The History Of The Business Zara Commerce Essay

The company selected for this assignment is Zara. A very brief history of Zara will be given. Then description of the company’s operations and its advantages and shortcoming will be discussed. Then suggestions for innovation in its current information technology and operations will be given along with cost and risk analysis and possible ways to reduce the risks, followed by final conclusion.

History:

Zara is the most successful brand of Spanish company Grupo Inditex. Its owner, Amancio Ortega, opened first retail store in 1975 in La Coruna, a small port in Spain. Zara became the world’s largest fashion retailer by 2008 end. By this time it had stores in over 70 countries, out performing its rivals like Gap of USA and Sweden based H&M (Hennes & Maurits) (http://www.guardian.co.uk/business/2008/aug/12/retail.spain).

Zara’s Innovative Operations:

Daniel Piette, director of fashion, LVMH described Zara as “possibly the most devastating and innovating retailer in the world” http://tbmdb.blogspot.com/2009/12/business-model-example-zara-devastating.html, owing to the company’s innovative and unique approach in fashion retail:

Zara has a vertically integrated supply chain, controlling most of the design phase, production phase and distribution system, down to its chain of retail outlets around the world.

Some part of the manufacturing process is handled by Zara’s sister concerns with nearby locations.

Unlike its competitors Zara does not outsource its production to Asian developing countries.

Proximity of production and distribution units provides more flexibility so that the company can meet the ever-changing demands of the consumers more efficiently than its competitors.

Zara has integrated the system of POS (Point Of Sales) that helps in monitoring what designs are bringing in maximum sales at the retail shops.

Store managers are allowed freedom to decide which designs to display and which ones to return, depending on the sales of those designs.

Store employees gather feedbacks from the customers and convey the information to headquarters via PDAs.

Design teams immediately respond to these feedbacks and begin designing new clothes accordingly.

The clothes are manufactured and distributed to the retail stores within a short period of 2 to 4 weeks owing to the vertical integration of its supply chain.

While its rivals are busy finding what the latest trends might be and eventually delivering new designs in 4 to 9 months, Zara manages to design, manufacture and distribute new designs in just 30 days.

Zara only produces small quantities of each style so that there is continuous demand of popular designs, cutting down on manufacturing costs as well.

Thus Zara delivers around 12000 different styles in a year whereas its competitors can produce only 4000-5000 per year. Hence, the company-coined phrase, ‘fast fashion’ http://www.3isite.com/articles/ImagesFashion_Zara_Part_I.pdf

Current Technology in Information & Communication

Zara spends only 0.5% of its revenue on information technology compared to expenditure of 2% by its competitors.

An order form is transmitted to each manager’s PDA asking for information such as availability of garments and patterns of garment sales.

The managers divide this order form into sections that are transmitted to the PDAs of each employee to fill up, based on customers’ feedback and the kind of designs sold.

Employees transmit back their respective completed sections to the manager’s PDAs.

The manager is given total authority to determine which sections are to be retained in the order form.

The edited order form is sent back to headquarters where the designing teams start designing according to the requirements.

This strategy helps in managing the inventories efficiently and forms a fast link between demand and supply, justifying the doctrine of ‘fast fashion’.

Summing up Zara’s use of technology http://leoborjblog.wordpress.com/2009/08/10/zara-it-for-fast-fashion/:

Gather customer requirements – PDAs

Logistics and transmission of order form – POS terminals and modems.

Quickly designing new style – CAD (Computer Aided Design)

Advantages of such an Innovative System

Vertical integration of supply chain and short turn-around time lead to high turnover of product.

Quick and efficient distribution helps to eliminate warehouse requirement, saving on additional storage costs.

Searching the market for latest fashion trends and responding quickly to the consumer requirements with the help of hand-held PDAs.

Complete autonomy and flexibility to the employees and managers who are in direct contact with the customers.

POS terminals run on DOS operating system, which is cheap and easy to maintain and operate.

