ZARA: IT for Fast Fashion Onder BARLAS Executive MBA Student Bogazici University, Istanbul Abstract: In 2003 Zara faced a problem whether to upgrade the operating system they used for their point-of-sale (POS) to a new Windows based one, or to continue using the stable and old one. This report aims to analyze the problem by conducting a SWOT analysis and offering a solution path best suited on Zara’s strategic position in the clothing industry. 1.
Brief Information about Inditex and Zara Inditex is a global specialty retailer that designs, manufactures, and sells apparel, footwear, and accessories for women, men and children through its chains around the world.
Inditex owns Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho. Over 80% of Inditex’s total employees are part of the retail sales force and 8. 5% are in manufacturing, design, logistics, and distribution. The remaining 11. 5% are part of the corporate headquarters. Zara is the most profitable brand of Inditex.
It has opened his first store in 1975 in La Coruna in Spain.
Today, La Coruna has become the central headquarters for Zara. The group is present in all continents: Europe, America, Asia and Africa. At the beginning of 2003, Zara operated 531 stores around the world. 2. Description of Zara’s Business Model Zara sells clothing for men, women and children. Zara’s target market is very broad because they do not define their target by segmenting ages and lifestyles as traditional retailers do. Zara targets young, educated people that likes and is sensitive to fashion.
As it has become globally standardized due to advances in communication, Zara uses this to their advantage by offering the latest in apparel on time. For that reason, 80- 85% of the garments that Zara offers globally are relative standardized fashionables. This is due to the fact that Zara’s marketing teams believe that a product that sells well in a fashion capital such as New York will most likely sell well in another such as Milan, Sao Paulo or Madrid since fashion has become more globally accessible. Zara’s main competitors are multinational clothing retailers such as H&M, Gap, and Benetton.
Zara is different from its competitors in three ways: ? Zara does virtually no advertising (twiceyearly ad promotion on sales and opening new store announcement). Thus, Zara’s marketing expenditures averaged 0. 3% of revenue, instead of the 3% to 4% for competitors. Zara only sells trendy clothes and not try to produce “classic” clothes which would always be in style. Zara’s clothes have fairly short life spans. About 75% of the ? Management Information Systems Page 1 of 4 ZARA: IT for Fast Fashion ? ? merchandise changes over every three to four weeks. The shoppers do not expect Zara garments to be highly durable.
Zara introduces substantially new design collections throughout the year. Other competitors introduce new design collections at the start of the fall/winter and spring/summer. Zara has empowered its employees: They decide what clothes should be in stores, the designed the garments by pairs for a specific collection. Their role is to create clothes not to be sold for a long time but only for a short period in appropriateness with the current trend. All finished garments are sent to Zara facility where they are ironed, inspected, given a machine readable tag, and sent to a distribution center.
Ordering: Every major section of a Zara store (man, women, children) has to place order quantities to headquarter twice a week with strict deadlines. As there is no inventory in store computers managers need to conduct a walkaround to check the stock for each section. Managers can see the newly available garments by using a PDA that is linked each night via dial up modem to main IS in La Coruna. Fulfillment: Fulfillment or shipping clothes to stores involve other commercials. They determine which store has to be supplied depending on the stock level.
They work with product manager to determine future production for each SKU. Items that stores didn’t order can also be sent. 4. SWOT Analyses of current IT Processes Strengths: ? DOS, which runs on mainframe, is a very stable operating system ? Data transfer periods are short ? No license costs exist ? DOS application is a in-house developed one, it is a tailored fit development, so IT people have extensive experience how to quickly solve problems without the need of a supplier. ? Due to the quick and convenient installation process of POS software, no external IT effort was needed, when opening a new store. . Zara’s Value Chain Design: Commercials decide which clothes will be designed and produced. The team usually consists of two designers and two managers, who purchase material, place production orders with factories, and set prices. Another group of commercials called store product managers sit in close proximity to the product teams and serve as Zara main interface with Zara stores around the world. They can initiate store to store transfers if some products are not popular in some areas. Manufacturing Zara introduces approximately 11 000 new items each year much more than its competitors.
Zara manufacturing is vertically integrated. There is a network with specialized facilities that quickly produces and delivers the required goods. Zara owns a group of factories in and around La Coruna to do the capital intensive initial production steps dyeing and cutting cloth. Management Information Systems Page 2 of 4 ZARA: IT for Fast Fashion Weaknesses: ? System runs DOS which Microsoft does not support anymore. ? Lack of shared information between systems creates an environment where the correctness of the data is dependent on the personal feedback.
