1. Zara’s Business and Operating Model: Zara is the most profitable brand of Inditex and in 2003 is contributing to 73.3% of group sales. Its business model is developed on short deadlines, small quantities and rapidly changing trends. Zara links back end production to front end retailing run by adapting to changing customer demands rapidly. Zara never produces “classics”, all of their fashion is trendy, they follow three main concepts a) The customer buys immediately as the current stock will run out b) The customers visit the store often as new fashion emerges quickly c) The clothes are relatively cheap as they are not meant to last.
The simple factor that makes this possible is the decentralization of decision making for each store; the decision of what is needed lies with the store managers as they are closer to the market.
People known as ”commercials” in La Coruna hold the final decision the business of what goes into production. 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. A set of people known as store product managers mobilize the business; they study the market for emerging trends and communicate the same to the in-house designers. They act as a liaising force between store to store transfers when they see slow moving garments of one region have a greater demand in another region. La Coruna also decides the location and design of the stores worldwide along with the pricing on apparel.
Zara’s Unique features: * There is no second check for the decisions made by the commercials, the firm took advantage of the intelligence and trust the judgement of employees throughout the firm * Zara owns factories for capital intensive production rather than outsourcing dyeing and cutting of cloth. This helps them gain lead time as less as 3 weeks. * Zara does not maximize capacity of production, it does work on the economies of scale * Zara brings in products throughout the year, unlike competition where new products came out only twice a year and existing collections are extended and modified to suit new demands * There is no specific team of “elite” designers. As they realized it is difficult to predict customer demands, Zara goes from customer to production line. * Zara has minimal advertising; their marketing expenditure was only 0.3% of revenues. * They did not sell clothes over the internet as it was more expensive to ship out small orders and they did not want to deal with the issues of handling exchanges and returns. * Their existing model could support any expansion of sales around the world due to the power of decentralization as they did not have to build new production and distribution channels.
The Zara’s business model individually in all separate units does not make sense but the units fit in well together. There are several things that Zara does which is not typical to a supply chain model, such as in-house production but this is Zara’s competitive advantage. 2. Financials- Exhibit 2
Inditex is the 2nd best of performance between the other groups and has 22% ROE. Inditex is 2nd in ROE and ROA and H & M has a better EOA at 20%. The ROA of H & M is higher due to low current assets and inventory. Through further analysis, Zara (Inditex) is very profitable with less operating expenses and COGS. Also the asset turnover is extremely low based on revenue per asset is low which is consistent with Zara’s lean operating model.
3. Ordering and SKU Replenishment: The ordering process is precisely defined and standardized around -the world. The store managers canvass around the store for trends and hot selling products. Post this analysis; they place an order with La Coruna twice a week. The order includes both new items and replenishment of stock for existing lines. If a store manager missed a deadline, La Coruna placed the order on behalf of the store by calculating previous sales. The managers come to know about the new products by linking their hand held devices to the information systems at La Coruna by dial up modems.
The fulfilment of the process is done by another set of “commercials”. They analyze the aggregated orders from stores and total supply of inventory at a SKU level. If the demand exceeds the supply, they have the freedom to decide which store get new stock, based on previous sales performance. The “commercials” also test markets with new products and the store managers could expect unordered items in the delivery. . Zara owns production lines that could finish the complete product in 3 weeks time. All the products are shipped into a central facility where they are inspected, ironed and priced. 2 days later these garments would be on display around the world. As they are vertically integrated, this ensures short lead times.
What to order was determined by 2 methods: 1) The store manager canvassed around the store to determine what is selling and order replenishment. As far as the offers were concerned, the store manager divided the offers into segments and beamed it around to the employees, who in turn beamed it back with required details post assessing the stores. 2) Zara’s fulfilment “commercials” tested waters and sent sample products based on their research. They never forecasted sales on what would see; rather they tested markets and produced batches based on feedback from the market.
The key information flows inside Zara is the system input via the PDA from store managers and the research done the product support team. The product support team works hand in hand with the fulfilment “commercials” that determine what needs to be replenished and which store gets the orders. Secondly “the offers” which is the new patterns is transmitted to the handheld devices of store managers by linking with the main system in La Coruna by dial up modems. And lastly “the offers” were beamed between hand held systems through infrared rays. The frequency of all this information was 2 times a week, but the production and delivery could occur in multiple overlying cycles. Zara is definitely getting all the information flows that it requires, although it is very manual and depends on the managers input.
4. How would you advise Zara on the IT question?
Let us analyze the situation at hand to help Zara not lose out on the competitive advantage due to IT. Zara is able to have short lead times is their ability to anticipate customer trends which is possible due to the current IT system that they have. Now they have an issue as all their POS (Point of sale) systems run on DOS and Microsoft does not support it anymore. Along with it the vendor might stop supplying the hardware to support DOS. Secondly, all the PDA systems used by the individual Zara stores are not inter-connected with the HQ systems. Additionally there is no automatic linking of the in house individual store systems as well to monitor trends and sales. If a change could link these systems it would be a good investment. Thus in conclusion, Salado’s proposal seems feasible and change is inevitable in the technology front. As the main needs of the firm are to improve in interconnectivity in stores and with the La Coruna systems, it is better to invest in IT at the moment. The next step is to choose among the available options of UNIX, LINUX or Windows. Finally it would be to see options of how to integrate the new IT system to existing flows of operations.

