Course: Information Systems Session: 1

Case: Zara: IT for Fast Fashion Theme: IT’s Value Proposition

Who When Where

Xan Salgado Badas
August 2003 La Coruna
Bruno Sanchez Ocampo
High Level Summary (1-3 sentences)

 Major issue faced by the company was related to the operating system that it was using for its
POS Terminal. The company was using the DOS Operating System for their POS terminal, which
was no longer supported by its vendor, Microsoft. The company thought that if the hardware
suppliers decided to upgrade their machines and they were no more compatible to be used in
the DOS Operating System, then Zara would not be able to open new stores until they upgrade
their existing OS.

Key Statistics & Financials

 Inditex operated 1,558 stores in 45 countries, of which nearly 550 were part of the Zara chain
 The group opened on average one store per day across the world
 46% of groups’ sales were inside Spain, with France the largest international market.
 Zara generated 73.3% of the group’s sales.
 Women accounted for 60% of sales with the rest evenly split between Men and the fast-growing
Children’s segment.
 For 2002 fiscal year, Inditex had posted 438 million / $508 million U.S. Dollars on revenues of
3,974 million (about $4,554 million US)
 Zara’s marketing expenditures averaged 0.3% of revenue, instead of the 3% - 4% typical for
competitors.
 Earning tripled between 1996 to 2000.
 There is ample room for growth – Italy (few stores and customers are most fashionable) and
Western Europe (as it can be supported with their current infrastructure)

Company Background Industry/Environmental Context

 The company had made its market

 Zara was founded by Amancio Ortega, distinction on the basis of high
who is the largest shareholder (2003) understandability of the customer needs and
and richest man in Spain. a quick response to these needs. Zara
 Started in 1963 with clothing factories, believed on two standards:
he believed that retailing and o Capable of providing the desired level of
manufacturing needed to be closely fashion and style to its customers at the
linked in the apparel industry. moment when people loved to have
 He formed a holding company (Inditex) them.
atop of Zara and other retail chains. o If the company wanted to get success in
 Jose Maria Castellanos Rios joined the the market, then it should believe upon
company as the IT Manager and believed the development of a strong brand image
in the cause – computers were critically with the help of quality products and
important in enabling the kind of services rather than depending upon huge
business they wanted to build. advertisement campaigns.
 Zara’s Business Model:
 it had adopted such a POS system that could
o Speed & Decision Making – give them thorough information about the
demands of the customers and made the
store managers capable of contacting the
 Zara needed to be able to
manufacturing and production units timely
respond instantly to the
when they were out of demand for a specific
demands of target
product. The store managers were given full
customers – young,
authority to choose products for their stores
fashion-conscious city
and make their orders according to the
dwellers whose taste in
trends and demands of their respective
clothing changed rapidly,
locality.
hard to predict, and also
hard to influence

 Leadership of Zara Operations Overview:

