The History of Zara

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 has 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 follows the concept of a vertically integrated supply chain, in which the company has a tight control over most of the design phase, production phase and distribution system to its chain of retail outlets. The rest of these processes is handled by its sister concerns with nearby locations. Unlike its competitors Zara does not outsource its production to Asian developing countries; the proximity of production units helps Zara by giving flexibility in production 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) and has formed a unique method that helps in the production of new designs. POS helps in monitoring what designs are bringing in maximum sales at the retail shops. The store managers are allowed freedom to decide which designs to display and which ones to keep back in the store, depending on the sales of those designs. Zara’s employees at the retail outlets gather feedbacks from the customers and convey the information to the headquarters with the help of hand-held PDAs that each employee is required to carry. At the headquarters, the design teams immediately respond to feedbacks sent via PDAs 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 and identifying what the latest trends might be and finally take 4 to 9 months to distribute new designs to their respective stores, Zara manages to design, manufacture and distribute new designs in a matter of just of 30 days.

Taking advantage of the fast turn around time, Zara eschews the concept of producing just one collection per season, like its rivals do. Instead the designs keep on changing frequently so that Zara manages to deliver new designs twice a week to its retail shops. Zara only produces small quantities of each style so that there is continuous demand of popular designs. It cuts down on manufacturing costs as well. Thus Zara manages to deliver 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’s use of technology in information & technology is unique from its competitors. Firstly Zara uses much less technology, in terms of expenditure and work-force, than its competitors – just 0.5% of its work force compared to 2.5% of employees that its rivals utilise. Similarly Zara spends only 0.5% of its revenue on information technology compared to expenditure of 2% by its competitors. Secondly Zara employs a unique combination of human and IT intelligence. Managers at the stores and the market survey done by the employees, form the human intelligence while IT intelligence consists of the PDA devices used to send information collected by the managers and other employees carrying the PDAs. 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 of each retail outlets then divide this order form into sections and these sections are transmitted to the PDAs of each employee to fill up, based on customers’ feedback and the kind of designs sold. Employees then transmit back their respective sections to the manager’s PDA, after entering the customer’s requirements. The managers of each store are given total authority to determine and identify which sections are to be retained in the order form. The edited order form is then sent back to headquarters where the designing teams start working on the basis of the order forms. This unique hybrid of humans & technology helps in managing the inventories efficiently and quick and efficient link between demand and supply, thus successfully helping in their own 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.

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

Zara and its sister concerns have been using DOS as their 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

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 efficient access of 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.
There will not be any need of hand held 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 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 quantities of different garments that buyer can order so that there is sufficient stock for the customers. This will reduce inventory cost as well.
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 now not depend entirely on the manager’s discretion 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).
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 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 taken to train the personnel till outside assistance is not required cannot be determined as level of training and learning will be different at different locations around the world.

Risk Reduction:

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 from 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 develop a contingency plan and an exit plan as well in case the company cannot continue with the up gradation for some reason.
Robust data backup is required in case the new system crashes due to mishandling by inexperienced staff.

Order Now