Case Study: Zara, IT for Fast Fashion

EXECUTIVE SUMMARY
The action recommended is to purchase a new POS system to support integration of all levels of the business from manufacturing to the customer. Because of Zara’s current solid financial position and leader in the marketplace, Zara will withstand the initial interruption of business to allow implementation of new technology due to their current solid financial position and leadership. KPIs are implemented to provide efficiencies within manufacturing, the DCs and sales to enhance the successful unique business model.

ISSUE IDENTIFICATION

The following are a list of issues/problems that must be addressed: • DOS system is no longer supported by Microsoft • In-house applications created by vendor • Writing applications versus buying applications • Transparency between stores • Order processing time • No formal IT process for setting budget or deciding on specific technology, investments or projects • Store managers scope of responsibility is high versus no discretion for store layout • No performance measures • No forecasting, buy and respond “on the fly” • Not high end fashion • High capital costs for DCs, manufacturing, and factories • Small batch production

ENVIRONMENTAL AND ROOT CAUSE ANALYSIS

1. DOS system is no longer supported by Microsoft since 2003. Zara chooses to write all their applications in house. This matches the philosophy for speed and decentralized decision making to ensure a stable, effective and easy roll out to each store and maintain. To support their in-house application writing process the IS department consists of 50 people and entails three groups – Store solutions, Logistics support, and Administrative systems. Commercial applications have to be extensively modified to accommodate the unique operation Zara runs. Zara is located in many countries with many currencies and a commercial application would not accommodate unless modified. The company can continue to write their applications or explore commercial applications that will increase their functionality within the business. 2. In-house applications are supplied by a hardware vendor and will not commit to not changing or updating the existing machines that may not be compatible to what Zara already has in place. This one vendor is Zara’s only client and holds the future in the vendor’s hands. Zara does not have a backup plan for hardware to secure future network reliability to transmit information they currently rely on to do business. 3. Transparency between stores does not exist. POS systems are not connected via any in-store network. Floppy disks are used to transfer information from order fulfillment to daily sales. Each store is equipped with terminals to transmit this information. Store Managers must call all stores to ask for in-store stock rather than having a real time system. 4. Time spent to place an order for each store is lengthy. Store Managers walked their stores at the end of each day by counting garments and talking to their sales people. This guess was entered into their handheld computer and then linked through a dial-up modem to La Coruna. Wireless networks are cheaper to install and inventory levels would instantly transmit the information as purchases triggered a replenishment order. 5. Zara has no Chief Information Officer to formalize IT processes for setting budgets or deciding on specific technology, investments or projects. Nor is there a formal justification of IT efforts or cost/benefit analysis. Salgado and Castellano would determine if there was a need required. Hiring a Chief Information Officer would allow analysis of the requirements as required during growth, change in trends and change in technology. 6. Store managers scope of responsibility is high consisting of dealing with customers, employees, contractors, and landlords. Along with deciding what garments would be on sale, managers placed orders for items they thought would sell versus given no discretion for how the store layout should be configured. A newer POS terminal would allow more time to promote sales and changing business needs to become more successful. 7. No performance measures have been in place to date due to the highly integrated business and the controlling of what happens to the product until the customer buys it. 8. Commercials are relied upon to guess what would sell and then communicated to production. With this type of integration within Zara’s factories this allowed changes to happen easily and rapidly. With no forecasting applications Zara buys and responds “on the fly”. Competitors use upgraded technology to track sales, history, designs and trends taking the guessing game out of the business. 9. Zara does not carry high end fashion clothes design. The clothes are designed to wear 10 times and then thrown away versus design of quality and standardized clothing lines. 10. Zara spares no expense with high capital costs for stores, shipping costs, equipment and automation, DCs, manufacturing, and factories. Zara provides stores to be located in prime retail districts, change store layouts every four to five years, have up to 11,000 new designs per year, ship by air, have highly efficient cloth cutting equipment, racks for shipping, upgrading their handhelds as new models are introduced. All their major capital investments in production and distribution facilities are used to increase the flexibility and responsiveness in the supply chain. With this flexibility, Zara maintains an 85% margin. Competitors have longer lead times, less capital investment to stock stores, provide new designs and only generate 60-70% margin on their sales. 11. Manufacturers produce in small batches to allow a three week cycle time from store order to delivery. Competitors carry inventory on fewer designs, spend less money on shipping and outsource easy tasks required in the make process.