wanted to maximize their
human capacity all
throughout the company At the heart of Zara’s success is a vertically
instead of relying on a integrated business strategy. Zara has control on all
small set of decision its business activities from design to distribution and
makers. (i.e. – retailing, which gives the company total business
commercials/store management.
managers had great
discretion in deciding
what clothes would be  Ordering:
designed and produced  Zara places orders 2x a week
and orders to store with  The order consists of
sign-off from senior replenishments of existing
leadership) items & newly available
garments.
 Quantities for replenishment
o Marketing, Merchandising & are predetermined based on
Advertising past selling data for those who
missing order submission
deadlines.
 Zara did virtually no  Managers decide
advertising. They spent replenishment quantities
relatively heavy on its through manually counting the
stores by locating it on sales & talking to personnel.
famous streets so they  Orders are made through PDAs
can attract many people. linked to the Information
 They usually redesigned systems at HQ
every 4-5 years, price of  Offers (newly available items,
garments were garments available, etc) are
determined by product different across each store.
 managers.
 Zara’s business practices  Fulfillment:
is to produce garments  For the fulfillment or shipment
that have a short life span of clothes to stores, Zara
both within the store and established another group of
in customers’ closets. commercials at La Coruña.
They wanted to create  They were tasked to match up
urgency in shopper’s the supply of finished clothes
behaviour (based on coming from factories into the
trending items), Distribution Center (DC) with
customers would visit the stores’ demands for these
stores because new styles items and they are working
are displayed all the time. with two pools of information:
 Zara has a website (a) aggregated orders from the
(www.zara.com), this only stores (b) total supply of
serves as a display of their inventory.
different garments and  The commercials played vital
their prices and is not roles in the fulfillment and
used for online shopping. delivery of orders. When
There are two reasons supply and demand line up
supporting it. First, Zara’s closely for a specific Stock-
distribution centers (DCs) Keeping Unit (SKU),
were not configured for commercials were not
picking small orders and required to make hard
shipping them to decisions because they simply
consumers. Moreover, it allowed the inventory to be
would be complicated to divided among all the stores
handle returns of via the computer.
merchandise bought  Zara’s goal was to produce,
online. Retail mail-order then deliver, only what the
industry had return rates stores needed, only when they
as high as 50%–60%, which needed it. Zara stores had no
Zara compared “back room” where excess
unfavorably with their inventory could be kept.
normal 5% store returns.

 Design & Manufacturing:

o Financials & Growth  Large retailers including Zara
 See Key Statistics section typically introduce new design
collections at the start of the
.
fall/winter and spring/summer
buying periods
 Zara introduced 11,000 new
items in a typical year while
their competitors averaged
only 2,000-4,000.
 Cut fabric was sewn into
garments at a network of
small local workshops that
guaranteed quick turnaround
 times.
 Zara’s approach was not
dependent on a long-range
sales forecast so the
commercials within the design
teams were the ones making
guesses on how well the
garment would sell.
 There is no need for Zara to
predict what would be selling
six months, or even one
month, in the future; it could
continuously sense what
customers wanted to buy and
respond “on the fly”.

Customers (or potential clients) Competitors

 Fashion Forward Customers  H&M, Gap, Benetton

Issue or Problem to be Solved

Zara had been using a stable IT system for its sales operations that helped the company position itself
in the retailing market. However, their POS terminals’ operating system is outdated and unsupported.
Since a problem from the supplier of their terminals may arise, Zara’s management needs to answer
the question whether they need to upgrade to newer yet complex OS or not.

Decision + Alternatives Action / Implementation

 Inditex’s IT head, Xan Salgado Badás, Recommendation:
wants to upgrade the existing POS
system of Zara. However, Bruno Sánchez
Ocampo opposed that installing a new  Zara upgrades to a newer OS while
buggy POS would be a liability for the continuing the operations using the old OS.
company. Should Zara upgrade their For now, using DOS seems profitable for the
existing operating system (run by MS company, but that might not be the case 10-
DOS) to a more modern system? 20 years from now. Zara’s competitive
 If they are not migrating to a new OS, advantage is its speed and it might lose it if
should they stock up on current POS the firm does not upgrade to a newer OS that
terminal to protect them from sudden can provide significantly faster and more
loss of support? accurate transactions.
 If they migrate to a new OS, can they
use the opportunity to build new
capabilities in POS?

Choices/Alternatives:
 Maintain the existing system to
For Zara to upgrade the current system, it
 prevent the company from the
possibility that it would make a
decision that would result to more
costs than benefits.

 Upgrade to an internally-developed should implement the change gradually. In

modem system that would help the the short term, there is no immediate need
company in monitoring its to upgrade the system. Zara needs to make
operations. the change over a long period. For Zara to
maintain its status in the industry, it should
 Outsource the software development first develop a strategy for the change.
to eliminate the cost that comes
with creating the software
internally.