Store managers could not look up their inventory balances on any in-store computer. They have to conduct walkarounds, in which they ask salespeople and count garments to determine the stock level. ? No online connection between the POS, PDAs and IS in La Coruna exists. Upgrades are retrieved by a dial up modem each night. As there is one terminal POS in a store, salespeople need to record the sales on floppy discs and insert it to the modem equipped terminal POS for sending sales data. ? No formal IT strategy and documentation such as cost/benefit analyses exist to justify IT efforts. No information exchange between PDA devices within a store exists. ? As stores cannot see each other’s stock levels, store personnel need to call the nearest stores one by another, if a garment is needed. Opportunities: Using the current system offers no opportunities for the future Threads: ? Any hardware change in the POS terminal will not be compatible with the current POS software. ? ? Competitors, who use a modern technology, can gain a competitive advantage due to the information exchange opportunities.
Employee turnover rate has an impact on the system, as most of the decisions are based on personal experience decentralized decision-making. 5. Recommendations for IT Transformation As already discussed Zara’s its main strategy is the ability to give a quick answer to target customers’ demand and its capacity to anticipate the customers’ trends. Therefore “Business Continuity” is more important than the overall IT transformation costs. Therefore unless the new system eliminates the weaknesses of the old one without compromising from the strengths, an investment in IT will not be required.
Therefore the new system should be as follows: ? Windows based POS terminals, with porting ability and online connection to IS which integrates manufacturing, distribution centers, and commercials at HQ on a high-speed network and decreases reaction time (upgrades to PDAs are delivered online, no floppy disc needed, demand is tracked in real time) POS functionality that includes, accurate inventory balances in real time, instant linkage of customer demand with manufacturing which will reduce total cycle time PDA’s will change information within the stores and each store can look at ? Management Information Systems Page 3 of 4 ZARA: IT for Fast Fashion others stores inventory if a specific garment is needed Projected cost of the new system is given below: Hardware costs: 1. €5,000 for 5 terminals per store x 531 stores = €2. 655. 000 2. €180 for wireless router per store x 531 stores = €95. 580 3. €250 for 5 Ethernet cards per store x 531 stores = €132. 750 Total Hardware Costs = €2. 883. 330 Connection Costs: €240 for connection per store x 531 stores = €127. 40 Initial Operating System Costs: 1. Windows 1 One time license cost per terminal = €140 Annual maintenance fee per terminal = €30 Cost per store = 5 terminals x €170 = €850 2. Unix One time license cost per terminal = €160 Annual maintenance fee per terminal = €25 Cost per store = 5 terminals x €185 = €925 3. Linux2 One time license cost per terminal = €0 Annual maintenance fee per terminal = €150 Cost per store = 5 terminals x €150 = €300 Total operating system costs = €850 x 531 = €451. 50 Programming costs: 20000 hours of programming time (if work hour per day is 8) = 2,500 days 2500 days x €450 per day = €1. 125. 000 Training/Installation Costs3: Cost per day = €2000 Overall costs = €2000 x 531 stores = €1. 062. 000 Total Implementation Costs = €5. 649. 120 Total Implementation Costs with %10 cost increase as buffer4 = €6. 214. 032 It is recommended that Zara upgrades its current systems.
Although by upgrading, Zara puts itself at a financial risk with potential loss of sales due to installation delays, increase in overhead (additional IT staff) and adding complexity to a relatively simple operation, the benefits of the system will be “priceless” as Zara’s main core competence “the ability to give a quick answer to target customers’ demand and its capacity to anticipate the customers’ trends” will be enhanced. Modern operating systems and internet connections are no longer luxuries, but prerequisites for growth. 1
Windows is selected as operating system as this removes the risk of the system becoming obsolete and no longer compatible with vendor’s machine upgrade to windows. 2 Depends on the IT staffs experience with Linux. It is assumed that the IT staff is novice in Linux. 3 It is assumed that there are two work shifts in place: 0715 and 15-23. Stores will not be closed during installation. Opportunity costs are neglected. 4 The risk in 10% increase in costs are taken in account as safety buffer Management Information Systems Page 4 of 4 ZARA: IT for Fast Fashion
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