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Running head: ZARA: IT FOR FAST FASHION

ZARA: IT for Fast Fashion

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ZARA: IT FOR FAST FASHION ZARA: IT for Fast Fashion Background of the Case Situation Zara is among the top international fashion brands under Inditex. Amancio Ortega founded the company in 1975 with its first store in La Coruna. Ortega had a primary goal of linking customer demand to manufacturing, and at the same time linking manufacturing to distribution. Inditex was created in 1985 as a parent company for Zara. In the same year, Jose Castellano joined Zara. Both Ortega and Castellano believed that fast response to customers, usage of PCs, and decentralized decision-making were key to the success of the company. Zara accounts for 73.3% of Inditexs total sales. The company specializes in new style clothes for women, children, and men. Women segment accounts for 60% of the company`s revenues. Zara`s business model makes use of current styles and trends to sell its clothes without advertising. The business fully relies on a team of employees known as commercials who

make decisions on which clothes are sold in the stores. The company was the pioneer in its niche market in several continents including Asia, Middle East America, Africa, and Europe. The company`s approach to information technology matches its core business model. Although the company has a website-www.zara.com, it is only used for displaying clothes and not for selling. The company prefers to develop its applications internally instead of purchasing commercially available software. As at the publication of this case, Zara was relying on an outdated operating system and a Point of Sale (POS) terminal for its stores. In addition, the company lacked full time network in all its stores. Zara`s POS system operates on DOS infrastructure that is no longer supported by Microsoft. Despite the fact the system is out of date, it is easy to use and maintain, and it is because of this system that Inditex has developed an outstanding and excellently performing value chain. However, in 2003, the company`s CEO had to make a decision on

ZARA: IT FOR FAST FASHION

whether to upgrade the current DOS system and risk facing reliability issues with the new system or retain the old system that is incompatible with future improvements or changes (McAfee, Dessain & Sjoman, 2007). Problems Facing the Organization and Probable Causes To have a comprehensive understanding of the problems Zara is facing, the paper examines the company`s primary and secondary activities using Porters Value Chain Model framework. The model is useful in assessing the areas of weakness that need strengthening for the company to improve its competitiveness and profitability. Applying the Model to the Case

As reflected in the above figure, Zara undertakes numerous operations. Its primary activities include but not limited to ordering, fulfillment, and design, with priority given to ordering. The company differentiates itself from the rest of competition through value addition in every stage beginning with manufacturing to sales. The business is supported by a number of activities that include procurement, human-resource management technology development, and business infrastructure. Additional support activities include its internal IT department that internally develops various applications under direct management of the CEO.

ZARA: IT FOR FAST FASHION Problems in Primary Activities Ordering-Manual checking of inventories for ordering purposes and the use of handled

computers (PDAs) has caused several problems in ordering. Firstly, the PDAs have small screens making their use difficult. Secondly, the business lacks in-store computers that can be used in checking inventory; as a result, the business is unable to match the exact inventory. Similarly, store managers are not able to see the inventories in other stores. Fulfillment- commercials are unable to accurately match demand to supply. This is because the orders for commercial ship items are not made by the stores. In addition, the absence of in-store computers has made it impossible to determine which stores require the items. Design- commercials are fully responsible for the design, however, there is a problem because those commercials in the design team make guesses with regard to design and communicate the same to factories for manufacturing. The second problem is that instead of tracking sales data. The commercials survey the market by simply talking to people. The use of information technology can help in tracking sales data and make it easy for commercials to communicate with store managers. Manufacturing- the company uses simple internally developed applications to plan its production. This has created a number of problems. Firstly, the simple applications lack complex mathematics to produce optimal schedules and plans. Secondly, the manufacturing schedules and plans are manually communicated instead of using information technology. In addition, Zara`s internally made software applications are incompatible with applications made by other external vendors. Distribution centers- Zara`s distribution centers heavily depend on computerization and automation because the IS tracks all the Stock-Keeping Units. Similarly, the distribution centers

ZARA: IT FOR FAST FASHION also use the internally developed software applications in controlling their automation in conjunction with developers of conveyor equipment. The problem is that the internally developed software may not be compatible with applications from other developers.

Stores- all Zara stores use Point of Sale systems and PDAs. The stores have to use floppy disks to share information and store managers have to check their inventory levels manually. These problems have been caused by the absence of computers in the stores other than the POS and PDA terminals. These devices lack the capacity to share data both within a store and with other stores to check stock availability. Furthermore, no in-store networks exist. Problems in Support Activities Administration and systems- the administration department uses standard commercial software and applications such as emails and word processing. However, the IS department develops all internal software. The problem is that the developed applications may not be appropriate for use because of incompatibility with vendor software. Procurement- the absence of in-store computers has made procurement difficult because it is nearly impossible to match the exact inventory. Business support areas- the absence of information technology has made communication difficult, more time is required, and offices need to be in close proximity to allow communication. Analysis of Alternative Solutions From the analysis of the above problems, it is evident that the solution is for Zara to invest in information technology. However, the DOS system equally has its strengths. As a result, there are two alternatives- Upgrading to Windows, UNIX, or Linux system and

