1.0 Executive Summary
I recently had dinner with Bruno Sanchez Ocampo where we had a discussion regarding the possible upgrading of Zara’s point-of-sale (POS) terminals to units that operate in the modern Windows Operating System (OS). Zara’s current POS terminals run on the Microsoft Disk Operating System (DOS).

As the largest retail chain established by Inditex, Zara generates 73.3% of the group’s sales. With the ability to quickly respond to the demands of their target customers, young fashion-conscious city dwellers, Zara are able to produce and deliver styles while they are still hot. Zara has three departments (Men, Women, and Children), each department, at corporate level in La Coruna, is managed by a group of “commercials”. Commercials consisted of two project managers and two designers, they are responsible for purchasing material, production orders and setting garment prices. Another group of commercials, called store product managers, travel extensively to observe current fashion trends and to discuss sales with store managers. Store project managers have the ability to transfer garments from store-to-store, based on the current sales trends in each geographic location. Store project managers report their finds to the project managers and designers for development of new designs or to re-order garment(s) that are popular. As a result, Zara’s clothing line changed continuously throughout the season, 75% of garments in the average store are changed over a period of three to four weeks. The constant influx of new designs produce two positive results in store sales and traffic, firstly, shoppers would buy garments on the spot to ensure that the did not miss out on the garment, and secondly, shoppers would visit the store often since new styles are constantly arriving.
To react quickly to the demands of customers, Zara has established a three cycle process, ordering, fulfillment and design and manufacturing. Twice a week store managers place an order for replenishment of existing items and initial orders for newly available garments. As the store POS terminals still operate on DOS and are not linked to an onsite computer, the store managers and staff have to manually inventory the store as part of the order using personal digital assistants (PDAs). PDAs are also used for handling garment returns and for transmitting information from headquarters to all stores. Each night, via dial-up modem, the inventory, or order, is transferred back to La Coruna. A group of commercials are then responsible to fill and ship the orders via Distribution Centers (DC) while consulting the new order information and the known inventory within a DC. If demand for a stock-keeping unit (SKU), the combination of garment plus fabric plus color plus size, is greater than the supply, the commercials will decide which orders get filled base on which stores have been most successful selling the particular garment. These commercials work closely with product managers to determine future production for each SKU. Zara has a vertically integrated manufacturing operation that allows the constant introduction of new garments and also ensures short lead times for the manufacture of goods. In as little as three weeks, a garment can go from design conception to arriving at a DC.
Like Zara’s approach for speed in the design, manufacture and delivery of garments, the company takes a similar approach with regards to information technology (IT). With no budget process, no chief information officer and no commercially available accounting software in place, the company has developed its own accounting, ordering, fulfillment and manufacturing software. As a result, there is no integrated IT system across the company.
2.0 Issue Identification
Zara is building a bigger and bigger company, while at the same time; internal systems are not being upgraded to follow in line with current technology. Microsoft no longer provides support for DOS. Should the vendor that provides our POS terminals discontinue or upgrade their machines to systems that are not DOS compatible, Zara would not be able to open additional stores, as in planned for further expansion in Italy, nor would they be able to replace any existing POS terminals should they breakdown. As a result, should Zara have to upgrade the current POS terminals that operate on a Windows OS, there is no IT department in place to handle the task of installation and implementation. At the moment Zara write their own software, the installation of POS terminals supported by DOS is quite simple with no IT support required. As a result IT spending is 0.5% of revenue compared to 2% of the competition.
3.0 Environmental and Root Cause Analysis
Founded by Amancio Ortega, Zara is an industry leader for “fast fashion”, it has built a reputation for responding quickly to the demands of its target customers and for its constantly changing store merchandise. Above its competitor’s, H&M, Gap and Benetton, Zara has several competitive advantages:
1. Zara only place ads to promote is twice-yearly sales and to announce the opening of a new store. The result was a marketing expenditure average of 0.3% of revenue, compared to its typical competitor’s average expenditure of 3% to 4%.
2. From the design of a garment to its introduction to store shelves worldwide, the time elapsed could be as little as 23 days.
The fast fashion market is very competitive, and the internal systems are currently working for Zara and its customers. However, should the POS and PAD’s operating on the DOS system become obsolete; Zara will endure a difficult time in maintaining its market position. This is compounded by the fact that Zara does not sell clothes over the internet. Their website is basic in nature, showing garments only. In order for customers to purchase the items they have to physically go to a store location.