Causes & Effects

Availability of DOS-Compatible POS Terminals

Zara had been using DOS-operated POS terminals. It helped Zara in its operations – from ordering,
sales recording, up to other business functions. Zara is the only customer who uses the
unsupported operating system.

Adaptation

To achieve business survival, companies must adapt to the endless changes in today’s industry. The
company’s ability to adapt should be of great importance because it somehow gives a bird’s eye
view of whether the company will succeed or not.

Zara’s ability to adapt merely relies whether or not the company should choose to upgrade and
reap its potential benefits, or just keep its existing OS and save itself from the risks it may bring.

Monetary Cost of Upgrading the POS Terminals - from Hardware to Software

To every venture a company has to make, it should take into consideration the monetary cost of
the project. Likewise, Zara should carefully analyze the expenses the company will make
regardless of which alternative the management will choose.Keeping the current system means
buying more DOS-compatible POS terminals. These terminals costs between $1,000 and $3,000
each, and even less for multiple terminal purchases made at a single time.
 Zara’s Competitive Advantage:

Zara is customer-responsive, has an outstanding business model (as unique & sophisticated as it is),
and is not defined by its target by segmenting age & lifestyle. Updates to the POS software can
cause downstream impacts to the overall business.

Reliability and Risk of Upgrading to a Newer OS or Not

Upgrading a business’ operating system is more than just a management decision. There are
certain reliabilities and risks that must be considered. In the case of Zara, using the DOS-based
point-of-sale system is easier for the employees, since they have mastered the process. It is also
easier to maintain because it uses a simple system unlike modern systems such as Windows and
Linux. However, DOS-based POS systems are severely limited in terms of ability to integrate across
the enterprise by connecting with other hardware. They also prevent the company from adding
new capabilities that can boost the company’s bottom line.

On the other hand, upgrading the POS system of Zara will help the company improve its customer
service through faster operations and better access to information. Though by upgrading into a
new system means that the company will have to operate on a system they are not familiar with,
there will be higher risk of error because they are not accustomed in using the new system.

Other Factors in Implementing the Alternative

Selecting and implementing a new operating system is a long and stressful process. It requires a
huge effort from all the members of an organization. For a company like Zara with more than 2000
stores around the world, implementation of a newer system is a critical consideration. Several
factors, which are vital in achieving success from the system development, need to be carefully
pondered upon.

Case Assignment Q&A

i. Did Zara have the right IT strategy?
ii. Should Zara upgrade its IT infrastructure?

SWOT Analysis (Thought Process)

 STRENGTHS WEAKNESSES

 Strategic location  Lack of marketing

 Fast-changing collection  Communication between stores to
 Fulfillment headquarter, stores to stores
 Zara’s Business model  Limited Stock of goods (clothes, shoes,
 Fast Fashion Philosophy bags)

 It has internationally established a  IT System

strong brand name  It has low store inventory that may

 It has more than 2000 stores around translate to stockouts
the world  There is no consumer loyalty
 Rationale decision making (Employee  Lack of brand awareness and equity
involvement on the business)
 They value cost minimization

OPPORTUNITIES THREATS

 Demand for high fashion at low price  Fierce competition (Gap, H&M, Forever
 Expanding its market 21, Uniqlo)
 It could go online  Possible imitation of designs, company’s
 It could create another section in their logo and its business model
stores  New entries in the market
 Economic crisis
 Competitors developing a newer and
more effective OS system
 Potential oversaturation of competitors
in current markets
 Large amount of consumer switching

System
- Strategy  System: what IT system do we need to implement business strategy?
- System  Strategy: what business strategy can we create based on our IT?
 Strategy

Structure System

Structure
- Organizations: decision-making, controls
- Operations: production/mgmt. process
- Culture: values, styles
IT Strategic Alignment Model
- Position – Where are we in the industry
- Purpose what do we to achieve
- Plan how do we get there

HIGH

Factor Strategic

Operational Dependence on IT

Support Turnaround
LOW
LOW HIGH