Inditex: Agile Fashion Force

A CORUÑA, Spain — Inditex headquarters, close to A Coruña, a port city in northern Spain, is the eye of a global storm of activity. Inside the snug plot of understated corporate buildings — terracotta-roofed warehouses, a semi-circle of white and grey striped bricks and a glassy box wrapped in reflective windows — all is remarkably calm.

In the Zara design studio, a white-walled, open-plan space the size of an aircraft hangar, twenty-somethings wander between one another's desks. The soundscape is a patter of Spanish, Mandarin and English; the uniform, unofficially, Zara.

In the distribution centre, products are sorted into the right boxes to be shipped to the right stores. Thousands of jackets on hangers glide around on carousels and, high overhead, boxes zip along a complicated Scalextric of conveyor belts. There are full-size mock-ups of Zara shops, stocked with clothing that will hit stores in a few weeks and complete with music and cash registers, but, as if in a ghost town, eerily void of customers.

There are several studios, where products are photographed for the online store. There are ten manufacturing facilities, where some Zara clothes are made. There is the office of the CEO, Pablo Isla. There is a canteen, where it is rumoured that Inditex founder Amancio Ortega Gaona — now the fourth richest man on the planet — still eats lunch with the company's employees. All the parts are here, quietly, modestly, working in sync.

But outside this industrious little settlement, the winds are blowing. In forty years, Inditex’s operations have swept across six continents and swelled in size. Today, the company is the largest fashion retailer in the world and owns eight brands, including Zara, Massimo Dutti, Pull & Bear and Bershka. Inditex produces 948 million garments each year — or, 50,000 different products, shipped in two deliveries per week to more than 6,500 stores in 88 markets as well as the warehouses that support online businesses in 27 countries.

With huge scale comes huge challenges. Inditex’s operations are now so large that every action the company takes has the potential to have vast negative impact on the planet. If every Inditex store accidentally left on a light overnight, it would add up to almost nine years of wasted electricity.

For a business this big to have zero impact on the planet would be practically impossible. But, as the world’s largest fashion retailer, Inditex has a responsibility to minimise the damage it does to the environment.

Is it possible for a fashion company like Inditex — working at this scale and moving this fast — to be sustainable? The answer is intimately bound up with the company’s origin. In 1975, Amancio Ortega Gaona, the son of a Spanish railway worker and the founder of a small dressmaker, was struck by the disconnect between his manufacturing facilities and the stores in which his products were sold. Tired of not knowing how customers were reacting to his goods and having no control over the way they were displayed, he set up his own store.

From the very beginning, he resolved to create products in response to market feedback. He spoke on the phone with his stores every day to find out what customers wanted and what they were buying and tailored his production output to precisely match this demand.

In today’s fashion industry, Inditex’s business model remains relatively rare. Most fashion businesses buy in bulk, ahead of time, because it costs less per garment, then ‘push’ products at customers. And if the garments don’t sell, they simply push harder, with more marketing, discounts and special offers. On the other hand, Inditex, which doesn’t advertise, allows its operations to be ‘pulled’ along by data collected from stores in real time: quantitative data — how many garments are selling — and qualitative data — why they are selling.

While conventional high street retailers pre-commit about 60 percent of their production, Inditex plans only about 15 percent in advance — the rest is made in response to customer feedback. To achieve this, the company’s production base of over 1,500 suppliers is at least 51 percent “proximity sourced” from facilities close to its Spanish distribution centres in countries such as Spain, Portugal and Morocco, meaning Inditex can design, manufacture and deliver product to the shop floor, all in three weeks.

In fact, Inditex operates more like a technology company than a traditional fashion retailer. In tech lingo, “agile development” refers to a method for building software products, where instead of planning large deployments far in advance, teams deliver small, regular updates in batches, improving the product they are building with each new batch in response to customer feedback. Inditex’s approach also shares some similarities with “lean manufacturing,” a principle made famous by Japanese automaker Toyota, which aims to constantly eliminate waste (any activity that consumes resources without adding value) within its manufacturing process.

When Ortega developed his approach, environmental sustainability was not likely at the front of his mind. However, his aim to avoid waste — wasted money, wasted resources, wasted product — is still ingrained in the company and has inherent benefits as Inditex strives to work in a more sustainable way. For example, by producing to demand, a much smaller percentage of product at Zara is discounted, fails to sell or goes to waste.

