Optimizing costs the Zara way

Zara is a successful mid-range clothing and accessories company best-known for its ability to launch over 10,000 new designs every year, and a new collection every 2 weeks. It offers affordable pricing and enjoys a loyal, engaged customer base.Flowing from its affordable pricing strategy, it is also a cost-optimization leader in its industry. For example, it has cut its advertising budget to ZERO - Zara does not buy space in print or electronic media, and relies exclusively on free, non-commercial channels.[caption width="500" align="alignright"]

Zara store, Washington DC[/caption]Outsourcing productionOne function which has seen lot of cost-cutting in the apparel industry is production. This industry embraced the axiom that it is best to ‘produce where it is cheap, and sell where it is valuable’. Almost every player, including all of Zara’s competitors, have outsourced production to low-cost countries like Bangladesh and Vietnam.Zara bucks the trend

“What Zara loses in cost advantage, it more than makes up for in flexibility, quality and time-to-market for every new collection.”

Now, you would expect Zara, with its strong focus on cost optimization, to have led this outsourcing trend. But it resisted, retaining more than 70% of its production in Europe. Its argument is simple and reflects its iron-clad strategy focus - Zara’s strength is in getting a new collection to the market every 2 weeks. While outsourcing lowers costs, it also significantly increases time-to-market.In other words, what Zara loses in cost advantage, it more than makes up for in flexibility, quality and time-to-market for every new collection. This reflects Zara’s smart cost-optimization strategy.It does not cut costs indiscriminately, across-the-board, even if it means bucking a successful trend (outsourcing). Instead, it identifies areas where sacrifices can be made in line with its strategy and without diluting its primary differentiators (in this case, its ability to quickly release large new collections).