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Zara Case Analysis

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Part 1: Executive Summary

This case focuses on the Spanish retail giant, Inditex and how its largest retail chain Zara has been so successful through its simple business model of speed, flexibility, and high fashion. As of 2002, Inditex had six separate chains: Zara, Massimo Dutti, Pull & Bear, Bershka, Stradivarius, and Oysho. Each chain operates independently and is responsible for its own strategy, product design, sourcing and manufacturing, distribution, retail. Zara is by far the largest, most profitable, and most internationalized of the chains.

In 2003, Zara's CIO must decide whether to upgrade the retailer's IT infrastructure and capabilities. At the time of the case, the company relies on an out-of-date operating system for its store terminals and has no full-time network in place across stores. The problem to the company is to decide whether it has to upgrade the present system and by doing so, risking the reliability they have with the current system or to continue with the present DOS based system which will not be compatible for future changes or improvements.
Part 2: Issues Identification

In 2003, Salgado, head of IT for Inditex, must decide whether to upgrade their pilot retailer - Zara's IT infrastructure and capabilities. At the time of the case, the company relies on an out-of-date operating system MS-DOS for its store terminals and has no full-time network in place across stores. In the short term, the going MS-DOS based system seems to be working perfectly without any issues since it has been in place for decades, however, in the long run, Salgado has two major concerns:

1. Software - Operation system
Zara’s POS is running on MS-DOS operation system which has no longer being supported by Microsoft Inc. DOS has completely been replaced by Windows when Windows XP was released in early 2001 and since then Microsoft Inc. stopped supporting DOS. This means Microsoft Inc. is no longer updating DOS or releasing any new version. All the computers will not have DOS installed and no more application software or hardware drivers, will be developed based on DOS.

2. Hardware - POS terminal
Normally the life of computer hardware is 5 years, but in average, it takes only 3 years for a new generation to arise. By 2003, the PDA had been discontinued in the market for several years and was replaced by smart hand device with larger screen, higher resolution, faster CPU and bigger memory. In case of massive new store opening, there is chance that not enough POS terminal to support the needs. Also, the hardware vendor for the POS terminals could upgrade their machines or some peripheral for them, so that they are not DOS-compatible anymore.

3. Network
Phone line dialing internet is at max of 56K/s, which has been replaced by Ethernet and Wireless which with a speed thousands of times faster. Take a 10 page order as an example, using modem would take half an hour and easy to get interrupted, but with Ethernet would be only a couple of seconds.
Part 3: Root Cause Analysis
Zara was founded by Orgega who had started with clothing factories. Ortega and Castellano believe:

1. Zara needed to be able to respond very quickly to the demands of target customers, who were young, fashion-conscious city dwellers.
2. Take advantage of the intelligence and trust the judgment of employees throughout the company, instead of relying on a small set of decision makers.

Zara’s information technology approach was consistent with Ortega and Castellano’s belief of speed and decentralized decision making. Zara had no CIO (Chief Information Officer) and no formal processes for setting an IT budget or deciding on specific technology investments or projects.

1. No CIO: This means IT (information technology) has not been given enough attention in Zara and they do not realize the importance of IT is the same as manufacturing and sales. Because of no dedicated IT leader, IT team customized program for each department based solely on their needs, but no one will think about the upstream and downstream capability. A program good for manufacturing may not convenient for sales, or programs developed for different department may based on different OS, etc.

2. No formal process for budget or investment: This means the investment on IT is enough as this seems to be ignorable, no one even bother to consider this seriously. Table 4.1 shows the investment on IT in 2001. Compared with average expense of North America Retails, the capital expense on IT of Zara was 0.5%, which is only ¼ of average. The workforce on IT of Zara is 0.5%, which is only 1/5 of average.

Table 4.1 IT Expense Comparison

Zara North America Retail
IT Spending / revenue (%) 0.5 2.0
IT Staff / Total Employee (%) 0.5 2.5

Part 4: Alternatives and Options
Tactical Evaluation Criteria:
T1 - The first evaluation criterion has to assure POS functioning well for everyday transaction.
T2 - The second criterion is to establish a expandable and sustainable POS system, both software and hardware, making sure it satisfies high speed growth of the company.

Alternatives:
Alternative 1:
The present system followed by Zara has been proved very effective and very easy to maintain, so Zara could stock enough inventory of POS terminal to handle the potential new stores or replacement of the broken ones.
Pros: As the current system is working well, go with the current system would keep the business smooth and it could also save the investment on new system which could be tremendous.
Cons: As the operation system is no longer supported by provider, there is a great chance that in a certain period, the system that they use, P-O-S (Point of Sale terminals), runs on DOS which Microsoft does not support anymore and any hardware change in the POS terminal will not be compatible with the current POS software. Also, the current system has very limited capability to be upgraded with new features. In addition, to stock current POS terminals would be a lot of money.

Alternative 2:
Start planning new POS system right away and replace current system with new system in a certain time frame.
Pros: The new system could have a lot of nice features to make the transactions more efficient. No worry about software or hardware support.
Cons: New system may not as easy and stable as the old system in the short term. Also, the initial investment will be huge.

Part 5: Recommendations
“Quick response to the demands of target customers” is the strategic goal of Zara. To reach this goal, we recommend Alternative 2 which has the follow advantage of solving the concerns facing with Zara:

1. Software & Hardware: New system will be based on Windows which is the most popular system in the world. There are tons of software and hardware provider working on this. It is fast, safe, easy to use.
2. Inventory information: The other main issue that Zara faces is that the stores don’t share inventory information electronically and hence inventory management becomes highly difficult and manual. The new system will easily imbed this function will high resolution images.
3. Network: The basic ordering activity in store happens with the use of a PDA device and modem to commutate with La Coruna and this made it really difficult to access all information effectively. Upgrading the present system will help in increasing the functionality and networking capability which will help in further improvements in Zara’s operational activities.

Part 6: Implementation Plan

This will be main IT project, and it might take 6-12 month for the new system to be fully functioning. To accomplish this, the project is broken down into the following steps:

1. Project proposal / feasibility plan: This should clearly lay out the budget of executing the plan. Also, it must decide who will be the system provide, using internal staff or outsourcing.
2. Search for system provider: If outsourcing, which system supplier should be using?
3. Demand analysis and program drafting: Identify the which function should be included in the system.
4. Testing: Choose representative stores equipping with new system parallel running with present system to assure new system is working and reliable.
5. Go live: All stores, existed and new, are equipped with new system and terminal.

Part 7: Monitor and Control

To assure the implementation of new system, it is important to choose several stores for testing. The tested stores should cover various sizes in different areas. While in the testing period, parallel systems are required to assure a smooth transition. Although there are many functionalities that can be added to the new system, Zara should not try to add all the functionality initially, but instead shift to the new system with minimum required functions giving the company the time for the transition and at the same time bringing some reliability to the system. Once the system become reliable, as long as the structure is in place, the additional functionalities can be added later in a sequential manner according to the priority.

Part 8: Conclusion
In conclusion, the POS upgrade that Zara is facing with now should be seen as a great opportunity for Zara to initiate a strategic approach in enhancing overall competitiveness. If taking this opportunity properly, Zara could become the pioneer of the industry.

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