The installation of a new OS can benefit Zara’s basic business model at all levels. Store managers will no longer have to complete inventory prior to every order. At any given moment commercials, theoretically, should be able to see current stock levels in all DC’s and even down to the store level. Commercials could then initiate store to store or DC transfers. Also with the theoretical inventory in hand, commercials can initiate immediate manufacturing for garments that are selling well.
As DOS and a new OS cannot be integrated into one system company wide, we need to determine the commercial impact and time required to upgrade our current systems. Conclusion: With an investment of approximately €5.5 million, Zara would be on both the cutting edge of fast fashion and technology. Without upgrading, Zara runs the risk of not keeping up with technology. Should the current systems, which are working fine, breakdown for become obsolete, Zara’s entire supply chain would fail. The Windows OS was chosen for its extended support from Microsoft and its attractive one time licensing fee.
4.0 Options
As the current systems are working fine there is no immediate action required, however, action must be taken to reduce the risk and exposure of Zara’s business and market share.
Short Term Option 1 (ST1) – Passive
Zara does nothing to address the possibility of their POS terminals and PDA devices becoming obsolete.
Pros: There is no effect on current processes and procedures for the order placement, fulfillment and design of garments.
Cons: Zara has to manage the risk of not keeping up with technology. As technology advances so should the business.
Short Term Option 2 (ST2) – Tactical
Zara approaches its current vendor that provides POS terminals operating on DOS and buys a large quantity of POS terminals for redundancy.
Pros: There is no effect on current processes and procedures for the order placement, fulfillment and design of garments. Should the vendor not be able to supply POS terminals in the future, current POS terminals breakdowns could be replaced from POS terminals in Zara stock.
Cons: Zara runs the risk of not keeping up with technology. This option is seen as a delay in accepting risk, the “let’s not change unless we have to” attitude.
Short Term Option 3 (ST3) – Aggressive
Zara immediately purchases and begins the process of implementing new POS terminals that operate on the Windows OS.
Pros: After implementation, rollout and training, Zara would be on the cutting edge of technology and fast fashion.
Cons: Initial investment of €5.5 million. Approximately 20,000 hours are required to fully complete the porting of the new operating system and to include the options of, same-store inventory, other-store inventory and inventory transfers. With an IT team of 10 people, working an 8 hour day, 5 days a week, the process would take 50 days to complete, assuming no delays. During this time there will be major disruptions to Zara’s supply chain with the possibility of stores not getting stock, the could have a knock down effect on the satisfaction of customers relying on a constant changing stock and fashion.
Long Term Option 1 – Strategic
Zara continues to operate using the POS terminals. However, running in parallel, the investment is made to upgrade the systems to run on the Windows OS.
Pros: There is no effect on the current processes and procedures for the order, fulfillment and design of garments, while at the same time, Zara has a dedicated IT team assembled to develop the new system for future roll out. With an IT team of 10 people, working an 8 hour day, 5 days a week, the process would take 50 days to complete, assuming no delays, with little to no disruption to current systems. Also, store managers have been requesting the system for some time now.
Cons: As Zara does not currently have an IT department, there may be a delay in staring the process do to the recruitment of qualified personnel. Also, the venture requires an investment of €5.5 million.
5.0 Recommendations
The decision to invest the time and money for the upgrade of current systems, company wide, has to be seen as a decision in risk management. Without keeping in line with developing technology Zara is accepting considerable risk. In order to mitigate risk and ensure the long term success and growth of Zara, we recommend the immediate implementation of ST2 followed by the immediate implementation of LT1. Zara’s purchase of additional POS terminals that run on DOS will produce redundancy in an aging technology, while at the same time, Zara will be preparing for the future by investing in both an IT department and technology.
6.0 Implementation
None of the elements of the recommendations are known to be in progress at this time. As, especially with the implementation of LT1, there will be a large number of individuals and/or departments involved, we have developed an action plan to outline responsibilities, dates and current status. Refer to the below table. 7.0 Monitor and Control
The table below contains the Key Performance Indicators used to evaluate the success or failure of the implementation of each element of the action plan. 8.0 Conclusion
In conclusion, the decision to upgrade the current DOS to Windows OS is not born out of necessity rather it has evolved out of the risk assessment for Zara’s dependence on aging technology.
If the new POS terminals and OS are implemented successfully, Zara is poised to continue its hold on its market share and its reputation of being able to quickly respond to the demands of their target customers, young fashion-conscious city dwellers. Also, if the rollout is successful, Inditex could roll out the new system across its other retail chains.