The finalists for the competition, sponsored by the Institute for Operations Research and the Management Sciences (INFORMS®), include:
Zara, a concept of the Inditex Group, with UCLA Anderson School of Management and the MIT Sloan School of Management, for “Zara Uses Operations Research to Reengineer Its Global Distribution Process.”
Fast Fashion is a term often associated with this Spanish clothing manufacturer and retailer, which has rapidly sped up the process of designing and delivering fashionable clothes throughout the world.
The Problem: Zara’s supply chain consists of two primary warehouses located in Spain which periodically receive shipments of finished clothes from suppliers and ship replenishment inventory directly to every Zara store in the world twice a week. A key challenge is to determine the exact number of units of each size (up to 8) of each article (up to 3,000 at any time) that should be included in each shipment to each store (more than 1,500). This problem is critical because its solution determines the “blood stream” of Zara’s merchandise to its stores.
And it is challenging because:
- the number of associated shipment decisions reaches several millions
- the amount of relevant data (warehouse inventory, store inventory and store sales history for each article) is also enormous;
- the available warehouse inventory is often limited;
- most stores will only sell merchandise when the set of available sizes is complete enough (introducing complex dependencies across sizes); and
- these decisions must be made in just a few hours.
In 2005, the process used by Zara for determining those shipments involved the examination by a large team of warehouse employees of shipment requests sent by every store, which presented an opportunity to improve both scalability and revenues.
The O.R. Solution: The Zara team started to develop an alternative decision process relying on proven operations research methods, including forecasting algorithms, stochastic analysis, and a large-scale mixed-integer programming model. Its implementation presented many technical difficulties, including the need to capture forecast uncertainty and store-level inventory policies, the live integration of a complex mathematical model with many large databases, and the development of the software and hardware infrastructure necessary to solve thousands of optimization problems in just a couple of hours every day. It also presented human challenges, because Zara’s culture greatly values human judgment and intuition for decision-making.
In June of 2007 however, Zara completed the deployment of this new process supported by operations research to all its stores and items sold worldwide, and has since been using it continuously. In late 2006 before full-scale deployment, Zara conducted a controlled pilot field experiment involving a limited number of articles and half of its stores worldwide in order to test this new OR-based process. That experiment showed with a high level of rigor that the new process increased in-season sales by a conservative estimate of 3-4%, reduced transshipments between stores, and increased the time spent by many articles on store displays.
The Value: From the sales impact alone, the realized financial benefits can thus be estimated as of late December 2008 at about $233 million (2007) and $353 million (2008) in additional revenue or $28 million (2007) and $42.4 million (2008) in additional net income, with both measures of impact predicted to grow at a rate of 13% per annum in subsequent years. On the cost side, Zara was able to maintain its warehouse inventory allocation team at its early 2007 staffing level of 60 individuals worldwide, even though it was initially planning on expanding that team proportionally to sales growth. The optimization model has also had a significant impact on the daily lives of these employees: They have all become enthusiastic users of the new tool and see their responsibility shift from repetitive manual data entry to exception handling, scenario analysis, and process improvement.
The six 2009 Franz Edelman finalists are:
- CSX Transportation for “CSX Railway Cashes in on Optimized Equipment Distribution.”
- HP for “Analytics for Product Portfolio Management.”
- IBM for “Analytics-Driven Solutions for Increased Sales Force Productivity.”
- Marriott International for “Group Pricing Optimizer.”
- Norske Skog for “Norske Skog Benefits as Operations Research Plays a 'Pivotal' Role in the Battle for Improved Profitability.”
- Zara for “Zara Uses Operations Research to Reengineer Its Global Distribution Process.”
This is the 38th year of the prestigious Franz Edelman Competition. The winner will be announced at a special awards banquet on April 27 at Applying Science to the Art of Business: the 2008 INFORMS Conference on OR/MS Practice.
Additional information about the 2009 Edelman Competition can be found online here. Additional information about the INFORMS Phoenix conference is here.
About INFORMS
The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, financial engineering, and telecommunications. The INFORMS website is www.informs.org. More information about operations research is at www.scienceofbetter.org.
###