Zara’s operations are quite innovative and effective, but there is still scope for further improvements in its IT operations and inventory management.

Perceived limitations of this System http://www.slideshare.net/koffman/zara-case-study-2780928

Zara has have been using DOS as its main operating system in all the processes. It is an outdated operating system.

As the POS vendor supplies DOS OS to zara only, it can always stop its supply, while continue to supply other operating systems to its other customers.

Store managers are the decision makers. Zara headquarter relies solely on the experience and intuition of the managers.

Instead of looking after customers, managers and employees have the time-consuming task of manually entering the garment details in small PDAs. This could result in the employees failing to assist some customers in choosing and might miss out on few garment sales.

Inventory is maintained manually as well.

Information transmitted is one way only. Managers have no knowledge of the inventories at headquarters and the store’s distribution centre. Consequently managers cannot promise a customer if a particular garment that has been sold out, can be replenished and in how many days.

Promises made to customers not kept can damage Zara’s reputation, so the managers need to know about the garments’ inventories at headquarters and the distribution centres.

There is a great demand for Zara’s garments even though new designs are available twice a week. Zara may consider increase in production to meet these ever growing demands. Gathering of information therefore may need to be upgraded in terms of frequency.

Its competitors can change to a better OS or software package and increase their turn around time, neutralizing Zara’s edge of ‘fast fashion’ over them.

New IT Technology for Sustainability http://www.123helpme.com/view.asp?id=97642; http://www.slideshare.net/koffman/zara-case-study-2780928

Benefits:

New technology may not help Zara in increasing the competitive edge over its competitors but will help in sustaining that edge.

A new operating system will help in installing software packages that will help in efficiently maintaining inventory at the stores as well as headquarters and distribution centers.

Upgrading to new OS will remove the company’s dependency on its current supplier of DOS.

Using more than one IT supplier will increase Zara’s bargaining power.

A Network can be set up between HQ, production centers and retail stores.

POS system can be automated so that each sale will automatically update the POS devices.

If the POS system of all stores can be interlinked all the store managers can easily know the inventory online and can make and keep their promises to customers demanding a particular garment.

POS automation will help reduce overall workload of the employees and managers, as they will not have to manually enter every detail required in the order form.

No more large data inputs in small PDAs.

Dedicated POS software will ensure that orders will now be made on the basis of theoretical inventories and will be more accurate.

Orders can be now placed continually increasing the frequency from twice a week to daily.

Ideal software to be used for integration would be ERP (Enterprise Resource Planning). Linking all the process in the supply chain, from HQ, design centers to retail stores, will not only help the managers in accessing inventories but will also help HQ to regulate the supplies more accurately according to the orders placed.

Production will become even leaner than before.

ECQ (Economic Order Quantity) can help in determining optimal quantities of different garments that customers can order so that the store has sufficient stock, while cutting down inventory cost.

Knowing reorder levels will streamline managing of the inventory and help in maintaining the autonomy of the managers. Managers can determine from the reorder levels whether a particular garment needs to be ordered before it will go out of stock and can transmit the same to the production centers that are now linked to the retail outlets.

Of course manual checks will still be needed occasionally to check a store’s real time inventory is same as the theoretical inventory in case of exceptions like garments getting stolen or gone missing.

Designers at HQ will not depend entirely on the manager’s intuition and can observe themselves sales of new designs due to two-way system integration by ERP.

Just in case a store does run out of stock on a particular garment, the manager can easily check the inventories of local nearby stores for availability and suggest the customer to go there.

Inter-store connectivity will have added advantage of shipping garments to another store that has more demand of a particular garment. This will further increase the speed-to-market.

Besides HQ even managers of different stores will benefit if they know through network what is selling at other stores and what is not.

Cost Analysis:

Zara will have to upgrade to better OS that will support ERP like Linux, Unix or Windows NT.