ALTERNATIVES AND/OR OPTIONS

|Option |PRO |CON |ALTERNATIVE |
|Staying with current DOS |Stable, effective, easy to |IS department consists of 50 people |Source a new POS system to increase functionality across the |
|system |roll out to stores and |to maintain and write in-house |business |
| |maintain |applications | |
|In-house applications are |Zara’s only customer and has|This is Zara’s only option because |Review updated technology to provide on-going support to the |
|supplied by hardware vendor |committed to not updating to|the DOS system is not supported any |business with minimal interruption |
| |a new system |longer | |
|Transparency between stores |Stores are focused on their |Time consuming to collect and |A current POS system allows stores to communicate inventory, |
|does not exist |store only to be successful |transmit data - ordering |ordering, sales, and historical data |
|No Chief Information Officer|Salgado and Castellano sat |No formal justification for IT |New POS application will provide transparency of information |
| |on steering committee to be |efforts or cost/benefit analyses |regarding revenue, sales, inventories, and expenses. |
| |involved early for | | |
| |computerization initiatives | | |
|Store Manager scope of |Very knowledgeable within |No discretion regarding store layout.|New POS would allow more time to promote sales and changing |
|responsibility is high |their store and relied on | |business needs. |
| |for input | | |
|No performance measures | |Zara’s highly integrated business |New POS system would allow KPI’s to be put in place for |
| | |allows short lead times to generate |manufacturing, shipping, and sales to measure efficiency. |
| | |revenue. | |
|Commercials relied on |Always know what trends and |Do not know how much inventory is at |New POS system would allow inventories to be managed and |
|guessing requirements |changes are required in the |there stores once trend changes and a|provide clarity for sales with particular designs and |
| |marketplace |new product design is required. |divisions. |
|Zara does not carry high end|Faster cycle time for supply|Consumers will go elsewhere for |New POS system will track SKUs to determine the cycle time of |
|fashion. |chain and increased revenues|quality and pay more. |clothing trends and frequency of sales. |
|High capital costs for |Cycle time of SKU is only |Must ensure trend designs are current|An updated POS system would automate the supply chain to |
|stores, shipping costs, |three weeks. |and reliable to sell and make a |increase efficiencies and provide historical data to review |
|automation, DCs, | |profit. |expenditures versus revenue |
|manufacturing and factories | | | |

RECOMMENDATION

The following is a summary of two options and my recommendations:

First option is sourcing a new POS system. The vendor will provide a stable, effective and easy to roll out process to each store and to maintain. Zara can buy extra systems to have on hand to keep them afloat until it is no longer supported by their hardware vendor. Sourcing a new POS system will allow continuous support of hardware and IS support by the vendor. Applications can be modified to fit the business model and reduce the internal IS department that maintains in-house applications to a capital cost that can support the new system purchasing. Sourcing a new POS system will increase functionality within the organization at a cheaper cost and measure productivity and efficiency to support the start up cost of implementation.

Option 2 is recommending a new POS system that will allow for stores to communicate by having real time inventory, on-line ordering would take moments due to always knowing your sales and what is required to be replenished. It would allow for inventory SKU’s, forecasting and providing historical information regarding trends and changes within the fashion world.

IMPLEMENTATION

Providing an updated IT system may cause interruption for a short period of time because all stores would require a transition period from DOS to a new PC. Employees would require training on applications tailored to ordering, sales, and inventory. Zara could provide a training environment like their store configuration set up and set up stores by providing new hardware and on the job training as an initial start-up. On going training could be budgeted for in their business plans. As efficiencies in the supply chain begin to reflect profit, the initial impact of start up will ease this capital expenditure in time.

MONITOR AND CONTROL

The monitor and control functions transpire into a successful implementation through the recommendation above. The process can be scheduled to be substantially complete with a one year time frame. An initial schedule is to be outlined by region and known sales. A designated team of commercials will fly from region to region to install and train existing staff within stores. As the new system comes on-line, Salgado will be able to manage activities in real time. KPIs can be measured through SKUs of garments of sales, inventory shrinkage, and productivity in warehouse and factories. He will see his profit, total revenue, return on investment, revenue growth and profit growth as historical data is collected over time.