ZARA: IT FOR FAST FASHION

maintaining DOS operating system. This section analyzes and compares the costs and benefits of the current system versus the new system. Costs Analysis Current system- the existing POS terminals that use the DOS system require less maintenance, which keeps the costs down. In addition, the IT department internally develops DOS compatible software instead of buying them from third-party vendors. Similarly, given its global operations, it is difficult to manage its accounting using commercial software. As a result, the company maintains an IT department with 50 employees accounting for no more than 0.5% of its total labor force, which is very cost effective. On the negative side, the fact that the stores are not interlinked, store employees have to make telephone calls to confirm the existence of inventories. This process is costly in times of time, phone costs and lost productivity. In addition, because of the inappropriate communication, the business requires more workers to manage its inventory, resulting in increased costs. The new system- a modern operating system such as Windows, UNIX, or Linux will permit the company to develop its capabilities. A number of costs will be involved in the upgrade. When we compare the cost of new operating system, Linux has no license cost. On the other hand, the one-time license cost for windows is 140, while that of UNIX is 160. As a result, Linux appears to be the cheapest alternative for Zara; however, it has higher ongoing costs that include service contract costs ranging between 10 and 150. Given that the company will have to install the new operating system on many computers, Zara has to take into account the cost of each operating system. Similarly, to upgrade its system, the company has to replace the POS terminals at cost of 5000. This will also require the installation of new routers, cables

ZARA: IT FOR FAST FASHION among others. In addition, it will incur staff training costs, connectivity cost per store, and software installation and maintenance costs. Benefits Analysis Current system- the current infrastructure has allowed the company to reduce its operating costs and increase its efficiency. Given that the software is internally developed, the company requires only 50 workers and its IT expenditure is below 25% of the fashion industry average. The internally developed applications allow the company to execute 95% of its daily operations and keep upgrade costs low. From 1996 to 2002, internally developed applications contributed 22.9% to the company`s ROE reduced outside vendor costs, and saved 15,000 development hours. As a result, the low costs imply good profit margins. The current IT infrastructure has allowed the company to have the second largest net margin of 10.49% and 11.02% in 2001 and 2002 respectively. New system-installing the new system will have a positive effect on the company`s revenues. It will permit effective communication among the store managers and between the

stores and the headquarters. The company will be in a position to predict future material needs of all its stores. It will also allow the company to manufacture its garment prototypes much faster and get prompt response from customers. As a result, the company will be able to achieve high sales level, more revenues, and more profits at a reduced cost. For instance, the upgrade will offer better efficiency, improve networking between stores, and as a result reduce operating costs and number of employees per store. Recommended Solution The current DOS POS system has been effective and is properly aligned with Zara`s core business. However, the company should now change to a new Windows, UNIX, or Linux system

ZARA: IT FOR FAST FASHION because there is uncertainty as to whether the supplier will continue to support the DOS system. Secondly, the company`s obsolete DOS operating system is incompatible with future improvements or growth. Migrating to a new operating system will yield significant benefits in terms of communication within and between stores. In addition, it will improve all the primary activities including ordering, fulfillment, design, manufacturing, and distribution. The company can progressively migrate to the new IT infrastructure as it continues to use its existing system. This will permit the company to improve its efficiency without facing sudden shocks associated with introducing the new IT infrastructure at once. Answers to Specific Questions Posed for the Case

Zara should upgrade to a new operating system, but the implementation process has to be gradual. In the short-run, there is no urgent need for the upgrade. Zara should implement the changes over a long-time horizon. Upgrading to a new operating system and building of networks within and between stores will not risk Zara`s robust and scalable infrastructure. Instead, it will enhance the networking capabilities within and between stores which allow store managers to stay in touch not only with other stores, but also with the headquarters. As a result, it will only improve on the existing robust and scalable infrastructure that the company has developed for many years. Given that Zara is using an out of date DOS system, there is an urgent need for the company to update its POS terminals with a new and compatible operating system. Modern POS terminals work with new operating systems such as Windows, Linux, or UNIX. Porting the POS application to a new operating system will result in new customer centered functionalities such as real time recording of sales, exchanges, and returns. In addition, back office computers using

ZARA: IT FOR FAST FASHION the POS system will now handle new functions such as controlling inventory and transferring of items from one store to another. The company should not purchase more of the existing POS terminals now to act as insurance. This would amount to investing more resources in an old system that will soon

become obsolete. Instead, Zara should invest these resources on the new operating system and do a pilot test by running it side by side with the old DOS in the initial stages and collect data on its functionality. This will provide the company with an opportunity to develop capabilities in the new software. During this transition period, the company should focus on developing its IT department by employing a CIO to be in charge of the department as opposed to the CEO. Under the leadership of the CIO, the company will be able to develop the necessary competencies required to address any IT related problems associated with the new OS.

Reference McAfee, A., Dessain, V. & Sjoman, A., (2007). Zara: IT for Fast Fashion. Harvard Business School, 1-23.

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