“I cannot afford waste. I need to secure that my production must be demanded. In the first moment, it’s more expensive. But the margins are lower at the end of the cycle,” said Jesús Echevarría, Inditex’s chief communications officer. “Try to explain in a business school that you are going to produce at a higher cost and that you are not going to advertise. Believe me, in the IPO, it was not easy to explain this model!”

But today, Inditex has outsized profits and market capitalisation when compared to other publicly-traded apparel retailers. Inditex went public in 2001, then valued at €9 billion (about $9.4 billion at current exchange rates). Today, its market capitalisation is €87.5 billion (about $97.8 billion).

Dr. Warren H. Hausman, professor of management science and engineering at Stanford University, attributes this to something he calls the ‘Zara Gap.’ Profits at Zara are up to four times higher than other apparel retailers. According to Dr Hausman, by adopting a more flexible, demand- driven operating model, there is an opportunity to increase their profits by 28 percent and their market capitalisation by up to 43 percent.

Contrary to external perception, Inditex is not, technically, vertically-integrated, in that it does not own most of its manufacturing facilities (the company declined to provide an exact figure, but said that it owns only a “small single digit” percentage of its total manufacturing output). But, crucially, the different parts of the business — suppliers, designers, stores, buyers — are all tightly connected, controlled and monitored by the company from a global nerve centre at the headquarters in A Coruña.

The ‘data centre,’ as it is called, is a spacious, simple rectangular room. Walls white, floors grey. Elongated white desks stretch lengthways across the space, where scores of people sit at computers, looking up at another massive screen on the wall in front. The back wall is a glass partition. Behind it, Echevarría folded his arms and looked on. “Here you can control the whole world,” he murmured, as we toured the company’s facilities.

In this room, which is manned 24 hours a day, 7 days a week, a team of people track real-time data on every Inditex operation in the world. Every Zara store, every logistics centre, Inditex’s own factories, the traffic on its website — all is watched in the form of maps, graphs, tables and spreadsheets. If a light is left on in Zara’s Shanghai store, someone in this room knows about it.

Just like Mr Ortega used to pick up the phone and call his stores every day, this constant flow of data has enabled Inditex to maintain its responsive model while expanding rapidly, bringing Ortega’s original vision to the modern fashion market. “Technology has changed the model dramatically. At the start, everything was done by phone — and it is still like that. Not [only] by phone, but trying to be as close as possible in contact with the customer,” said Echevarría. “At the beginning it was a matter of human relationships, but now you also have a lot of tools for analysis and you can be as quick as possible.”

But keeping such tight control over its operations has another perk: Inditex is able to implement environmental policies across its whole business, from one end of the supply chain to the other, in a way that is actually traceable. Some choice examples: one computer system calculates emissions in logistics operations, covering over 63,000 operations. Another monitors the eco-efficiency of 1,300 stores. At the company headquarters, wind turbines and solar panels tell of how Inditex’s corporate buildings now run on 52 percent renewable power.

In the HQ’s manufacturing facility, a group of women inside a small glass hub move colourful shapes around on computer screens. It looks like they are playing tetris. In fact, they are plotting out pattern cuts in fabric, using a tool designed to minimise textile waste. In the distribution centre, garments are steamed by machines powered by rechanneled waste energy from other parts of the building. Cardboard boxes are stacked and RFID tags collected for re-use. Big skips of textile scraps wait to be recycled.

“We feel we know our responsibility because of our size and influence in the sector. We are perfectly aware that this means additional responsibility and we want to play a leading role,” said Pablo Isla, the company’s chief executive, speaking in a rare interview about the company’s sustainability policies. “We, as a big global company, are probably much better placed than if we were 100 smaller companies doing the same amount of business. Because you have the resources: the corporate social responsibility team that we have is only possible if you are a big company. Being a global company, you have the resources to go ahead with all these initiatives.”

And yet, the pace of Inditex’s expansion also means that, in a sense, the company is running just to stand still. In spite of its environmental policies, the volume of industrial waste the group emits increased from under 11 million kilograms in 2009 to over 12 million kilograms in 2013, according to a ‘sustainability balance sheet’ contained in the company’s 2013 annual report.

