR article in November 2004 by Ferdows, Lewis and Machuca “Rapid-Fire Fulfillment” makes clear. The article, on which this post draws, marvels at Zara’s performance: “Zara defies most of the current conventional wisdom about how supply chains should be run..” And yet the performance is there: “The company can design, produce, and deliver a new garment and put it on display in its stores worldwide in a mere 15 days. Such a pace is unheard-of in the fashion business, where designers typically spend months planning for the next season.”

To anyone familiar with Agile software development, Zara’s management practices look neither questionable nor crazy. They are simply the basic principles of Agile software development transposed to the retail clothing sector. I will talk more about those principles tomorrow. But first, let’s take a closer look at Zara.

Zara is the leading brand of the global clothing manufacturer/retailer Inditex. Headquartered in Spain, Zara manufactures around half of its production in-house, with only a quarter of its production outsourced to Asia. Instead of relying on outside partners, the company manages all the functions of design, warehousing, distribution, and logistics itself. Zara deliberately leaves extra manufacturing capacity to be able to respond rapidly to unexpected demand, rather than driving its factories to maximize output.

Instead of producing only the designs it needs, Zara’s designers create approximately 40,000 new designs annually, from which 10,000 are selected for production. Instead of excising all redundant labor, Zara makes a point of running three parallel, but operationally distinct, product families with separate design, sales, and procurement and production-planning staffs dedicated to the specific needs of each clothing line: women, men and children. Instead of separating design from manufacturing, Zara’s designers sit right in the midst of the production process to facilitate communications.

Rather than aiming for economies of scale, Zara manufactures and distributes products in small batches. Zara’s retail stores are required to place orders and accept deliveries in rigid cycles: as a result, regular customers know exactly when new deliveries come and so visit the stores more frequently on those days. Zara has a policy of zero-advertising, relying instead on customer delight and word of mouth.

Instead of shipping clothes as cheaply as possible, Zara ships clothes in racks with price tags already on them, so that they can be displayed immediately. Zara often beats the high-fashion houses to the market and offers almost the same products, made with less expensive fabric, at much lower prices. Zara sometimes leaves large areas of its expensive retail shops empty so that it can respond flexibly to demand. Zara ignores the potential profits to be made from concentrating on its best-selling items, even encouraging its bestselling items to sell out, thus encouraging customers to shop more often and more promptly.

Zara does almost everything that a cost-conscious traditional manager wouldn’t do. Instead of cutting costs in each activity of the firm, Zara optimizes operations for the performance of the firm as a whole.

Zara in fact implements the basic principles of Agile software development–total focus on delighting the customer, working in self-organizing teams, coordinating work in short cycles driven by customer feedback, values of trust and openness, and horizontal communications.

The results have been remarkable. Despite the struggling Spanish economy and an industry characterized by mercurial and quixotic customer demand, Zara is flourishing. Inditex has become one of the two largest clothes retailers in the world. Because Zara can offer a large variety of the latest designs quickly and in limited quantities, it collects 85% of the full ticket price on its retail clothing, while the industry average is 60% to 70%. According to The Economist, “Inditex’s sales have quadrupled to €13.8 billion ($19.1 billion) since the firm’s initial public offering in 2001. Inditex’s operating profits are high and have been more stable over time than its peers.”