Zara IT Case


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A Retail Management Case Study on Zara's Implementation of IT

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Zara IT Case

  1. 1. OVERVIEWZara Philosophy The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. That is the idea we still live by. — José María Castellano Ríos, Inditex CEO
  2. 2. Speed & Decision Making • Zara needs to respond quickly to demands of their young & fashion conscious customersOVERVIEW • Fashion misses are very common as new stylesSpeed & can appear very suddenlyDecision Making • Store managers have more authority than other stores such as deciding the garment to be put on sale • ‘Commercials’ decide which garments to be produced & sold • Have great deal of autonomy as higher management doesn’t second guess their decisions
  3. 3. Marketing, merchandising & advertising • Very low spending on marketing while heavy spending on storesOVERVIEW • No ‘classics’ clothes but clothes with veryMarketing & short lifespan forcing customers to buy it on the spot, visit stores oftenGrowth Growth Opportunities • Currently 550 ZARA stores part of Inditex chain • Huge growth opportunities in Italy & western European market • Hence there is need for new production & distribution network
  4. 4. Ordering & fulfillment • Manual inventory management based upon direct observation & store manager judgment • Use of PDA’s, Infrared, dial-up modem for order management • Process is complicated & divided in various steps such asOVERVIEW breaking order into segments and beaming these segmentsManufacturing to concerned person who then filled up their part Design & manufacturing • Maximum time from conception to distribution centre is three weeks • Vertically integrated supply chain ensured constant introduction of new items with short lead times • Based upon commercial’s guess which need not be accurate
  5. 5. Information systems at La Coruna, factories, stores & DC’s • Several information systems are used to prepare orders, distribute them over internets & collect them • Factories had simple applications which provided information about order & due datesOVERVIEW • Distribution center had largest automation with completeInformation tracking of SKU’s • Stores used PDA’s which communicate to La Coruna viaSystems modems • PDA’s were upgraded constantly while POS terminals remained same for over decade! • POS used DOS as operating system & its installation & maintenance was very simple • No real time feedback from stores to Zara’s headquarters • Transmission required copying into floppy disc & then sending it using internet which happened at the end of the day • No dialogue between PDA & POS inside store or between two stores
  6. 6. Conventional Business Model Zara’s Business Model Reliant on outsourcing production. Highly responsive vertically integratedSupply chain supply chainRole of store Deals with customers , employees Decision taking powers with respect tomanager stocking Ads primarily for publicizing the Ads only for yearly sales & announce newMarketing assortment store inaugurations.(0.3% of revenue)Design teams Design conceptualized by Small elite Dedicated teams for different segments. Ex: team common for all segments. Women-Night Wear, Kids-Sports wear etc.Product life span Generally apparel firms produced Short life span but increased launches of CLASSIC clothes. new style clothing. Average new launches per year:2000- Average new launches per year:11000 4000Time to market Comparatively high due to outsourcing. As Zara is vertically integrated lead times as Industry average is 6 months. well as time for new product launches are less(2-4 weeks)Sales Forecast It is done. Not done due to flexible factories.IT Spending 2% of revenue as IT applications are 0.5% of revenue as in-house applications outsourced to vendors were developed
  7. 7. “The original business idea was very simple. Link customer demand to manufacturing, and link manufacturing to distribution. That is the idea we still live by” DESIGN & PRODUCTION TEAM Factories – Dying & cutting clothes Commercials Commercials- - Dedicated to 3 WEEKS Small Local Store Product Department in Shops Managers stores - Sewing DISTRIBUTION CENTRE 2 DAYS STORES
  8. 8. Current Status • Zara currently uses POS system based upon DOS which is very easy to use & working fine for them • This system does all the basic operations of billing but doesn’t provide any customer insights, real-time data or any advanced sales projections • As Zara is getting bigger & bigger its operation are becoming more complexCURRENT • Hardware vendor may modify peripherals for POS so that they may not run on ancient OS such as DOSSTATUS Dilemna • Shall they let go of DOS which is working great for them & migrate to modern OS such as Windows, Linux? • If they are not migrating to new OS then should they stock up on current POS terminals to protect them from sudden loss of support from vendor? • If they migrate to new OS, can they use this opportunity to build new capabilities in POS? • If they are building new POS, then can they extend its capabilities so that it can have network across the stores & within the company?
  9. 9. Why DOS based POS works for Zara! • DOS based POS is in alignment with Zaras business philosophy • Majority of business concentrated in Europe specially Spain • Zara prefers speed based decentralised decision making • Highly responsive vertically integrated supply chain reduces need for long range sales forecastIT • More dependant on market feedback from ‘commercials’ thanDOS based POS from customer data insights • Believed in ‘manufacturing on fly’ rather than long range sales forecast • Zara doesn’t require theoretical inventory to be 100% accurate • Low level of inventory in current scale of operation: Zara stores maintained low inventory levels thus reducing need for smart inventory management • Current scope of operations makes ordering & fulfillment possible using DOS based POS
