Executive Summary

Zara has relied on Personal Digital Assistants (PDA’s) and Point of Sales (POS) terminal operating on Microsoft DOS which are not linked to the headquarters or other stores for its daily transactions. Although, the system has proved to be stable and reliable over time, it has become obsolete and cannot be supported by the providers.
I recommend that the company invest on a new system like Windows, UNIX or Linux operating system which will enhance connectivity and flexibility in operations and information flow.
Investing in a cutting edge technology though may be capital intensive initially; it will ultimately improve efficiencies across board and provide new learning opportunities for the entire workforce.

Introduction

Zara is a division of the Inditex group, a multinational clothing retailer and manufacturer with headquarters in La Coruna, Spain. Inditex operates in a `fast fashion` industry and in an environment where consumer demand was notoriously hard to forecast.
The first Zara store was opened in 1975 near the factory. Today, Zara has over 650 stores spread across 50 countries around the world located in luxury shopping districts that attracts well-heeled customers.
As part of an integrated group that includes, fabric, dye making and computer aided (CAD) cloth making factory, Zara contributes over 73.3% of the group’s sales in 2002 fiscal-year and the most profitable. Almost half of Inditex revenue is gotten in Spain while France is the largest international market.
Zara business model offers a rapid turnaround in design, production and delivery of new garments in 15 days in its stores worldwide compared with competitions like Benetton, H&M and Gap that typically spend months is planning. This is premised on short deadlines, low inventories in the stores and unique designs based on current fashion trend. All these with wide choice offerings and low prices available to customers makes Zara tower above competitors. As head of IT for Inditex, Xan Salgado Badas, and the task is decide whether to retain the Point of Sales (POS) terminals as currently used or upgrade the POS terminals to a modern operating system or install new built in-store networks with wireless technology. The decision has to be made quickly so as to be ahead of competition and increase efficiencies in the supply chain process.
Both the Chairman (Amancio Ortega) and CEO (Jose Maria Castellano Rios) believes that technology is a critical tool and a very important enabler in the fast fashion industry. They also share the need for speed and decentralized decision making. This is achieved based on a self-reinforcing system built on three principles, namely;
• Close the communication loop
• Stick to the rhythm across the entire chain.
• Leverage on your capital assets to increase supply chain flexibility
Inditex Ortega learned from experience that: To be successful, “you need to have five fingers touching the factory and five touching the customer”. Translation: Control what happens to your product until the customer buys it.
Castellano says: “The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. That is the idea we live by”.
This adopted philosophy gives Zara the ability to offer a large variety of trendy designs to customers and in limited quantities which enables collection of 85% of full sales ticket price on its retail clothing while the industrial average is 60% to 70%.

Environmental and Root Cause Analysis

Operation
Ordering: The stock filling process at Zara stores worldwide is cumbersome as is. Every major section of a store (Men, Women, and Children) placed order to La Coruna twice a week with tight deadlines and if the timeline is missed, the store will receive shipment based on what they sold in the previous order. Although the store managers/personnel use PDA or hand held device to send information to headquarters for order placement and customer’s feedback and there is no way to know stock levels except for physical check by personnel around the store.
Also, Managers can see the newly available garments by consulting a handled computer that is linked each night via dial up modem to information system at La Coruna.
Fulfillment: Fulfillment or shipping clothes to stores to satisfy orders involve other group of commercials. They determine which store s would get available inventory and which would not base on past selling record. They work with product manager to determine future production for each SKU. They could also ship items that stores didn’t order like new garments. Ordering and fulfillment should be aligned with a modern IS