Implementation cost of Linux is lowest of the three OS. But recurring costs like service-contract is much higher (McAfee et al) http://www.123helpme.com/view.asp?id=97642.

Annual cost of using Unix is the lowest and if functionality remains more or less same, Unix will be best suited.

If other costs like plans for systems failure are not taken into consideration then implementation cost will be relatively much lower than prospective ROI (Return On Investment).

Risk Analysis:

Changing software and operating system in all retail shops world over is not an easy task.

Due to location of Zara’s retail outlets all over the world, there will be many extra tangible costs.

Cost of replacing current POS system with the new one.

Cost of installation of new cables in each store and maybe new infrastructure to support the cables.

Cost of external IT support, hiring professional consultants.

Cost of internal IT management and technical training of personnel.

Time period needed to train the personnel till outside assistance is no longer required, cannot be accurately predicted. This is because levels of training and learning will be different at different locations around the world.

Knowing other store’s inventory may have a drawback. If two stores in the same general area have a demand of same design and employees of one store get to know that only the other store has received the garments due to shortage of supplies, it may lead to a political situation.

Risk Reduction:

Zara should ensure that managers of different stores, particularly in the same area or district should have good rapport and understanding with each other so that they can ask for and receive garments in the rare but probable case of shortage of supply.

Both current and new systems should operate together till the personnel of each store can run the new system smoothly; this will not interrupt any service provided to customers.

Zara has a huge pilot outlet that is around 1,500 square meters. Zara can use this as training facility for its personnel from all over the world. Zara can use it to test the new system as well.

Zara can hire experienced software professionals and open an in-house department for software management and development.

Zara can outsource the management and development to experienced software companies. However Zara will have to trade-off between highly efficient and expensive companies.

Zara should form scenarios and identify the possible outcomes. This will provide a deeper understanding of its implementation strategy.

Option analysis – Zara can consider different options like ‘expand options’ if the current scenario is favorable or ‘defer options’ if not favorable.

The company can also consider ‘stage options’ where it can invest in predefined stages of the implementation process. This way it will have the flexibility of abandoning the new project at any stage and reverting to the old DOS system, if any major problem occurs.

Implementation staging can be done by first testing the new system at Zara HQ. If successful, further testing can be done in a single district having more than one retail outlet. This process will continue by successively increasing the testing area from one district to number of districts, whole of Spain and finally Europe, if implementation at each stage is successful.

Zara should develop a contingency plan and an exit plan as well in case the company cannot continue with the up-gradation, or has to abandon the new system for some reason.

Efficient data backup is required in case the new system crashes due to mishandling by inexperienced staff etc.

Conclusion

By and large, continually increasing the frequency of information within the supply chain will help Zara to meet demand and supply requirements more efficiently and effectively. This efficiency will reflect at the stores and production and distribution centres as well, increasing the speed of delivery and further fulfilling almost every single customer’s individual tastes and requirements. Consequently it will provide a more firm control over operations and perhaps a more proactive working environment.

Assimilating all the data at different stores and supply chain process units, into a single system will facilitate sharing of returns, ordering and sales information. This will result in more accurate stocks measurements and real-time measurements.

New innovation in the company’s information technology can have some other benefits as well. The ERP system will in a way connect the employees of a store to those at other stores around the world bringing forth a new feeling of integrity. Working on new and advanced applications may well lead to employee satisfaction and a feeling of pride. This can produce a highly motivated and efficient work force.

Sustainability is a critical factor in any company’s expansion plans, especially in a global company like Zara. Therefore Zara should continually acclimatize its business competencies of product development, promotion, communication and information technology according to its global expansion operations.

However it should be noted that Zara has been operating successfully for more than three decades with a decentralized, autonomous (for stores) and informal working culture. Care should be taken in not enforcing too many standardized and regimental tasks. It can easily disrupt the creativity and working relationship of its task force. Innovation and incorporating new technology should not radically change a successful business’s operations, rather it should be used to facilitate it or ‘grease the wheels’.