  10. 10. Easy installation & ease of operation • Use of DOS based POS is very user friendly, stable & easy to maintain • Layman like store employee can switch on system & set up entire POS architecture • Complete software installation does the trick in the event of serious software malfunctionIT • No need for separate maintenance crew for POS as employeesInstallation can do it by themselves • Ease of customization on POS: Zara operated in various geographies & currencies which necessitates need of customization • It is very easy to customise & write their own softwares on DOS based POS • Majority of complex operations such as sewing, dying were outsourced by Zara • Hence factories required simple applications rather than complicated applications due to its current scope of business
  11. 11. Zara approach to IT policy • Comparatively low spending on IT (0.5% of revenue) as compared to industry average (2% of revenue) • No separate IT department, all decisions related to IT applications taken directly by top managementIT • No cost benefit analysis or formal justification for IT effortsIT Policy • Preference over customised IT applications due to unique nature of business • Recruitment of talent locally rather than from all over the world • Thus basic principles of It policy of Zara is ‘keep it simple, keep it cost effective’ • DOS base POS achieved all these principles
  12. 12. Why do we need a new systemITNeed for New • Zara is the only customer using DOSSystem • Hardware vendor might upgrade their machines which are not DOS- compatible • Vendor not ready to sign a contract • Centralized data to help expand in different countries • Following table shows the expansion of Zara in Asian continent which would require the new system
  13. 13. GEOGRAPIC DISTRIBUTION OF ZARA STORES NO. OF STORES 450 419 UK 400 4% OTHERS 350 12% PORTUGAL 300 8% SPAIN TOTAL - 531 48% 250 GREECE 6% 200 GERMANY FRANCE 150 5% 17% 100 75 50 30 7 0 MIDDLE EAST ASIA-PACIFIC AMERICAS EUROPE• Majority of stores present in Europe Increase in number of stores implies• Highest concentration in Spain followed increase in Data-Base size & need for by France real time data-base• Ample room for growth exists within Zara’s current markets
  14. 14. Store -1 IT System Layout PDA: 1 Current IT Layout • No communication between storesPDA : 2 PDA: 3 • Unidirectional communication with Modem PDA- 1 Common NetworkPDA-2 PDA-3 Store -2 Store -1 Modem DC Factory PDA: 1 PDA : 2 PDA: 3 • Communication between stores possible • Bi-directional communication with PDA- 1 Modem PDA-2 PDA-3 New IT Layout Store -2
  15. 15. Trade off – New System IT Revenue (%) 2.5 IT Employee (%) of total 2 3 1.52.5 1 2 0.51.5 0 1 Inditex North American0.5 Retailers 0 Inditex North American Retailers Efficiency •Better inventory Total investment (8.3 management € mn) •Inter-connected stores •Cost of replacing existing •Real time customer DOS systems insights •One time cost •Trend analysis (License, installation, hard ware) •Annual connectivity charges •Human resource for IT
  16. 16. Order Fulfillment ProcessCurrent Order Fulfillment Process Segment 1 Store 1 (Men) Offer received in Store Segment 2 digital format Store 2 manager Combined Order (Women) from La Coruna (Infrared) Segment 3 Store 3 (Kids) Order is generated & given to La Coruna New Order Fulfillment Process Store 1 Order is Store Offer received in generated & Store 2 manager digital format given to La from La Coruna Coruna Store 3
  17. 17. Financials in millions of Euros Total cost of up gradation Particulars Cost (in Euros) Year 2003 estimated 2002 Operating System cost (windows) 4,51,350Net Operating Revenues 4,848 3,974.0 Hardware cost 28,83,330Cost of Goods Sold 2,368.3 1,954.9 Connectivity cost 1,27,440Gross Margin 2,480.0 2,019.1 Installation charges 42,48,000Operating Expenses 1,480.6 1,179.8 Programming cost 6,00,000Annual operating cost 0.127 - Total cost 83,10,120 Break up of costsOperating Profits 999.4 839.3 Onetime costs 81,82,680Non-Operating Expenses 288.1 224.3 Recurring cost 1,27,440POS up gradation cost 8.2 -Pre-Tax Income 703.0 615.0Income Tax 213.2 172.5Minority Interest 5.8 4.4 • Recurring cost includes annual connectivity chargesNet Income 483.9 438.1 • Rest of the costs are one time cost onlyNet Margin 9.98% 11.02% • CAGR of 22% calculated using past data of 1996-2002 • Rest of the costs such as COGS, operating costs are calculated based upon past data • Migration to windows based POS will cause net margin decreases to 9.98% but well above average net margin of 8.29% • Cost of up gradation can be funded through cash & cash equivalent of 525 million Euros
  18. 18. Roadmap & Implementation • Gathering and analyzing the requirements of the new system on the upgraded OS • Proof of Concept for feasibilityRequirements • Selecting a migration method • Identifying the resources and availability • Prototyping, Designing & Implementing Design & • Testing the new systemImplementation • A pilot run of the system for a country having less customers as compared to other countries • Existing system running in parallel to the new system Migration • Migration of data from old system to the new system after the successful pilot run