Design and manufacturing
Stores are located in prime retail districts and layouts are changed frequently. Zara introduces approximately 11 000 new items in a typical year while competitors average 2000-4000. Zara vertically integrated manufacturing with CAD which gives room for flexibility and quick turnaround. Designs and cutting of fabrics are done in-house. Garments are delivered to the stores with prices ready for the rack.
IS and Commercial Process
Zara’s approach to information technology was consistent with its preference for speed and decentralized decision making. No formal process on IS investments. Low It spending of 0.5% of revenue compared with 2% by competitors.
As the head of IT for Inditex, the holding company atop Zara, there must be meeting point with Bruno Ocampo Sanchez, technical lead for POS system on the way forward.
While it’s risky to let the POS goes far behind the current technology, Sanchez thinks it’s riskier to upgrade them to ‘stay current’. The software works fine now, we shouldn’t touch it.
The PDA and POS in use works on Microsoft-DOS system which is no longer supported has been problem free for years. In fact, store managers require no training to use the existing technology.
Compared to 3.5% that competition spends on advertisement, Zara spends about 0.3%. It rarely do sales, which enables the savings of about €229,400,000/yr. The group is growing bigger with Inditex stores growing from 57 in 1982 to 1,317 in 2002 in European countries and 1,558 around the world. For effective management of the expansion, Zara need an integrated software system to manage all the stores and take advantage of the latest technology available and also tap into the huge online market left untapped which is the fad among the young generation.

Alternatives and Options

Options Pro Cons Alternative
Retain the PDA & POS with DOS 1.Works fine
2.Stable
3. Cheap
4.User Friendly
5. Expert IT in-house 1.DOS obsolete(Zara is the only user left)
2.Limited flexibility
3.No connectivity to other stores and Headquarters Upgrade
Upgrade the system 1.Flexibility
2.Faster and easy flow of data
3. Wide network
4. Opportunity to learn new technology 1. Initial capital is high
2. Irreversible Outsource IS
Outsourcing the IS 1.Efficient
2. Reliable
3. Training

Expensive Upgrade the system or retain the existing system

Recommendation

The company’s strategy is to respond to customers’ demand quickly and anticipate new trends and satisfy the yearnings of ever changing taste of customers. We need to spend money on something that will increase and enforce speed.
The system in use has been effective and easy to maintain. However, the POS system run on DOS which Microsoft doesn’t support. The company cannot rely on obsolete technology and POS terminal that the hardware may no longer be available.
Although the initial investment is high, it is imperative that the existing system is upgraded to Windows, UNIX or Linux to align with Zara expansion. See exhibit 1 for options and cost implication.
This will offer competitive advantage in cutting edge technology, improved interconnectivity across Zara operations and tapping into the fertile internet market. It will also offer efficient and real time forecast of Inventory or stock levels.
There is also a good opportunity for the workforce across board to learn and have knowledge a new technology.

Implementation Plan

Activity Who -Primary Who- Support When
Submit Proposal Salgado & Sanchez CEO Immediate
RFI /RFQ / vendor selection/purchase Salgado Cierva/Castellano/Ortega 3 months
Installation /Training Sanchez/Cobian Salgado/business units/Vega 9 – 12 months

Monitor and Control

The upgrade is going to be an expensive investment. Effective monitoring and control of the recommendation list above will ensure successful implementation. This can be done with setting of milestones and timely checks to measure progress.
Although we have always developed our own IT solution, the business is growing bigger and may require input and support from solution providers as consultants. Zara IT team with the support of solution providers could come up with solution that fit and lower costs
Also training of the workforce in a structured manner is pivotal to smooth transition to the new system.

Exhibits

Exhibit 1 Estimated Cost of operating system for POS terminals (total package)
Windows: Licence, Installation, Maintenance and Training €3,500,000
UNIX: Licence, Installation, Maintenance and Training €2,850,000
Linux: Licence, Installation, Maintenance and Training €2,650,000

Exhibit 2 Estimated Cost of Hardware, connectivity and high speed internet
POS terminals for initial 1558 stores at an average of 6 units/store €850,000
Connectivity, wireless router/Ethernet and HS internet €480,000

Exhibit 3 Because of the strategic importance of the project and the high cost, a team comprising the following should be constituted to manage the project from conception to finish.
1. Agustin Garcia-Poveda (GM) – Project Lead
2. Xan Salgado – Deputy Project Lead
3. Borja de la Cierva
4. Juan Cobian
5. Jesus Vega
6. Ramon Renon
7. Lorena Alba