Exhibit 1
Zara Business & Operating Model
Fewer Price Markdowns
Limited item life in store: 75% SKU turnover / month
New SKUs in store regularly
Rapid market feedback
Decentralized design teams' continuous output
Fast-moving stock
Higher sales & stock turnover
Short lead times: orders delivered to store within 2 days
Storefronts as ads
Low Ad & Marketing spend
Fast replenish strong-selling items
More new fashion items in stock

Design feedback loop

Local factories & workshops: fast cycle dye/cut/sew/finish

Commercial teams decide which SKUs to re-order from production system

Store managers decide what items to order
No on-line sales channel

Source: Zara: IT For Fast Fashion
Decentralized Retail
Continuous Design & New SKUs
Fast Cycle Operations & Fulfillment

Order what is required by customers
Assess buying patterns
Intelligence and judgement of employees trusted in the organization
Increased profits and additional cash flow for expansion
Changing customer demands
Design and “PRIME” location of stores
Commercials to input final decision on production
Sent to Zara facility for inspection, ironing and price tags Sent to Distribution centres for forwarding to stores Order placed directly with La Coruna via PDA’s post canvassing the stores

Exhibit 2
Of the fundamentals, investors look at Return on Equity, as it shows how a firm’s management is using investor’s money. The minimum average benchmark in the market is 15% as it does not factor into the financing borrowed from bonds or borrowing. ROA is essential to consider as it factors in both bond and equity, and we can see how the company is using these finances. A strong ROE is a strong signal that managers are generating good returns from shareholders' investments. ROE is a measure that management is giving shareholders more for their money. On the other hand, if ROA is low or the company is carrying a lot of debt, a high ROE can give investors a false impression about the company's fortunes. ROE should be greater than 5%.
From the calculation below we can see that H and M is the only competitor from the given list that is doing on average market measures. This tells us that most of the profit contribution to the Inditex is by Zara. And as stated in the case, Zara contributes 73% of the revenues to Inditex, which is 2912 bn Euros.

| 2002 | | 2003 | | Inditex | Gap | H and M | Benetton | | Inditex | Gap | H and M | Benetton | Net Revenue | 3974 | 13819 | 4972 | 1992 | | 3250 | 15559 | 4269 | 2098 | net income | 438 | 456 | 621 | -10 | | 341 | -9 | 412 | 148 | share holders equity | 1761 | 3497 | 2085 | 1141 | | 1486 | 3396 | 1650 | 1241 | total assets | 3014 | 9467 | 3184 | 2643 | | 2605 | 8566 | 2183 | 2821 | | | | | | | | | | | | | | | | | | | | | ROE[ Annual Net Income(2003) /
Average Shareholders Equity] | 21% | 0% | 22% | 12% | | | | | | ROA [Annual net income/ total assets] | 15% | 5% | 20% | 0% | | 13% | 0% | 19% | 5% | | | | | | | | | | | | 0.733 | | | | | | | | | Revenue of Zara | 2912.942 | | | | | | | | |