Its water consumption and use has also continued to climb, more than doubling between 2009 and 2013. At the same time, other metrics show progress: the group’s direct greenhouse gas emissions dropped from 24,591 CO2eq in 2009 to 22,525 CO2eq in 2013. (CO2eq is a unit used to measure a range of greenhouse gas emissions in terms of their CO2 equivalent).

But Inditex’s most ambitious policies on sustainability concern its global supply chain, much of which is based in developing nations, in factories not owned by the company. How realistic is it to successfully implement sustainability policies there?

Half an hour’s drive from Casablanca, down a dusty track off a duel carriageway where donkeys tow carts of oranges along the side of the road and women with babies strapped to their chests shuffle between the traffic, rapping on windows and asking for money in a mixture of French and Arabic, is a group of five factories that make denim products for Inditex.

The company, which requested not to be named in this article, is not owned by Inditex, but has worked with the brand since it was set up 25 years ago. Over time, it has expanded its operations and staff (currently around 2,000 people) to meet the demands of the retailer, which makes up, on average, 80 percent of its orders.

In one of its most significant sustainability policies, Inditex has pledged to entirely eliminate toxic chemicals from its supply chain by 2020. In 2013, it carried out 1 million chemical analyses in its supply chain against ‘The List,’ its catalogue of over 8,000 substances — some illegal; many harmful but still commonly used in the textile industry.

Inside this company’s “laundry” facility, where the jeans are cleaned, tubs of chemicals are labelled ‘CTW’ (‘Clear to Wear’, the name of the policy this comes under) or ‘Not CTW’, for the other brands the facility works for. As part of CTW, according to the factory manager, independent auditors perform chemical tests on garments from every new order the facility makes, on behalf of Inditex.

The reason Inditex is able to enforce its policies in this factory — or in a factory in Bangladesh or Egypt, for that matter — is what goes on behind that glass wall in A Coruña. “The CSR systems and the buying systems are totally integrated. If CSR says we cannot work with a factory, the system does not allow the buyer to place any order,” explained Indalecio Pérez, who has worked in Inditex’s CSR department for 12 years. An Inditex buyer can view the results of a factory’s environmental and social audits and the factory knows this, thus creating a bigger incentive to perform well than if audit results were only visible to the company’s CSR team. “If you compare with other companies, our sustainability covers all aspects, [from] the design of the garment to the end. It really makes a difference when you talk with an internal buyer and he knows about the purchasing practices, the chemical restrictions, environmental awareness.”

During our visit, the company’s laundry facility was installing a machine to treat and recycle 50 percent of its wastewater — the facility uses 80,000 cubic litres of water per day. According to the local staff, the investment in the machine was the factory’s own, but was made in order to comply with Inditex’s standards (as well as to cut its bills, as water is expensive in Morocco). Currently, the laundry disposes of its untreated wastewater into public water depuration systems.

In countries like Morocco where the local envrionmental laws are lax — and often ignored — holding factories to sustainability standards conceived in Europe is a tough job. Morocco passed its first environmental protection law, which prohibits dumping waste or gas, in 2003. Despite this, a 2013 United Nations report found Morocco’s environmental legal framework “underdeveloped and still inconsistent.”

Detox Catwalk, a report published by Greenpeace that measures the action taken by fashion companies to address toxic pollution in their supply chains, named Inditex a “leader” on the issue. “It is a challenge for any brand, let alone a gigantic fashion empire like Inditex, to manage its suppliers to comply with high standards of environmental performance, especially if they are higher than the national standard in the manufacturing locations,” said Yixiu Wu, head of Toxics Campaign at Greenpeace East Asia. “When we had this conversation with Inditex, we were very impressed by their reporting. Clearly they have invested a lot of testing, money and knowledge.”

In each foreign market, Inditex uses a “cluster” system to tailor its approach on the ground. Each cluster is a group of stakeholders based in the same geographical region — suppliers, manufacturers, trade unions, international purchasers, local Inditex CSR teams. Their goal is to work together to make their local supply chain more sustainable, first, by standardising the implementation of Inditex’s policies in the region. That’s why, in this Moroccan factory, just like at Inditex’s HQ, textile scraps are bagged, ready to be picked up by a recycling firm.

Second, the cluster further tailors Inditex’s policies to the reality of its region. Because of its scale — Inditex is the biggest client that many of its suppliers have and, because the group favours expanding production at existing facilities over adding new ones, the working relationships are long-term — Inditex has the muscle to clamp down on factories and ensure they comply.

Where possible, Inditex will work with a supplier over time to help it meet its environmental standards, though the company has severed ties with some dyeing facilities in Morocco because of environmental problems that they weren’t able to address through its corrective action plans. However, in some facilities, “we are only 5 or 10 percent of their clients, so we can only make 5 or 10 percent of the change,” said Pérez. “And that’s why we operate the clusters, you need cooperation with all of the stakeholders, otherwise you cannot solve the problem.”

Inditex’s biggest ongoing sustainability challenge is raw material sourcing. Currently, the company is not able to trace the origin of the majority of its cotton beyond which country it is from — by the time the fabric reaches Inditex, it is the product of a number of plantations, spinning mills, cotton traders and fabric manufacturers.

Inditex has upped its use of organic cotton, putting 10 million organic cotton garments on the market in 2014. But with 60 percent of its annual output of 948 million products made of cotton, this is only a small fraction. According to Felix Poza Peña, head of corporate and social responsibility at Inditex, organic cotton is simply not available at scale and due to fragmentation of the market, reforming the industry is a major challenge.

“This is a big part of their business and we couldn’t find any policy on all of their cotton sourcing,” said Heather Webb, a researcher at Ethical Consumer Research Association (ECRA), a not-for-profit research co-operative. ECRA gave Inditex a middle ranking on environmental performance — two high street brands received the ECRA’s best rating; the majority received its worst — citing the company’s Achilles heel as the fact that it does not have its environmental reports independently verified.

Inditex’s growth in Asia raises another question mark. Currently, every Inditex product, regardless of where it is manufactured, is delivered to distribution centres in Spain, where it is sorted and sent on to the company’s global store network. Currently, 70 percent of Inditex’s stores are in Europe, 9 percent are in the Americas and 21 percent are in the rest of the world. But since 2011, the group has almost doubled its store count in China from 275 to 500 and, if this pace of growth continues, it will soon be hard to justify moving goods between continents and back again — from an Asian factory, to Spain, back to an Asian store — in terms of wasted time, wasted resources and negative environmental impact. The company is considering a distribution centre closer to Asian markets to complement its existing facility in Spain.

While Inditex prides itself on the speed at which it can take product to market, the company is not enamoured of its association with “fast fashion,” the system of creating cheap, quickly renewed product that encourages consumers to buy more, which is, at its core, unsustainable.

“We don’t like this concept because it seems like you are pushing and pushing,” said Pablo Isla. “This is not our approach at all, we take a lot of care about each garment, each collection and the coordination, the manufacturing part of the business.”

It’s certainly true that many smaller scale clothing brands are more ideal models of “sustainable fashion” than Inditex. They use up less natural resources, create less waste and have less harmful environmental footprints. But they also lack any real influence on the suppliers that feed the global industry at large. And most people aren’t buying their clothes from small businesses — they’re buying from places like Zara.

“I don’t know a perfect factory, in all of my experience. When I see a blank report I say, ‘It’s not possible, do it again.’ I think the work that we do is never ending,” said Indalecio Pérez. “I think there is some common feeling of fear about what ‘the guys in the textile industry’ are doing. If we want to change, we need to change as an industry. We need to be ready to talk with other brands, with global leaders, with global supply chains, with global NGOs.”

“If you want to go fast, go alone. But if you want to go far, go together. We want to go far.”

Disclosure: BoF travelled to Spain and Morocco as a guest of Inditex.

Editor’s Note: This article was revised on 30 March, 2015. An earlier version of this article misstated that a laundry facility at a Zara supplier in Morocco used 80,000 cubic metres of water per day. It does not. The facility uses 80,000 litres per day. An earlier version of this article also misstated that Inditex works with factories in Mozambique. It does not. In Africa, Inditex works with factories in Morocco and Egypt.

A version of this article first appeared in a special print edition of The Business of Fashion, which highlights ‘7 Issues Facing Fashion Now,’ from sustainability and the human cost of manufacturing clothing to untapped business opportunities in technology, Africa and the plus-size market. Join the discussion on BoF Voices, a new platform where the global fashion community can come together to express and exchange ideas and opinions on the most important topics facing fashion today.